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Alfred Marshall, Principles of Economics (8th ed.) [1890]

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Alfred Marshall, Principles of Economics (London: Macmillan and Co. 8th ed. 1920). http://oll.libertyfund.org/titles/1676

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About this Title:

This is the 8th edition of what is regarded to be the first “modern” economics textbook, leading in various editions from the 19th into the 20th century. The final 8th edition was Marshall’s most-used and most-cited.

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The text is in the public domain.

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This material is put online to further the educational goals of Liberty Fund, Inc. Unless otherwise stated in the Copyright Information section above, this material may be used freely for educational and academic purposes. It may not be used in any way for profit.

Table of Contents:

CONTENTS

  • BOOK I
  • PRELIMINARY SURVEY.
  • BOOK I, CHAPTER I INTRODUCTION.
  • BOOK I, CHAPTER II THE SUBSTANCE OF ECONOMICS.
  • BOOK I, CHAPTER III ECONOMIC GENERALIZATIONS OR LAWS.
  • BOOK I, CHAPTER IV THE ORDER AND AIMS OF ECONOMIC STUDIES.
  • BOOK II
  • SOME FUNDAMENTAL NOTIONS.
  • BOOK II, CHAPTER I INTRODUCTORY.
  • BOOK II, CHAPTER II WEALTH.
  • BOOK II, CHAPTER III PRODUCTION. CONSUMPTION. LABOUR. NECESSARIES.
  • BOOK II, CHAPTER IV INCOME. CAPITAL.
  • BOOK III
  • ON WANTS AND THEIR SATISFACTION.
  • BOOK III, CHAPTER I INTRODUCTORY.
  • BOOK III, CHAPTER II WANTS IN RELATION TO ACTIVITIES.
  • BOOK III, CHAPTER III GRADATIONS OF CONSUMERS' DEMAND.
  • BOOK III, CHAPTER IV THE ELASTICITY OF WANTS.
  • Note on Statistics of Consumption.
  • BOOK III, CHAPTER V CHOICE BETWEEN DIFFERENT USES OF THE SAME THING. IMMEDIATE AND DEFERRED USES.
  • BOOK III, CHAPTER VI VALUE AND UTILITY.
  • BOOK IV
  • THE AGENTS OF PRODUCTION.
    Land, Labour, Capital and Organization.
  • BOOK IV, CHAPTER I INTRODUCTORY.
  • BOOK IV, CHAPTER II THE FERTILITY OF LAND.
  • BOOK IV, CHAPTER III THE FERTILITY OF LAND, CONTINUED. THE TENDENCY TO DIMINISHING RETURN.
  • Note on the Law of Diminishing Return.
  • BOOK IV, CHAPTER IV THE GROWTH OF POPULATION.
  • BOOK IV, CHAPTER V THE HEALTH AND STRENGTH OF THE POPULATION.
  • BOOK IV, CHAPTER VI INDUSTRIAL TRAINING.
  • BOOK IV, CHAPTER VII THE GROWTH OF WEALTH.
  • Note on the Statistics of the Growth of Wealth.
  • BOOK IV, CHAPTER VIII INDUSTRIAL ORGANIZATION.
  • BOOK IV, CHAPTER IX INDUSTRIAL ORGANIZATION, CONTINUED. DIVISION OF LABOUR. THE INFLUENCE OF MACHINERY.
  • BOOK IV, CHAPTER X INDUSTRIAL ORGANIZATION, CONTINUED. THE CONCENTRATION OF SPECIALIZED INDUSTRIES IN PARTICULAR LOCALITIES.
  • BOOK IV, CHAPTER XI INDUSTRIAL ORGANIZATION, CONTINUED. PRODUCTION ON A LARGE SCALE.
  • BOOK IV, CHAPTER XII INDUSTRIAL ORGANIZATION, CONTINUED. BUSINESS MANAGEMENT.
  • BOOK IV, CHAPTER XIII CONCLUSION. CORRELATION OF THE TENDENCIES TO INCREASING AND TO DIMINISHING RETURN.
  • BOOK V
  • GENERAL RELATIONS OF DEMAND, SUPPLY AND VALUE.
  • BOOK V, CHAPTER I INTRODUCTORY. ON MARKETS.
  • BOOK V, CHAPTER II TEMPORARY EQUILIBRIUM OF DEMAND AND SUPPLY.
  • BOOK V, CHAPTER III EQUILIBRIUM OF NORMAL DEMAND AND SUPPLY.
  • BOOK V, CHAPTER IV THE INVESTMENT AND DISTRIBUTION OF RESOURCES.
  • BOOK V, CHAPTER V EQUILIBRIUM OF NORMAL DEMAND AND SUPPLY, CONTINUED, WITH REFERENCE TO LONG AND SHORT PERIODS.
  • BOOK V, CHAPTER VI JOINT AND COMPOSITE DEMAND. JOINT AND COMPOSITE SUPPLY.
  • BOOK V, CHAPTER VII PRIME AND TOTAL COST IN RELATION TO JOINT PRODUCTS. COST OF MARKETING. INSURANCE AGAINST RISK. COST OF REPRODUCTION.
  • BOOK V, CHAPTER VIII MARGINAL COSTS IN RELATION TO VALUES. GENERAL PRINCIPLES.
  • BOOK V, CHAPTER IX MARGINAL COSTS IN RELATION TO VALUES. GENERAL PRINCIPLES, CONTINUED.
  • BOOK V, CHAPTER X MARGINAL COSTS IN RELATION TO AGRICULTURAL VALUES.
  • BOOK V, CHAPTER XI MARGINAL COSTS IN RELATION TO URBAN VALUES.
  • BOOK V, CHAPTER XII EQUILIBRIUM OF NORMAL DEMAND AND SUPPLY, CONTINUED, WITH REFERENCE TO THE LAW OF INCREASING RETURN.
  • BOOK V, CHAPTER XIII THEORY OF CHANGES OF NORMAL DEMAND AND SUPPLY IN RELATION TO THE DOCTRINE OF MAXIMUM SATISFACTION.
  • BOOK V, CHAPTER XIV THE THEORY OF MONOPOLIES.
  • BOOK V, CHAPTER XV SUMMARY OF THE GENERAL THEORY OF EQUILIBRIUM OF DEMAND AND SUPPLY.
  • BOOK VI
  • THE DISTRIBUTION OF THE NATIONAL INCOME.
  • BOOK VI, CHAPTER I PRELIMINARY SURVEY OF DISTRIBUTION.
  • BOOK VI, CHAPTER II PRELIMINARY SURVEY OF DISTRIBUTION, CONTINUED.
  • BOOK VI, CHAPTER III EARNINGS OF LABOUR.
  • BOOK VI, CHAPTER IV EARNINGS OF LABOUR, CONTINUED.
  • BOOK VI, CHAPTER V EARNINGS OF LABOUR, CONTINUED.
  • BOOK VI, CHAPTER VI INTEREST OF CAPITAL.
  • BOOK VI, CHAPTER VII PROFITS OF CAPITAL AND BUSINESS POWER.
  • BOOK VI, CHAPTER VIII PROFITS OF CAPITAL AND BUSINESS POWER, CONTINUED.
  • BOOK VI, CHAPTER IX RENT OF LAND.
  • BOOK VI, CHAPTER X LAND TENURE.
  • BOOK VI, CHAPTER XI GENERAL VIEW OF DISTRIBUTION.
  • BOOK VI, CHAPTER XII GENERAL INFLUENCES OF ECONOMIC PROGRESS.
  • BOOK VI, CHAPTER XIII PROGRESS IN RELATION TO STANDARDS OF LIFE.
  • APPENDIX A THE GROWTH OF FREE INDUSTRY AND ENTERPRISE.
  • APPENDIX B THE GROWTH OF ECONOMIC SCIENCE.
  • APPENDIX C THE SCOPE AND METHOD OF ECONOMICS.
  • APPENDIX D USES OF ABSTRACT REASONING IN ECONOMICS.
  • APPENDIX E DEFINITIONS OF CAPITAL.
  • APPENDIX F BARTER.
  • APPENDIX G THE INCIDENCE OF LOCAL RATES, WITH SOME SUGGESTIONS AS TO POLICY.
  • APPENDIX H LIMITATIONS OF THE USE OF STATICAL ASSUMPTIONS IN REGARD TO INCREASING RETURN.
  • APPENDIX I RICARDO'S THEORY OF VALUE.
  • APPENDIX J THE DOCTRINE OF THE WAGES-FUND.
  • APPENDIX K CERTAIN KINDS OF SURPLUS.
  • APPENDIX L RICARDO'S DOCTRINE AS TO TAXES AND IMPROVEMENTS IN AGRICULTURE.

BOOK I: PRELIMINARY SURVEY.

BOOK I, CHAPTER I: INTRODUCTION.

8sect; 1. Political Economy or Economics is a study of mankind in the ordinary business of life; it examines that part of individual and social action which is most closely connected with the attainment and with the use of the material requisites of wellbeing.

Thus it is on the one side a study of wealth; and on the other, and more important side, a part of the study of man. For man's character has been moulded by his every-day work, and the material resources which he thereby procures, more than by any other influence unless it be that of his religious ideals; and the two great forming agencies of the world's history have been the religious and the economic. Here and there the ardour of the military or the artistic spirit has been for a while predominant: but religious and economic influences have nowhere been displaced from the front rank even for a time; and they have nearly always been more important than all others put together. Religious motives are more intense than economic, but their direct action seldom extends over so large a part of life. For the business by which a person earns his livelihood generally fills his thoughts during by far the greater part of those hours in which his mind is at its best; during them his character is being formed by the way in which he uses his faculties in his work, by the thoughts and the feelings which it suggests, and by his relations to his associates in work, his employers or his employees.

And very often the influence exerted on a person's character by the amount of his income is hardly less, if it is less, than that exerted by the way in which it is earned. It may make little difference to the fulness of life of a family whether its yearly income is £1000 or £5000; but it makes a very great difference whether the income is £30 or £150: for with £150 the family has, with £30 it has not, the material conditions of a complete life. It is true that in religion, in the family affections and in friendship, even the poor may find scope for many of those faculties which are the source of the highest happiness. But the conditions which surround extreme poverty, especially in densely crowded places, tend to deaden the higher faculties. Those who have been called the Residuum of our large towns have little opportunity for friendship; they know nothing of the decencies and the quiet, and very little even of the unity of family life; and religion often fails to reach them. No doubt their physical, mental, and moral ill-health is partly due to other causes than poverty: but this is the chief cause.

And, in addition to the Residuum, there are vast numbers of people both in town and country who are brought up with insufficient food, clothing, and house-room; whose education is broken off early in order that they may go to work for wages; who thenceforth are engaged during long hours in exhausting toil with imperfectly nourished bodies, and have therefore no chance of developing their higher mental faculties. Their life is not necessarily unhealthy or unhappy. Rejoicing in their affections towards God and man, and perhaps even possessing some natural refinement of feeling, they may lead lives that are far less incomplete than those of many, who have more material wealth. But, for all that, their poverty is a great and almost unmixed evil to them. Even when they are well, their weariness often amounts to pain, while their pleasures are few; and when sickness comes, the suffering caused by poverty increases tenfold. And, though a contented spirit may go far towards reconciling them to these evils, there are others to which it ought not to reconcile them. Overworked and undertaught, weary and careworn, without quiet and without leisure, they have no chance of making the best of their mental faculties.

Although then some of the evils which commonly go with poverty are not its necessary consequences; yet, broadly speaking, "the destruction of the poor is their poverty," and the study of the causes of poverty is the study of the causes of the degradation of a large part of mankind.

8sect; 2. Slavery was regarded by Aristotle as an ordinance of nature, and so probably was it by the slaves themselves in olden time. The dignity of man was proclaimed by the Christian religion: it has been asserted with increasing vehemence during the last hundred years: but, only through the spread of education during quite recent times, are we beginning to feel the full import of the phrase. Now at last we are setting ourselves seriously to inquire whether it is necessary that there should be any so-called "lower classes" at all: that is, whether there need be large numbers of people doomed from their birth to hard work in order to provide for others the requisites of a refined and cultured life; while they themselves are prevented by their poverty and toil from having any share or part in that life.

The hope that poverty and ignorance may gradually be extinguished, derives indeed much support from the steady progress of the working classes during the nineteenth century. The steam-engine has relieved them of much exhausting and degrading toil; wages have risen; education has been improved and become more general; the railway and the printing-press have enabled members of the same trade in different parts of the country to communicate easily with one another, and to undertake and carry out broad and far-seeing lines of policy; while the growing demand for intelligent work has caused the artisan classes to increase so rapidly that they now outnumber those whose labour is entirely unskilled. A great part of the artisans have ceased to belong to the "lower classes" in the sense in which the term was originally used; and some of them already lead a more refined and noble life than did the majority of the upper classes even a century ago.

This progress has done more than anything else to give practical interest to the question whether it is really impossible that all should start in the world with a fair chance of leading a cultured life, free from the pains of poverty and the stagnating influences of excessive mechanical toil; and this question is being pressed to the front by the growing earnestness of the age.

The question cannot be fully answered by economic science. For the answer depends partly on the moral and political capabilities of human nature, and on these matters the economist has no special means of information: he must do as others do, and guess as best he can. But the answer depends in a great measure upon facts and inferences, which are within the province of economics; and this it is which gives to economic studies their chief and their highest interest.

8sect; 3. It might have been expected that a science, which deals with questions so vital for the wellbeing of mankind, would have engaged the attention of many of the ablest thinkers of every age, and be now well advanced towards maturity. But the fact is that the number of scientific economists has always been small relatively to the difficulty of the work to be done; so that the science is still almost in its infancy. One cause of this is that the bearing of economics on the higher wellbeing of man has been overlooked. Indeed, a science which has wealth for its subject-matter, is often repugnant at first sight to many students; for those who do most to advance the boundaries of knowledge, seldom care much about the possession of wealth for its own sake.

But a more important cause is that many of those conditions of industrial life, and of those methods of production, distribution and consumption, with which modern economic science is concerned, are themselves only of recent date. It is indeed true that the change in substance is in some respects not so great as the change in outward form; and much more of modern economic theory, than at first appears, can be adapted to the conditions of backward races. But unity in substance, underlying many varieties of form, is not easy to detect; and changes in form have had the effect of making writers in all ages profit less than they otherwise might have done by the work of their predecessors.

The economic conditions of modern life, though more complex, are in many ways more definite than those of earlier times. Business is more clearly marked off from other concerns; the rights of individuals as against others and as against the community are more sharply defined; and above all the emancipation from custom, and the growth of free activity, of constant forethought and restless enterprise, have given a new precision and a new prominence to the causes that govern the relative values of different things and different kinds of labour.

8sect; 4. It is often said that the modern forms of industrial life are distinguished from the earlier by being more competitive. But this account is not quite satisfactory. The strict meaning of competition seems to be the racing of one person against another, with special reference to bidding for the sale or purchase of anything. This kind of racing is no doubt both more intense and more widely extended than it used to be: but it is only a secondary, and one might almost say, an accidental consequence from the fundamental characteristics of modern industrial life.

There is no one term that will express these characteristics adequately. They are, as we shall presently see, a certain independence and habit of choosing one's own course for oneself, a self-reliance; a deliberation and yet a promptness of choice and judgment, and a habit of forecasting the future and of shaping one's course with reference to distant aims. They may and often do cause people to compete with one another; but on the other hand they may tend, and just now indeed they are tending, in the direction of co-operation and combination of all kinds good and evil. But these tendencies towards collective ownership and collective action are quite different from those of earlier times, because they are the result not of custom, not of any passive drifting into association with one's neighbours, but of free choice by each individual of that line of conduct which after careful deliberation seems to him the best suited for attaining his ends, whether they are selfish or unselfish.

The term "competition" has gathered about it evil savour, and has come to imply a certain selfishness and indifference to the wellbeing of others. Now it is true that there is less deliberate selfishness in early than in modern forms of industry; but there is also less deliberate unselfishness. It is deliberateness, and not selfishness, that is the characteristic of the modern age.

For instance, while custom in a primitive society extends the limits of the family, and prescribes certain duties to one's neighbours which fall into disuse in a later civilization, it also prescribes an attitude of hostility to strangers. In a modern society the obligations of family kindness become more intense, though they are concentrated on a narrower area; and neighbours are put more nearly on the same footing with strangers. In ordinary dealings with both of them the standard of fairness and honesty is lower than in some of the dealings of a primitive people with their neighbours: but it is much higher than in their dealings with strangers. Thus it is the ties of neighbourhood alone that have been relaxed: the ties of family are in many ways stronger than before, family affection leads to much more self-sacrifice and devotion than it used to do; and sympathy with those who are strangers to us is a growing source of a kind of deliberate unselfishness, that never existed before the modern age. That country which is the birthplace of modern competition devotes a larger part of its income than any other to charitable uses, and spent twenty millions on purchasing the freedom of the slaves in the West Indies.

In every age poets and social reformers have tried to stimulate the people of their own time to a nobler life by enchanting stories of the virtues of the heroes of old. But neither the records of history nor the contemporary observation of backward races, when carefully studied, give any support to the doctrine that man is on the whole harder and harsher than he was; or that he was ever more willing than he is now to sacrifice his own happiness for the benefit of others in cases where custom and law have left him free to choose his own course. Among races, whose intellectual capacity seems not to have developed in any other direction, and who have none of the originating power of the modern business man, there will be found many who show an evil sagacity in driving a hard bargain in a market even with their neighbours. No traders are more unscrupulous in taking advantage of the necessities of the unfortunate than are the corn-dealers and money-lenders of the East.

Again, the modern era has undoubtedly given new openings for dishonesty in trade. The advance of knowledge has discovered new ways of making things appear other than they are, and has rendered possible many new forms of adulteration. The producer is now far removed from the ultimate consumer; and his wrong-doings are not visited with the prompt and sharp punishment which falls on the head of a person who, being bound to live and die in his native village, plays a dishonest trick on one of his neighbours. The opportunities for knavery are certainly more numerous than they were; but there is no reason for thinking that people avail themselves of a larger proportion of such opportunities than they used to do. On the contrary, modern methods of trade imply habits of trustfulness on the one side and a power of resisting temptation to dishonesty on the other, which do not exist among a backward people. Instances of simple truth and personal fidelity are met with under all social conditions: but those who have tried to establish a business of modern type in a backward country find that they can scarcely ever depend on the native population for filling posts of trust. It is even more difficult to dispense with imported assistance for work, which calls for a strong moral character, than for that which requires great skill and mental ability. Adulteration and fraud in trade were rampant in the middle ages to an extent that is very astonishing, when we consider the difficulties of wrong-doing without detection at that time.

In every stage of civilization, in which the power of money has been prominent, poets in verse and prose have delighted to depict a past truly "Golden Age," before the pressure of mere material gold had been felt. Their idyllic pictures have been beautiful, and have stimulated noble imaginations and resolves; but they have had very little historical truth. Small communities with simple wants for which the bounty of nature has made abundant provision, have indeed sometimes been nearly free from care about their material needs, and have not been tempted to sordid ambitions. But whenever we can penetrate to the inner life of a crowded population under primitive conditions in our own time, we find more want, more narrowness, and more hardness than was manifest at a distance: and we never find a more widely diffused comfort alloyed by less suffering than exists in the western world to-day. We ought therefore not to brand the forces, which have made modern civilization, by a name which suggests evil.

It is perhaps not reasonable that such a suggestion should attach to the term "competition"; but in fact it does. In fact, when competition is arraigned, its anti-social forms are made prominent; and care is seldom taken to inquire whether there are not other forms of it, which are so essential to the maintenance of energy and spontaneity, that their cessation might probably be injurious on the balance to social wellbeing. The traders or producers, who find that a rival is offering goods at a lower price than will yield them a good profit, are angered at his intrusion, and complain of being wronged; even though it may be true that those who buy the cheaper goods are in greater need than themselves, and that the energy and resourcefulness of their rival is a social gain. In many cases the "regulation of competition" is a misleading term, that veils the formation of a privileged class of producers, who often use their combined force to frustrate the attempts of an able man to rise from a lower class than their own. Under the pretext of repressing anti-social competition, they deprive him of the liberty of carving out for himself a new career, where the services rendered by him to the consumers of the commodity would be greater than the injuries, that he inflicts on the relatively small group which objects to his competition.

If competition is contrasted with energetic co-operation in unselfish work for the public good, then even the best forms of competition are relatively evil; while its harsher and meaner forms are hateful. And in a world in which all men were perfectly virtuous, competition would be out of place; but so also would be private property and every form of private right. Men would think only of their duties; and no one would desire to have a larger share of the comforts and luxuries of life than his neighbours. Strong producers could easily bear a touch of hardship; so they would wish that their weaker neighbours, while producing less should consume more. Happy in this thought, they would work for the general good with all the energy, the inventiveness, and the eager initiative that belonged to them; and mankind would be victorious in contests with nature at every turn. Such is the Golden Age to which poets and dreamers may look forward. But in the responsible conduct of affairs, it is worse than folly to ignore the imperfections which still cling to human nature.

History in general, and especially the history of socialistic ventures, shows that ordinary men are seldom capable of pure ideal altruism for any considerable time together; and that the exceptions are to be found only when the masterful fervour of a small band of religious enthusiasts makes material concerns to count for nothing in comparison with the higher faith.

No doubt men, even now, are capable of much more unselfish service than they generally render: and the supreme aim of the economist is to discover how this latent social asset can be developed most quickly, and turned to account most wisely. But he must not decry competition in general, without analysis: he is bound to retain a neutral attitude towards any particular manifestation of it until he is sure that, human nature being what it is, the restraint of competition would not be more anti-social in its working than the competition itself.

We may conclude then that the term "competition" is not well suited to describe the special characteristics of industrial life in the modern age. We need a term that does not imply any moral qualities, whether good or evil, but which indicates the undisputed fact that modern business and industry are characterized by more self-reliant habits, more forethought, more deliberate and free choice. There is not any one term adequate for this purpose: but Freedom of Industry and Enterprise, or more shortly, Economic Freedom, points in the right direction; and it may be used in the absence of a better. Of course this deliberate and free choice may lead to a certain departure from individual freedom when co-operation or combination seems to offer the best route to the desired end. The questions how far these deliberate forms of association are likely to destroy the freedom in which they had their origin and how far they are likely to be conducive to the public weal, lie beyond the scope of the present volume3.

8sect; 5. This introductory chapter was followed in earlier editions by two short sketches: the one related to the growth of free enterprise and generally of economic freedom, and the other to the growth of economic science. They have no claim to be systematic histories, however compressed; they aim only at indicating some landmarks on the routes by which economic structure and economic thought have travelled to their present position. They are now transferred to Appendices A and B at the end of this volume, partly because their full drift can best be seen after some acquaintance has been made with the subject-matter of economics; and partly because in the twenty years, which have elapsed since they were first written, public opinion as to the position which the study of economic and social science should hold in a liberal education has greatly developed. There is less need now than formerly to insist that the economic problems of the present generation derive much of their subject-matter from technical and social changes that are of recent date, and that their form as well as their urgency assume throughout the effective economic freedom of the mass of the people.

The relations of many ancient Greeks and Romans with the slaves of their households were genial and humane. But even in Attica the physical and moral wellbeing of the great body of the inhabitants was not accepted as a chief aim of the citizen. Ideals of life were high, but they concerned only a few: and the doctrine of value, which is full of complexities in the modern age, could then have been worked out on a plan; such as could be conceived to-day, only if nearly all manual work were superseded by automatic machines which required merely a definite allowance of steam-power and materials, and had no concern with the requirements of a full citizen's life. Much of modern economics might indeed have been anticipated in the towns of the Middle Ages, in which an intelligent and daring spirit was for the first time combined with patient industry. But they were not left to work out their career in peace; and the world had to wait for the dawn of the new economic era till a whole nation was ready for the ordeal of economic freedom.

England especially was gradually prepared for the task; but towards the end of the eighteenth century, the changes, which had so far been slow and gradual, suddenly became rapid and violent. Mechanical inventions, the concentration of industries, and a system of manufacturing on a large scale for distant markets broke up the old traditions of industry, and left everyone to bargain for himself as best he might; and at the same time they stimulated an increase of population for which no provision had been made beyond standing-room in factories and workshops. Thus free competition, or rather, freedom of industry and enterprise, was set loose to run, like a huge untrained monster, its wayward course. The abuse of their new power by able but uncultured business men led to evils on every side; it unfitted mothers for their duties, it weighed down children with overwork and disease; and in many places it degraded the race. Meanwhile the kindly meant recklessness of the poor law did even more to lower the moral and physical energy of Englishmen than the hard-hearted recklessness of the manufacturing discipline: for by depriving the people of those qualities which would fit them for the new order of things, it increased the evil and diminished the good caused by the advent of free enterprise.

And yet the time at which free enterprise was showing itself in an unnaturally harsh form, was the very time in which economists were most lavish in their praises of it. This was partly because they saw clearly, what we of this generation have in a great measure forgotten, the cruelty of the yoke of custom and rigid ordinance which it had displaced; and partly because the general tendency of Englishmen at the time was to hold that freedom in all matters, political and social, was worth having at every cost except the loss of security. But partly also it was that the productive forces which free enterprise was giving to the nation, were the only means by which it could offer a successful resistance to Napoleon. Economists therefore treated free enterprise not indeed as an unmixed good, but as a less evil than such regulation as was practicable at the time.

Adhering to the lines of thought that had been started chiefly by mediæval traders, and continued by French and English philosophers in the latter half of the eighteenth century, Ricardo and his followers developed a theory of the action of free enterprise (or, as they said, free competition), which contained many truths, that will be probably important so long as the world exists. Their work was wonderfully complete within the narrow area which it covered. But much of the best of it consists of problems relating to rent and the value of corn:—problems on the solution of which the fate of England just then seemed to depend; but many of which, in the particular form in which they were worked out by Ricardo, have very little direct bearing on the present state of things.

A good deal of the rest of their work was narrowed by its regarding too exclusively the peculiar condition of England at that time; and this narrowness has caused a reaction. So that now, when more experience, more leisure, and greater material resources have enabled us to bring free enterprise somewhat under control, to diminish its power of doing evil and increase its power of doing good, there is growing up among many economists a sort of spite against it. Some even incline to exaggerate its evils, and attribute to it the ignorance and suffering, which are the results either of tyranny and oppression in past ages, or of the misunderstanding and mismanagement of economic freedom.

Intermediate between these two extremes are the great body of economists who, working on parallel lines in many different countries, are bringing to their studies an unbiassed desire to ascertain the truth, and a willingness to go through with the long and heavy work by which alone scientific results of any value can be obtained. Varieties of mind, of temper, of training and of opportunities lead them to work in different ways, and to give their chief attention to different parts of the problem. All are bound more or less to collect and arrange facts and statistics relating to past and present times; and all are bound to occupy themselves more or less with analysis and reasoning on the basis of those facts which are ready at hand: but some find the former task the more attractive and absorbing, and others the latter. This division of labour, however, implies not opposition, but harmony of purpose. The work of all adds something or other to that knowledge, which enables us to understand the influences exerted on the quality and tone of man's life by the manner in which he earns his livelihood, and by the character of that livelihood.

BOOK I, CHAPTER II: THE SUBSTANCE OF ECONOMICS.

8sect; 1. Economics is a study of men as they live and move and think in the ordinary business of life. But it concerns itself chiefly with those motives which affect, most powerfully and most steadily, man's conduct in the business part of his life. Everyone who is worth anything carries his higher nature with him into business; and, there as elsewhere, he is influenced by his personal affections, by his conceptions of duty and his reverence for high ideals. And it is true that the best energies of the ablest inventors and organizers of improved methods and appliances are stimulated by a noble emulation more than by any love of wealth for its own sake. But, for all that, the steadiest motive to ordinary business work is the desire for the pay which is the material reward of work. The pay may be on its way to be spent selfishly or unselfishly, for noble or base ends; and here the variety of human nature comes into play. But the motive is supplied by a definite amount of money: and it is this definite and exact money measurement of the steadiest motives in business life, which has enabled economics far to outrun every other branch of the study of man. Just as the chemist's fine balance has made chemistry more exact than most other physical sciences; so this economist's balance, rough and imperfect as it is, has made economics more exact than any other branch of social science. But of course economics cannot be compared with the exact physical sciences: for it deals with the ever changing and subtle forces of human nature4.

The advantage which economics has over other branches of social science appears then to arise from the fact that its special field of work gives rather larger opportunities for exact methods than any other branch. It concerns itself chiefly with those desires, aspirations and other affections of human nature, the outward manifestations of which appear as incentives to action in such a form that the force or quantity of the incentives can be estimated and measured with some approach to accuracy; and which therefore are in some degree amenable to treatment by scientific machinery. An opening is made for the methods and the tests of science as soon as the force of a person's motives—not the motives themselves—can be approximately measured by the sum of money, which he will just give up in order to secure a desired satisfaction; or again by the sum which is just required to induce him to undergo a certain fatigue.

It is essential to note that the economist does not claim to measure any affection of the mind in itself, or directly; but only indirectly through its effect. No one can compare and measure accurately against one another even his own mental states at different times: and no one can measure the mental states of another at all except indirectly and conjecturally by their effects. Of course various affections belong to man's higher nature and others to his lower, and are thus different in kind. But, even if we confine our attention to mere physical pleasures and pains of the same kind, we find that they can only be compared indirectly by their effects. In fact, even this comparison is necessarily to some extent conjectural, unless they occur to the same person at the same time.

For instance the pleasures which two persons derive from smoking cannot be directly compared: nor can even those which the same person derives from it at different times. But if we find a man in doubt whether to spend a few pence on a cigar, or a cup of tea, or on riding home instead of walking home, then we may follow ordinary usage, and say that he expects from them equal pleasures.

If then we wish to compare even physical gratifications, we must do it not directly, but indirectly by the incentives which they afford to action. If the desires to secure either of two pleasures will induce people in similar circumstances each to do just an hour's extra work, or will induce men in the same rank of life and with the same means each to pay a shilling for it; we then may say that those pleasures are equal for our purposes, because the desires for them are equally strong incentives to action for persons under similar conditions.

Thus measuring a mental state, as men do in ordinary life, by its motor-force or the incentive which it affords to action, no new difficulty is introduced by the fact that some of the motives of which we have to take account belong to man's higher nature, and others to his lower.

For suppose that the person, whom we saw doubting between several little gratifications for himself, had thought after a while of a poor invalid whom he would pass on his way home; and had spent some time in making up his mind whether he would choose a physical gratification for himself, or would do a kindly act and rejoice in another's joy. As his desires turned now towards the one, now the other, there would be change in the quality of his mental states; and the philosopher is bound to study the nature of the change.

But the economist studies mental states rather through their manifestations than in themselves; and if he finds they afford evenly balanced incentives to action, he treats them primâ facie as for his purpose equal. He follows indeed in a more patient and thoughtful way, and with greater precautions, what everybody is always doing every day in ordinary life. He does not attempt to weigh the real value of the higher affections of our nature against those of our lower: he does not balance the love for virtue against the desire for agreeable food. He estimates the incentives to action by their effects just in the same way as people do in common life. He follows the course of ordinary conversation, differing from it only in taking more precautions to make clear the limits of his knowledge as he goes. He reaches his provisional conclusions by observations of men in general under given conditions without attempting to fathom the mental and spiritual characteristics of individuals. But he does not ignore the mental and spiritual side of life. On the contrary, even for the narrower uses of economic studies, it is important to know whether the desires which prevail are such as will help to build up a strong and righteous character. And in the broader uses of those studies, when they are being applied to practical problems, the economist, like every one else, must concern himself with the ultimate aims of man, and take account of differences in real value between gratifications that are equally powerful incentives to action and have therefore equal economic measures. A study of these measures is only the starting-point of economics: but it is the starting-point5.

8sect; 2. There are several other limitations of the measurement of motive by money to be discussed. The first of these arises from the necessity of taking account of the variations in the amount of pleasure, or other satisfaction, represented by the same sum of money to different persons and under different circumstances.

A shilling may measure a greater pleasure (or other satisfaction) at one time than at another even for the same person; because money may be more plentiful with him, or because his sensibility may vary6. And persons whose antecedents are similar, and who are outwardly like one another, are often affected in very different ways by similar events. When, for instance, a band of city school children are sent out for a day's holiday in the country, it is probable that no two of them derive from it enjoyment exactly the same in kind, or equal in intensity. The same surgical operation causes different amounts of pain to different people. Of two parents who are, so far as we can tell, equally affectionate, one will suffer much more than the other from the loss of a favourite son. Some who are not very sensitive generally are yet specially susceptible to particular kinds of pleasure and pain; while differences in nature and education make one man's total capacity for pleasure or pain much greater than another's.

It would therefore not be safe to say that any two men with the same income derive equal benefit from its use; or that they would suffer equal pain from the same diminution of it. Although when a tax of £1 is taken from each of two persons having an income of £300 a-year, each will give up that £1 worth of pleasure (or other satisfaction) which he can most easily part with, i.e. each will give up what is measured to him by just £1; yet the intensities of the satisfaction given up may not be nearly equal.

Nevertheless, if we take averages sufficiently broad to cause the personal peculiarities of individuals to counterbalance one another, the money which people of equal incomes will give to obtain a benefit or avoid an injury is a good measure of the benefit or injury. If there are a thousand persons living in Sheffield, and another thousand in Leeds, each with about £100 a-year, and a tax of £1 is levied on all of them; we may be sure that the loss of pleasure or other injury which the tax will cause in Sheffield is of about equal importance with that which it will cause in Leeds: and anything that increased all the incomes by £1 would give command over equivalent pleasures and other benefits in the two towns. This probability becomes greater still if all of them are adult males engaged in the same trade; and therefore presumably somewhat similar in sensibility and temperament, in taste and education. Nor is the probability much diminished, if we take the family as our unit, and compare the loss of pleasure that results from diminishing by £1 the income of each of a thousand families with incomes of £100 a-year in the two places.

Next we must take account of the fact that a stronger incentive will be required to induce a person to pay a given price for anything if he is poor than if he is rich. A shilling is the measure of less pleasure, or satisfaction of any kind, to a rich man than to a poor one. A rich man in doubt whether to spend a shilling on a single cigar, is weighing against one another smaller pleasures than a poor man, who is doubting whether to spend a shilling on a supply of tobacco that will last him for a month. The clerk with £100 a-year will walk to business in a much heavier rain than the clerk with £300 a-year; for the cost of a ride by tram or omnibus measures a greater benefit to the poorer man than to the richer. If the poorer man spends the money, he will suffer more from the want of it afterwards than the richer would. The benefit that is measured in the poorer man's mind by the cost is greater than that measured by it in the richer man's mind.

But this source of error also is lessened when we are able to consider the actions and the motives of large groups of people. If we know, for instance, that a bank failure has taken £200,000 from the people of Leeds and £100,000 from those of Sheffield, we may fairly assume that the suffering caused in Leeds has been about twice as great as in Sheffield; unless indeed we have some special reason for believing that the shareholders of the bank in the one town were a richer class than those in the other; or that the loss of employment caused by it pressed in uneven proportions on the working classes in the two towns.

By far the greater number of the events with which economics deals affect in about equal proportions all the different classes of society; so that if the money measures of the happiness caused by two events are equal, it is reasonable and in accordance with common usage to regard the amounts of the happiness in the two cases as equivalent. And, further, as money is likely to be turned to the higher uses of life in about equal proportions, by any two large groups of people taken without special bias from any two parts of the western world, there is even some primâ facie probability that equal additions to their material resources will make about equal additions to the fullness of life, and the true progress of the human race.

8sect; 3. To pass to another point. When we speak of the measurement of desire by the action to which it forms the incentive, it is not to be supposed that we assume every action to be deliberate, and the outcome of calculation. For in this, as in every other respect, economics takes man just as he is in ordinary life: and in ordinary life people do not weigh beforehand the results of every action, whether the impulses to it come from their higher nature or their lower7.

Now the side of life with which economics is specially concerned is that in which man's conduct is most deliberate, and in which he most often reckons up the advantages and disadvantages of any particular action before he enters on it. And further it is that side of his life in which, when he does follow habit and custom, and proceeds for the moment without calculation, the habits and customs themselves are most nearly sure to have arisen from a close and careful watching the advantages and disadvantages of different courses of conduct. There will not in general have been any formal reckoning up of two sides of a balance-sheet: but men going home from their day's work, or in their social meetings, will have said to one another, "It did not answer to do this, it would have been better to do that," and so on. What makes one course answer better than another, will not necessarily be a selfish gain, nor any material gain; and it will often have been argued that "though this or that plan saved a little trouble or a little money, yet it was not fair to others," and "it made one look mean," or "it made one feel mean."

It is true that when a habit or a custom, which has grown up under one set of conditions, influences action under other conditions, there is so far no exact relation between the effort and the end which is attained by it. In backward countries there are still many habits and customs similar to those that lead a beaver in confinement to build himself a dam; they are full of suggestiveness to the historian, and must be reckoned with by the legislator. But in business matters in the modern world such habits quickly die away.

Thus then the most systematic part of people's lives is generally that by which they earn their living. The work of all those engaged in any one occupation can be carefully observed; general statements can be made about it, and tested by comparison with the results of other observations; and numerical estimates can be framed as to the amount of money or general purchasing power that is required to supply a sufficient motive for them.

The unwillingness to postpone enjoyment, and thus to save for future use, is measured by the interest on accumulated wealth which just affords a sufficient incentive to save for the future. This measurement presents however some special difficulties, the study of which must be postponed.

8sect; 4. Here, as elsewhere, we must bear in mind that the desire to make money does not itself necessarily proceed from motives of a low order, even when it is to be spent on oneself. Money is a means towards ends, and if the ends are noble, the desire for the means is not ignoble. The lad who works hard and saves all he can, in order to be able to pay his way afterwards at a University, is eager for money; but his eagerness is not ignoble. In short, money is general purchasing power, and is sought as a means to all kinds of ends, high as well as low, spiritual as well as material8.

Thus though it is true that "money" or "general purchasing power" or "command over material wealth," is the centre around which economic science clusters; this is so, not because money or material wealth is regarded as the main aim of human effort, nor even as affording the main subject-matter for the study of the economist, but because in this world of ours it is the one convenient means of measuring human motive on a large scale. If the older economists had made this clear, they would have escaped many grievous misrepresentations; and the splendid teachings of Carlyle and Ruskin as to the right aims of human endeavour and the right uses of wealth, would not then have been marred by bitter attacks on economics, based on the mistaken belief that that science had no concern with any motive except the selfish desire for wealth, or even that it inculcated a policy of sordid selfishness9.

Again, when the motive to a man's action is spoken of as supplied by the money which he will earn, it is not meant that his mind is closed to all other considerations save those of gain. For even the most purely business relations of life assume honesty and good faith; while many of them take for granted, if not generosity, yet at least the absence of meanness, and the pride which every honest man takes in acquitting himself well. Again, much of the work by which people earn their living is pleasurable in itself; and there is truth in the contention of socialists that more of it might be made so. Indeed even business work, that seems at first sight unattractive, often yields a great pleasure by offering scope for the exercise of men's faculties, and for their instincts of emulation and of power. For just as a racehorse or an athlete strains every nerve to get in advance of his competitors, and delights in the strain; so a manufacturer or a trader is often stimulated much more by the hope of victory over his rivals than by the desire to add something to his fortune10.

8sect; 5. It has indeed always been the practice of economists to take careful account of all the advantages which attract people generally towards an occupation, whether they appear in a money form or not. Other things being equal, people will prefer an occupation in which they do not need to soil their hands, in which they enjoy a good social position, and so on; and since these advantages affect, not indeed every one exactly in the same way, but most people in nearly the same way, their attractive force can be estimated and measured by the money wages to which they are regarded as equivalent.

Again, the desire to earn the approval, to avoid the contempt of those around one is a stimulus to action which often works with some sort of uniformity in any class of persons at a given time and place; though local and temporary conditions influence greatly not only the intensity of the desire for approval, but also the range of persons whose approval is desired. A professional man, for instance, or an artisan will be very sensitive to the approval or disapproval of those in the same occupation, and care little for that of other people; and there are many economic problems, the discussion of which would be altogether unreal, if care were not taken to watch the direction and to estimate pretty closely the force of motives such as these.

As there may be a taint of selfishness in a man's desire to do what seems likely to benefit his fellow-workers, so there may be an element of personal pride in his desire that his family should prosper during his life and after it. But still the family affections generally are so pure a form of altruism, that their action might have shown little semblance of regularity, had it not been for the uniformity in the family relations themselves. As it is, their action is fairly regular; and it has always been fully reckoned with by economists, especially in relation to the distribution of the family income between its various members, the expenses of preparing children for their future career, and the accumulation of wealth to be enjoyed after the death of him by whom it has been earned.

It is then not the want of will but the want of power, that prevents economists from reckoning in the action of motives such as these; and they welcome the fact that some kinds of philanthropic action can be described in statistical returns, and can to a certain extent be reduced to law, if sufficiently broad averages are taken. For indeed there is scarcely any motive so fitful and irregular, but that some law with regard to it can be detected by the aid of wide and patient observation. It would perhaps be possible even now to predict with tolerable closeness the subscriptions that a population of a hundred thousand Englishmen of average wealth will give to support hospitals and chapels and missions; and, in so far as this can be done, there is a basis for an economic discussion of supply and demand with reference to the services of hospital nurses, missionaries and other religious ministers. It will however probably be always true that the greater part of those actions, which are due to a feeling of duty and love of one's neighbour, cannot be classed, reduced to law and measured; and it is for this reason, and not because they are not based on self-interest, that the machinery of economics cannot be brought to bear on them.

8sect; 6. Perhaps the earlier English economists confined their attention too much to the motives of individual action. But in fact economists, like all other students of social science, are concerned with individuals chiefly as members of the social organism. As a cathedral is something more than the stones of which it is made, as a person is something more than a series of thoughts and feelings, so the life of society is something more than the sum of the lives of its individual members. It is true that the action of the whole is made up of that of its constituent parts; and that in most economic problems the best starting-point is to be found in the motives that affect the individual, regarded not indeed as an isolated atom, but as a member of some particular trade or industrial group; but it is also true, as German writers have well urged, that economics has a great and an increasing concern in motives connected with the collective ownership of property, and the collective pursuit of important aims. The growing earnestness of the age, the growing intelligence of the mass of the people, and the growing power of the telegraph, the press, and other means of communication are ever widening the scope of collective action for the public good; and these changes, together with the spread of the co-operative movement, and other kinds of voluntary association are growing up under the influence of various motives besides that of pecuniary gain: they are ever opening to the economist new opportunities of measuring motives whose action it had seemed impossible to reduce to any sort of law.

But in fact the variety of motives, the difficulties of measuring them, and the manner of overcoming those difficulties are among the chief subjects with which we shall be occupied in this treatise. Almost every point touched in the present chapter will need to be discussed in fuller detail with reference to some one or more of the leading problems of economics.

8sect; 7. To conclude provisionally: economists study the actions of individuals, but study them in relation to social rather than individual life; and therefore concern themselves but little with personal peculiarities of temper and character. They watch carefully the conduct of a whole class of people, sometimes the whole of a nation, sometimes only those living in a certain district, more often those engaged in some particular trade at some time and place: and by the aid of statistics, or in other ways, they ascertain how much money on the average the members of the particular group, they are watching, are just willing to pay as the price of a certain thing which they desire, or how much must be offered to them to induce them to undergo a certain effort or abstinence that they dislike. The measurement of motive thus obtained is not indeed perfectly accurate; for if it were, economics would rank with the most advanced of the physical sciences; and not, as it actually does, with the least advanced.

But yet the measurement is accurate enough to enable experienced persons to forecast fairly well the extent of the results that will follow from changes in which motives of this kind are chiefly concerned. Thus, for instance, they can estimate very closely the payment that will be required to produce an adequate supply of labour of any grade, from the lowest to the highest, for a new trade which it is proposed to start in any place. When they visit a factory of a kind that they have never seen before, they can tell within a shilling or two a week what any particular worker is earning, by merely observing how far his is a skilled occupation and what strain it involves on his physical, mental and moral faculties. And they can predict with tolerable certainty what rise of price will result from a given diminution of the supply of a certain thing, and how that increased price will react on the supply.

And, starting from simple considerations of this kind, economists go on to analyse the causes which govern the local distribution of different kinds of industry, the terms on which people living in distant places exchange their goods with one another, and so on: and they can explain and predict the ways in which fluctuations of credit will affect foreign trade; or again the extent to which the burden of a tax will be shifted from those on whom it is levied, on to those for whose wants they cater; and so on.

In all this they deal with man as he is: not with an abstract or "economic" man; but a man of flesh and blood. They deal with a man who is largely influenced by egoistic motives in his business life to a great extent with reference to them; but who is also neither above vanity and recklessness, nor below delight in doing his work well for its own sake, or in sacrificing himself for the good of his family, his neighbours, or his country; a man who is not below the love of a virtuous life for its own sake. They deal with man as he is: but being concerned chiefly with those aspects of life in which the action of motive is so regular that it can be predicted, and the estimate of the motor-forces can be verified by results, they have established their work on a scientific basis.

For in the first place, they deal with facts which can be observed, and quantities which can be measured and recorded; so that when differences of opinion arise with regard to them, the differences can be brought to the test of public and well-established records; and thus science obtains a solid basis on which to work. In the second place, the problems, which are grouped as economic, because they relate specially to man's conduct under the influence of motives that are measurable by a money price, are found to make a fairly homogeneous group. Of course they have a great deal of subject-matter in common: that is obvious from the nature of the case. But, though not so obvious à priori, it will also be found to be true that there is a fundamental unity of form underlying all the chief of them; and that in consequence, by studying them together, the same kind of economy is gained, as by sending a single postman to deliver all the letters in a certain street, instead of each one entrusting his letters to a separate messenger. For the analyses and organized processes of reasoning that are wanted for any one group of them, will be found generally useful for other groups.

The less then we trouble ourselves with scholastic inquiries as to whether a certain consideration comes within the scope of economics, the better. If the matter is important let us take account of it as far as we can. If it is one as to which there exist divergent opinions, such as cannot be brought to the test of exact and well-ascertained knowledge; if it is one on which the general machinery of economic analysis and reasoning cannot get any grip, then let us leave it aside in our purely economic studies. But let us do so simply because the attempt to include it would lessen the certainty and the exactness of our economic knowledge without any commensurate gain; and remembering always that some sort of account of it must be taken by our ethical instincts and our common sense, when they as ultimate arbiters come to apply to practical issues the knowledge obtained and arranged by economics and other sciences.

BOOK I, CHAPTER III: ECONOMIC GENERALIZATIONS OR LAWS.

8sect; 1. It is the business of economics, as of almost every other science, to collect facts, to arrange and interpret them, and to draw inferences from them. "Observation and description, definition and classification are the preparatory activities. But what we desire to reach thereby is a knowledge of the interdependence of economic phenomena.... Induction and deduction are both needed for scientific thought as the right and left foot are both needed for walking11." The methods required for this twofold work are not peculiar to economics; they are the common property of all sciences. All the devices for the discovery of the relations between cause and effect, which are described in treatises on scientific method, have to be used in their turn by the economist: there is not any one method of investigation which can properly be called the method of economics; but every method must be made serviceable in its proper place, either singly or in combination with others. And as the number of combinations that can be made on the chess-board, is so great that probably no two games exactly alike were ever played; so no two games which the student plays with nature to wrest from her her hidden truths, which were worth playing at all, ever made use of quite the same methods in quite the same way.

But in some branches of economic inquiry and for some purposes, it is more urgent to ascertain new facts, than to trouble ourselves with the mutual relations and explanations of those which we already have. While in other branches there is still so much uncertainty as to whether those causes of any event which lie on the surface and suggest themselves at first are both true causes of it and the only causes of it, that it is even more urgently needed to scrutinize our reasoning about facts which we already know, than to seek for more facts.

For this and other reasons, there always has been and there probably always will be a need for the existence side by side of workers with different aptitudes and different aims, some of whom give their chief attention to the ascertainment of facts, while others give their chief attention to scientific analysis; that is taking to pieces complex facts, and studying the relations of the several parts to one another and to cognate facts. It is to be hoped that these two schools will always exist; each doing its own work thoroughly, and each making use of the work of the other. Thus best may we obtain sound generalizations as to the past and trustworthy guidance from it for the future.

8sect; 2. Those physical sciences, which have progressed most beyond the points to which they were brought by the brilliant genius of the Greeks, are not all of them strictly speaking "exact sciences." But they all aim at exactness. That is they all aim at precipitating the result of a multitude of observations into provisional statements, which are sufficiently definite to be brought under test by other observations of nature. These statements, when first put forth, seldom claim a high authority. But after they have been tested by many independent observations, and especially after they have been applied successfully in the prediction of coming events, or of the results of new experiments, they graduate as laws. A science progresses by increasing the number and exactness of its laws; by submitting them to tests of ever increasing severity; and by enlarging their scope till a single broad law contains and supersedes a number of narrower laws, which have been shown to be special instances of it.

In so far as this is done by any science, a student of it can in certain cases say with authority greater than his own (greater perhaps than that of any thinker, however able, who relies on his own resources and neglects the results obtained by previous workers), what results are to be expected from certain conditions, or what are the true causes of a certain known event.

Although the subject-matter of some progressive physical sciences is not, at present at least, capable of perfectly exact measurement; yet their progress depends on the multitudinous co-operation of armies of workers. They measure their facts and define their statements as closely as they can: so that each investigator may start as nearly as possible where those before him left off. Economics aspires to a place in this group of sciences: because though its measurements are seldom exact, and are never final; yet it is ever working to make them more exact, and thus to enlarge the range of matters on which the individual student may speak with the authority of his science.

8sect; 3. Let us then consider more closely the nature of economic laws, and their limitations. Every cause has a tendency to produce some definite result if nothing occurs to hinder it. Thus gravitation tends to make things fall to the ground: but when a balloon is full of gas lighter than air, the pressure of the air will make it rise in spite of the tendency of gravitation to make it fall. The law of gravitation states how any two things attract one another; how they tend to move towards one another, and will move towards one another if nothing interferes to prevent them. The law of gravitation is therefore a statement of tendencies.

It is a very exact statement—so exact that mathematicians can calculate a Nautical Almanac, which will show the moments at which each satellite of Jupiter will hide itself behind Jupiter. They make this calculation for many years beforehand; and navigators take it to sea, and use it in finding out where they are. Now there are no economic tendencies which act as steadily and can be measured as exactly as gravitation can: and consequently there are no laws of economics which can be compared for precision with the law of gravitation.

But let us look at a science less exact than astronomy. The science of the tides explains how the tide rises and falls twice a day under the action of the sun and the moon: how there are strong tides at new and full moon, and weak tides at the moon's first and third quarter; and how the tide running up into a closed channel, like that of the Severn, will be very high; and so on. Thus, having studied the lie of the land and the water all round the British isles, people can calculate beforehand when the tide will probably be at its highest on any day at London Bridge or at Gloucester; and how high it will be there. They have to use the word probably, which the astronomers do not need to use when talking about the eclipses of Jupiter's satellites. For, though many forces act upon Jupiter and his satellites, each one of them acts in a definite manner which can be predicted beforehand: but no one knows enough about the weather to be able to say beforehand how it will act. A heavy downpour of rain in the upper Thames valley, or a strong north-east wind in the German Ocean, may make the tides at London Bridge differ a good deal from what had been expected.

The laws of economics are to be compared with the laws of the tides, rather than with the simple and exact law of gravitation. For the actions of men are so various and uncertain, that the best statement of tendencies, which we can make in a science of human conduct, must needs be inexact and faulty. This might be urged as a reason against making any statements at all on the subject; but that would be almost to abandon life. Life is human conduct, and the thoughts and emotions that grow up around it. By the fundamental impulses of our nature we all—high and low, learned and unlearned—are in our several degrees constantly striving to understand the courses of human action, and to shape them for our purposes, whether selfish or unselfish, whether noble or ignoble. And since we must form to ourselves some notions of the tendencies of human action, our choice is between forming those notions carelessly and forming them carefully. The harder the task, the greater the need for steady patient inquiry; for turning to account the experience, that has been reaped by the more advanced physical sciences; and for framing as best we can well thought-out estimates, or provisional laws, of the tendencies of human action.

8sect; 4. The term "law" means then nothing more than a general proposition or statement of tendencies, more or less certain, more or less definite. Many such statements are made in every science: but we do not, indeed we can not, give to all of them a formal character and name them as laws. We must select; and the selection is directed less by purely scientific considerations than by practical convenience. If there is any general statement which we want to bring to bear so often, that the trouble of quoting it at length, when needed, is greater than that of burdening the discussion with an additional formal statement and an additional technical name, then it receives a special name, otherwise not12.

Thus a law of social science, or a Social Law, is a statement of social tendencies; that is, a statement that a certain course of action may be expected under certain conditions from the members of a social group.

Economic laws, or statements of economic tendencies, are those social laws which relate to branches of conduct in which the strength of the motives chiefly concerned can be measured by a money price.

There is thus no hard and sharp line of division between those social laws which are, and those which are not, to be regarded also as economic laws. For there is a continuous gradation from social laws concerned almost exclusively with motives that can be measured by price, to social laws in which such motives have little place; and which are therefore generally as much less precise and exact than economic laws, as those are than the laws of the more exact physical sciences.

Corresponding to the substantive "law" is the adjective "legal." But this term is used only in connection with "law" in the sense of an ordinance of government; not in connection with "law" the sense of a statement of relation between cause and effect. The adjective used for this purpose is derived from "norma," a term which is nearly equivalent to "law," and might perhaps with advantage be substituted for it in scientific discussions. And following our definition of an economic law, we may say that the course of action which may be expected under certain conditions from the members of an industrial group is the normal action of the members of that group relatively to those conditions.

This use of the term Normal has been misunderstood; and it may be well to say something as to the unity in difference which underlies various uses of the term. When we talk of a Good man or a Strong man, we refer to excellence or strength of those particular physical mental or moral qualities which are indicated in the context. A strong judge has seldom the same qualities as a strong rower; a good jockey is not always of exceptional virtue. In the same way every use of the term normal implies the predominance of certain tendencies which appear likely to be more or less steadfast and persistent in their action over those which are relatively exceptional and intermittent. Illness is an abnormal condition of man: but a long life passed without any illness is abnormal. During the melting of the snows, the Rhine rises above its normal level: but in a cold dry spring when it is less than usual above that normal level, it may be said to be abnormally low (for that time of year). In all these cases normal results are those which may be expected as the outcome of those tendencies which the context suggests; or, in other words, which are in accordance with those "statements of tendency," those Laws or Norms, which are appropriate to the context.

This is the point of view from which it is said that normal economic action is that which may be expected in the long run under certain conditions (provided those conditions are persistent) from the members of an industrial group. It is normal that bricklayers in most parts of England are willing to work for 10d. an hour, but refuse to work for 7d. In Johannesburg it may be normal that a brick-layer should refuse work at much less than £1 a day. The normal price of bona fide fresh laid eggs may be taken to be a penny when nothing is said as to the time of the year: and yet threepence may be the normal price in town during January; and twopence may be an abnormally low price then, caused by "unseasonable" warmth.

Another misunderstanding to be guarded against arises from the notion that only those economic results are normal, which are due to the undisturbed action of free competition. But the term has often to be applied to conditions in which perfectly free competition does not exist, and can hardly even be supposed to exist; and even where free competition is most dominant, the normal conditions of every fact and tendency will include vital elements that are not a part of competition nor even akin to it. Thus, for instance, the normal arrangement of many transactions in retail and wholesale trade, and on Stock and Cotton Exchanges, rests on the assumption that verbal contracts, made without witnesses, will be honourably discharged; and in countries in which this assumption cannot legitimately be made, some parts of the Western doctrine of normal value are inapplicable. Again, the prices of various Stock Exchange securities are affected "normally" by the patriotic feelings not only of the ordinary purchasers, but of the brokers themselves: and so on.

Lastly it is sometimes erroneously supposed that normal action in economics is that which is right morally. But that is to be understood only when the context implies that the action is being judged from the ethical point of view. When we are considering the facts of the world, as they are, and not as they ought to be, we shall have to regard as "normal" to the circumstances in view, much action which we should use our utmost efforts to stop. For instance, the normal condition of many of the very poorest inhabitants of a large town is to be devoid of enterprise, and unwilling to avail themselves of the opportunities that may offer for a healthier and less squalid life elsewhere; they have not the strength, physical, mental and moral, required for working their way out of their miserable surroundings. The existence of a considerable supply of labour ready to make match-boxes at a very low rate is normal in the same way that a contortion of the limbs is a normal result of taking strychnine. It is one result, a deplorable result, of those tendencies the laws of which we have to study. This illustrates one peculiarity which economics shares with a few other sciences, the nature of the material of which can be modified by human effort. Science may suggest a moral or practical precept to modify that nature and thus modify the action of laws of nature. For instance, economics may suggest practical means of substituting capable workers for those who can only do such work as match-box making; as physiology may suggest measures for so modifying the breeds of cattle that they mature early, and carry much flesh on light frames. The laws of the fluctuation of credit and prices have been much altered by increased powers of prediction.

Again when "normal" prices are contrasted with temporary or market prices, the term refers to the dominance in the long run of certain tendencies under given conditions. But this raises some difficult questions which may be postponed13.

8sect; 5. It is sometimes said that the laws of economics are "hypothetical." Of course, like every other science, it undertakes to study the effects which will be produced by certain causes, not absolutely, but subject to the condition that other things are equal, and that the causes are able to work out their effects undisturbed. Almost every scientific doctrine, when carefully and formally stated, will be found to contain some proviso to the effect that other things are equal: the action of the causes in question is supposed to be isolated; certain effects are attributed to them, but only on the hypothesis that no cause is permitted to enter except those distinctly allowed for. It is true however that the condition that time must be allowed for causes to produce their effects is a source of great difficulty in economics. For meanwhile the material on which they work, and perhaps even the causes themselves, may have changed; and the tendencies which are being described will not have a sufficiently "long run" in which to work themselves out fully. This difficulty will occupy our attention later on.

The conditioning clauses implied in a law are not continually repeated, but the common sense of the reader supplies them for himself. In economics it is necessary to repeat them oftener than elsewhere, because its doctrines are more apt than those of any other science to be quoted by persons who have had no scientific training, and who perhaps have heard them only at second hand, and without their context. One reason why ordinary conversation is simpler in form than a scientific treatise, is that in conversation we can safely omit conditioning clauses; because, if the hearer does not supply them for himself, we quickly detect the misunderstanding, and set it right. Adam Smith and many of the earlier writers on economics attained seeming simplicity by following the usages of conversation, and omitting conditioning clauses. But this has caused them to be constantly misunderstood, and has led to much waste of time and trouble in profitless controversy; they purchased apparent ease at too great a cost even for that gain14.

Though economic analysis and general reasoning are of wide application, yet every age and every country has its own problems; and every change in social conditions is likely to require a new development of economic doctrines15.

BOOK I, CHAPTER IV: THE ORDER AND AIMS OF ECONOMIC STUDIES.

8sect; 1. We have seen that the economist must be greedy of facts; but that facts by themselves teach nothing. History tells of sequences and coincidences; but reason alone can interpret and draw lessons from them. The work to be done is so various that much of it must be left to be dealt with by trained common sense, which is the ultimate arbiter in every practical problem. Economic science is but the working of common sense aided by appliances of organized analysis and general reasoning, which facilitate the task of collecting, arranging, and drawing inferences from particular facts. Though its scope is always limited, though its work without the aid of common sense is vain, yet it enables common sense to go further in difficult problems than would otherwise be possible.

Economic laws are statements with regard to the tendencies of man's action under certain conditions. They are hypothetical only in the same sense as are the laws of the physical sciences: for those laws also contain or imply conditions. But there is more difficulty in making the conditions clear, and more danger in any failure to do so, in economics than in physics. The laws of human action are not indeed as simple, as definite or as clearly ascertainable as the law of gravitation; but many of them may rank with the laws of those natural sciences which deal with complex subject-matter.

The raison d'être of economics as a separate science is that it deals chiefly with that part of man's action which is most under the control of measurable motives; and which therefore lends itself better than any other to systematic reasoning and analysis. We cannot indeed measure motives of any kind, whether high or low, as they are in themselves: we can measure only their moving force. Money is never a perfect measure of that force; and it is not even a tolerably good measure unless careful account is taken of the general conditions under which it works, and especially of the riches or poverty of those whose action is under discussion. But with careful precautions money affords a fairly good measure of the moving force of a great part of the motives by which men's lives are fashioned.

The study of theory must go hand in hand with that of facts: and for dealing with most modern problems it is modern facts that are of the greatest use. For the economic records of the distant past are in some respects slight and untrustworthy; and the economic conditions of early times are wholly unlike those of the modern age of free enterprise, of general education, of true democracy, of steam, of the cheap press and the telegraph.

8sect; 2. Economics has then as its purpose firstly to acquire knowledge for its own sake, and secondly to throw light on practical issues. But though we are bound, before entering on any study, to consider carefully what are its uses, we should not plan out our work with direct reference to them. For by so doing we are tempted to break off each line of thought as soon as it ceases to have an immediate bearing on that particular aim which we have in view at the time: the direct pursuit of practical aims leads us to group together bits of all sorts of knowledge, which have no connection with one another except for the immediate purposes of the moment; and which throw but little light on one another. Our mental energy is spent in going from one to another; nothing is thoroughly thought out; no real progress is made.

The best grouping, therefore, for the purposes of science is that which collects together all those facts and reasonings which are similar to one another in nature: so that the study of each may throw light on its neighbour. By working thus for a long time at one set of considerations, we get gradually nearer to those fundamental unities which are called nature's laws: we trace their action first singly, and then in combination; and thus make progress slowly but surely. The practical uses of economic studies should never be out of the mind of the economist, but his special business is to study and interpret facts and to find out what are the effects of different causes acting singly and in combination.

8sect; 3. This may be illustrated by enumerating some of the chief questions to which the economist addresses himself. He inquires:—

What are the causes which, especially in the modern world, affect the consumption and production, the distribution and exchange of wealth; the organization of industry and trade; the money market; wholesale and retail dealing; foreign trade, and the relations between employers and employed? How do all these movements act and react upon one another? How do their ultimate differ from their immediate tendencies?

Subject to what limitations is the price of anything a measure of its desirability? What increase of wellbeing is primâ facie likely to result from a given increase in the wealth of any class of society? How far is the industrial efficiency of any class impaired by the insufficiency of its income? How far would an increase of the income of any class, if once effected, be likely to sustain itself through its effects in increasing their efficiency and earning power?

How far does, as a matter of fact, the influence of economic freedom reach (or how far has it reached at any particular time) in any place, in any rank of society, or in any particular branch of industry? What other influences are most powerful there; and how is the action of all these influences combined? In particular, how far does economic freedom tend of its own action to build up combinations and monopolies, and what are their effects? How are the various classes of society likely to be affected by its action in the long run; what will be the intermediate effects while its ultimate results are being worked out; and, account being taken of the time over which they will spread, what is the relative importance of these two classes of ultimate and intermediate effects? What will be the incidence of any system of taxes? What burdens will it impose on the community, and what revenue will it afford to the State?

8sect; 4. The above are the main questions with which economic science has to deal directly, and with reference to which its main work of collecting facts, of analysing them and reasoning about them should be arranged. The practical issues which, though lying for the greater part outside the range of economic science, yet supply a chief motive in the background to the work of the economist, vary from time to time, and from place to place, even more than do the economic facts and conditions which form the material of his studies. The following problems seem to be of special urgency now in our own country:—

How should we act so as to increase the good and diminish the evil influences of economic freedom, both in its ultimate results and in the course of its progress? If the first are good and the latter evil, but those who suffer the evil, do not reap the good; how far is it right that they should suffer for the benefit of others?

Taking it for granted that a more equal distribution of wealth is to be desired, how far would this justify changes in the institutions of property, or limitations of free enterprise even when they would be likely to diminish the aggregate of wealth? In other words, how far should an increase in the income of the poorer classes and a diminution of their work be aimed at, even if it involved some lessening of national material wealth? How far could this be done without injustice, and without slackening the energies of the leaders of progress? How ought the burdens of taxation to be distributed among the different classes of society?

Ought we to rest content with the existing forms of division of labour? Is it necessary that large numbers of the people should be exclusively occupied with work that has no elevating character? Is it possible to educate gradually among the great mass of workers a new capacity for the higher kinds of work; and in particular for undertaking co-operatively the management of the business in which they are themselves employed?

What are the proper relations of individual and collective action in a stage of civilization such as ours? How far ought voluntary association in its various forms, old and new, to be left to supply collective action for those purposes for which such action has special advantages? What business affairs should be undertaken by society itself acting through its government, imperial or local? Have we, for instance, carried as far as we should the plan of collective ownership and use of open spaces, of works of art, of the means of instruction and amusement, as well as of those material requisites of a civilized life, the supply of which requires united action, such as gas and water, and railways?

When government does not itself directly intervene, how far should it allow individuals and corporations to conduct their own affairs as they please? How far should it regulate the management of railways and other concerns which are to some extent in a position of monopoly, and again of land and other things the quantity of which cannot be increased by man? Is it necessary to retain in their full force all the existing rights of property; or have the original necessities for which they were meant to provide, in some measure passed away?

Are the prevailing methods of using wealth entirely justifiable? What scope is there for the moral pressure of social opinion in constraining and directing individual action in those economic relations in which the rigidity and violence of government interference would be likely to do more harm than good? In what respect do the duties of one nation to another in economic matters differ from those of members of the same nation to one another?

Economics is thus taken to mean a study of the economic aspects and conditions of man's political, social and private life; but more especially of his social life. The aims of the study are to gain knowledge for its own sake, and to obtain guidance in the practical conduct of life, and especially of social life. The need for such guidance was never so urgent as now; a later generation may have more abundant leisure than we for researches that throw light on obscure points in abstract speculation, or in the history of past times, but do not afford immediate aid in present difficulties.

But though thus largely directed by practical needs, economics avoids as far as possible the discussion of those exigencies of party organization, and those diplomacies of home and foreign politics of which the statesman is bound to take account in deciding what measures that he can propose will bring him nearest to the end that he desires to secure for his country. It aims indeed at helping him to determine not only what that end should be, but also what are the best methods of a broad policy devoted to that end. But it shuns many political issues, which the practical man cannot ignore: and it is therefore a science, pure and applied, rather than a science and an art. And it is better described by the broad term "Economics" than by the narrower term "Political Economy."

8sect; 5. The economist needs the three great intellectual faculties, perception, imagination and reason: and most of all he needs imagination, to put him on the track of those causes of visible events which are remote or lie below the surface, and of those effects of visible causes which are remote or lie below the surface.

The natural sciences and especially the physical group of them have this great advantage as a discipline over all studies of man's action, that in them the investigator is called on for exact conclusions which can be verified by subsequent observation or experiment. His fault is soon detected if he contents himself with such causes and such effects as lie on the surface; or again if he ignores the mutual interaction of the forces of nature, wherein every movement modifies and is modified by all that surround it. Nor does the thorough student of physics rest satisfied with a mere general analysis; he is ever striving to make it quantitative; and to assign its proper proportion to each element in his problem.

In sciences that relate to man exactness is less attainable. The path of least resistance is sometimes the only one open: it is always alluring; and though it is also always treacherous, the temptation is great to follow it even when a more thorough way can be fought out by resolute work. The scientific student of history is hampered by his inability to experiment and even more by the absence of any objective standard to which his estimates of relative proportion can be referred. Such estimates are latent in almost every stage of his argument: he cannot conclude that one cause or group of causes has been overridden by another without making some implicit estimate of their relative weights. And yet it is only by a great effort that he perceives how dependent he is on his own subjective impressions. The economist also is hampered by this difficulty, but in a less degree than other students of man's action; for indeed he has some share in those advantages which give precision and objectivity to the work of the physicist. So long, at all events, as he is concerned with current and recent events, many of his facts group themselves under classes as to which statements can be made that are definite, and often were approximately accurate numerically: and thus he is at some advantage in seeking for causes and for results which lie below the surface, and are not easily seen; and in analyzing complex conditions into their elements and in reconstructing a whole out of many elements.

In smaller matters, indeed, simple experience will suggest the unseen. It will, for instance, put people in the way of looking for the harm to strength of character and to family life that comes from ill-considered aid to the thriftless; even though what is seen on the surface is almost sheer gain. But greater effort, a larger range of view, a more powerful exercise of the imagination are needed in tracking the true results of, for instance, many plausible schemes for increasing steadiness of employment. For that purpose it is necessary to have learnt how closely connected are changes in credit, in domestic trade, in foreign trade competition, in harvests, in prices; and how all of these affect steadiness of employment for good and for evil. It is necessary to watch how almost every considerable economic event in any part of the Western world affects employment in some trades at least in almost every other part. If we deal only with those causes of unemployment which are near at hand, we are likely to make no good cure of the evils we see; and we are likely to cause evils, that we do not see. And if we are to look for those which are far off and weigh them in the balance, then the work before us is a high discipline for the mind.

Again, when by a "standard rule" or any other device wages are kept specially high in any trade, imagination set agoing will try to track the lives of those who are prevented by the standard rule from doing work, of which they are capable, at a price that people are willing to pay for it. Are they pushed up, or are they pushed down? If some are pushed up and some pushed down, as commonly happens, is it the many that are pushed up and the few that are pushed down, or the other way about? If we look at surface results, we may suppose that it is the many who are pushed up. But if, by the scientific use of the imagination, we think out all the ways in which prohibitions, whether on Trade Union authority or any other, prevent people from doing their best and earning their best, we shall often conclude that it is the many who have been pushed down, and the few who have been pushed up. Partly under English influence, some Australasian colonies are making bold ventures, which hold out specious promise of greater immediate comfort and ease to the workers. Australasia has indeed a great reserve of borrowing power in her vast landed property: and should the proposed short cuts issue in some industrial decadence, the fall may be slight and temporary. But it is already being urged that England should move on similar lines: and a fall for her would be more serious. What is needed, and what we may hope is coming in the near future, is a larger study of such schemes of the same kind and by the same order of minds as are applied to judging a new design for a battleship with reference to her stability in bad weather.

In such problems as this it is the purely intellectual, and sometimes even the critical faculties, which are most in demand. But economic studies call for and develop the faculty of sympathy, and especially that rare sympathy which enables people to put themselves in the place, not only of their comrades, but also of other classes. This class sympathy is, for instance, strongly developed by inquiries, which are becoming every day more urgent, of the reciprocal influences which character and earnings, methods of employment and habits of expenditure exert on one another; of the ways in which the efficiency of a nation is strengthened by and strengthens the confidences and affections which hold together the members of each economic group—the family, employers and employees in the same business, citizens of the same country; of the good and evil that are mingled in the individual unselfishness and the class selfishness of professional etiquette and of trade union customs; and of movements by which our growing wealth and opportunities may best be turned to account for the wellbeing of the present and coming generations16.

8sect; 6. The economist needs imagination especially in order that he may develop his ideals. But most of all he needs caution and reserve in order that his advocacy of ideals may not outrun his grasp of the future.

After many more generations have passed, our present ideals and methods may seem to belong to the infancy, rather than to the maturity of man. One definite advance has already been made. We have learnt that every one until proved to be hopelessly weak or base is worthy of full economic freedom: but we are not in a position to guess confidently to what goal the advance thus begun will ultimately lead. In the later Middle Ages a rough beginning was made of the study of the industrial organism, regarded as embracing all humanity. Each successive generation has seen further growths of that organism; but none has seen so large a growth as our own. The eagerness with which it has been studied has grown with its growth; and no parallel can be found in earlier times to the breadth and variety of the efforts that have been made to comprehend it. But the chief outcome of recent studies is to make us recognize more fully, than could be done by any previous generation, how little we know of the causes by which progress is being fashioned, and how little we can forecast the ultimate destiny of the industrial organism.

Some harsh employers and politicians, defending exclusive class privileges early in last century, found it convenient to claim the authority of political economy on their side; and they often spoke of themselves as "economists." And even in our own time, that title has been assumed by opponents of generous expenditure on the education of the masses of the people, in spite of the fact that living economists with one consent maintain that such expenditure is a true economy, and that to refuse it is both wrong and bad business from a national point of view. But Carlyle and Ruskin, followed by many other writers who had no part in their brilliant and ennobling poetical visions, have without examination held the great economists responsible for sayings and deeds to which they were really averse; and in consequence there has grown up a popular misconception of their thoughts and character.

The fact is that nearly all the founders of modern economics were men of gentle and sympathetic temper, touched with the enthusiasm of humanity. They cared little for wealth for themselves; they cared much for its wide diffusion among the masses of the people. They opposed antisocial monopolies however powerful. In their several generations they supported the movement against the class legislation which denied to trade unions privileges that were open to associations of employers; or they worked for a remedy against the poison which the old Poor Law was instilling into the hearts and homes of the agricultural and other labourers; or they supported the factory acts, in spite of the strenuous opposition of some politicians and employers who claimed to speak in their name. They were without exception devoted to the doctrine that the wellbeing of the whole people should be the ultimate goal of all private effort and all public policy. But they were strong in courage and caution; they appeared cold, because they would not assume the responsibility of advocating rapid advances on untried paths, for the safety of which the only guarantees offered were the confident hopes of men whose imaginations were eager, but not steadied by knowledge nor disciplined by hard thought.

Their caution was perhaps a little greater than necessary: for the range of vision even of the great seers of that age was in some respects narrower than is that of most educated men in the present time; when, partly through the suggestions of biological study, the influence of circumstances in fashioning character is generally recognized as the dominant fact in social science. Economists have accordingly now learnt to take a larger and more hopeful view of the possibilities of human progress. They have learnt to trust that the human will, guided by careful thought, can so modify circumstances as largely to modify character; and thus to bring about new conditions of life still more favourable to character; and therefore to the economic, as well as the moral, wellbeing of the masses of the people. Now as ever it is their duty to oppose all plausible short cuts to that great end, which would sap the springs of energy and initiative.

The rights of property, as such, have not been venerated by those master minds who have built up economic science; but the authority of the science has been wrongly assumed by some who have pushed the claims of vested rights to extreme and antisocial uses. It may be well therefore to note that the tendency of careful economic study is to base the rights of private property not on any abstract principle, but on the observation that in the past they have been inseparable from solid progress; and that therefore it is the part of responsible men to proceed cautiously and tentatively in abrogating or modifying even such rights as may seem to be inappropriate to the ideal conditions of social life.

BOOK II: SOME FUNDAMENTAL NOTIONS.

BOOK II, CHAPTER I: INTRODUCTORY.

8sect; 1. We have seen that economics is, on the one side, a Science of Wealth; and, on the other, that part of the Social Science of man's action in society, which deals with his Efforts to satisfy his Wants, in so far as the efforts and wants are capable of being measured in terms of wealth, or its general representative, i.e. money. We shall be occupied during the greater part of this volume with these wants and efforts; and with the causes by which the prices that measure the wants are brought into equilibrium with those that measure the efforts. For this purpose we shall have to study in Book III. wealth in relation to the diversity of man's wants, which it has to satisfy; and in Book IV. wealth in relation to the diversity of man's efforts by which it is produced.

But in the present Book, we have to inquire which of all the things that are the result of man's efforts, and are capable of satisfying man's wants, are to be counted as Wealth; and into what groups or classes these are to be divided. For there is a compact group of terms connected with Wealth itself, and with Capital, the study of each of which throws light on the others; while the study of the whole together is a direct continuation, and in some respects a completion, of that inquiry as to the scope and methods of economics on which we have just been engaged. And, therefore, instead of taking what may seem the more natural course of starting with an analysis of wants, and of wealth in direct relation to them, it seems on the whole best to deal with this group of terms at once.

In doing this we shall of course have to take some account of the variety of wants and efforts; but we shall not want to assume anything that is not obvious and a matter of common knowledge. The real difficulty of our task lies in another direction; being the result of the need under which economics, alone among sciences, lies of making shift with a few terms in common use to express a great number of subtle distinctions.

8sect; 2. As Mill says17 :—"The ends of scientific classification are best answered when the objects are formed into groups respecting which a greater number of general propositions can be made, and those propositions more important, than those which could be made respecting any other groups into which the same things could be distributed." But we meet at starting with the difficulty that those propositions which are the most important in one stage of economic development, are not unlikely to be among the least important in another, if indeed they apply at all.

In this matter economists have much to learn from the recent experiences of biology: and Darwin's profound discussion of the question18 throws a strong light on the difficulties before us. He points out that those parts of the structure which determine the habits of life and the general place of each being in the economy of nature, are as a rule not those which throw most light on its origin, but those which throw least. The qualities which a breeder or a gardener notices as eminently adapted to enable an animal or a plant to thrive in its environment, are for that very reason likely to have been developed in comparatively recent times. And in like manner those properties of an economic institution which play the most important part in fitting it for the work which it has to do now, are for that very reason likely to be in a great measure of recent growth.

Instances are found in many of the relations between employer and employed, between middleman and producer, between bankers and their two classes of clients, those from whom they borrow and those to whom they lend. The substitution of the term "interest" for "usury" corresponds to a general change in the character of loans, which has given an entirely new key-note to our analysis and classification of the different elements into which the cost of production of a commodity may be resolved. Again, the general scheme of division of labour into skilled and unskilled is undergoing a gradual change; the scope of the term "rent" is being broadened in some directions and narrowed in others; and so on.

But on the other hand we must keep constantly in mind the history of the terms which we use. For, to begin with, this history is important for its own sake; and because it throws side lights on the history of the economic development of society. And further, even if the sole purpose of our study of economics were to obtain knowledge that would guide us in the attainment of immediate practical ends, we should yet be bound to keep our use of terms as much as possible in harmony with the traditions of the past; in order that we might be quick to perceive the indirect hints and the subtle and subdued warnings, which the experiences of our ancestors offer for our instruction.

8sect; 3. Our task is difficult. In physical sciences indeed, whenever it is seen that a group of things have a certain set of qualities in common, and will often be spoken of together, they are formed into a class with a special name; and as soon as a new notion emerges, a new technical term is invented to represent it. But economics cannot venture to follow this example. Its reasonings must be expressed in language that is intelligible to the general public; it must therefore endeavour to conform itself to the familiar terms of everyday life, and so far as possible must use them as they are commonly used.

In common use almost every word has many shades of meaning, and therefore needs to be interpreted by the context. And, as Bagehot has pointed out, even the most formal writers on economic science are compelled to follow this course; for otherwise they would not have enough words at their disposal. But unfortunately they do not always avow that they are taking this freedom; sometimes perhaps they are scarcely even aware of the fact themselves. The bold and rigid definitions, with which their expositions of the science begin, lull the reader into a false security. Not being warned that he must often look to the context for a special interpretation clause, he ascribes to what he reads a meaning different from that which the writers had in their own minds; and perhaps misrepresents them and accuses them of folly of which they had not been guilty19.

Again, most of the chief distinctions marked by economic terms are differences not of kind but of degree. At first sight they appear to be differences of kind, and to have sharp outlines which can be clearly marked out; but a more careful study has shown that there is no real breach of continuity. It is a remarkable fact that the progress of economics has discovered hardly any new real differences in kind, while it is continually resolving apparent differences in kind into differences in degree. We shall meet with many instances of the evil that may be done by attempting to draw broad, hard and fast lines of division, and to formulate definite propositions with regard to differences between things which nature has not separated by any such lines.

8sect; 4. We must then analyze carefully the real characteristics of the various things with which we have to deal; and we shall thus generally find that there is some use of each term which has distinctly greater claims than any other to be called its leading use, on the ground that it represents a distinction that is more important for the purposes of modern science than any other that is in harmony with ordinary usage. This may be laid down as the meaning to be given to the term whenever nothing to the contrary is stated or implied by the context. When the term is wanted to be used in any other sense, whether broader or narrower, the change must be indicated.

Even among the most careful thinkers there will always remain differences of opinion as to the exact places in which some at least of the lines of definition should be drawn. The questions at issue must in general be solved by judgments as to the practical convenience of different courses; and such judgments cannot always be established or overthrown by scientific reasoning: there must remain a margin of debatable ground. But there is no such margin in the analysis itself: if two people differ with regard to that, they cannot both be right. And the progress of the science may be expected gradually to establish this analysis on an impregnable basis20.

BOOK II, CHAPTER II: WEALTH.

8sect; 1. All wealth consists of desirable things; that is, things which satisfy human wants directly or indirectly: but not all desirable things are reckoned as wealth. The affection of friends, for instance, is an important element of wellbeing, but it is not reckoned as wealth, except by a poetic licence. Let us then begin by classifying desirable things, and then consider which of them should be accounted as elements of wealth.

In the absence of any short term in common use to represent all desirable things, or things that satisfy human wants, we may use the term Goods for that purpose.

Desirable things or goods are Material, or Personal and Immaterial. Material goods consist of useful material things, and of all rights to hold, or use, or derive benefits from material things, or to receive them at a future time. Thus they include the physical gifts of nature, land and water, air and climate; the products of agriculture, mining, fishing, and manufacture; buildings, machinery, and implements; mortgages and other bonds; shares in public and private companies, all kinds of monopolies, patent-rights, copyrights; also rights of way and other rights of usage. Lastly, opportunities of travel, access to good scenery, museums, etc. are the embodiment of material facilities, external to a man; though the faculty of appreciating them is internal and personal.

A man's non-material goods fall into two classes. One consists of his own qualities and faculties for action and for enjoyment; such for instance as business ability, professional skill, or the faculty of deriving recreation from reading or music. All these lie within himself and are called internal. The second class are called external because they consist of relations beneficial to him with other people. Such, for instance, were the labour dues and personal services of various kinds which the ruling classes used to require from their serfs and other dependents. But these have passed away; and the chief instances of such relations beneficial to their owner now-a-days are to be found in the good will and business connection of traders and professional men21.

Again, goods may be transferable or non-transferable. Among the latter are to be classed a person's qualities and faculties for action and enjoyment (i.e. his internal goods); also such part of his business connection as depends on personal trust in him and cannot be transferred, as part of his vendible good will; also the advantages of climate, light, air, and his privileges of citizenship and rights and opportunities of making use of public property22.

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Those goods are free, which are not appropriated and are afforded by Nature without requiring the effort of man. The land in its original state was a free gift of nature. But in settled countries it is not a free good from the point of view of the individual. Wood is still free in some Brazilian forests. The fish of the sea are free generally: but some sea fisheries are jealously guarded for the exclusive use of members of a certain nation, and may be classed as national property. Oyster beds that have been planted by man are not free in any sense; those that have grown naturally are free in every sense if they are not appropriated; if they are private property they are still free gifts from the point of view of the nation. But, since the nation has allowed its rights in them to become vested in private persons, they are not free from the point of view of the individual; and the same is true of private rights of fishing in rivers. But wheat grown on free land and the fish that have been landed from free fisheries are not free: for they have been acquired by labour.

8sect; 2. We may now pass to the question which classes of a man's goods are to be reckoned as part of his wealth. The question is one as to which there is some difference of opinion, but the balance of argument as well as of authority seems clearly to incline in favour of the following answer:—

When a man's wealth is spoken of simply, and without any interpretation clause in the context, it is to be taken to be his stock of two classes of goods.

In the first class are those material goods to which he has (by law or custom) private rights of property, and which are therefore transferable and exchangeable. These it will be remembered include not only such things as land and houses, furniture and machinery, and other material things which may be in his single private ownership, but also any shares in public companies, debenture bonds, mortgages and other obligations which he may hold requiring others to pay money or goods to him. On the other hand, the debts which he owes to others may be regarded as negative wealth; and they must be subtracted from his gross possessions before his true net wealth can be found.

Services and other goods, which pass out of existence in the same instant that they come into it, are, of course, not part of the stock of wealth23.

In the second class are those immaterial goods which belong to him, are external to him, and serve directly as the means of enabling him to acquire material goods. Thus it excludes all his own personal qualities and faculties, even those which enable him to earn his living; because they are Internal. And it excludes his personal friendships, in so far as they have no direct business value. But it includes his business and professional connections, the organization of his business, and—where such things exist—his property in slaves, in labour dues, etc.

This use of the term Wealth is in harmony with the usage of ordinary life: and, at the same time, it includes those goods, and only those, which come clearly within the scope of economic science, as defined in Book I.; and which may therefore be called economic goods. For it includes all those things, external to a man, which (i) belong to him, and do not belong equally to his neighbours, and therefore are distinctly his; and which (ii) are directly capable of a money measure,—a measure that represents on the one side the efforts and sacrifices by which they have been called into existence, and, on the other, the wants which they satisfy24.

8sect; 3. A broader view of wealth may indeed be taken for some purposes; but then recourse must be had to a special interpretation clause, to prevent confusion. Thus, for instance, the carpenter's skill is as direct a means of enabling him to satisfy other people's material wants, and therefore indirectly his own, as are the tools in his work-basket; and perhaps it may be convenient to have a term which will include it as part of wealth in a broader use. Pursuing the lines indicated by Adam Smith25, and followed by most continental economists, we may define personal wealth so as to include all those energies, faculties, and habits which directly contribute to making people industrially efficient; together with those business connections and associations of any kind, which we have already reckoned as part of wealth in the narrower use of the term. Industrial faculties have a further claim to be regarded as economic in the fact that their value is as a rule capable of some sort of indirect measurement26.

The question whether it is ever worth while to speak of them as wealth is merely one of convenience, though it has been much discussed as if it were one of principle.

Confusion would certainly be caused by using the term "wealth" by itself when we desire to include a person's industrial qualities. "Wealth" simply should always mean external wealth only. But little harm, and some good seems likely to arise from the occasional use of the phrase "material and personal wealth."

8sect; 4. But we still have to take account of those material goods which are common to him with his neighbours; and which therefore it would be a needless trouble to mention when comparing his wealth with theirs; though they may be important for some purposes, and especially for comparisons between the economic conditions of distant places or distant times.

These goods consist of the benefits which he derives from living in a certain place at a certain time, and being a member of a certain state or community; they include civil and military security, and the right and opportunity to make use of public property and institutions of all kinds, such as roads, gaslight, etc., and rights to justice or to a free education. The townsman and the countryman have each of them for nothing many advantages which the other either cannot get at all, or can get only at great expense. Other things being equal, one person has more real wealth in its broadest sense than another, if the place in which the former lives has a better climate, better roads, better water, more wholesome drainage; and again better newspapers, books, and places of amusement and instruction. House-room, food and clothing, which would be insufficient in a cold climate, may be abundant in a warm climate: on the other hand, that warmth which lessens men's physical needs, and makes them rich with but a slight provision of material wealth, makes them poor in the energy that procures wealth.

Many of these things are collective goods; i.e. goods which are not in private ownership. And this brings us to consider wealth from the social, as opposed to the individual point of view.

8sect; 5. Let us then look at those elements of the wealth of a nation which are commonly ignored when estimating the wealth of the individuals composing it. The most obvious forms of such wealth are public material property of all kinds, such as roads and canals, buildings and parks, gasworks and waterworks; though unfortunately many of them have been secured not by public savings, but by public borrowings, and there is the heavy "negative" wealth of a large debt to be set against them.

But the Thames has added more to the wealth of England than all its canals, and perhaps even than all its railroads. And though the Thames is a free gift of nature (except in so far as its navigation has been improved), while the canal is the work of man, yet we ought for many purposes to reckon the Thames a part of England's wealth.

German economists often lay stress on the non-material elements of national wealth; and it is right to do this in some problems relating to national wealth, but not in all. Scientific knowledge indeed, wherever discovered, soon becomes the property of the whole civilized world, and may be considered as cosmopolitan rather than as specially national wealth. The same is true of mechanical inventions and of many other improvements in the arts of production; and it is true of music. But those kinds of literature which lose their force by translation, may be regarded as in a special sense the wealth of those nations in whose language they are written. And the organization of a free and well-ordered State is to be regarded for some purposes as an important element of national wealth.

But national wealth includes the individual as well as the collective property of its members. And in estimating the aggregate sum of their individual wealth, we may save some trouble by omitting all debts and other obligations due to one member of a nation from another. For instance, so far as the English national debt and the bonds of an English railway are owned within the nation, we can adopt the simple plan of counting the railway itself as part of the national wealth, and neglecting railway and government bonds altogether. But we still have to deduct for those bonds etc. issued by the English Government or by private Englishmen, and held by foreigners; and to add for those foreign bonds etc. held by Englishmen27.

Cosmopolitan wealth differs from national wealth much as that differs from individual wealth. In reckoning it, debts due from members of one nation to those of another may conveniently be omitted from both sides of the account. Again, just as rivers are important elements of national wealth, the ocean is one of the most valuable properties of the world. The notion of cosmopolitan wealth is indeed nothing more than that of national wealth extended over the whole area of the globe.

Individual and national rights to wealth rest on the basis of civil and international law, or at least of custom that has the force of law. An exhaustive investigation of the economic conditions of any time and place requires therefore an inquiry into law and custom; and economics owes much to those who have worked in this direction. But its boundaries are already wide; and the historical and juridical bases of the conceptions of property are vast subjects which may best be discussed in separate treatises.

8sect; 6. The notion of Value is intimately connected with that of Wealth; and a little may be said about it here. "The word value" says Adam Smith "has two different meanings, and sometimes expresses the utility of some particular object and sometimes the power of purchasing other goods which the possession of that object conveys." But experience has shown that it is not well to use the word in the former sense.

The value, that is the exchange value, of one thing in terms of another at any place and time, is the amount of that second thing which can be got there and then in exchange for the first. Thus the term value is relative, and expresses the relation between two things at a particular place and time.

Civilized countries generally adopt gold or silver or both as money. Instead of expressing the values of lead and tin, and wood, and corn and other things in terms of one another, we express them in terms of money in the first instance; and call the value of each thing thus expressed its price. If we know that a ton of lead will exchange for fifteen sovereigns at any place and time, while a ton of tin will exchange for ninety sovereigns, we say that their prices then and there are £15 and £90 respectively, and we know that the value of a ton of tin in terms of lead is six tons then and there.

The price of every thing rises and falls from time to time and place to place; and with every such change the purchasing power of money changes so far as that thing goes. If the purchasing power of money rises with regard to some things, and at the same time falls equally with regard to equally important things, its general purchasing power (or its power of purchasing things in general) has remained stationary. This phrase conceals some difficulties, which we must study later on. But meanwhile we may take it in its popular sense, which is sufficiently clear; and we may throughout this volume neglect possible changes in the general purchasing power of money. Thus the price of anything will be taken as representative of its exchange value relatively to things in general, or in other words as representative of its general purchasing power28.

But if inventions have increased man's power over nature very much, then the real value of money is better measured for some purposes in labour than in commodities. This difficulty however will not much affect our work in the present volume, which is only a study of the "Foundations" of economics.

BOOK II, CHAPTER III: PRODUCTION. CONSUMPTION. LABOUR. NECESSARIES.

8sect; 1. Man cannot create material things. In the mental and moral world indeed he may produce new ideas; but when he is said to produce material things, he really only produces utilities; or in other words, his efforts and sacrifices result in changing the form or arrangement of matter to adapt it better for the satisfaction of wants. All that he can do in the physical world is either to readjust matter so as to make it more useful, as when he makes a log of wood into a table; or to put it in the way of being made more useful by nature, as when he puts seed where the forces of nature will make it burst out into life29.

It is sometimes said that traders do not produce: that while the cabinet-maker produces furniture, the furniture-dealer merely sells what is already produced. But there is no scientific foundation for this distinction. They both produce utilities, and neither of them can do more: the furniture-dealer moves and rearranges matter so as to make it more serviceable than it was before, and the carpenter does nothing more. The sailor or the railway-man who carries coal above ground produces it, just as much as the miner who carries it underground; the dealer in fish helps to move on fish from where it is of comparatively little use to where it is of greater use, and the fisherman does no more. It is true that there are often more traders than are necessary; and that, whenever that is the case, there is a waste. But there is also waste if there are two men to a plough which can be well worked by one man; in both cases all those who are at work produce, though they may produce but little. Some writers have revived the mediæval attacks on trade on the ground that it does not produce. But they have not aimed at the right mark. They should have attacked the imperfect organization of trade, particularly of retail trade30.

Consumption may be regarded as negative production. Just as man can produce only utilities, so he can consume nothing more. He can produce services and other immaterial products, and he can consume them. But as his production of material products is really nothing more than a rearrangement of matter which gives it new utilities; so his consumption of them is nothing more than a disarrangement of matter, which diminishes or destroys its utilities. Often indeed when he is said to consume things, he does nothing more than to hold them for his use, while, as Senior says, they "are destroyed by those numerous gradual agents which we call collectively time31." As the "producer" of wheat is he who puts seed where nature will make it grow, so the "consumer" of pictures, of curtains, and even of a house or a yacht does little to wear them out himself; but he uses them while time wastes them.

Another distinction to which some prominence has been given, but which is vague and perhaps not of much practical use, is that between consumers' goods (called also consumption goods, or again goods of the first order), such as food, clothes, etc., which satisfy wants directly on the one hand; and, on the other hand, producers' goods (called also production goods, or again instrumental, or again intermediate goods), such as ploughs and looms and raw cotton, which satisfy wants indirectly by contributing towards the production of the first class of goods32.

8sect; 2. All labour is directed towards producing some effect. For though some exertions are taken merely for their own sake, as when a game is played for amusement, they are not counted as labour. We may define labour as any exertion of mind or body undergone partly or wholly with a view to some good other than the pleasure derived directly from the work33. And if we had to make a fresh start it would be best to regard all labour as productive except that which failed to promote the aim towards which it was directed, and so produced no utility. But in all the many changes which the meaning of the word "productive" has undergone, it has had special reference to stored-up wealth, to the comparative neglect and sometimes even to the exclusion of immediate and transitory enjoyment34; and an almost unbroken tradition compels us to regard the central notion of the word as relating to the provision for the wants of the future rather than those of the present. It is true that all wholesome enjoyments, whether luxurious or not, are legitimate ends of action both public and private; and it is true that the enjoyment of luxuries affords an incentive to exertion, and promotes progress in many ways. But if the efficiency and energy of industry are the same, the true interest of a country is generally advanced by the subordination of the desire for transient luxuries to the attainment of those more solid and lasting resources which will assist industry in its future work, and will in various ways tend to make life larger. This general idea has been in solution, as it were, in all stages of economic theory; and has been precipitated by different writers into various hard and fast distinctions by which certain trades have been marked off as productive and certain others as unproductive.

For instance, many writers even of recent times have adhered to Adam Smith's plan of classing domestic servants as unproductive. There is doubtless in many large houses a superabundance of servants, some of whose energies might with advantage to the community be transferred to other uses: but the same is true of the greater part of those who earn their livelihood by distilling whisky; and yet no economist has proposed to call them unproductive. There is no distinction in character between the work of the baker who provides bread for a family, and that of the cook who boils potatoes. If the baker should be a confectioner, or fancy baker, it is probable that he spends at least as much of his time as the domestic cook does, on labour that is unproductive in the popular sense of providing unnecessary enjoyments.

Whenever we use the word Productive by itself, it is to be understood to mean productive of the means of production, and of durable sources of enjoyment. But it is a slippery term, and should not be used where precision is needed35.

If ever we want to use it in a different sense, we must say so: for instance we may speak of labour as productive of necessaries, etc.

Productive consumption, when employed as a technical term, is commonly defined as the use of wealth in the production of further wealth; and it should properly include not all the consumption of productive workers, but only that which is necessary for their efficiency. The term may perhaps be useful in studies of the accumulation of material wealth. But it is apt to mislead. For consumption is the end of production; and all wholesome consumption is productive of benefits, many of the most worthy of which do not directly contribute to the production of material wealth36.

8sect; 3. This brings us to consider the term Necessaries. It is common to distinguish necessaries, comforts, and luxuries; the first class including all things required to meet wants which must be satisfied, while the latter consist of things that meet wants of a less urgent character. But here again there is a troublesome ambiguity. When we say that a want must be satisfied, what are the consequences which we have in view if it is not satisfied? Do they include death? Or do they extend only to the loss of strength and vigour? In other words, are necessaries the things which are necessary for life, or those which are necessary for efficiency?

The term Necessaries, like the term Productive, has been used elliptically, the subject to which it refers being left to be supplied by the reader; and since the implied subject has varied, the reader has often supplied one which the writer did not intend, and thus misunderstood his drift. In this, as in the preceding case, the chief source of confusion can be removed by supplying explicitly in every critical place that which the reader is intended to understand.

The older use of the term Necessaries was limited to those things which were sufficient to enable the labourers, taken one with another, to support themselves and their families. Adam Smith and the more careful of his followers observed indeed variations in the standard of comfort and "decency": and they recognized that differences of climate and differences of custom make things necessary in some cases, which are superfluous in others37. But Adam Smith was influenced by reasonings of the Physiocrats: they were based on the condition of the French people in the eighteenth century, most of whom had no notion of any necessaries beyond those which were required for mere existence. In happier times, however, a more careful analysis has made it evident that there is for each rank of industry, at any time and place, a more or less clearly defined income which is necessary for merely sustaining its members; while there is another and larger income which is necessary for keeping it in full efficiency38.

It may be true that the wages of any industrial class might have sufficed to maintain a higher efficiency, if they had been spent with perfect wisdom. But every estimate of necessaries must be relative to a given place and time; and unless there be a special interpretation clause to the contrary, it may be assumed that the wages will be spent with just that amount of wisdom, forethought, and unselfishness, which prevails in fact among the industrial class under discussion. With this understanding we may say that the income of any class in the ranks of industry is below its necessary level, when any increase in their income would in the course of time produce a more than proportionate increase in their efficiency. Consumption may be economized by a change of habits, but any stinting of necessaries is wasteful39.

8sect; 4. Some detailed study of the necessaries for efficiency of different classes of workers will have to be made, when we come to inquire into the causes that determine the supply of efficient labour. But it will serve to give some definiteness to our ideas, if we consider here what are the necessaries for the efficiency of an ordinary agricultural or of an unskilled town labourer and his family, in England, in this generation. They may be said to consist of a well-drained dwelling with several rooms, warm clothing, with some changes of underclothing, pure water, a plentiful supply of cereal food, with a moderate allowance of meat and milk, and a little tea, etc., some education and some recreation, and lastly, sufficient freedom for his wife from other work to enable her to perform properly her maternal and her household duties. If in any district unskilled labour is deprived of any of these things, its efficiency will suffer in the same way as that of a horse that is not properly tended, or a steam-engine that has an inadequate supply of coals. All consumption up to this limit is strictly productive consumption: any stinting of this consumption is not economical, but wasteful.

In addition, perhaps, some consumption of alcohol and tobacco, and some indulgence in fashionable dress are in many places so habitual, that they may be said to be conventionally necessary, since in order to obtain them the average man and woman will sacrifice some things which are necessary for efficiency. Their wages are therefore less than are practically necessary for efficiency, unless they provide not only for what is strictly necessary consumption, but include also a certain amount of conventional necessaries40.

The consumption of conventional necessaries by productive workers is commonly classed as productive consumption; but strictly speaking it ought not to be; and in critical passages a special interpretation clause should be added to say whether or not they are included.

It should however be noticed that many things which are rightly described as superfluous luxuries, do yet, to some extent, take the place of necessaries; and to that extent their consumption is productive when they are consumed by producers41.

BOOK II, CHAPTER IV: INCOME. CAPITAL.

8sect; 1. In a primitive community each family is nearly self-sufficing, and provides most of its own food and clothing and even household furniture. Only a very small part of the income, or comings in, of the family is in the form of money; when one thinks of their income at all, one reckons in the benefits which they get from their cooking utensils, just as much as those which they get from their plough: one draws no distinction between their capital and the rest of their accumulated stock, to which the cooking utensils and the plough alike belong42.

But with the growth of a money economy there has been a strong tendency to confine the notion of income to those incomings which are in the form of money; including "payments in kind" (such as the free use of a house, free coals, gas, water), which are given as part of an employee's remuneration, and in lieu of money payments.

In harmony with this meaning of Income, the language of the market-place commonly regards a man's capital as that part of his wealth which he devotes to acquiring an income in the form of money; or, more generally, to acquisition (Erwerbung) by means of trade. It may be convenient sometimes to speak of this as his trade capital; which may be defined to consist of those external goods which a person uses in his trade, either holding them to be sold for money or applying them to produce things that are to be sold for money. Among its conspicuous elements are such things as the factory and the business plant of a manufacturer; that is, his machinery, his raw material, any food, clothing, and house-room that he may hold for the use of his employees, and the goodwill of his business.

To the things in his possession must be added those to which he has a right and from which he is drawing income: including loans which he has made on mortgage or in other ways, and all the command over capital which he may hold under the complex forms of the modern "money market." On the other hand debts owed by him must be deducted from his capital.

This definition of capital from the individual or business point of view is firmly established in ordinary usage; and it will be assumed throughout the present treatise whenever we are discussing problems relating to business in general, and in particular to the supply of any particular group of commodities for sale in open market. Income and capital will be discussed from the point of view of private business in the first half of the chapter; and afterwards the social point of view will be considered.

8sect; 2. If a person is engaged in business, he is sure to have to incur certain outgoings for raw material, the hire of labour, etc. And, in that case, his true or net income is found by deducting from his gross income "the outgoings that belong to its production43."

Anything which a person does for which he is paid directly or indirectly in money, swells his nominal income; while no services that he performs for himself are commonly reckoned as adding to his nominal income. But, though it is best generally to neglect them when they are trivial, account should for consistency be taken of them, when they are of a kind which people commonly pay for having done for them. Thus a woman who makes her own clothes or a man who digs in his own garden or repairs his own house, is earning income; just as would the dressmaker, gardener or carpenter who might be hired to do the work.

In this connection we may introduce a term of which we shall have to make frequent use hereafter. The need for it arises from the fact that every occupation involves other disadvantages besides the fatigue of the work required in it, and every occupation offers other advantages besides the receipt of money wages. The true reward which an occupation offers to labour has to be calculated by deducting the money value of all its disadvantages from that of all its advantages; and we may describe this true reward as the net advantages of the occupation.

The payment made by a borrower for the use of a loan for, say, a year is expressed as the ratio which that payment bears to the loan, and is called interest. And this term is also used more broadly to represent the money equivalent of the whole income which is derived from capital. It is commonly expressed as a certain percentage on the "capital" sum of the loan. Whenever this is done the capital must not be regarded as a stock of things in general. It must be regarded as a stock of one particular thing, money, which is taken to represent them. Thus £100 may be lent at four per cent., that is for an interest of £4 yearly. And, if a man employs in business a capital stock of goods of various kinds which are estimated as worth £10,000 in all; then £400 a year may be said to represent interest at the rate of four per cent. on that capital, on the supposition that the aggregate money value of the things which constitute it has remained unchanged. He would not, however, be willing to continue the business unless he expected his total net gains from it to exceed interest on his capital at the current rate. These gains are called profits.

The command over goods to a given money value, which can be applied to any purpose, is often described as "free" or "floating" capital44.

When a man is engaged in business, his profits for the year are the excess of his receipts from his business during the year over his outlay for his business. The difference between the value of his stock of plant, material, etc. at the end and at the beginning of the year is taken as part of his receipts or as part of his outlay, according as there has been an increase or decrease of value. What remains of his profits after deducting interest on his capital at the current rate (allowing, where necessary, for insurance) is generally called his earnings of undertaking or management. The ratio in which his profits for the year stand to his capital is spoken of as his rate of profits. But this phrase, like the corresponding phrase with regard to interest, assumes that the money value of the things which constitute his capital has been estimated: and such an estimate is often found to involve great difficulties.

When any particular thing, as a house, a piano, or a sewing machine is lent out, the payment for it is often called Rent. And economists may follow this practice without inconvenience when they are regarding the income from the point of view of the individual trader. But, as will be argued presently, the balance of advantage seems to lie in favour of reserving the term Rent for the income derived from the free gifts of nature, whenever the discussion of business affairs passes from the point of view of the individual to that of society at large. And for that reason, the term Quasi-rent will be used in the present volume for the income derived from machines and other appliances for production made by man. That is to say, any particular machine may yield an income which is of the nature of a rent, and which is sometimes called a Rent; though on the whole, there seems to be some advantage in calling it a Quasi-rent. But we cannot properly speak of the interest yielded by a machine. If we use the term "interest" at all, it must be in relation not to the machine itself, but to its money value. For instance if the work done by a machine which cost £100 is worth £4 a year net, that machine is yielding a quasi-rent of £4 which is equivalent to interest at four per cent. on its original cost: but if the machine is worth only £80 now, it is yielding five per cent. on its present value. This however raises some difficult questions of principle, which will be discussed in Book V.

8sect; 3. Next to consider some details relating to capital. It has been classed as Consumption capital, and Auxiliary or Instrumental capital: and though no clear distinction can be drawn between the two classes, it may sometimes be convenient to use the terms, with the understanding that they are vague. Where definiteness is necessary, the terms should be avoided; and explicit enumerations should be given. The general notion of the distinction which the terms are designed to suggest, can be gathered from the following approximate definitions.

Consumption capital consists of goods in a form to satisfy wants directly; that is, goods which afford a direct sustenance to the workers, such as food, clothes, house-room, etc.

Auxiliary, or instrumental, capital is so called because it consists of all the goods that aid labour in production. Under this head come tools, machines, factories, railways, docks, ships, etc.; and raw materials of all kinds.

But of course a man's clothes assist him in his work and are instrumental in keeping him warm; and he derives a direct benefit from the shelter of his factory as he does from the shelter of his house45.

We may follow Mill in distinguishing circulating capital "which fulfils the whole of its office in the production in which it is engaged, by a single use," from fixed capital "which exists in a durable shape and the return to which is spread over a period of corresponding duration46."

8sect; 4. The customary point of view of the business man is that which is most convenient for the economist to adopt when discussing the production of goods for a market, and the causes which govern their exchange value. But there is a broader point of view which the business man, no less than the economist, must adopt when he studies the causes which govern the material wellbeing of the community as a whole. Ordinary conversation may pass from one point of view to another without any formal note of the change: for if a misunderstanding arises it soon becomes manifest; and confusion is cut short by a question or by a volunteered explanation. But the economist may take no risks of that sort: he must make prominent any change in his point of view or in his uses of terms. His path might have seemed smoother for the time, if he had passed silently from one use to another: but in the long run better progress is made by a clear indication of the meaning attached to each term in every doubtful case47.

Let us then during the remainder of this chapter deliberately adopt the social, in contrast with the individual point of view: let us look at the production of the community as a whole, and at its total net income available for all purposes. That is, let us revert nearly to the point of view of a primitive people, who are chiefly concerned with the production of desirable things, and with their direct uses; and who are little concerned with exchange and marketing.

From this point of view income is regarded as including all the benefits which mankind derive at any time from their efforts, in the present and in the past, to turn nature's resources to their best account. The pleasure derived from the beauties of the rainbow, or the sweet taste of the fresh morning air, are left out of the reckoning, not because they are unimportant, nor because the estimate would in any way be vitiated by including them; but solely because reckoning them in would serve no good purpose, while it would add greatly to the length of our sentences and the prolixity of our discussions. For a similar reason it is not worth while to take separate account of the simple services which nearly every one renders to himself, such as putting on his clothes; though there are a few persons who choose to pay others to do such things for them. Their exclusion involves no principle; and time spent by some controversial writers on discussing it has been wasted. It simply follows the maxim De minimis non curat lex. A driver who, not noticing a pool in his way, splashes a passer by is not held to have done him legal injury; though there is no distinction in principle between his act and that of another, who by a similar lack of attention, did serious harm to someone else.

A man's present labour yields him income directly, when devoted to his own use; and he looks to be paid for it in some for or another if he devotes it as a matter of business to the service of others. Similarly any useful thing which he has made or acquired in the past, or which has been handed down to him, under the existing institutions of property, by others who have so made or acquired it, is generally a source of material benefit to him directly or indirectly. If he applies it in business, this income generally appears in the form of money. But a broader use of this term is occasionally needed, which embraces the whole income of benefits of every sort which a person derives from the ownership of property however applied: it includes for instance the benefits which he gets from the use of his own piano, equally with those which a piano dealer would win by letting out a piano on hire. The language of common life while averse to so broad a use of the term Income as this even when discussing social problems, yet habitually includes a certain number of forms of income, other than money income.

The Income Tax Commissioners count a dwelling-house inhabited by its owner as a source of taxable income, though it yields its income of comfort directly. They do this, not on any abstract principle; but partly because of the practical importance of house-room, partly because the ownership of a house is commonly treated in a business fashion, and partly because the real income accruing from it can easily be separated off and estimated. They do not claim to establish any absolute distinction in kind between the things which their rule includes, and those which it excludes.

Jevons, regarding the problem from a purely mathematical point of view, was justified in classing all commodities in the hands of consumers as capital. But some writers, while developing this suggestion with great ingenuity, have treated it as a great principle; and that appears to be an error in judgment. A true sense of proportion requires us not to burden our work with the incessant enumeration of details of secondary importance, of which no account is taken in customary discourse, and which cannot even be described without offending against popular conventions.

8sect; 5. This brings us to consider the use of the term capital from the point of view of inquiries into the material wellbeing of society as a whole. Adam Smith said that a person's capital is that part of his stock from which he expects to derive an income. And almost every use of the term capital, which is known to history, has corresponded more or less closely to a parallel use of the term Income: in almost every use, capital has been that part of a man's stock from which he expects to derive an income.

By far the most important use of the term Capital in general, i.e. from the social point of view, is in the inquiry how the three agents of production, land (that is, natural agents), labour and capital, contribute to producing the national income (or the national dividend, as it will be called later on); and how that income is distributed among the three agents. And this is an additional reason for making the terms Capital and Income correlative from the social, as we did from the individual point of view.

Accordingly it is proposed in this treatise to count as part of capital from the social point of view all things other than land, which yield income that is generally reckoned as such in common discourse; together with similar things in public ownership, such as government factories: the term Land being taken to include all free gifts of nature, such as mines, fisheries, etc., which yield income.

Thus it will include all things held for trade purposes, whether machinery, raw material or finished goods; theatres and hotels; home farms and houses: but not furniture or clothes owned by those who use them. For the former are and the latter are not commonly regarded as yielding income by the world at large, as is shown by the practice of the income tax commissioners.

This usage of the term is in harmony with the common practice of economists of treating social problems in broad outline to start with, and reserving minor details for later consideration: it is in harmony also with their common practice of taking Labour to include those activities, and those only, which are regarded as the source of income in this broader use of the term. Labour together with capital and land thus defined are the sources of all that income of which account is commonly taken in reckoning up the National Income48.

8sect; 6. Social income may be estimated by adding together the incomes of the individuals in the society in question, whether it be a nation or any other group of persons. We must however not count the same thing twice. If we have counted a carpet at its full value, we have already counted the values of the yarn and the labour that were used in making it; and these must not be counted again. And further, if the carpet was made of wool that was in stock at the beginning of the year, the value of that wool must be deducted from the value of the carpet before the net income of the year is reached; while similar deduction must be made for the wear and tear of machinery and other plant used in making it. This is required by the general rule, with which we started, that true or net income is found by deducting from gross income the outgoings that belong to its production.

But if the carpet is cleaned by domestic servants or at steam scouring works, the value of the labour spent in cleaning it must be counted in separately; for otherwise the results of this labour would be altogether omitted from the inventory of those newly-produced commodities and conveniences which constitute the real income of the country. The work of domestic servants is always classed as "labour" in the technical sense; and since it can be assessed en bloc at the value of their remuneration in money and in kind without being enumerated in detail, its inclusion raises no great statistical difficulty. There is however some inconsistency in omitting the heavy domestic work which is done by women and other members of the household, where no servants are kept.

Again, suppose a landowner with an annual income of £10,000 hires a private secretary at a salary of £500, who hires a servant at wages of £50. It may seem that if the incomes of all these three persons are counted in as part of the net income of the country, some of it will be counted twice over, and some three times. But this is not the case. The landlord transfers to his secretary, in return for his assistance, part of the purchasing power derived from the produce of land; and the secretary again transfers part of this to his servant in return for his assistance. The farm produce the value of which goes as rent to the landlord, the assistance which the landlord derives from the work of the secretary, and that which the secretary derives from the work of the servant are independent parts of the real net income of the country; and therefore the £10,000 and the £500 and the £50 which are their money measures, must all be counted in when we are estimating the income of the country. But if the landlord makes an allowance of £500 a year to his son, that must not be counted as an independent income; because no services are rendered for it. And it would not be assessed to the Income tax.

As the net payments on account of interest etc. due to an individual—net, i.e. after deducting those due from him to others—are part of his income, so the money and other things received net by a nation from other countries are part of its income.

8sect; 7. The money income, or inflow, of wealth gives a measure of a nation's prosperity, which, untrustworthy as it is, is yet in some respects better than that afforded by the money value of its stock of wealth.

For income consists chiefly of commodities in a form to give pleasure directly; while the greater part of national wealth consists of the means of production, which are of service to the nation only in so far as they contribute to producing commodities ready for consumption. And further, though this is a minor point, consumable commodities, being more portable, have more nearly uniform prices all the world over than the things used in producing them: the prices of an acre of good land in Manitoba and Kent differ more than those of a bushel of wheat in the two places.

But if we look chiefly at the income of a country we must allow for the depreciation of the sources from which it is derived. More must be deducted from the income derived from a house if it is made of wood, than if it is made of stone; a stone house counts for more towards the real richness of a country than a wooden house which gives equally good accommodation. Again, a mine may yield for a time a large income, but be exhausted in a few years: in that case, it must be counted as equivalent to a field, or a fishery, which yields a much smaller annual income, but will yield that income permanently.

8sect; 8. In purely abstract, and especially in mathematical, reasoning the terms Capital and Wealth are used as synonymous almost perforce, except that "land" proper may for some purposes be omitted from Capital. But there is a clear tradition that we should speak of Capital when considering things as agents of production; and that we should speak of Wealth when considering them as results of production, as subjects of consumption and as yielding pleasures of possession. Thus the chief demand for capital arises from its productiveness, from the services which it renders, for instance, in enabling wool to be spun and woven more easily than by the unaided hand, or in causing water to flow freely wherever it is wanted instead of being carried laboriously in pails; (though there are other uses of capital, as for instance when it is lent to a spendthrift, which cannot easily be brought under this head). On the other hand the supply of capital is controlled by the fact that, in order to accumulate it, men must act prospectively: they must "wait" and "save," they must sacrifice the present to the future.

At the beginning of this Book it was argued that the economist must forego the aid of a complete set of technical terms. He must make the terms in common use serve his purpose in the expression of precise thought, by the aid of qualifying adjectives or other indications in the context. If he arbitrarily assigns a rigid exact use to a word which has several more or less vague uses in the market place, he confuses business men, and he is in some danger of committing himself to untenable positions. The selection of a normal use for such terms as Income and Capital must therefore be tested by actually working with it49.

BOOK III: ON WANTS AND THEIR SATISFACTION.

BOOK III, CHAPTER I: INTRODUCTORY.

8sect; 1. The older definitions of economics described it as the science which is concerned with the production, the distribution, the exchange, and the consumption of wealth. Later experience has shown that the problems of distribution and exchange are so closely connected, that it is doubtful whether anything is to be gained by the attempt to keep them separate. There is however a good deal of general reasoning with regard to the relation of demand and supply which is required as a basis for the practical problems of value, and which acts as an underlying backbone, giving unity and consistency to the main body of economic reasoning. Its very breadth and generality mark it off from the more concrete problems of distribution and exchange to which it is subservient; and therefore it is put together in Book V. on "The General Theory of Demand and Supply" which prepares the way for "Distribution and Exchange, or Value."

But first comes the present Book III., a study of Wants and their satisfaction, i.e. of demand and consumption: and then Book IV., a study of the agents of production, that is, the agents by whose means wants are satisfied, including man himself, the chief agent and the sole aim of production. Book IV. corresponds in general character to that discussion of production to which a large place has been given in nearly all English treatises on general economics during the last two generations; although its relation to the problems of demand and supply has not been made sufficiently clear.

8sect; 2. Until recently the subject of demand or consumption has been somewhat neglected. For important as is the inquiry how to turn our resources to the best account, it is not one which lends itself, so far as the expenditure of private individuals is concerned, to the methods of economics. The common sense of a person who has had a large experience of life will give him more guidance in such a matter than he can gain from subtle economic analyses; and until recently economists said little on the subject, because they really had not much to say that was not the common property of all sensible people. But recently several causes have combined to give the subject a greater prominence in economic discussions.

The first of these is the growing belief that harm was done by Ricardo's habit of laying disproportionate stress on the side of cost of production, when analysing the causes that determine exchange value. For although he and his chief followers were aware that the conditions of demand played as important a part as those of supply in determining value, yet they did not express their meaning with sufficient clearness, and they have been misunderstood by all but the most careful readers.

Secondly, the growth of exact habits of thought in economics is making people more careful to state distinctly the premises on which they reason. This increased care is partly due to the application by some writers of mathematical language and mathematical habits of thought. It is indeed doubtful whether much has been gained by the use of complex mathematical formulæ. But the application of mathematical habits of thought has been of great service; for it has led people to refuse to consider a problem until they are quite sure what the problem is; and to insist on knowing what is, and what is not intended to be assumed before proceeding further.

This has in its turn compelled a more careful analysis of all the leading conceptions of economics, and especially of demand; for the mere attempt to state clearly how the demand for a thing is to be measured opens up new aspects of the main problems of economics. And though the theory of demand is yet in its infancy, we can already see that it may be possible to collect and arrange statistics of consumption in such a way as to throw light on difficult questions of great importance to public wellbeing.

Lastly, the spirit of the age induces a closer attention to the question whether our increasing wealth may not be made to go further than it does in promoting the general wellbeing; and this again compels us to examine how far the exchange value of any element of wealth, whether in collective or individual use, represents accurately the addition which it makes to happiness and wellbeing.

We will begin this Book with a short study of the variety of human wants, considered in their relation to human efforts and activities. For the progressive nature of man is one whole. It is only temporarily and provisionally that we can with profit isolate for study the economic side of his life; and we ought to be careful to take together in one view the whole of that side. There is a special need to insist on this just now, because the reaction against the comparative neglect of the study of wants by Ricardo and his followers shows signs of being carried to the opposite extreme. It is important still to assert the great truth on which they dwelt somewhat too exclusively; viz. that while wants are the rulers of life among the lower animals, it is to changes in the forms of efforts and activities that we must turn when in search for the keynotes of the history of mankind.

BOOK III, CHAPTER II: WANTS IN RELATION TO ACTIVITIES.

8sect; 1. Human wants and desires are countless in number and very various in kind: but they are generally limited and capable of being satisfied. The uncivilized man indeed has not many more than the brute animal; but every step in his progress upwards increases the variety of his needs together with the variety in his methods of satisfying them. He desires not merely larger quantities of the things he has been accustomed to consume, but better qualities of those things; he desires a greater choice of things, and things that will satisfy new wants growing up in him.

Thus though the brute and the savage alike have their preferences for choice morsels, neither of them cares much for variety for its own sake. As, however, man rises in civilization, as his mind becomes developed, and even his animal passions begin to associate themselves with mental activities, his wants become rapidly more subtle and more various; and in the minor details of life he begins to desire change for the sake of change, long before he has consciously escaped from the yoke of custom. The first great step in this direction comes with the art of making a fire: gradually he gets to accustom himself to many different kinds of food and drink cooked in many different ways; and before long monotony begins to become irksome to him, and he finds it a great hardship when accident compels him to live for a long time exclusively on one or two kinds of food.

As a man's riches increase, his food and drink become more various and costly; but his appetite is limited by nature, and when his expenditure on food is extravagant it is more often to gratify the desires of hospitality and display than to indulge his own senses.

This brings us to remark with Senior that "Strong as is the desire for variety, it is weak compared with the desire for distinction: a feeling which if we consider its universality, and its constancy, that it affects all men and at all times, that it comes with us from the cradle and never leaves us till we go into the grave, may be pronounced to be the most powerful of human passions." This great half-truth is well illustrated by a comparison of the desire for choice and various food with that for choice and various dress.

8sect; 2. That need for dress which is the result of natural causes varies with the climate and the season of year, and a little with the nature of a person's occupations. But in dress conventional wants overshadow those which are natural. Thus in many of the earlier stages of civilization the sumptuary mandates of Law and Custom have rigidly prescribed to the members of each caste or industrial grade, the style and the standard of expense up to which their dress must reach and beyond which they may not go; and part of the substance of these mandates remains now, though subject to rapid change. In Scotland, for instance, in Adam Smith's time many persons were allowed by custom to go abroad without shoes and stockings who may not do so now; and many may still do it in Scotland who might not in England. Again, in England now a well-to-do labourer is expected to appear on Sunday in a black coat and, in some places, in a silk hat; though these would have subjected him to ridicule but a short time ago. There is a constant increase both in that variety and expensiveness which custom requires as a minimum, and in that which it tolerates as a maximum; and the efforts to obtain distinction by dress are extending themselves throughout the lower grades of English society.

But in the upper grades, though the dress of women is still various and costly, that of men is simple and inexpensive as compared with what it was in Europe not long ago, and is to-day in the East. For those men who are most truly distinguished on their own account, have a natural dislike to seem to claim attention by their dress; and they have set the fashion50.

8sect; 3. House room satisfies the imperative need for shelter from the weather: but that need plays very little part in the effective demand for house room. For though a small but well-built cabin gives excellent shelter, its stifling atmosphere, its necessary uncleanliness, and its want of the decencies and the quiet of life are great evils. It is not so much that they cause physical discomfort as that they tend to stunt the faculties, and limit people's higher activities. With every increase in these activities the demand for larger house room becomes more urgent51.

And therefore relatively large and well-appointed house room is, even in the lowest social ranks, at once a "necessary for efficiency52," and the most convenient and obvious way of advancing a material claim to social distinction. And even in those grades in which everyone has house room sufficient for the higher activities of himself and his family, a yet further and almost unlimited increase is desired as a requisite for the exercise of many of the higher social activities.

8sect; 4. It is, again, the desire for the exercise and development of activities, spreading through every rank of society, which leads not only to the pursuit of science, literature and art for their own sake, but to the rapidly increasing demand for the work of those who pursue them as professions. Leisure is used less and less as an opportunity for mere stagnation; and there is a growing desire for those amusements, such as athletic games and travelling, which develop activities rather than indulge any sensuous craving53.

For indeed the desire for excellence for its own sake, is almost as wide in its range as the lower desire for distinction. Just as the desire for distinction graduates down from the ambition of those who may hope that their names will be in men's mouths in distant lands and in distant times, to the hope of the country lass that the new ribbon she puts on for Easter may not pass unnoticed by her neighbours; so the desire for excellence for its own sake graduates down from that of a Newton, or a Stradivarius, to that of the fisherman who, even when no one is looking and he is not in a hurry, delights in handling his craft well, and in the fact that she is well built and responds promptly to his guidance. Desires of this kind exert a great influence on the supply of the highest faculties and the greatest inventions; and they are not unimportant on the side of demand. For a large part of the demand for the most highly skilled professional services and the best work of the mechanical artisan, arises from the delight that people have in the training of their own faculties, and in exercising them by aid of the most delicately adjusted and responsive implements.

Speaking broadly therefore, although it is man's wants in the earliest stages of his development that give rise to his activities, yet afterwards each new step upwards is to be regarded as the development of new activities giving rise to new wants, rather than of new wants giving rise to new activities.

We see this clearly if we look away from healthy conditions of life, where new activities are constantly being developed; and watch the West Indian negro, using his new freedom and wealth not to get the means of satisfying new wants, but in idle stagnation that is not rest; or again look at that rapidly lessening part of the English working classes, who have no ambition and no pride or delight in the growth of their faculties and activities, and spend on drink whatever surplus their wages afford over the bare necessaries of a squalid life.

It is not true therefore that "the Theory of Consumption is the scientific basis of economics54." For much that is of chief interest in the science of wants, is borrowed from the science of efforts and activities. These two supplement one another; either is incomplete without the other. But if either, more than the other, may claim to be the interpreter of the history of man, whether on the economic side or any other, it is the science of activities and not that of wants; and McCulloch indicated their true relations when, discussing "the progressive nature of man55," he said:—"The gratification of a want or a desire is merely a step to some new pursuit. In every stage of his progress he is destined to contrive and invent, to engage in new undertakings; and when these are accomplished to enter with fresh energy upon others."

From this it follows that such a discussion of demand as is possible at this stage of our work, must be confined to an elementary analysis of an almost purely formal kind. The higher study of consumption must come after, and not before, the main body of economic analysis; and, though it may have its beginning within the proper domain of economics, it cannot find its conclusion there, but must extend far beyond56.

BOOK III, CHAPTER III: GRADATIONS OF CONSUMERS' DEMAND.

8sect; 1. When a trader or a manufacturer buys anything to be used in production, or be sold again, his demand is based on his anticipations of the profits which he can derive from it. These profits depend at any time on speculative risks and on other causes, which will need to be considered later on. But in the long run the price which a trader or manufacturer can afford to pay for a thing depends on the prices which consumers will pay for it, or for the things made by aid of it. The ultimate regulator of all demand is therefore consumers' demand. And it is with that almost exclusively that we shall be concerned in the present Book.

Utility is taken to be correlative to Desire or Want. It has been already argued that desires cannot be measured directly, but only indirectly by the outward phenomena to which they give rise: and that in those cases with which economics is chiefly concerned the measure is found in the price which a person is willing to pay for the fulfilment or satisfaction of his desire. He may have desires and aspirations which are not consciously set for any satisfaction: but for the present we are concerned chiefly with those which do so aim; and we assume that the resulting satisfaction corresponds in general fairly well to that which was anticipated when the purchase was made57.

There is an endless variety of wants, but there is a limit to each separate want. This familiar and fundamental tendency of human nature may be stated in the law of satiable wants or of diminishing utility thus:—The total utility of a thing to anyone (that is, the total pleasure or other benefit it yields him) increases with every increase in his stock of it, but not as fast as his stock increases. If his stock of it increases at a uniform rate the benefit derived from it increases at a diminishing rate. In other words, the additional benefit which a person derives from a given increase of his stock of a thing, diminishes with every increase in the stock that he already has.

That part of the thing which he is only just induced to purchase may be called his marginal purchase, because he is on the margin of doubt whether it is worth his while to incur the outlay required to obtain it. And the utility of his marginal purchase may be called the marginal utility of the thing to him. Or, if instead of buying it, he makes the thing himself, then its marginal utility is the utility of that part which he thinks it only just worth his while to make. And thus the law just given may be worded:—

The marginal utility of a thing to anyone diminishes with every increase in the amount of it he already has58.

There is however an implicit condition in this law which should be made clear. It is that we do not suppose time to be allowed for any alteration in the character or tastes of the man himself. It is therefore no exception to the law that the more good music a man hears, the stronger is his taste for it likely to become; that avarice and ambition are often insatiable; or that the virtue of cleanliness and the vice of drunkenness alike grow on what they feed upon. For in such cases our observations range over some period of time; and the man is not the same at the beginning as at the end of it. If we take a man as he is, without allowing time for any change in his character, the marginal utility of a thing to him diminishes steadily with every increase in his supply of it59.

8sect; 2. Now let us translate this law of diminishing utility into terms of price. Let us take an illustration from the case of a commodity such as tea, which is in constant demand and which can be purchased in small quantities. Suppose, for instance, that tea of a certain quality is to be had at 2s. per lb. A person might be willing to give 10s. for a single pound once a year rather than go without it altogether; while if he could have any amount of it for nothing he would perhaps not care to use more than 30 lbs. in the year. But as it is, he buys perhaps 10 lbs. in the year; that is to say, the difference between the satisfaction which he gets from buying 9 lbs. and 10 lbs. is enough for him to be willing to pay 2s. for it: while the fact that he does not buy an eleventh pound, shows that he does not think that it would be worth an extra 2s. to him. That is, 2s. a pound measures the utility to him of the tea which lies at the margin or terminus or end of his purchases; it measures the marginal utility to him. If the price which he is just willing to pay for any pound be called his demand price, then 2s. is his marginal demand price. And our law may be worded:—

The larger the amount of a thing that a person has the less, other things being equal (i.e. the purchasing power of money, and the amount of money at his command being equal), will be the price which he will pay for a little more of it: or in other words his marginal demand price for it diminishes.

His demand becomes efficient, only when the price which he is willing to offer reaches that at which others are willing to sell.

This last sentence reminds us that we have as yet taken no account of changes in the marginal utility of money, or general purchasing power. At one and the same time, a person's material resources being unchanged, the marginal utility of money to him is a fixed quantity, so that the prices he is just willing to pay for two commodities are to one another in the same ratio as the utility of those two commodities.

8sect; 3. A greater utility will be required to induce him to buy a thing if he is poor than if he is rich. We have seen how the clerk with £100 a year will walk to business in a heavier rain than the clerk with £300 a year60. But although the utility, or the benefit, that is measured in the poorer man's mind by twopence is greater than that measured by it in the richer man's mind; yet if the richer man rides a hundred times in the year and the poorer man twenty times, then the utility of the hundredth ride which the richer man is only just induced to take is measured to him by twopence; and the utility of the twentieth ride which the poorer man is only just induced to take is measured to him by twopence. For each of them the marginal utility is measured by two-pence; but this marginal utility is greater in the case of the poorer man than in that of the richer.

In other words, the richer a man becomes the less is the marginal utility of money to him; every increase in his resources increases the price which he is willing to pay for any given benefit. And in the same way every diminution of his resources increases the marginal utility of money to him, and diminishes the price that he is willing to pay for any benefit61.

8sect; 4. To obtain complete knowledge of demand for anything, we should have to ascertain how much of it he would be willing to purchase at each of the prices at which it is likely to be offered; and the circumstance of his demand for, say, tea can be best expressed by a list of the prices which he is willing to pay; that is, by his several demand prices for different amounts of it. (This list may be called his demand schedule.)

Thus for instance we may find that he would buy

6 lbs. at50d. per lb.10 lbs. at24d. per lb.
7   "40   "11   "21   "
8   "33   "12   "19   "
9   "28   "13   "17   "

If corresponding prices were filled in for all intermediate amounts we should have an exact statement of his demand62. We cannot express a person's demand for a thing by the "amount he is willing to buy," or by the "intensity of his eagerness to buy a certain amount," without reference to the prices at which he would buy that amount and other amounts. We can represent it exactly only by lists of the prices at which he is willing to buy different amounts63.

When we say that a person's demand for anything increases, we mean that he will buy more of it than he would before at the same price, and that he will buy as much of it as before at a higher price. A general increase in his demand is an increase throughout the whole list of prices at which he is willing to purchase different amounts of it, and not merely that he is willing to buy more of it at the current prices64.

8sect; 5. So far we have looked at the demand of a single individual. And in the particular case of such a thing as tea, the demand of a single person is fairly representative of the general demand of a whole market: for the demand for tea is a constant one; and, since it can be purchased in small quantities, every variation in its price is likely to affect the amount which he will buy. But even among those things which are in constant use, there are many for which the demand on the part of any single individual cannot vary continuously with every small change in price, but can move only by great leaps. For instance, a small fall in the price of hats or watches will not affect the action of every one; but it will induce a few persons, who were in doubt whether or not to get a new hat or a new watch, to decide in favour of doing so.

There are many classes of things the need for which on the part of any individual is inconstant, fitful, and irregular. There can be no list of individual demand prices for wedding-cakes, or the services of an expert surgeon. But the economist has little concern with particular incidents in the lives of individuals. He studies rather "the course of action that may be expected under certain conditions from the members of an industrial group," in so far as the motives of that action are measurable by a money price; and in these broad results the variety and the fickleness of individual action are merged in the comparatively regular aggregate of the action of many.

In large markets, then—where rich and poor, old and young, men and women, persons of all varieties of tastes, temperaments and occupations are mingled together,—the peculiarities in the wants of individuals will compensate one another in a comparatively regular gradation of total demand. Every fall, however slight in the price of a commodity in general use, will, other things being equal, increase the total sales of it; just as an unhealthy autumn increases the mortality of a large town, though many persons are uninjured by it. And therefore if we had the requisite knowledge, we could make a list of prices at which each amount of it could find purchasers in a given place during, say, a year.

The total demand in the place for, say, tea, is the sum of the demands of all the individuals there. Some will be richer and some poorer than the individual consumer whose demand we have just written down; some will have a greater and others a smaller liking for tea than he has. Let us suppose that there are in the place a million purchasers of tea, and that their average consumption is equal to his at each several price. Then the demand of that place is represented by the same list of prices as before, if we write a million pounds of tea instead of one pound65.

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There is then one general law of demand:—The greater the amount to be sold, the smaller must be the price at which it is offered in order that it may find purchasers; or, in other words, the amount demanded increases with a fall in price, and diminishes with a rise in price. There will not be any uniform relation between the fall in price and the increase of demand. A fall of one-tenth in the price may increase the sales by a twentieth or by a quarter, or it may double them. But as the numbers in the left-hand column of the demand schedule increase, those in the right-hand column will always diminish66.

The price will measure the marginal utility of the commodity to each purchaser individually: we cannot speak of price as measuring marginal utility in general, because the wants and circumstances of different people are different.

8sect; 6. The demand prices in our list are those at which various quantities of a thing can be sold in a market during a given time and under given conditions. If the conditions vary in any respect the prices will probably require to be changed; and this has constantly to be done when the desire for anything is materially altered by a variation of custom, or by a cheapening of the supply of a rival commodity, or by the invention of a new one. For instance, the list of demand prices for tea is drawn out on the assumption that the price of coffee is known; but a failure of the coffee harvest would raise the prices for tea. The demand for gas is liable to be reduced by an improvement in electric lighting; and in the same way a fall in the price of a particular kind of tea may cause it to be substituted for an inferior but cheaper variety67.

Our next step will be to consider the general character of demand in the cases of some important commodities ready for immediate consumption. We shall thus be continuing the inquiry made in the preceding chapter as to the variety and satiability of wants; but we shall be treating it from a rather different point of view, viz. that of price-statistics68.

BOOK III, CHAPTER IV: THE ELASTICITY OF WANTS.

8sect; 1. We have seen that the only universal law as to a person's desire for a commodity is that it diminishes, other things being equal, with every increase in his supply of that commodity. But this diminution may be slow or rapid. If it is slow the price that he will give for the commodity will not fall much in consequence of a considerable increase in his supply of it; and a small fall in price will cause a comparatively large increase in his purchases. But if it is rapid, a small fall in price will cause only a very small increase in his purchases. In the former case his willingness to purchase the thing stretches itself out a great deal under the action of a small inducement: the elasticity of his wants, we may say, is great. In the latter case the extra inducement given by the fall in price causes hardly any extension of his desire to purchase: the elasticity of his demand is small. If a fall in price from say 16d. to 15d. per lb. of tea would much increase his purchases, then a rise in price from 15d. to 16d. would much diminish them. That is, when the demand is elastic for a fall in price, it is elastic also for a rise.

And as with the demand of one person so with that of a whole market. And we may say generally:—The elasticity (or responsiveness) of demand in a market is great or small according as the amount demanded increases much or little for a given fall in price, and diminishes much or little for a given rise in price69.

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8sect; 2. The price which is so high relatively to the poor man as to be almost prohibitive, may be scarcely felt by the rich; the poor man, for instance, never tastes wine, but the very rich man may drink as much of it as he has a fancy for, without giving himself a thought of its cost. We shall therefore get the clearest notion of the law of the elasticity of demand by considering one class of society at a time. Of course there are many degrees of richness among the rich, and of poverty among the poor; but for the present we may neglect these minor subdivisions.

When the price of a thing is very high relatively to any class, they will buy but little of it; and in some cases custom and habit may prevent them from using it freely even after its price has fallen a good deal. It may still remain set apart for a limited number of special occasions, or for use in extreme illness, etc. But such cases, though not infrequent, do not form the general rule; and anyhow as soon as it has been taken into common use, any considerable fall in its price causes a great increase in the demand for it. The elasticity of demand is great for high prices, and great, or at least considerable, for medium prices; but it declines as the price falls; and gradually fades away if the fall goes so far that satiety level is reached.

This rule appears to hold with regard to nearly all commodities and with regard to the demand of every class; save only that the level at which high prices end and low prices begin, is different for different classes; and so again is the level at which low prices end and very low prices begin. There are however many varieties in detail; arising chiefly from the fact that there are some commodities with which people are easily satiated, and others—chiefly things used for display—for which their desire is almost unlimited. For the latter the elasticity of demand remains considerable, however low the price may fall, while for the former the demand loses nearly all its elasticity as soon as a low price has once been reached70.

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8sect; 3. There are some things the current prices of which in this country are very low relatively even to the poorer classes; such are for instance salt, and many kinds of savours and flavours, and also cheap medicines. It is doubtful whether any fall in price would induce a considerable increase in the consumption of these.

The current prices of meat, milk and butter, wool, tobacco, imported fruits, and of ordinary medical attendance, are such that every variation in price makes a great change in the consumption of them by the working classes, and the lower half of the middle classes; but the rich would not much increase their own personal consumption of them however cheaply they were to be had. In other words, the direct demand for these commodities is very elastic on the part of the working and lower middle classes, though not on the part of the rich. But the working class is so numerous that their consumption of such things as are well within their reach is much greater than that of the rich; and therefore the aggregate demand for all things of the kind is very elastic. A little while ago sugar belonged to this group of commodities: but its price in England has now fallen so far as to be low relatively even to the working classes, and the demand for it is therefore not elastic71.

The current prices of wall-fruit, of the better kinds of fish, and other moderately expensive luxuries are such as to make the consumption of them by the middle class increase much with every fall in price; in other words, the middle class demand for them is very elastic: while the demand on the part of the rich and on the part of the working class is much less elastic, the former because it is already nearly satiated, the latter because the price is still too high.

The current prices of such things as rare wines, fruit out of season, highly skilled medical and legal assistance, are so high that there is but little demand for them except from the rich: but what demand there is, often has considerable elasticity. Part of the demand for the more expensive kinds of food is really a demand for the means of obtaining social distinction, and is almost insatiable72.

8sect; 4. The case of necessaries is exceptional. When the price of wheat is very high, and again when it is very low, the demand has very little elasticity: at all events if we assume that wheat, even when scarce, is the cheapest food for man; and that, even when most plentiful, it is not consumed in any other way. We know that a fall in the price of the quartern loaf from 6d. to 4d. has scarcely any effect in increasing the consumption of bread. With regard to the other end of the scale it is more difficult to speak with certainty, because there has been no approach to a scarcity in England since the repeal of the corn laws. But, availing ourselves of the experience of a less happy time, we may suppose that deficits in the supply of 1, 2, 3, 4, or 5 tenths would cause a rise in price of 3, 8, 16, 28, or 45 tenths respectively73. Much greater variations in prices indeed than this have not been uncommon. Thus wheat sold in London for ten shillings a bushel in 1335, but in the following year it sold for ten pence74.

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There may be even more violent changes than this in the price of a thing which is not necessary, if it is perishable and the demand for it is inelastic: thus fish may be very dear one day, and sold for manure two or three days later.

Water is one of the few things the consumption of which we are able to observe at all prices, from the very highest down to nothing at all. At moderate prices the demand for it is very elastic. But the uses to which it can be put are capable of being completely filled: and as its price sinks towards zero the demand for it loses its elasticity. Nearly the same may be said of salt. Its price in England is so low that the demand for it as an article of food is very inelastic: but in India the price is comparatively high and the demand is comparatively elastic.

The price of house-room, on the other hand, has never fallen very low except when a locality is being deserted by its inhabitants. Where the condition of society is healthy, and there is no check to general prosperity, there seems always to be an elastic demand for house-room, on account both of the real conveniences and the social distinction which it affords. The desire for those kinds of clothing which are not used for the purpose of display, is satiable: when their price is low the demand for them has scarcely any elasticity.

The demand for things of a higher quality depends much on sensibility: some people care little for a refined flavour in their wine provided they can get plenty of it: others crave a high quality, but are easily satiated. In the ordinary working class districts the inferior and the better joints are sold at nearly the same price: but some well-paid artisans in the north of England have developed a liking for the best meat, and will pay for it nearly as high a price as can be got in the west end of London, where the price is kept artificially high by the necessity of sending the inferior joints away for sale elsewhere. Use also gives rise to acquired distastes as well as to acquired tastes. Illustrations which make a book attractive to many readers, will repel those whose familiarity with better work has rendered them fastidious. A person of high musical sensibility in a large town will avoid bad concerts: though he might go to them gladly if he lived in a small town, where no good concerts are to be heard, because there are not enough persons willing to pay the high price required to cover their expenses. The effective demand for first-rate music is elastic only in large towns; for second-rate music it is elastic both in large and small towns.

Generally speaking those things have the most elastic demand, which are capable of being applied to many different uses. Water for instance is needed first as food, then for cooking, then for washing of various kinds and so on. When there is no special drought, but water is sold by the pailful, the price may be low enough to enable even the poorer classes to drink as much of it as they are inclined, while for cooking they sometimes use the same water twice over, and they apply it very scantily in washing. The middle classes will perhaps not use any of it twice for cooking; but they will make a pail of water go a good deal further for washing purposes than if they had an unlimited supply at command. When water is supplied by pipes, and charged at a very low rate by meter, many people use as much of it even for washing as they feel at all inclined to do; and when the water is supplied not by meter but at a fixed annual charge, and is laid on in every place where it is wanted, the use of it for every purpose is carried to the full satiety limit75.

On the other hand, demand is, generally speaking, very inelastic, firstly, for absolute necessaries (as distinguished from conventional necessaries and necessaries for efficiency); and secondly, for some of those luxuries of the rich which do not absorb much of their income.

8sect; 5. So far we have taken no account of the difficulties of getting exact lists of demand prices, and interpreting them correctly. The first which we have to consider arises from the element of time, the source of many of the greatest difficulties in economics.

Thus while a list of demand prices represents the changes in the price at which a commodity can be sold consequent on changes in the amount offered for sale, other things being equal; yet other things seldom are equal in fact over periods of time sufficiently long for the collection of full and trustworthy statistics. There are always occurring disturbing causes whose effects are commingled with, and cannot easily be separated from, the effects of that particular cause which we desire to isolate. This difficulty is aggravated by the fact that in economics the full effects of a cause seldom come at once, but often spread themselves out after it has ceased to exist.

To begin with, the purchasing power of money is continually changing, and rendering necessary a correction of the results obtained on our assumption that money retains a uniform value. This difficulty can however be overcome fairly well, since we can ascertain with tolerable accuracy the broader changes in the purchasing power of money.

Next come the changes in the general prosperity and in the total purchasing power at the disposal of the community at large. The influence of these changes is important, but perhaps less so than is generally supposed. For when the wave of prosperity is descending, prices fall, and this increases the resources of those with fixed incomes at the expense of those whose incomes depend on the profits of business. The downward fluctuation of prosperity is popularly measured almost entirely by the conspicuous losses of this last class; but the statistics of the total consumption of such commodities as tea, sugar, butter, wool, etc. prove that the total purchasing power of the people does not meanwhile fall very fast. Still there is a fall, and the allowance to be made for it must be ascertained by comparing the prices and the consumption of as many things as possible.

Next come the changes due to the gradual growth of population and wealth. For these an easy numerical correction can be made when the facts are known76.

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8sect; 6. Next, allowance must be made for changes in fashion, and taste and habit77, for the opening out of new uses of a commodity, for the discovery or improvement or cheapening of other things that can be applied to the same uses with it. In all these cases there is great difficulty in allowing for the time that elapses between the economic cause and its effect. For time is required to enable a rise in the price of a commodity to exert its full influence on consumption. Time is required for consumers to become familiar with substitutes that can be used instead of it, and perhaps for producers to get into the habit of producing them in sufficient quantities. Time may be also wanted for the growth of habits of familiarity with the new commodities and the discovery of methods of economizing them.

For instance when wood and charcoal became dear in England, familiarity with coal as a fuel grew slowly, fireplaces were but slowly adapted to its use, and an organized traffic in it did not spring up quickly even to places to which it could be easily carried by water: the invention of processes by which it could be used as a substitute for charcoal in manufacture went even more slowly, and is indeed hardly yet complete. Again, when in recent years the price of coal became very high, a great stimulus was given to the invention of economies in its use, especially in the production of iron and steam; but few of these inventions bore much practical fruit till after the high price had passed away. Again, when a new tramway or suburban railway is opened, even those who live near the line do not get into the habit of making the most of its assistance at once; and a good deal more time elapses before many of those whose places of business are near one end of the line change their homes so as to live near the other end. Again, when petroleum first became plentiful few people were ready to use it freely; gradually petroleum and petroleum lamps have become familiar to all classes of society: too much influence would therefore be attributed to the fall in price which has occurred since then, if it were credited with all the increase of consumption.

Another difficulty of the same kind arises from the fact that there are many purchases which can easily be put off for a short time, but not for a long time. This is often the case with regard to clothes and other things which are worn out gradually, and which can be made to serve a little longer than usual under the pressure of high prices. For instance, at the beginning of the cotton famine the recorded consumption of cotton in England was very small. This was partly because retail dealers reduced their stock, but chiefly because people generally made shift to do as long as they could without buying new cotton goods. In 1864 however many found themselves unable to wait longer; and a good deal more cotton was entered for home consumption in that year, though the price was then much higher, than in either of the preceding years. For commodities of this kind then a sudden scarcity does not immediately raise the price fully up to the level, which properly corresponds to the reduced supply. Similarly after the great commercial depression in the United States in 1873 it was noticed that the boot trade revived before the general clothing trade; because there is a great deal of reserve wear in the coats and hats that are thrown aside in prosperous times as worn out, but not so much in the boots.

8sect; 7. The above difficulties are fundamental: but there are others which do not lie deeper than the more or less inevitable faults of our statistical returns.

We desire to obtain, if possible, a series of prices at which different amounts of a commodity can find purchasers during a given time in a market. A perfect market is a district, small or large, in which there are many buyers and many sellers all so keenly on the alert and so well acquainted with one another's affairs that the price of a commodity is always practically the same for the whole of the district. But independently of the fact that those who buy for their own consumption, and not for the purposes of trade, are not always on the look out for every change in the market, there is no means of ascertaining exactly what prices are paid in many transactions. Again, the geographical limits of a market are seldom clearly drawn, except when they are marked out by the sea or by custom-house barriers; and no country has accurate statistics of commodities produced in it for home consumption.

Again, there is generally some ambiguity even in such statistics as are to be had. They commonly show goods as entered for consumption as soon as they pass into the hands of dealers; and consequently an increase of dealers' stocks cannot easily be distinguished from an increase of consumption. But the two are governed by different causes. A rise of prices tends to check consumption; but if the rise is expected to continue, it will probably, as has already been noticed, lead dealers to increase their stocks78.

Next it is difficult to insure that the commodities referred to are always of the same quality. After a dry summer what wheat there is, is exceptionally good; and the prices for the next harvest year appear to be higher than they really are. It is possible to make allowance for this, particularly now that dry Californian wheat affords a standard. But it is almost impossible to allow properly for the changes in quality of many kinds of manufactured goods. This difficulty occurs even in the case of such a thing as tea: the substitution in recent years of the stronger Indian tea for the weaker Chinese tea has made the real increase of consumption greater than that which is shown by the statistics.

Note on Statistics of Consumption.

8sect; 8. General Statistics of consumption are published by many Governments with regard to certain classes of commodities. But partly for the reasons just indicated they are of very little service in helping us to trace either a causal connection between variations in prices and variations in the amounts which people will buy, or in the distribution of different kinds of consumption among the different classes of the community.

As regards the first of these objects, viz. the discovery of the laws connecting variations in consumption consequent on variations in price, there seems much to be gained by working out a hint given by Jevons (Theory, pp. 11, 12) with regard to shopkeepers' books. A shopkeeper, or the manager of a co-operative store, in the working man's quarter of a manufacturing town has often the means of ascertaining with tolerable accuracy the financial position of the great body of his customers. He can find out how many factories are at work, and for how many hours in the week, and he can hear about all the important changes in the rate of wages: in fact he makes it his business to do so. And as a rule his customers are quick in finding out changes in the price of things which they commonly use. He will therefore often find cases in which an increased consumption of a commodity is brought about by a fall in its price, the cause acting quickly, and acting alone without any admixture of disturbing causes. Even where disturbing causes are present, he will often be able to allow for their influence. For instance, he will know that as the winter comes on, the prices of butter and vegetables rise; but the cold weather makes people desire butter more and vegetables less than before: and therefore when the prices of both vegetables and butter rise towards the winter, he will expect a greater falling off of consumption in the case of vegetables than should properly be attributed to the rise in price taken alone, but a less falling off in the case of butter. If however in two neighbouring winters his customers have been about equally numerous, and in receipt of about the same rate of wages; and if in the one the price of butter was a good deal higher than in the other, then a comparison of his books for the two winters will afford a very accurate indication of the influence of changes in price on consumption. Shopkeepers who supply other classes of society must occasionally be in a position to furnish similar facts relating to the consumption of their customers.

If a sufficient number of tables of demand by different sections of society could be obtained, they would afford the means of estimating indirectly the variations in total demand that would result from extreme variations in price, and thus attaining an end which is inaccessible by any other route. For, as a general rule, the price of a commodity fluctuates within but narrow limits; and therefore statistics afford us no direct means of guessing what the consumption of it would be, if its price were either fivefold or a fifth part of what it actually is. But we know that its consumption would be confined almost entirely to the rich if its price were very high; and that, if its price were very low, the great body of its consumption would in most cases be among the working classes. If then the present price is very high relatively to the middle or to the working classes, we may be able to infer from the laws of their demand at the present prices what would be the demand of the rich if the price were so raised so as to be very high relatively even to their means. On the other hand, if the present price is moderate relatively to the means of the rich, we may be able to infer from their demand what would be the demand of the working classes if the price were to fall to a level which is moderate relatively to their means. It is only by thus piecing together fragmentary laws of demand that we can hope to get any approach to an accurate law relating to widely different prices. (That is to say, the general demand curve for a commodity cannot be drawn with confidence except in the immediate neighbourhood of the current price, until we are able to piece it together out of the fragmentary demand curves of different classes of society. Compare the Second Section of this Chapter.)

When some progress has been made in reducing to definite law the demand for commodities that are destined for immediate consumption, then, but not till then, will there be use in attempting a similar task with regard to those secondary demands which are dependent on these—the demands namely for the labour of artisans and others who take part in the production of things for sale; and again the demand for machines, factories, railway material and other instruments of production. The demand for the work of medical men, of domestic servants and of all those whose services are rendered direct to the consumer is similar in character to the demand for commodities for immediate consumption, and its laws may be investigated in the same manner.

It is a very important, but also difficult task to ascertain the proportions in which the different classes of society distribute their expenditure between necessaries, comforts and luxuries; between things that provide only present pleasure, and those that build up stores of physical and moral strength; and lastly between those which gratify the lower wants and those which stimulate and educate the higher wants. Several endeavours have been made in this direction on the Continent during the last fifty years; and latterly the subject has been investigated with increasing vigour not only there but also in America and in England79.

BOOK III, CHAPTER V: CHOICE BETWEEN DIFFERENT USES OF THE SAME THING. IMMEDIATE AND DEFERRED USES.

8sect; 1. The primitive housewife finding that she has a limited number of hanks of yarn from the year's shearing, considers all the domestic wants for clothing and tries to distribute the yarn between them in such a way as to contribute as much as possible to the family wellbeing. She will think she has failed if, when it is done, she has reason to regret that she did not apply more to making, say, socks, and less to vests. That would mean that she had miscalculated the points at which to suspend the making of socks and vests respectively; that she had gone too far in the case of vests, and not far enough in that of socks; and that therefore at the points at which she actually did stop, the utility of yarn turned into socks was greater than that of yarn turned into vests. But if, on the other hand, she hit on the right points to stop at, then she made just so many socks and vests that she got an equal amount of good out of the last bundle of yarn that she applied to socks, and the last she applied to vests. This illustrates a general principle, which may be expressed thus:—

If a person has a thing which he can put to several uses, he will distribute it among these uses in such a way that it has the same marginal utility in all. For if it had a greater marginal utility in one use than another, he would gain by taking away some of it from the second use and applying it to the first80.

One great disadvantage of a primitive economy, in which there is but little free exchange, is that a person may easily have so much of one thing, say wool, that when he has applied it to every possible use, its marginal utility in each use is low: and at the same time he may have so little of some other thing, say wood, that its marginal utility for him is very high. Meanwhile some of his neighbours may be in great need of wool, and have more wood than they can turn to good account. If each gives up that which has for him the lower utility and receives that which has the higher, each will gain by the exchange. But to make such an adjustment by barter, would be tedious and difficult.

The difficulty of barter is indeed not so very great where there are but a few simple commodities each capable of being adapted by domestic work to several uses; the weaving wife and the spinster daughters adjusting rightly the marginal utilities of the different uses of the wool, while the husband and the sons do the same for the wood.

8sect; 2. But when commodities have become very numerous and highly specialized, there is an urgent need for the free use of money, or general purchasing power; for that alone can be applied easily in an unlimited variety of purchases. And in a money-economy, good management is shown by so adjusting the margins of suspense on each line of expenditure that the marginal utility of a shilling's worth of goods on each line shall be the same. And this result each one will attain by constantly watching to see whether there is anything on which he is spending so much that he would gain by taking a little away from that line of expenditure and putting it on some other line.

Thus, for instance, the clerk who is in doubt whether to ride to town, or to walk and have some little extra indulgence at his lunch, is weighing against one another the (marginal) utilities of two different modes of spending his money. And when an experienced housekeeper urges on a young couple the importance of keeping accounts carefully; a chief motive of the advice is that they may avoid spending impulsively a great deal of money on furniture and other things; for, though some quantity of these is really needful, yet when bought lavishly they do not give high (marginal) utilities in proportion to their cost. And when the young pair look over their year's budget at the end of the year, and find perhaps that it is necessary to curtail their expenditure somewhere, they compare the (marginal) utilities of different items, weighing the loss of utility that would result from taking away a pound's expenditure here, with that which they would lose by taking it away there: they strive to adjust their parings down so that the aggregate loss of utility may be a minimum, and the aggregate of utility that remains to them may be a maximum81.

8sect; 3. The different uses between which a commodity is distributed need not all be present uses; some may be present and some future. A prudent person will endeavour to distribute his means between all their several uses, present and future, in such a way that they will have in each the same marginal utility. But in estimating the present marginal utility of a distant source of pleasure a twofold allowance must be made; firstly, for its uncertainty (this is an objective property which all well-informed persons would estimate in the same way); and secondly, for the difference in the value to them of a distant as compared with a present pleasure (this is a subjective property which different people would estimate in different ways according to their individual characters, and their circumstances at the time).

If people regarded future benefits as equally desirable with similar benefits at the present time, they would probably endeavour to distribute their pleasures and other satisfactions evenly throughout their lives. They would therefore generally be willing to give up a present pleasure for the sake of an equal pleasure in the future, provided they could be certain of having it. But in fact human nature is so constituted that in estimating the "present value" of a future benefit most people generally make a second deduction from its future value, in the form of what we may call a "discount," that increases with the period for which the benefit is deferred. One will reckon a distant benefit at nearly the same value which it would have for him if it were present; while another who has less power of realizing the future, less patience and self-control, will care comparatively little for any benefit that is not near at hand. And the same person will vary in his mood, being at one time impatient, and greedy for present enjoyment; while at another his mind dwells on the future, and he is willing to postpone all enjoyments that can conveniently be made to wait. Sometimes he is in a mood to care little for anything else: sometimes he is like the children who pick the plums out of their pudding to eat them at once, sometimes like those who put them aside to be eaten last. And, in any case, when calculating the rate at which a future benefit is discounted, we must be careful to make allowance for the pleasures of expectation.

The rates at which different people discount the future affect not only their tendency to save, as the term is ordinarily understood, but also their tendency to buy things which will be a lasting source of pleasure rather than those which give a stronger but more transient enjoyment; to buy a new coat rather than to indulge in a drinking bout, or to choose simple furniture that will wear well, rather than showy furniture that will soon fall to pieces.

It is in regard to these things especially that the pleasure of possession makes itself felt. Many people derive from the mere feeling of ownership a stronger satisfaction than they derive from ordinary pleasures in the narrower sense of the term: for example, the delight in the possession of land will often induce people to pay for it so high a price that it yields them but a very poor return on their investment. There is a delight in ownership for its own sake; and there is a delight in ownership on account of the distinction it yields. Sometimes the latter is stronger than the former, sometimes weaker; and perhaps no one knows himself or other people well enough to be able to draw the line quite certainly between the two.

8sect; 4. As has already been urged, we cannot compare the quantities of two benefits, which are enjoyed at different times even by the same person. When a person postpones a pleasure-giving event he does not postpone the pleasure; but he gives up a present pleasure and takes in its place another, or an expectation of getting another at a future date: and we cannot tell whether he expects the future pleasure to be greater than the one which he is giving up, unless we know all the circumstances of the case. And therefore, even though we know the rate at which he discounts future pleasurable events, such as spending £1 on immediate gratifications, we yet do not know the rate at which he discounts future pleasures82.

We can however get an artificial measure of the rate at which he discounts future benefits by making two assumptions. These are, firstly, that he expects to be about as rich at the future date as he is now; and secondly, that his capacity for deriving benefit from the things which money will buy will on the whole remain unchanged, though it may have increased in some directions and diminished in others. On these assumptions, if he is willing, but only just willing, to spare a pound from his expenditure now with the certainty of having (for the disposal of himself or his heirs) a guinea one year hence, we may fairly say that he discounts future benefits that are perfectly secure (subject only to the conditions of human mortality) at the rate of five per cent. per annum. And on these assumptions the rate at which he discounts future (certain) benefits, will be the rate at which he can discount money in the money market83.

So far we have considered each pleasure singly; but a great many of the things which people buy are durable, i.e. are not consumed in a single use; a durable good, such as a piano, is the probable source of many pleasures, more or less remote; and its value to a purchaser is the aggregate of the usance, or worth to him of all these pleasures, allowance being made for their uncertainty and for their distance84.

BOOK III, CHAPTER VI: VALUE AND UTILITY.

8sect; 1. We may now turn to consider how far the price which is actually paid for a thing represents the benefit that arises from its possession. This is a wide subject on which economic science has very little to say, but that little is of some importance.

We have already seen that the price which a person pays for a thing can never exceed, and seldom comes up to that which he would be willing to pay rather than go without it: so that the satisfaction which he gets from its purchase generally exceeds that which he gives up in paying away its price; and he thus derives from the purchase a surplus of satisfaction. The excess of the price which he would be willing to pay rather than go without the thing, over that which he actually does pay, is the economic measure of this surplus satisfaction. It may be called consumer's surplus.

It is obvious that the consumer's surpluses derived from some commodities are much greater than from others. There are many comforts and luxuries of which the prices are very much below those which many people would pay rather than go entirely without them; and which therefore afford a very great consumer's surplus. Good instances are matches, salt, a penny newspaper, or a postage-stamp.

This benefit, which he gets from purchasing at a low price things for which he would rather pay a high price than go without them, may be called the benefit which he derives from his opportunities, or from his environment; or, to recur to a word that was in common use a few generations ago, from his conjuncture. Our aim in the present chapter is to apply the notion of consumer's surplus as an aid in estimating roughly some of the benefits which a person derives from his environment or his conjuncture85.

8sect; 2. In order to give definiteness to our notions, let us consider the case of tea purchased for domestic consumption. Let us take the case of a man, who, if the price of tea were 20s. a pound, would just be induced to buy one pound annually; who would just be induced to buy two pounds if the price were 14s., three pounds if the price were 10s., four pounds if the price were 6s., five pounds if the price were 4s., six pounds if the price were 3s., and who, the price being actually 2s., does purchase seven pounds. We have to investigate the consumer's surplus which he derives from his power of purchasing tea at 2s. a pound.

The fact that he would just be induced to purchase one pound if the price were 20s., proves that the total enjoyment or satisfaction which he derives from that pound is as great as that which he could obtain by spending 20s. on other things. When the price falls to 14s., he could, if he chose, continue to buy only one pound. He would then get for 14s. what was worth to him at least 20s.; and he will obtain a surplus satisfaction worth to him at least 6s., or in other words a consumer's surplus of at least 6s. But in fact he buys a second pound of his own free choice, thus showing that he regards it as worth to him at least 14s., and that this represents the additional utility of the second pound to him. He obtains for 28s. what is worth to him at least 20s. + 14s.; i.e. 34s. His surplus satisfaction is at all events not diminished by buying it, but remains worth at least 6s. to him. The total utility of the two pounds is worth at least 34s., his consumer's surplus is at least 6s.86 The fact that each additional purchase reacts upon the utility of the purchases which he had previously decided to make has already been allowed for in making out the schedule and must not be counted a second time.

When the price falls to 10s., he might, if he chose, continue to buy only two pounds; and obtain for 20s. what was worth to him at least 34s., and derive a surplus satisfaction worth at least 14s. But in fact he prefers to buy a third pound: and as he does this freely, we know that he does not diminish his surplus satisfaction by doing it. He now gets for 30s. three pounds; of which the first is worth to him at least 20s., the second at least 14s., and the third at least 10s. The total utility of the three is worth at least 44s., his consumer's surplus is at least 14s., and so on.

When at last the price has fallen to 2s. he buys seven pounds, which are severally worth to him not less than 20, 14, 10, 6, 4, 3, and 2s. or 59s. in all. This sum measures their total utility to him, and his consumer's surplus is (at least) the excess of this sum over the 14s. he actually does pay for them, i.e. 45s. This is the excess value of the satisfaction he gets from buying the tea over that which he could have got by spending the 14s. in extending a little his purchase of other commodities, of which he had just not thought it worth while to buy more at their current prices; and any further purchases of which at those prices would not yield him any consumer's surplus. In other words, he derives this 45s. worth of surplus enjoyment from his conjuncture, from the adaptation of the environment to his wants in the particular matter of tea. If that adaptation ceased, and tea could not be had at any price, he would have incurred a loss of satisfaction at least equal to that which he could have got by spending 45s. more on extra supplies of things that were worth to him only just what he paid for them87.

8sect; 3. In the same way if we were to neglect for the moment the fact that the same sum of money represents different amounts of pleasure to different people, we might measure the surplus satisfaction which the sale of tea affords, say, in the London market, by the aggregate of the sums by which the prices shown in a complete list of demand prices for tea exceeds its selling price88.

This analysis, with its new names and elaborate machinery, appears at first sight laboured and unreal. On closer study it will be found to introduce no new difficulties and to make no new assumptions; but only to bring to light difficulties and assumptions that are latent in the common language of the market-place. For in this, as in other cases, the apparent simplicity of popular phrases veils a real complexity, and it is the duty of science to bring out that latent complexity; to face it; and to reduce it as far as possible: so that in later stages we may handle firmly difficulties that could not be grasped with a good grip by the vague thought and language of ordinary life.

It is a common saying in ordinary life that the real worth of things to a man is not gauged by the price he pays for them: that, though he spends for instance much more on tea than on salt, yet salt is of greater real worth to him; and that this would be clearly seen if he were entirely deprived of it. This line of argument is but thrown into precise technical form when it is said that we cannot trust the marginal utility of a commodity to indicate its total utility. If some ship-wrecked men, expecting to wait a year before they were rescued, had a few pounds of tea and the same number of pounds of salt to divide between them, the salt would be the more highly prized; because the marginal utility of an ounce of salt, when a person expects to get only a few of them in the year is greater than that of tea under like circumstances. But, under ordinary circumstances, the price of salt being low, every one buys so much of it that an additional pound would bring him little additional satisfaction: the total utility of salt to him is very great indeed, and yet its marginal utility is low. On the other hand, since tea is costly, most people use less of it and let the water stay on it rather longer than they would, if it could be got at nearly as low a price as salt can. Their desire for it is far from being satiated: its marginal utility remains high, and they may be willing to pay as much for an additional ounce of it as they would for an additional pound of salt. The common saying of ordinary life with which we began suggests all this: but not in an exact and definite form, such as is needed for a statement which will often be applied in later work. The use of technical terms at starting adds nothing to knowledge: but it puts familiar knowledge in a firm compact shape, ready to serve as the basis for further study89.

Or the real worth of a thing might be discussed with reference not to a single person but to people in general; and thus it would naturally be assumed that a shilling's worth of gratification to one Englishman might be taken as equivalent with a shilling's worth to another, "to start with," and "until cause to the contrary were shown." But everyone would know that this was a reasonable course only on the supposition that the consumers of tea and those of salt belonged to the same classes of people; and included people of every variety of temperament90.

This involves the consideration that a pound's worth of satisfaction to an ordinary poor man is a much greater thing than a pound's worth of satisfaction to an ordinary rich man: and if instead of comparing tea and salt, which are both used largely by all classes, we compared either of them with champagne or pineapples, the correction to be made on this account would be more than important: it would change the whole character of the estimate. In earlier generations many statesmen, and even some economists, neglected to make adequate allowance for considerations of this class, especially when constructing schemes of taxation; and their words or deeds seemed to imply a want of sympathy with the sufferings of the poor; though more often they were due simply to want of thought.

On the whole however it happens that by far the greater number of the events with which economics deals, affect in about equal proportions all the different classes of society; so that if the money measures of the happiness caused by two events are equal, there is not in general any very great difference between the amounts of the happiness in the two cases. And it is on account of this fact that the exact measurement of the consumers' surplus in a market has already much theoretical interest, and may become of high practical importance.

It will be noted however that the demand prices of each commodity, on which our estimates of its total utility and consumers' surplus are based, assume that other things remain equal, while its price rises to scarcity value: and when the total utilities of two commodities which contribute to the same purpose are calculated on this plan, we cannot say that the total utility of the two together is equal to the sum of the total utilities of each separately91.

8sect; 4. The substance of our argument would not be affected if we took account of the fact that, the more a person spends on anything the less power he retains of purchasing more of it or of other things, and the greater is the value of money to him (in technical language every fresh expenditure increases the marginal value of money to him). But though its substance would not be altered, its form would be made more intricate without any corresponding gain; for there are very few practical problems, in which the corrections to be made under this head would be of any importance92.

There are however some exceptions. For instance, as Sir R. Giffen has pointed out, a rise in the price of bread makes so large a drain on the resources of the poorer labouring families and raises so much the marginal utility of money to them, that they are forced to curtail their consumption of meat and the more expensive farinaceous foods: and, bread being still the cheapest food which they can get and will take, they consume more, and not less of it. But such cases are rare; when they are met with, each must be treated on its own merits.

It has already been remarked that we cannot guess at all accurately how much of anything people would buy at prices very different from those which they are accustomed to pay for it: or in other words, what the demand prices for it would be for amounts very different from those which are commonly sold. Our list of demand prices is therefore highly conjectural except in the neighbourhood of the customary price; and the best estimates we can form of the whole amount of the utility of anything are liable to large error. But this difficulty is not important practically. For the chief applications of the doctrine of consumers' surplus are concerned with such changes in it as would accompany changes in the price of the commodity in question in the neighbourhood of the customary price: that is, they require us to use only that information with which we are fairly well supplied. These remarks apply with special force to necessaries93.

8sect; 5. There remains another class of considerations which are apt to be overlooked in estimating the dependence of wellbeing upon material wealth. Not only does a person's happiness often depend more on his own physical, mental and moral health than on his external conditions: but even among these conditions many that are of chief importance for his real happiness are apt to be omitted from an inventory of his wealth. Some are free gifts of nature; and these might indeed be neglected without great harm if they were always the same for everybody; but in fact they vary much from place to place. More of them however are elements of collective wealth which are often omitted from the reckoning of individual wealth; but which become important when we compare different parts of the modern civilized world, and even more important when we compare our own age with earlier times.

Collective action for the purposes of securing common wellbeing, as for instance in lighting and watering the streets, will occupy us much towards the end of our inquiries. Co-operative associations for the purchase of things for personal consumption have made more progress in England than elsewhere: but those for purchasing the things wanted for trade purposes by farmers and others, have until lately been backward in England. Both kinds are sometimes described as Consumers' associations; but they are really associations for economizing effort in certain branches of business, and belong to the subject of Production rather than Consumption.

8sect; 6. When we speak of the dependence of wellbeing on material wealth, we refer to the flow or stream of wellbeing as measured by the flow or stream of incoming wealth and the consequent power of using and consuming it. A person's stock of wealth yields by its usance and in other ways an income of happiness, among which of course are to be counted the pleasures of possession: but there is little direct connection between the aggregate amount of that stock and his aggregate happiness. And it is for that reason that we have throughout this and preceding chapters spoken of the rich, the middle classes and the poor as having respectively large, medium and small incomes—not possessions94.

In accordance with a suggestion made by Daniel Bernoulli, we may regard the satisfaction which a person derives from his income as commencing when he has enough to support life, and afterwards as increasing by equal amounts with every equal successive percentage that is added to his income; and vice versâ for loss of income95.

But after a time new riches often lose a great part of their charms. Partly this is the result of familiarity; which makes people cease to derive much pleasure from accustomed comforts and luxuries, though they suffer greater pain from their loss. Partly it is due to the fact that with increased riches there often comes either the weariness of age, or at least an increase of nervous strain; and perhaps even habits of living that lower physical vitality, and diminish the capacity for pleasure.

In every civilized country there have been some followers of the Buddhist doctrine that a placid serenity is the highest ideal of life; that it is the part of the wise man to root out of his nature as many wants and desires as he can; that real riches consist not in the abundance of goods but in the paucity of wants. At the other extreme are those who maintain that the growth of new wants and desires is always beneficial because it stimulates people to increased exertions. They seem to have made the mistake, as Herbert Spencer says, of supposing that life is for working, instead of working for life96

The truth seems to be that as human nature is constituted, man rapidly degenerates unless he has some hard work to do, some difficulties to overcome; and that some strenuous exertion is necessary for physical and moral health. The fulness of life lies in the development and activity of as many and as high faculties as possible. There is intense pleasure in the ardent pursuit of any aim, whether it be success in business, the advancement of art and science, or the improvement of the condition of one's fellow-beings. The highest constructive work of all kinds must often alternate between periods of over-strain and periods of lassitude and stagnation; but for ordinary people, for those who have no strong ambitions, whether of a lower or a higher kind, a moderate income earned by moderate and fairly steady work offers the best opportunity for the growth of those habits of body, mind, and spirit in which alone there is true happiness.

There is some misuse of wealth in all ranks of society. And though, speaking generally, we may say that every increase in the wealth of the working classes adds to the fulness and nobility of human life, because it is used chiefly in the satisfaction of real wants; yet even among the artisans in England, and perhaps still more in new countries, there are signs of the growth of that unwholesome desire for wealth as a means of display which has been the chief bane of the well-to-do classes in every civilized country. Laws against luxury have been futile; but it would be a gain if the moral sentiment of the community could induce people to avoid all sorts of display of individual wealth. There are indeed true and worthy pleasures to be got from wisely ordered magnificence: but they are at their best when free from any taint of personal vanity on the one side and envy on the other; as they are when they centre round public buildings, public parks, public collections of the fine arts, and public games and amusements. So long as wealth is applied to provide for every family the necessaries of life and culture, and an abundance of the higher forms of enjoyment for collective use, so long the pursuit of wealth is a noble aim; and the pleasures which it brings are likely to increase with the growth of those higher activities which it is used to promote.

When the necessaries of life are once provided, everyone should seek to increase the beauty of things in his possession rather than their number or their magnificence. An improvement in the artistic character of furniture and clothing trains the higher faculties of those who make them, and is a source of growing happiness to those who use them. But if instead of seeking for a higher standard of beauty, we spend our growing resources on increasing the complexity and intricacy of our domestic goods, we gain thereby no true benefit, no lasting happiness. The world would go much better if everyone would buy fewer and simpler things, and would take trouble in selecting them for their real beauty; being careful of course to get good value in return for his outlay, but preferring to buy a few things made well by highly paid labour rather than many made badly by low paid labour.

But we are exceeding the proper scope of the present Book; the discussion of the influence on general wellbeing which is exerted by the mode in which each individual spends his income is one of the more important of those applications of economic science to the art of living.

BOOK IV: THE AGENTS OF PRODUCTION.
Land, Labour, Capital and Organization.

BOOK IV, CHAPTER I: INTRODUCTORY.

8sect; 1. The agents of production are commonly classed as Land, Labour and Capital. By Land is meant the material and the forces which Nature gives freely for man's aid, in land and water, in air and light and heat. By Labour is meant the economic work of man, whether with the hand or the head1. By Capital is meant all stored-up provision for the production of material goods, and for the attainment of those benefits which are commonly reckoned as part of income. It is the main stock of wealth regarded as an agent of production rather than as a direct source of gratification.

Capital consists in a great part of knowledge and organization: and of this some part is private property and other part is not. Knowledge is our most powerful engine of production; it enables us to subdue Nature and force her to satisfy our wants. Organization aids knowledge; it has many forms, e.g. that of a single business, that of various businesses in the same trade, that of various trades relatively to one another, and that of the State providing security for all and help for many. The distinction between public and private property in knowledge and organization is of great and growing importance: in some respects of more importance than that between public and private property in material things; and partly for that reason it seems best sometimes to reckon Organization apart as a distinct agent of production. It cannot be fully examined till a much later stage in our inquiry; but something has to be said of it in the present Book.

In a sense there are only two agents of production, nature and man. Capital and organization are the result of the work of man aided by nature, and directed by his power of forecasting the future and his willingness to make provision for it. If the character and powers of nature and of man be given, the growth of wealth and knowledge and organization follow from them as effect from cause. But on the other hand man is himself largely formed by his surroundings, in which nature plays a great part: and thus from every point of view man is the centre of the problem of production as well as that of consumption; and also of that further problem of the relations between the two, which goes by the twofold name of Distribution and Exchange.

The growth of mankind in numbers, in health and strength, in knowledge, ability, and in richness of character is the end of all our studies: but it is an aim to which economics can do no more than contribute some important elements. In its broader aspects therefore the study of this growth belongs to the end, if to any part of a treatise on economics: but does not properly belong even there. Meanwhile we cannot avoid taking account of the direct agency of man in production, and of the conditions which govern his efficiency as a producer. And on the whole it is perhaps the most convenient course, as it certainly is that most in accordance with English tradition, to include some account of the growth of population in numbers and character as a part of the general discussion of production.

8sect; 2. It is not possible at this stage to do more than indicate very slightly the general relations between demand and supply, between consumption and production. But it may be well, while the discussion of utility and value is fresh in our minds, to take a short glance at the relations between value and the disutility or discommodity that has to be overcome in order to obtain those goods which have value because they are at once desirable and difficult of attainment. All that can be said now must be provisional; and may even seem rather to raise difficulties than to solve them: and there will be an advantage in having before us a map, in however slight and broken outline, of the ground to be covered.

While demand is based on the desire to obtain commodities, supply depends mainly on the overcoming of the unwillingness to undergo "discommodities." These fall generally under two heads:—labour, and the sacrifice involved in putting off consumption. It must suffice here to give a sketch of the part played by ordinary labour in supply. It will be seen hereafter that remarks similar, though not quite the same, might have been made about the work of management and the sacrifice which is involved (sometimes, but not always) in that waiting which is involved in accumulating the means of production.

The discommodity of labour may arise from bodily or mental fatigue, or from its being carried on in unhealthy surroundings, or with unwelcome associates, or from its occupying time that is wanted for recreation, or for social or intellectual pursuits. But whatever be the form of the discommodity, its intensity nearly always increases with the severity and the duration of labour.

Of course much exertion is undergone for its own sake, as for instance in mountaineering, in playing games and in the pursuit of literature, of art, and of science; and much hard work is done under the influence of a desire to benefit others2. But the chief motive to most labour, in our use of the term, is the desire to obtain some material advantage; which in the present state of the world appears generally in the form of the gain of a certain amount of money. It is true that even when a man is working for hire he often finds pleasure in his work: but he generally gets so far tired before it is done that he is glad when the hour for stopping arrives. Perhaps after he has been out of work for some time, he might, as far as his immediate comfort is concerned, rather work for nothing than not work at all; but he will probably prefer not to spoil his market, any more than a manufacturer would, by offering what he has for sale much below its normal price. On this matter much will need to be said in another volume.

In technical phrase this may be called the marginal disutility of labour. For, as with every increase in the amount of a commodity its marginal utility falls; and as with every fall in that desirableness, there is a fall in the price that can be got for the whole of the commodity, and not for the last part only; so the marginal disutility of labour generally increases with every increase in its amount.

The unwillingness of anyone already in an occupation to increase his exertions depends, under ordinary circumstances, on fundamental principles of human nature which economists have to accept as ultimate facts. As Jevons remarks3, there is often some resistance to be overcome before setting to work. Some little painful effort is often involved at starting; but this gradually diminishes to zero, and is succeeded by pleasure; which increases for a while until it attains a certain low maximum; after which it diminishes to zero, and is succeeded by increasing weariness and craving for relaxation and change. In intellectual work, however, the pleasure and excitement, after they have once set in, often go on increasing till progress is stopped of necessity or by prudence. Everyone in health has a certain store of energy on which he can draw, but which can only be replaced by rest; so that if his expenditure exceed his income for long, his health becomes bankrupt; and employers often find that in cases of great need a temporary increase of pay will induce their workmen to do an amount of work which they cannot long keep up, whatever they are paid for it. One reason of this is that the need for relaxation becomes more urgent with every increase in the hours of labour beyond a certain limit. The disagreeableness of additional work increases; partly because, as the time left for rest and other activities diminishes, the agreeableness of additional free time increases.

Subject to these and some other qualifications, it is broadly true that the exertions which any set of workers will make, rise or fall with a rise or fall in the remuneration which is offered to them. As the price required to attract purchasers for any given amount of a commodity, was called the demand price for that amount during a year or any other given time; so the price required to call forth the exertion necessary for producing any given amount of a commodity, may be called the supply price for that amount during the same time. And if for the moment we assumed that production depended solely upon the exertions of a certain number of workers, already in existence and trained for their work, we should get a list of supply prices corresponding to the list of demand prices which we have already considered. This list would set forth theoretically in one column of figures various amounts of exertion and therefore of production; and in a parallel column the prices which must be paid to induce the available workers to put forth these amounts of exertion4.

But this simple method of treating the supply of work of any kind, and consequently the supply of goods made by that work, assumes that the number of those who are qualified for it is fixed; and that assumption can be made only for short periods of time. The total numbers of the people change under the action of many causes. Of these causes only some are economic; but among them the average earnings of labour take a prominent place; though their influence on the growth of numbers is fitful and irregular.

But the distribution of the population between different trades is more subject to the influence of economic causes. In the long run the supply of labour in any trade is adapted more or less closely to the demand for it: thoughtful parents bring up their children to the most advantageous occupations to which they have access; that is to those that offer the best reward, in wages and other advantages, in return for labour that is not too severe in quantity or character, and for skill that is not too hard to be acquired. This adjustment between demand and supply can however never be perfect; fluctuations of demand may make it much greater or much less for a while, even for many years, than would have been just sufficient to induce parents to select for their children that trade rather than some other of the same class. Although therefore the reward to be had for any kind of work at any time does stand in some relation to the difficulty of acquiring the necessary skill combined with the exertion, the disagreeableness, the waste of leisure, etc. involved in the work itself; yet this correspondence is liable to great disturbances. The study of these disturbances is a difficult task; and it will occupy us much in later stages of our work. But the present Book is mainly descriptive and raises few difficult problems.

BOOK IV, CHAPTER II: THE FERTILITY OF LAND.

8sect; 1. The requisites of production are commonly spoken of as land, labour and capital: those material things which owe their usefulness to human labour being classed under capital, and those which owe nothing to it being classed as land. The distinction is obviously a loose one: for bricks are but pieces of earth slightly worked up; and the soil of old settled countries has for the greater part been worked over many times by man, and owes to him its present form. There is however a scientific principle underlying the distinction. While man has no power of creating matter, he creates utilities by putting things into a useful form5; and the utilities made by him can be increased in supply if there is an increased demand for them: they have a supply price. But there are other utilities over the supply of which he has no control; they are given as a fixed quantity by nature and have therefore no supply price. The term "land" has been extended by economists so as to include the permanent sources of these utilities6; whether they are found in land, as the term is commonly used, or in seas and rivers, in sunshine and rain, in winds and waterfalls.

When we have inquired what it is that marks off land from those material things which we regard as products of the land, we shall find that the fundamental attribute of land is its extension. The right to use a piece of land gives command over a certain space—a certain part of the earth's surface. The area of the earth is fixed: the geometric relations in which any particular part of it stands to other parts are fixed. Man has no control over them; they are wholly unaffected by demand; they have no cost of production, there is no supply price at which they can be produced.

The use of a certain area of the earth's surface is a primary condition of anything that man can do; it gives him room for his own actions, with the enjoyment of the heat and the light, the air and the rain which nature assigns to that area; and it determines his distance from, and in a great measure his relations to, other things and other persons. We shall find that it is this property of "land" which, though as yet insufficient prominence has been given to it, is the ultimate cause of the distinction which all writers on economics are compelled to make between land and other things. It is the foundation of much that is most interesting and most difficult in economic science.

Some parts of the earth's surface contribute to production chiefly by the services which they render to the navigator: others are of chief value to the miner; others—though this selection is made by man rather than by nature—to the builder. But when the productiveness of land is spoken of our first thoughts turn to its agricultural use.

8sect; 2. To the agriculturist an area of land is the means of supporting a certain amount of vegetable, and perhaps ultimately of animal, life. For this purpose the soil must have certain mechanical and chemical qualities.

Mechanically, it must be so far yielding that the fine roots of plants can push their way freely in it; and yet it must be firm enough to give them a good hold. It must not err as some sandy soils do by affording water too free a passage: for then it will often be dry, and the plant food will be washed away almost as soon as it is formed in the soil or put into it. Nor must it err, as stiff clays do, by not allowing the water a fairly free passage. For constant supplies of fresh water, and of the air that it brings with it in its journey through the soil, are essential: they convert into plant food the minerals and gases that otherwise would be useless or even poisonous. The action of fresh air and water and of frosts are nature's tillage of the soil; and even unaided they will in time make almost any part of the earth's surface fairly fertile if the soil that they form can rest where it is, and is not torn away down-hill by rain and torrents as soon as it is formed. But man gives great aid in this mechanical preparation of the soil. The chief purpose of his tillage is to help nature to enable the soil to hold plant roots gently but firmly, and to enable the air and water to move about freely in it. And farmyard manure subdivides clay soils and makes them lighter and more open; while to sandy soils it gives a much needed firmness of texture, and helps them, mechanically as well as chemically, to hold the materials of plant food which would otherwise be quickly washed out of them.

Chemically the soil must have the inorganic elements that the plant wants in a form palatable to it; and in some cases man can make a great change with but little labour. For he can then turn a barren into a very fertile soil by adding a small quantity of just those things that are needed; using in most cases either lime in some of its many forms, or those artificial manures which modern chemical science has provided in great variety: and he is now calling in the aid of bacteria to help him in this work.

8sect; 3. By all these means the fertility of the soil can be brought under man's control. He can by sufficient labour make almost any land bear large crops. He can prepare the soil mechanically and chemically for whatever crops he intends to grow next. He can adapt his crops to the nature of the soil and to one another; selecting such a rotation that each will leave the land in such a state, and at such a time of year, that it can be worked up easily and without loss of time into a suitable seed bed for the coming crop. He can even permanently alter the nature of the soil by draining it, or by mixing with it other soil that will supplement its deficiencies. Hitherto this has been done only on a small scale; chalk and lime, clay and marl have been but thinly spread over the fields; a completely new soil has seldom been made except in gardens and other favoured spots. But it is possible, and even as some think probable, that at some future time the mechanical agencies used in making railways and other great earthworks may be applied on a large scale to creating a rich soil by mixing two poor soils with opposite faults.

All these changes are likely to be carried out more extensively and thoroughly in the future than in the past. But even now the greater part of the soil in old countries owes much of its character to human action; all that lies just below the surface has in it a large element of capital, the produce of man's past labour. Those free gifts of nature which Ricardo classed as the "inherent" and "indestructible" properties of the soil, have been largely modified; partly impoverished and partly enriched by the work of many generation of men.

But it is different with that which is above the surface. Every acre has given to it by nature an annual income of heat and light, of air and moisture; and over these man has but little control. He may indeed alter the climate a little by extensive drainage works or by planting forests, or cutting them down. But, on the whole, the action of the sun and the wind and the rain are an annuity fixed by nature for each plot of land. Ownership of the land gives possession of this annuity: and it also gives the space required for the life and action of vegetables and animals; the value of this space being much affected by its geographical position.

We may then continue to use the ordinary distinction between the original or inherent properties, which the land derives from nature, and the artificial properties which it owes to human action; provided we remember that the first include the space-relations of the plot in question, and the annuity that nature has given it of sunlight and air and rain; and that in many cases these are the chief of the inherent properties of the soil. It is chiefly from them that the ownership of agricultural land derives its peculiar significance, and the Theory of Rent its special character.

8sect; 4. But the question how far the fertility of any soil is due to the original properties given to it by nature, and how far to the changes in it made by man, cannot be fully discussed without taking account of the kind of produce raised from it. Human agency can do much more to promote the growth of some crops than of others. At one end of the scale are forest trees; an oak well planted and with plenty of room has very little to gain from man's aid: there is no way of applying labour to it so as to obtain any considerable return. Nearly the same may be said of the grass on some rich river bottoms which are endowed with a rich soil and good natural drainage; wild animals feeding off this grass without man's care will farm it nearly as well as he does; and much of the richest farm land in England (paying a rent of £6 an acre and upwards) would give to unaided nature almost as great a return as is got from it now. Next comes land which, though not quite so rich, is still kept in permanent pasture; and after this comes arable land on which man does not trust to nature's sowing, but prepares for each crop a seed bed to suit its special wants, sows the seed himself and weeds away the rivals to it. The seeds which he sows are selected for their habit of quickly maturing and fully developing just those parts which are most useful to him; and though the habit of making this selection carefully is only quite modern, and is even now far from general, yet the continued work of thousands of years has given him plants that have but little resemblance to their wild ancestors. Lastly, the kinds of produce which owe most to man's labour and care are the choicer kinds of fruits, flowers and vegetables, and of animals, particularly those which are used for improving their own breeds. For while nature left to herself would select those that are best able to take care of themselves and their offspring, man selects those which will provide him most quickly with the largest supplies of the things he most wants; and many of the choicest products could not hold their own at all without his care.

Thus various then are the parts which man plays in aiding nature to raise the different kinds of agricultural produce. In each case he works on till the extra return got by extra capital and labour has so far diminished that it will no longer remunerate him for applying them. Where this limit is soon reached he leaves nature to do nearly all the work; where his share in the production has been great, it is because he has been able to work far without reaching this limit. We are thus brought to consider the law of diminishing return.

It is important to note that the return to capital and labour now under discussion is measured by the amount of the produce raised independently of any changes that may meanwhile take place in the exchange value or price of produce; such, for instance, as might occur if a new railway had been made in the neighbourhood, or the population of the county had increased much, while agricultural produce could not be imported easily. Such changes will be of vital importance when we come to draw inferences from the law of diminishing return, and particularly when we discuss the pressure of increasing population on the means of subsistence. But they have no bearing on the law itself, because that has to do not with the value of the produce raised, but only with its amount7.

BOOK IV, CHAPTER III: THE FERTILITY OF LAND, CONTINUED. THE TENDENCY TO DIMINISHING RETURN.

8sect; 1. The law of or statement of tendency to Diminishing Return may be provisionally worded thus:

An increase in the capital and labour applied in the cultivation of land causes in general a less than proportionate increase in the amount of produce raised, unless it happens to coincide with an improvement in the arts of agriculture.

We learn from history and by observation that every agriculturist in every age and clime desires to have the use of a good deal of land; and that when he cannot get it freely, he will pay for it, if he has the means. If he thought that he would get as good results by applying all his capital and labour to a very small piece, he would not pay for any but a very small piece.

When land that requires no clearing is to be had for nothing, everyone uses just that quantity which he thinks will give his capital and labour the largest return. His cultivation is "extensive," not "intensive." He does not aim at getting many bushels of corn from any one acre, for then he would cultivate only a few acres. His purpose is to get as large a total crop as possible with a given expenditure of seed and labour; and therefore he sows as many acres as he can manage to bring under a light cultivation. Of course he may go too far: he may spread his work over so large an area that he would gain by concentrating his capital and labour on a smaller space; and under these circumstances if he could get command over more capital and labour so as to apply more to each acre, the land would give him an Increasing Return; that is, an extra return larger in proportion than it gives to his present expenditure. But if he has made his calculations rightly, he is using just so much ground as will give him the highest return; and he would lose by concentrating his capital and labour on a smaller area. If he had command over more capital and labour and were to apply more to his present land, he would gain less than he would by taking up more land; he would get a Diminishing Return, that is, an extra return smaller in proportion than he gets for the last applications of capital and labour that he now makes, provided of course that there is meanwhile no perceptible improvement in his agricultural skill. As his sons grow up they will have more capital and labour to apply to land; and in order to avoid obtaining a diminishing return, they will want to cultivate more land. But perhaps by this time all the neighbouring land is already taken up, and in order to get more they must buy it or pay a rent for the use of it, or migrate where they can get it for nothing8.

This tendency to a diminishing return was the cause of Abraham's parting from Lot9, and of most of the migrations of which history tells. And wherever the right to cultivate land is much in request, we may be sure that the tendency to a diminishing return is in full operation. Were it not for this tendency every farmer could save nearly the whole of his rent by giving up all but a small piece of his land, and bestowing all his capital and labour on that. If all the capital and labour which he would in that case apply to it, gave as good a return in proportion as that which he now applies to it, he would get from that plot as large a produce as he now gets from his whole farm; and he would make a net gain of all his rent save that of the little plot that he retained.

It may be conceded that the ambition of farmers often leads them to take more land than they can properly manage: and indeed almost every great authority on agriculture from Arthur Young downwards, has inveighed against this mistake. But when they tell a farmer that he would gain by applying his capital and labour to a smaller area, they do not necessarily mean that he would get a larger gross produce. It is sufficient for their argument that the saving in rent would more than counterbalance any probable diminution of the total returns that he got from the land. If a farmer pays a fourth of his produce as rent, he would gain by concentrating his capital and labour on less land, provided the extra capital and labour applied to each acre gave anything more than three-fourths as good a return in proportion, as he got from his earlier expenditure.

Again, it may be granted that much land, even in a country as advanced as England, is so unskilfully cultivated that it could be made to give more than double its present gross produce if twice the present capital and labour were applied to it skilfully. Very likely those are right who maintain that if all English farmers were as able, wise and energetic as the best are, they might profitably apply twice the capital and labour that is now applied. Assuming rent to be one-fourth of the present produce, they might get seven hundredweight of produce for every four that they now get: it is conceivable that with still more improved methods they might get eight hundredweight, or even more. But this does not prove that, as things are, further capital and labour could obtain from land an increasing return. The fact remains that, taking farmers as they are with the skill and energy which they actually have, we find as the result of universal observation that there is not open to them a short road to riches by giving up a great part of their land, by concentrating all their capital and labour on the remainder, and saving for their own pockets the rent of all but that remainder. The reason why they cannot do this is told in the law of diminishing return; that return being measured, as has already been said by its quantity, not its exchange value.

We may now state distinctly the limitations which were implied under the words "in general" in our provisional wording of the law. The law is a statement of a tendency which may indeed be held in check for a time by improvements in the arts of production and by the fitful course of the development of the full powers of the soil; but which must ultimately become irresistible if the demand for produce should increase without limit. Our final statement of the tendency may then be divided into two parts, thus:—

Although an improvement in the arts of agriculture may raise the rate of return which land generally affords to any given amount of capital and labour; and although the capital and labour already applied to any piece of land may have been so inadequate for the development of its full powers, that some further expenditure on it even with the existing arts of agriculture would give a more than proportionate return; yet these conditions are rare in an old country: and, except when they are present, the application of increased capital and labour to land will add a less than proportionate amount to the produce raised, unless there be meanwhile an increase in the skill of the individual cultivator. Secondly, whatever may be the future developments of the arts of agriculture, a continued increase in the application of capital and labour to land must ultimately result in a diminution of the extra produce which can be obtained by a given extra amount of capital and labour.

8sect; 2. Making use of a term suggested by James Mill, we may regard the capital and labour applied to land as consisting of equal successive doses10. As we have seen, the return to the first few doses may perhaps be small and a greater number of doses may get a larger proportionate return; the return to successive doses may even in exceptional cases alternately rise and fall. But our law states that sooner or later (it being always supposed that there is meanwhile no change in the arts of cultivation) a point will be reached after which all further doses will obtain a less proportionate return than the preceding doses. The dose is always a combined dose of labour and capital, whether it is applied by a peasant owner working unaided on his own land, or at the charges of a capitalist farmer who does no manual labour himself. But in the latter case the main body of the outlay presents itself in the form of money; and when discussing the business economy of farming in relation to English conditions, it is often convenient to consider the labour converted at its market value into a money equivalent, and to speak of doses of capital simply, rather than of doses of labour and capital.

The dose which only just remunerates the cultivator may be said to be the marginal dose, and the return to it the marginal return. If there happens to be in the neighbourhood land that is cultivated but only just pays its expenses, and so gives no surplus for rent we may suppose this dose applied to it. We can then say that the dose applied to it is applied to land on the margin of cultivation, and this way of speaking has the advantage of simplicity. But it is not necessary for the argument to suppose that there is any such land: what we want to fix our minds on is the return to the marginal dose; whether it happens to be applied to poor land or to rich does not matter; all that is necessary is that it should be the last dose which can profitably be applied to that land11.

When we speak of the marginal, or the "last" dose applied to the land, we do not mean the last in time, we mean that dose which is on the margin of profitable expenditure; that is, which is applied so as just to give the ordinary returns to the capital and labour of the cultivator, without affording any surplus. To take a concrete instance, we may suppose a farmer to be thinking of sending the hoers over a field once more; and after a little hesitation he decides that it is worth his while, but only just worth his while to do it. The dose of capital and labour spent on doing it, is then the last dose in our present sense, though there are many doses still to be applied in reaping the crop. Of course the return to this last dose cannot be separated from the others; but we ascribe to it all that part of the produce which we believe would not have been produced if the farmer had decided against the extra hoeing12.

Since the return to the dose on the margin of cultivation just remunerates the cultivator, it follows that he will be just remunerated for the whole of his capital and labour by as many times the marginal return as he has applied doses in all. Whatever he gets in excess of this is the surplus produce of the land. This surplus is retained by the cultivator if he owns the land himself13.

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It is important to note that this description of the nature of surplus produce is not a theory of rent: we shall not be ready for that till a much later stage. All that can be said here, is that this surplus produce may, under certain conditions, become the rent which the owner of the land can exact from the tenant for its use. But, as we shall see hereafter, the full rent of a farm in an old country is made up of three elements: the first being due to the value of the soil as it was made by nature; the second to improvements made in it by man; and the third, which is often the most important of all, to the growth of a dense and rich population, and to facilities of communication by public roads, railroads, etc.

It is to be noted also that in an old country it is impossible to discover what was the original state of the land before it was first cultivated. The results of some of man's work are for good and evil fixed in the land, and cannot be distinguished from those of nature's work: the line of division is blurred, and must be drawn more or less arbitrarily. But for most purposes it is best to regard the first difficulties of coping with nature as pretty well conquered before we begin to reckon the farmer's cultivation. Thus the returns that we count as due to the first doses of capital and labour are generally the largest of all, and the tendency of the return to diminish shows itself at once. Having English agriculture chiefly in view, we may fairly take, as Ricardo did, this as the typical case14.

8sect; 3. Let us next inquire on what depends the rate of diminution or of increase of the returns to successive doses of capital and labour. We have seen that there are great variations in the share of the produce which man may claim as the additional result of his own work over what unaided nature would have produced; and that man's share is much larger with some crops and soils and methods of cultivation than with others. Thus broadly speaking it increases as we pass from forest to pasture land, from pasture to arable, and from plough land to spade land; and this is because the rate of diminution of the return is as a rule greatest in forests, rather less in pasture, still less in arable land, and least of all in spade land.

There is no absolute measure of the richness or fertility of land. Even if there be no change in the arts of production, a mere increase in the demand for produce may invert the order in which two adjacent pieces of land rank as regards fertility. The one which gives the smaller produce, when both are uncultivated, or when the cultivation of both is equally slight, may rise above the other and justly rank as the more fertile when both are cultivated with equal thoroughness. In other words, many of those lands which are the least fertile when cultivation is merely extensive, become among the most fertile when cultivation is intensive. For instance, self-drained pasture land may give a return large in proportion to a very slight expenditure of capital and labour, but a rapidly diminishing return to further expenditure: as population increases it may gradually become profitable to break up some of the pasture and introduce a mixed cultivation of roots and grains and grasses; and then the return to further doses of capital and labour may diminish less quickly.

Other land makes poor pasture, but will give more or less liberal returns to a great deal of capital and labour applied in tilling and in manuring it; its returns to the early doses are not very high, but they diminish slowly.

Again, other land is marshy. It may, as did the fens of east England, produce little but osiers and wild fowl. Or, as is the case in many tropical districts, it may be prolific of vegetation, but so shrouded with malaria that it is difficult for man to live there, and still more to work there. In such cases the returns to capital and labour are at first small, but as drainage progresses, they increase; afterwards perhaps they again fall off15.

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But when improvements of this kind have once been made, the capital invested in the soil cannot be removed; the early history of the cultivation is not repeated; and the produce due to further applications of capital and labour shows a tendency to diminishing return16.

Similar though less conspicuous changes may occur on land already well cultivated. For instance, without being marshy, it may be in need of a little drainage to take off the stagnant water from it, and to enable fresh water and air to stream through it. Or the subsoil may happen to be naturally richer than the soil at the surface: or again, though not itself rich, it may have just those properties in which the surface soil is deficient, and then a thorough system of deep steam-ploughing may permanently change the character of the land.

Thus we need not suppose that when the return to extra capital and labour has begun to diminish, it will always continue to do so. Improvements in the arts of production may, it has always been understood, raise generally the return which can be got by any amount of capital and labour; but this is not what is meant here. The point is that, independently of any increase in his knowledge, and using only those methods with which he has long been familiar, a farmer finding extra capital and labour at his command, may sometimes obtain an increasing return even at a late stage in his cultivation17.

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It has been well said that as the strength of a chain is that of its weakest link, so fertility is limited by that element in which it is most deficient. Those who are in a hurry, will reject a chain which has one or two very weak links, however strong the rest may be: and prefer to it a much slighter chain that has no flaw. But if there is heavy work to be done, and they have time to make repairs, they will set the larger chain in order, and then its strength will exceed that of the other. In this we find the explanation of much that is apparently strange in agricultural history.

The first settlers in a new country generally avoid land which does not lend itself to immediate cultivation. They are often repelled by the very luxuriance of natural vegetation, if it happens to be of a kind that they do not want. They do not care to plough land that is at all heavy, however rich it might become if thoroughly worked. They will have nothing to do with water-logged land. They generally select light land which can easily be worked with a double plough, and then they sow their seed broadly, so that the plants when they grow up may have plenty of light and air, and may collect their food from a wide area.

When America was first settled, many farming operations that are now done by horse machinery were still done by hand; and though now the farmers have a strong preference for flat prairie land, free from stumps and stones, where their machines can work easily and without risk, they had then no great objection to a hill-side. Their crops were light in proportion to their acreage, but heavy in proportion to the capital and labour expended in raising them.

We cannot then call one piece of land more fertile than another until we know something about the skill and enterprise of its cultivators, and the amount of capital and labour at their disposal; and till we know whether the demand for produce is such as to make intensive cultivation profitable with the resources at their disposal. If it is, those lands will be the most fertile which give the highest average returns to a large expenditure of capital and labour; but if not, those will be the most fertile which give the best returns to the first few doses. The term fertility has no meaning except with reference to the special circumstances of a particular time and place.

But even when so limited there is some uncertainty as to the usage of the term. Sometimes attention is directed chiefly to the power which land has of giving adequate returns to intensive cultivation and so bearing a large total produce per acre; and sometimes to its power of yielding a large surplus produce or rent, even though its gross produce is not very large: thus in England now rich arable land is very fertile in the former sense, rich meadow in the latter. For many purposes it does not matter which of these senses of the term is understood: in the few cases in which it does matter, an interpretation clause must be supplied in the context18.

8sect; 4. But further, the order of fertility of different soils is liable to be changed by changes in the methods of cultivation and in the relative values of different crops. Thus when at the end of last century Mr Coke showed how to grow wheat well on light soils by preparing the way with clover, they rose relatively to clay soils; and now though they are still sometimes called from old custom "poor," some of them have a higher value, and are really more fertile, than much of the land that used to be carefully cultivated while they were left in a state of nature.

Again, the increasing demand in central Europe for wood to be used as fuel and for building purposes, has raised the value of the pine-covered mountain slopes relatively to almost every other kind of land. But in England this rise has been prevented by the substitution of coal for wood as fuel, and of iron for wood as a material for ship-building, and lastly by England's special facilities for importing wood. Again, the cultivation of rice and jute often gives a very high value to lands that are too much covered with water to bear most other crops. And again, since the repeal of the Corn Laws the prices of meat and dairy produce have risen in England relatively to that of corn. Those arable soils that would grow rich forage crops in rotation with corn, rose relatively to the cold clay soils; and permanent pasture recovered part of that great fall in value relatively to arable land, which had resulted from the growth of population19.

Independently of any change in the suitability of the prevailing crops and methods of cultivation for special soils, there is a constant tendency towards equality in the value of different soils. In the absence of any special cause to the contrary, the growth of population and wealth will make the poorer soils gain on the richer. Land that was at one time entirely neglected is made by much labour to raise rich crops; its annual income of light and heat and air, is probably as good as those of richer soils: while its faults can be much lessened by labour20.

As there is no absolute standard for fertility, so there is none of good cultivation. The best cultivation in the richest parts of the Channel Islands, for instance, involves a lavish expenditure of capital and labour on each acre: for they are near good markets and have a monopoly of an equable and early climate. If left to nature the land would not be very fertile, for though it has many virtues, it has two weak links (being deficient in phosphoric acid and potash). But, partly by the aid of the abundant seaweed on its shores, these links can be strengthened, and the chain thus becomes exceptionally strong. Intense, or as it is ordinarily called in England "good" cultivation, will thus raise £100 worth of early potatoes from a single acre. But an equal expenditure per acre by the farmer in Western America would ruin him; relatively to his circumstances it would not be good, but bad cultivation.

8sect; 5. Ricardo's wording of the law of diminishing return was inexact. It is however probable that the inaccuracy was due not to careless thinking but only to careless writing. In any case he would have been justified in thinking that these conditions were not of great importance in the peculiar circumstances of England at the time at which he wrote, and for the special purposes of the particular practical problems he had in view. Of course he could not anticipate the great series of inventions which were about to open up new sources of supply, and, with the aid of free trade, to revolutionize English agriculture; but the agricultural history of England and other countries might have led him to lay greater stress on the probability of a change21.

He stated that the first settlers in a new country invariably chose the richest lands, and that as population increased, poorer and poorer soils were gradually brought under cultivation, speaking carelessly as though there were an absolute standard of fertility. But as we have already seen, where land is free, everyone chooses that which is best adapted for his own purpose, and that which will give him, all things considered, the best return for his capital and labour. He looks out, therefore, for land that can be cultivated at once, and passes by land that has any weak links in the chain of its elements of fertility, however strong it may be in some other links. But besides having to avoid malaria, he must think of his communication with his markets and the base of his resources; and in some cases the need for security against the attacks of enemies and wild beasts outweighs all other considerations. It is therefore not to be expected that the lands which were first chosen, should turn out always to be those which ultimately come to be regarded as the most fertile. Ricardo did not consider this point, and thus laid himself open to attacks by Carey and others, which, though for the greater part based on a misinterpretation of his position, have yet some solid substance in them.

The fact that, in new countries, soils which an English farmer would regard as poor, are sometimes cultivated before neighbouring soils which he would regard as rich, is not inconsistent, as some foreign writers have supposed, with the general tenor of Ricardo's doctrines. Its practical importance is in relation to the conditions under which the growth of population tends to cause increased pressure on the means of subsistence: it shifts the centre of interest from the mere amount of the farmer's produce to its exchange value in terms of the things which the industrial population in his neighbourhood will offer for it22.

8sect; 6. Ricardo, and the economists of his time generally were too hasty in deducing this inference from the law of diminishing return; and they did not allow enough for the increase of strength that comes from organization. But in fact every farmer is aided by the presence of neighbours whether agriculturists or townspeople23. Even if most of them are engaged like himself in agriculture, they gradually supply him with good roads, and other means of communication: they give him a market in which he can buy at reasonable terms what he wants, necessaries, comforts and luxuries for himself and his family, and all the various requisites for his farm work: they surround him with knowledge: medical aid, instruction and amusement are brought to his door; his mind becomes wider, and his efficiency is in many ways increased. And if the neighbouring market town expands into a large industrial centre, his gain is much greater. All his produce is worth more; some things which he used to throw away fetch a good price. He finds new openings in dairy farming and market gardening, and with a larger range of produce he makes use of rotations that keep his land always active without denuding it of any one of the elements that are necessary for its fertility.

Further, as we shall see later on, an increase of population tends to develop the organization of trade and industry; and therefore the law of diminishing return does not apply to the total capital and labour spent in a district as sharply as to that on a single farm. Even when cultivation has reached a stage after which each successive dose applied to a field would get a less return than the preceding dose, it may be possible for an increase in the population to cause a more than proportional increase in the means of subsistence. It is true that the evil day is only deferred: but it is deferred. The growth of population, if not checked by other causes, must ultimately be checked by the difficulty of obtaining raw produce; but in spite of the law of diminishing return, the pressure of population on the means of subsistence may be restrained for a long time to come by the opening up of new fields of supply, by the cheapening of railway and steamship communication, and by the growth of organization and knowledge.

Against this must be set the growing difficulty of getting fresh air and light, and in some cases fresh water, in densely peopled places. The natural beauties of a place of fashionable resort have a direct money value which cannot be overlooked; but it requires some effort to realize the true value to men, women and children of being able to stroll amid beautiful and varied scenery.

8sect; 7. As has already been said the land in economic phrase includes rivers and the sea. In river-fisheries, the extra return to additional applications of capital and labour shows a rapid diminution. As to the sea, opinions differ. Its volume is vast, and fish are very prolific; and some think that a practically unlimited supply can be drawn from the sea by man without appreciably affecting the numbers that remain there; or in other words, that the law of diminishing return scarcely applies at all to sea-fisheries: while others think that experience shows a falling-off in the productiveness of those fisheries that have been vigorously worked, especially by steam trawlers. The question is important, for the future population of the world will be appreciably affected as regards both quantity and quality, by the available supply of fish.

The produce of mines again, among which may be reckoned quarries and brickfields, is said to conform to the law of diminishing return; but this statement is misleading. It is true that we find continually increasing difficulty in obtaining a further supply of minerals, except in so far as we obtain increased power over nature's stores through improvements in the arts of mining, and through better knowledge of the contents of the earth's crust; and there is no doubt that, other things being equal, the continued application of capital and labour to mines will result in a diminishing rate of yield. But this yield is not a net yield, like the return of which we speak in the law of diminishing return. That return is part of a constantly recurring income, while the produce of mines is merely a giving up of their stored-up treasures. The produce of the field is something other than the soil; for the field, properly cultivated, retains its fertility. But the produce of the mine is part of the mine itself.

To put the same thing in another way, the supply of agricultural produce and of fish is a perennial stream; mines are as it were nature's reservoir. The more nearly a reservoir is exhausted, the greater is the labour of pumping from it; but if one man could pump it out in ten days, ten men could pump it out in one day: and when once empty, it would yield no more. So the mines that are being opened this year might just as easily have been opened many years ago: if the plans had been properly laid in advance, and the requisite specialized capital and skill got ready for the work, ten years' supply of coal might have been raised in one year without any increased difficulty; and when a vein had once given up its treasure, it could produce no more. This difference is illustrated by the fact that the rent of a mine is calculated on a different principle from that of a farm. The farmer contracts to give back the land as rich as he found it: a mining company cannot do this; and while the farmer's rent is reckoned by the year, mining rent consists chiefly of "royalties" which are levied in proportion to the stores that are taken out of nature's storehouse24.

On the other hand, services which land renders to man, in giving him space and light and air in which to live and work, do conform strictly to the law of diminishing return. It is advantageous to apply a constantly increasing capital to land that has any special advantages of situation, natural or acquired. Buildings tower up towards the sky; natural light and ventilation are supplemented by artificial means, and the steam lift reduces the disadvantages of the highest floors; and for this expenditure there is a return of extra convenience, but it is a diminishing return. However great the ground rent may be, a limit is at last reached after which it is better to pay more ground rent for a larger area than to go on piling up storey on storey any further; just as the farmer finds that at last a stage is reached at which more intensive cultivation will not pay its expenses, and it is better to pay more rent for extra land, than to face the diminution in the return which he would get by applying more capital and labour to his old land25. From this it results that the theory of ground rents is substantially the same as that of farm rents. This and similar facts will presently enable us to simplify and extend the theory of value as given by Ricardo and Mill.

And what is true of building land is true of many other things. If a manufacturer has, say, three planing machines there is a certain amount of work which he can get out of them easily. If he wants to get more work from them he must laboriously economize every minute of their time during the ordinary hours, and perhaps work overtime. Thus after they are once well employed, every successive application of effort to them brings him a diminishing return. At last the net return is so small that he finds it cheaper to buy a fourth machine than to force so much work out of his old machines: just as a farmer who has already cultivated his land highly finds it cheaper to take in more land than to force more produce from his present land. Indeed there are points of view from which the income derived from machinery partakes of the nature of rent: as will be shown in Book V.

Note on the Law of Diminishing Return.

8sect; 8. The elasticity of the notion of diminishing return cannot be fully considered here; for it is but an important detail of that large general problem of the economic distribution of resources in the investment of capital, which is the pivot of the main argument of Book V. and indeed of a great part of the whole Volume. But a few words about it seem now to be called for in this place, because much stress has recently been laid on it under the able and suggestive leadership of Professor Carver26.

If a manufacturer expends an inappropriately large amount of his resources on machinery, so that a considerable part of it is habitually idle; or on buildings, so that a considerable part of his space is not well filled; or on his office staff, so that he has to employ some of them on work that it is not worth what it costs; then his excessive expenditure in that particular direction will not be as remunerative as his previous expenditure had been: and it may be said to yield him a "diminishing return." But this use of the phrase, though strictly correct is apt to mislead unless used with caution. For when the tendency to a diminishing return from increased labour and capital applied to land is regarded as a special instance of the general tendency to diminishing return from any agent of production, applied in excessive proportion to the other agents, one is apt to take it for granted that the supply of the other factors can be increased. That is to say, one is apt to deny the existence of that condition—the fixedness of the whole stock of cultivable land in an old country—which was the main foundation of those great classical discussions of the law of diminishing return, which we have just been considering. Even the individual farmer may not always be able to get an additional ten or fifty acres adjoining his own farm, just when he wants them, save at a prohibitive price. And in that respect land differs from most other agents of production even from the individual point of view. This difference may indeed be regarded as of little account in regard to the individual farmer. But from the social point of view, from the point of view of the following chapters on population it is vital. Let us look into this.

In every phase of any branch of production there is some distribution of resources between various expenditures which yields a better result than any other. The abler the man in control of any business, the nearer he will approach to the ideally perfect distribution; just as the abler the primitive housewife in control of a family's stock of wool, the nearer she will approach to an ideal distribution of wool between the different needs of the family27.

If his business extends he will extend his uses of each requisite of production in due proportion; but not, as has sometimes been said, proportionately; for instance the proportion of manual work to machine work, which would be appropriate in a small furniture factory would not be appropriate in a large one. If he makes the best possible apportionment of his resources, he gets the greatest (marginal) return from each appliance of production of which his business is capable. If he uses too much of any one he gets a diminishing return from it; because the others are not able to back it up properly. And this diminishing return is analogous to that which a farmer obtains, when he cultivates land so intensively that he obtains a diminishing return from it. If the farmer can get more land at the same rent as he has paid for the old, he will take more land, or else lie open to the imputation of being a bad business man: and this illustrates the fact that land from the point of view of the individual cultivator is simply one form of capital.

But when the older economists spoke of the Law of Diminishing Return they were looking at the problems of agriculture not only from the point of view of the individual cultivator but also from that of the nation as a whole. Now if the nation as a whole finds its stock of planing machines or ploughs inappropriately large or inappropriately small, it can redistribute its resources. It can obtain more of that in which it is deficient, while gradually lessening its stock of such things as are superabundant: but it cannot do that in regard to land: it can cultivate its land more intensively, but it cannot get any more. And for that reason the older economists rightly insisted that, from the social point of view, land is not on exactly the same footing as those implements of production which man can increase without limit.

No doubt in a new country where there is an abundance of rich land not yet brought under cultivation, this fixedness of the total stock of land is not operative. American economists often speak of the value, or rent, of land as varying with the land's distance from good markets, rather than with its fertility; because even now there is a great deal of rich land in their country which is not fully cultivated. And in like manner they lay but little stress on the fact that the diminishing return to labour and capital in general applied to the land by discreet farmers, in such a country as England, is not exactly on the same footing as the diminishing return to an inappropriate investment of their resources by indiscreet farmers or manufacturers in a disproportionately large number of ploughs or planing machines.

It is true that when the tendency to diminishing return is generalized, the return is apt to be expressed in terms of value, and not of quantity. It must however be conceded that the older method of measuring return in terms of quantity often jostled against the difficulty of rightly interpreting a dose of labour and capital without the aid of a money measure: and that, though helpful for a broad preliminary survey, it cannot be carried very far.

But even the recourse to money fails us, if we want to bring to a common standard the productiveness of lands in distant times or places; and we must then fall back on rough, and more or less arbitrary modes of measurement, which make no aim at numerical precision, but will yet suffice for the broader purposes of history. We have to take account of the facts that there are great variations in the relative amounts of labour and capital in a dose: and that interest on capital is generally a much less important item in backward than in advanced stages of agriculture, in spite of the fact that the rate of interest is generally much lower in the latter. For most purposes it is probably best to take as a common standard a day's unskilled labour of given efficiency: we thus regard the dose as made up of so much labour of different kinds, and such charges for the use and replacement of capital, as will together make up the value of, say, ten days' such labour; the relative proportions of these elements and their several values in terms of such labour being fixed according to the special circumstances of each problem28.

A similar difficulty is found in comparing the returns obtained by labour and capital applied under different circumstances. So long as the crops are of the same kind, the quantity of one return can be measured off against that of another: but, when they are of different kinds, they cannot be compared till they are reduced to a common measure of value. When, for instance, it is said that land would give better returns to the capital and labour expended on it with one crop or rotation of crops than with another, the statement must be understood to hold only on the basis of the prices at the time. In such a case we must take the whole period of rotation together, assuming the land to be in the same condition at the beginning and the end of the rotation; and counting on the one hand all the labour and capital applied during the whole period, and on the other the aggregate returns of all the crops.

It must be remembered that the return due to a dose of labour and capital is not here taken to include the value of the capital itself. For instance, if part of the capital on a farm consists of two-year-old oxen, then the returns to a year's labour and capital will include not the full weight of these oxen at the end of the year, but only the addition that has been made to it during the year. Again, when a farmer is said to work with a capital of £10 to the acre, this includes the value of everything that he has on the farm; but the total volume of the doses of labour and capital applied to a farm during, say, a year, does not include the whole value of the fixed capital, such as machinery and horses, but only the value of their use after allowing for interest, depreciation and repairs; though it does include the whole value of the circulating capital, such as seed.

The above is the method of measuring capital generally adopted, and it is to be taken for granted if nothing is said to the contrary; but another method is more suitable occasionally. Sometimes it is convenient to speak as though all the capital applied were circulating capital applied at the beginning of the year or during it: and in that case everything that is on the farm at the end of the year is part of the produce. Thus, young cattle are regarded as a sort of raw material which is worked up in the course of time into fat cattle ready for the butcher. The farm implements may even be treated in the same way, their value at the beginning of the year being taken as so much circulating capital applied to the farm, and at the end of the year as so much produce. This plan enables us to avoid a good deal of repetition of conditioning clauses as to depreciation, etc., and to save the use of words in many ways. It is often the best plan for general reasonings of an abstract character, particularly if they are expressed in a mathematical form.

The law of diminishing return must have occupied thoughtful men in every densely peopled country. It was first stated clearly by Turgot (Œuvres, ed. Daire I. pp. 420, 1), as Prof. Cannan has shown; and its chief applications were developed by Ricardo.

BOOK IV, CHAPTER IV: THE GROWTH OF POPULATION.

8sect; 1. The production of wealth is but a means to the sustenance of man; to the satisfaction of his wants; and to the development of his activities, physical, mental, and moral. But man himself is the chief means of the production of that wealth of which he is the ultimate aim29 : and this and the two following chapters will be given to some study of the supply of labour; i.e. of the growth of population in numbers, in strength, in knowledge, and in character.

In the animal and vegetable world the growth of numbers is governed by the tendency of individuals to propagate their species on the one hand, and on the other hand by the struggle for life which thins out the young before they arrive at maturity. In the human race alone the conflict of these two opposing forces is complicated by other influences. On the one hand regard for the future induces many individuals to control their natural impulses; sometimes with the purpose of worthily discharging their duties as parents; sometimes, as for instance at Rome under the Empire, for mean motives. And on the other hand society exercises pressure on the individual by religious, moral and legal sanctions, sometimes with the object of quickening, and sometimes with that of retarding, the growth of population.

The study of the growth of population is often spoken of as though it were a modern one. But in a more or less vague form it has occupied the attention of thoughtful men in all ages of the world. To its influence, often unavowed, sometimes not even clearly recognized, we can trace a great part of the rules, customs and ceremonies that have been enjoined in the Eastern and Western world by law-givers, by moralists, and those nameless thinkers, whose far-seeing wisdom has left its impress on national habits. Among vigorous races, and in times of great military conflict, they aimed at increasing the supply of males capable of bearing arms; and in the higher stages of progress they have inculcated a great respect for the sanctity of human life; but in the lower stages, they have encouraged and even compelled the ruthless slaughter of the infirm and the aged, and sometimes of a certain proportion of the female children.

In ancient Greece and Rome, with the safety-valve of the power of planting colonies, and in the presence of constant war, an increase in the number of citizens was regarded as a source of public strength; and marriage was encouraged by public opinion, and in many cases even by legislation: though thoughtful men were even then aware that action in the contrary sense might be necessary if the responsibilities of parentage should ever cease to be burdensome30. In later times there may be observed, as Roscher says31, a regular ebb and flow of the opinion that the State should encourage the growth of numbers. It was in full flow in England under the first two Tudors, but in the course of the sixteenth century it slackened and turned; and it began to ebb, when the abolition of the celibacy of the religious orders, and the more settled state of the country had had time to give a perceptible impetus to population; the effective demand for labour having meanwhile been diminished by the increase of sheep runs, and by the collapse of that part of the industrial system which had been organized by the monastic establishments. Later on the growth of population was checked by that rise in the standard of comfort which took effect in the general adoption of wheat as the staple food of Englishmen during the first half of the eighteenth century. At that time there were even fears, which later inquiries showed to be unfounded, that the population was actually diminishing. Petty32 had forestalled some of Carey's and Wakefield's arguments as to the advantages of a dense population. Child had argued that "whatever tends to the depopulating of a country tends to the impoverishment of it"; and that "most nations in the civilized parts of the world are more or less rich or poor proportionably to the paucity or plenty of their people, and not to the sterility or fruitfulness of their land33." And by the time that the world-struggle with France had attained its height, when the demands for more and more troops were ever growing, and when manufacturers were wanting more men for their new machinery; the bias of the ruling classes was strongly flowing in favour of an increase of population. So far did this movement of opinion reach that in 1796 Pitt declared that a man who had enriched his country with a number of children had a claim on its assistance. An Act, passed amid the military anxieties of 1806, which granted exemptions from taxes to the fathers of more than two children born in wedlock, was repealed as soon as Napoleon had been safely lodged in St Helena34.

8sect; 2. But during all this time there had been a growing feeling among those who thought most seriously on social problems, that an inordinate increase of numbers, whether it strengthened the State or not, must necessarily cause great misery: and that the rulers of the State had no right to subordinate individual happiness to the aggrandizement of the State. In France in particular a reaction was caused, as we have seen, by the cynical selfishness with which the Court and its adherents sacrificed the wellbeing of the people for the sake of their own luxury and military glory. If the humane sympathies of the Physiocrats had been able to overcome the frivolity and harshness of the privileged classes of France, the eighteenth century would probably not have ended in tumult and bloodshed, the march of freedom in England would not have been arrested, and the dial of progress would have been more forward than it is by the space of at least a generation. As it was, but little attention was paid to Quesnay's guarded but forcible protest:—"one should aim less at augmenting the population than at increasing the national income, for the condition of greater comfort which is derived from a good income, is preferable to that in which a population exceeds its income and is ever in urgent need of the means of subsistence35."

Adam Smith said but little on the question of population, for indeed he wrote at one of the culminating points of the prosperity of the English working classes; but what he does say is wise and well balanced and modern in tone. Accepting the Physiocratic doctrine as his basis, he corrected it by insisting that the necessaries of life are not a fixed and determined quantity, but have varied much from place to place and time to time; and may vary more36. But he did not work out this hint fully. And there was nothing to lead him to anticipate the second great limitation of the Physiocratic doctrine, which has been made prominent in our time by the carriage of wheat from the centre of America to Liverpool for less than what had been the cost of its carriage across England.

The eighteenth century wore on to its close and the next century began; year by year the condition of the working classes in England became more gloomy. An astonishing series of bad harvests37, a most exhausting war38, and a change in the methods of industry that dislocated old ties, combined with an injudicious poor law to bring the working classes into the greatest misery they have ever suffered, at all events since the beginning of trustworthy records of English social history39. And to crown all, well-meaning enthusiasts, chiefly under French influence, were proposing communistic schemes which would enable people to throw on society the whole responsibility for rearing their children40.

Thus while the recruiting sergeant and the employer of labour were calling for measures tending to increase the growth of population, more far-seeing men began to inquire whether the race could escape degradation if the numbers continued long to increase as they were then doing. Of these inquirers the chief was Malthus, and his Essay on the Principle of Population is the starting-point of all modern speculations on the subject.

8sect; 3. Malthus' reasoning consists of three parts, which must be kept distinct. The first relates to the supply of labour. By a careful study of facts he proves that every people, of whose history we have a trustworthy record, has been so prolific that the growth of its numbers would have been rapid and continuous if it had not been checked either by a scarcity of the necessaries of life, or some other cause, that is, by disease, by war, by infanticide, or lastly by voluntary restraint.

His second position relates to the demand for labour. Like the first it is supported by facts, but by a different set of facts. He shows that up to the time at which he wrote no country (as distinguished from a city, such as Rome or Venice) had been able to obtain an abundant supply of the necessaries of life after its territory had become very thickly peopled. The produce which Nature returns to the work of man is her effective demand for population: and he shows that up to this time a rapid increase in population when already thick had not led to a proportionate increase in this demand41.

Thirdly, he draws the conclusion that what had been in the past, was likely to be in the future; and that the growth of population would be checked by poverty or some other cause of suffering unless it were checked by voluntary restraint. He therefore urges people to use this restraint, and, while leading lives of moral purity, to abstain from very early marriages42.

His position with regard to the supply of population, with which alone we are directly concerned in this chapter, remains substantially valid. The changes which the course of events has introduced into the doctrine of population relate chiefly to the second and third steps of his reasoning. We have already noticed that the English economists of the earlier half of last century overrated the tendency of an increasing population to press upon the means of subsistence; and it was not Malthus' fault that he could not foresee the great developments of steam transport by land and by sea, which have enabled Englishmen of the present generation to obtain the products of the richest lands of the earth at comparatively small cost.

But the fact that he did not foresee these changes makes the second and third steps of his argument antiquated in form; though they are still in a great measure valid in substance. It remains true that unless the checks on the growth of population in force at the end of the nineteenth century are on the whole increased (they are certain to change their form in places that are as yet imperfectly civilized) it will be impossible for the habits of comfort prevailing in Western Europe to spread themselves over the whole world and maintain themselves for many hundred years. But of this more hereafter43.

8sect; 4. The growth in numbers of a people depends firstly on the Natural Increase, that is, the excess of their births over their deaths; and secondly on migration.

The number of births depends chiefly on habits relating to marriage, the early history of which is full of instruction; but we must confine ourselves here to the conditions of marriage in modern civilized countries.

The age of marriage varies with the climate. In warm climates where childbearing begins early, it ends early, in colder climates it begins later and ends later44; but in every case the longer marriages are postponed beyond the age that is natural to the country, the smaller is the birth-rate; the age of the wife being of course much more important in this respect than that of the husband45. Given the climate, the average age of marriage depends chiefly on the ease with which young people can establish themselves, and support a family according to the standard of comfort that prevails among their friends and acquaintances; and therefore it is different in different stations of life.

In the middle classes a man's income seldom reaches its maximum till he is forty or fifty years old; and the expense of bringing up his children is heavy and lasts for many years. The artisan earns nearly as much at twenty-one as he ever does, unless he rises to a responsible post, but he does not earn much before he is twenty-one: his children are likely to be a considerable expense to him till about the age of fifteen; unless they are sent into a factory, where they may pay their way at a very early age; and lastly the labourer earns nearly full wages at eighteen, while his children begin to pay their own expenses very early. In consequence, the average age at marriage is highest among the middle classes: it is low among the artisans and lower still among the unskilled labourers46.

Unskilled labourers, when not so poor as to suffer actual want and not restrained by any external cause, have seldom, if ever, shown a lower power of increase than that of doubling in thirty years; that is, of multiplying a million-fold in six hundred years, a billion-fold in twelve hundred: and hence it might be inferred a priori that their increase has never gone on without restraint for any considerable time. This inference is confirmed by the teaching of all history. Throughout Europe during the Middle Ages, and in some parts of it even up to the present time, unmarried labourers have usually slept in the farmhouse or with their parents; while a married pair have generally required a house for themselves: when a village has as many hands as it can well employ, the number of houses is not increased, and young people have to wait as best they can.

There are many parts of Europe even now in which custom exercising the force of law prevents more than one son in each family from marrying; he is generally the eldest, but in some places the youngest: if any other son marries he must leave the village. When great material prosperity and the absence of all extreme poverty are found in old-fashioned corners of the Old World, the explanation generally lies in some such custom as this with all its evils and hardships47. It is true that the severity of this custom may be tempered by the power of migration; but in the Middle Ages the free movement of the people was hindered by stern regulations. The free towns indeed often encouraged immigration from the country: but the rules of the gilds were in some respects almost as cruel to people who tried to escape from their old homes as were those enforced by the feudal lords themselves48.

8sect; 5. In this respect the position of the hired agricultural labourer has changed very much. The towns are now always open to him and his children; and if he betakes himself to the New World he is likely to succeed better than any other class of emigrants. But on the other hand the gradual rise in the value of land and its growing scarcity is tending to check the increase of population in some districts in which the system of peasant properties prevails, in which there is not much enterprise for opening out new trades or for emigration, and parents feel that the social position of their children will depend on the amount of their land. They incline to limit artificially the size of their families and to treat marriage very much as a business contract, seeking always to marry their sons to heiresses. Francis Galton pointed out that, though the families of English peers are generally large, the habits of marrying the eldest son to an heiress who is presumably not of a fertile stock, and sometimes dissuading younger sons from marriage, have led to the extinction of many peerages. Similar habits among French peasants, combined with their preference for small families, keep their numbers almost stationary.

On the other hand there seem to be no conditions more favourable to the rapid growth of numbers than those of the agricultural districts of new countries. Land is to be had in abundance, railways and steamships carry away the produce of the land and bring back in exchange implements of advanced types, and many of the comforts and luxuries of life. The "farmer," as the peasant proprietor is called in America, finds therefore that a large family is not a burden, but an assistance to him. He and they live healthy out-of-door lives; there is nothing to check but everything to stimulate the growth of numbers. The natural increase is aided by immigration; and thus, in spite of the fact that some classes of the inhabitants of large cities in America are, it is said, reluctant to have many children, the population has increased sixteen-fold in the last hundred years49.

On the whole it seems proved that the birth-rate is generally lower among the well-to-do than among those who make little expensive provision for the future of themselves and their families, and who live an active life: and that fecundity is diminished by luxurious habits of living. Probably it is also diminished by severe mental strain; that is to say, given the natural strength of the parents, their expectation of a large family is diminished by a great increase of mental strain. Of course those who do high mental work, have as a class more than the average of constitutional and nervous strength; and Galton has shown that they are not as a class unprolific. But they commonly marry late.

8sect; 6. The growth of population in England has a more clearly defined history than that in the United Kingdom, and we shall find some interest in noticing its chief movements.

The restraints on the increase of numbers during the Middle Ages were the same in England as elsewhere. In England as elsewhere the religious orders were a refuge to those for whom no establishment in marriage could be provided; and religious celibacy while undoubtedly acting in some measure as an independent check on the growth of population, is in the main to be regarded rather as a method in which the broad natural forces tending to restrain population expressed themselves, than as an addition to them. Infectious and contagious diseases, both endemic and epidemic, were caused by dirty habits of life which were even worse in England than in the South of Europe; and famines by the failures of good harvests and the difficulties of communication; though this evil was less in England than elsewhere.

Country life was, as elsewhere, rigid in its habits; young people found it difficult to establish themselves until some other married pair had passed from the scene and made a vacancy in their own parish; for migration to another parish was seldom thought of by an agricultural labourer under ordinary circumstances. Consequently whenever plague or war or famine thinned the population, there were always many waiting to be married, who filled the vacant places; and, being perhaps younger and stronger than the average of newly married couples, had larger families50.

There was however some movement even of agricultural labourers towards districts which had been struck more heavily than their neighbours by pestilence, by famine or the sword. Moreover artisans were often more or less on the move, and this was especially the case with those who were engaged in the building trades, and those who worked in metal and wood; though no doubt the "wander years" were chiefly those of youth, and after these were over the wanderer was likely to settle down in the place in which he was born. Again, there seems to have been a good deal of migration on the part of the retainers of the landed gentry, especially of the greater barons who had seats in several parts of the country. And lastly, in spite of the selfish exclusiveness which the gilds developed as years went on, the towns offered in England as elsewhere a refuge to many who could get no good openings for work and for marriage in their own homes. In these various ways some elasticity was introduced into the rigid system of mediæval economy; and population was able to avail itself in some measure of the increased demand for labour which came gradually with the growth of knowledge, the establishment of law and order, and the development of oceanic trade51.

In the latter half of the seventeenth and the first half of the eighteenth century the central government exerted itself to hinder the adjustment of the supply of population in different parts of the country to the demand for it by Settlement laws, which made any one chargeable to a parish who had resided there forty days, but ordered that he might be sent home by force at any time within that period52. Landlords and farmers were so eager to prevent people from getting a "settlement" in their parish that they put great difficulties in the way of building cottages, and sometimes even razed them to the ground. In consequence the agricultural population of England was stationary during the hundred years ending with 1760; while the manufactures were not yet sufficiently developed to absorb large numbers. This retardation in the growth of numbers was partly caused by, and partly a cause of, a rise in the standard of living; a chief element of which was an increased use of wheat in the place of inferior grains as the food of the common people53.

From 1760 onwards those who could not establish themselves at home found little difficulty in getting employment in the new manufacturing or mining districts, where the demand for workers often kept the local authorities from enforcing the removal clauses of the Settlement Act. To these districts young people resorted freely, and the birth-rate in them became exceptionally high; but so did the death-rate also; the net result being a fairly rapid growth of population. At the end of the century, when Malthus wrote, the Poor Law again began to influence the age of marriage; but this time in the direction of making it unduly early. The sufferings of the working classes caused by a series of famines and by the French War made some measure of relief necessary; and the need of large bodies of recruits for the army and navy was an additional inducement to tender-hearted people to be somewhat liberal in their allowances to a large family, with the practical effect of making the father of many children often able to procure more indulgences for himself without working than he could have got by hard work if he had been unmarried or had only a small family. Those who availed themselves most of this bounty were naturally the laziest and meanest of the people, those with least self-respect and enterprise. So although there was in the manufacturing towns a fearful mortality, particularly of infants, the quantity of the people increased fast; but its quality improved little, if at all, till the passing of the New Poor Law in 1834. Since that time the rapid growth of the town population has, as we shall see in the next chapter, tended to increase mortality, but this has been counteracted by the growth of temperance, of medical knowledge, of sanitation and of general cleanliness. Emigration has increased, the age of marriage has been slightly raised and a somewhat less proportion of the whole population are married; but, on the other hand, the ratio of births to a marriage has risen54; with the result that population has been growing very nearly steadily55. Let us examine the course of recent changes a little more closely.

8sect; 7. Early in this century, when wages were low and wheat was dear, the working classes generally spent more than half their income on bread: and consequently a rise in the price of wheat diminished marriages very much among them: that is, it diminished very much the number of marriages by banns. But it raised the income of many members of the well-to-do classes, and therefore often increased the number of marriages by licence56. Since however these were but a small part of the whole, the net effect was to lower the marriage-rate57. But as time went on, the price of wheat fell and wages rose, till now the working classes spend on the average less than a quarter of their incomes on bread; and in consequence the variations of commercial prosperity have got to exercise a preponderating influence on the marriage-rate58.

Since 1873 though the average real income of the population of England has indeed been increasing, its rate of increase has been less than in the preceding years, and meanwhile there has been a continuous fall of prices, and consequently a continuous fall in the money incomes of many classes of society. Now people are governed in their calculations as to whether they can afford to marry or not, more by the money income which they expect to be able to get, than by elaborate calculations of changes in its purchasing power. And therefore the standard of living among the working classes has been rising rapidly, perhaps more rapidly than at any other time in English history: their household expenditure measured in money has remained about stationary, and measured in goods has increased very fast. Meanwhile the price of wheat has also fallen very much, and a marked fall in the marriage-rate for the whole country has often accompanied a marked fall in the price of wheat. The marriage-rate is now reckoned on the basis that each marriage involves two persons and should therefore count for two. The English rate fell from 17.6 per thousand in 1873 to 14.2 in 1886. It rose to 16.5 in 1899; in 1907 it was 15.8, but in 1908 only 14.959.

There is much to be learnt from the history of population in Scotland and in Ireland. In the lowlands of Scotland a high standard of education, the development of mineral resources, and close contact with their richer English neighbours have combined to afford a great increase of average income to a rapidly increasing population. On the other hand, the inordinate growth of population in Ireland before the potato-famine in 1847, and its steady diminution since that time, will remain for ever landmarks in economic history.

Comparing the habits of different nations60 we find that in the Teutonic countries of Central and Northern Europe, the age of marriage is kept late, partly in consequence of the early years of manhood being spent in the army; but that it has been very early in Russia; where, at all events under the old régime, the family group insisted on the son's bringing a wife to help in the work of the household as early as possible, even if he had to leave her for a time and go to earn his living elsewhere. In the United Kingdom and America there is no compulsory service, and men marry early. In France, contrary to general opinion, early marriages on the part of men are not rare; while on the part of women they are more common than in any country for which we have statistics, except the Slavonic countries, where they are much the highest.

The marriage-rate, the birth-rate and the death-rate are diminishing in almost every country. But the general mortality is high where the birth-rate is high. For instance, both are high in Slavonic countries, and both are low in the North of Europe. The death-rates are low in Australasia, and the "natural" increase there is fairly high, though the birth-rate is low and falling very fast. In fact its fall in the various States ranged from 23 to 30 per cent. in the period 1881-190161.

BOOK IV, CHAPTER V: THE HEALTH AND STRENGTH OF THE POPULATION.

8sect; 1. We have next to consider the conditions on which depend health and strength, physical, mental and moral. They are the basis of industrial efficiency, on which the production of material wealth depends; while conversely the chief importance of material wealth lies in the fact that, when wisely used, it increases the health and strength, physical, mental and moral of the human race.

In many occupations industrial efficiency requires little else than physical vigour; that is, muscular strength, a good constitution and energetic habits. In estimating muscular, or indeed any other kind of strength for industrial purposes, we must take account of the number of hours in the day, of the number of days in the year, and the number of years in the lifetime, during which it can be exerted. But with this precaution we can measure a man's muscular exertion by the number of feet through which his work would raise a pound weight, if it were applied directly to this use; or in other words by the number of "foot pounds" of work that he does62.

Although the power of sustaining great muscular exertion seems to rest on constitutional strength and other physical conditions, yet even it depends also on force of will, and strength of character. Energy of this kind, which may perhaps be taken to be the strength of the man, as distinguished from that of his body, is moral rather than physical; but yet it depends on the physical condition of nervous strength. This strength of the man himself, this resolution, energy and self-mastery, or in short this "vigour" is the source of all progress: it shows itself in great deeds, in great thoughts and in the capacity for true religious feeling63.

Vigour works itself out in so many forms, that no simple measure of it is possible. But we are all of us constantly estimating vigour, and thinking of one person as having more "backbone," more "stuff in him," or as being "a stronger man" than another. Business men even in different trades, and University men even when engaged in different studies, get to estimate one another's strength very closely. It soon becomes known if less strength is required to get a "first class" in one study than another.

8sect; 2. In discussing the growth of numbers a little has been said incidentally of the causes which determine length of life: but they are in the main the same as those which determine constitutional strength and vigour, and they will occupy our attention again in the present chapter.

The first of these causes is the climate. In warm countries we find early marriages and high birth-rates, and in consequence a low respect for human life: this has probably been the cause of a great part of the high mortality that is generally attributed to the insalubrity of the climate64.

Vigour depends partly on race qualities: but these, so far as they can be explained at all, seem to be chiefly due to climate65.

8sect; 3. Climate has also a large share in determining the necessaries of life; the first of which is food. Much depends on the proper preparation of food; and a skilled housewife with ten shillings a week to spend on food will often do more for the health and strength of her family than an unskilled one with twenty. The great mortality of infants among the poor is largely due to the want of care and judgment in preparing their food; and those who do not entirely succumb to this want of motherly care often grow up with enfeebled constitutions.

In all ages of the world except the present, want of food has caused wholesale destruction of the people. Even in London in the seventeenth and eighteenth centuries the mortality was eight per cent. greater in years of dear corn than in years of cheap corn66. But gradually the effects of increased wealth and improved means of communication are making themselves felt nearly all over the world; the severity of famines is mitigated even in such a country as India; and they are unknown in Europe and in the New World. In England now want of food is scarcely ever the direct cause of death: but it is a frequent cause of that general weakening of the system which renders it unable to resist disease; and it is a chief cause of industrial inefficiency.

We have already seen that the necessaries for efficiency vary with the nature of the work to be done, but we must now examine this subject a little more closely.

As regards muscular work in particular there is a close connection between the supply of food that a man has, and his available strength. If the work is intermittent, as that of some dock labourers, a cheap but nutritious grain diet is sufficient. But for very heavy continuous strain such as is involved in puddlers' and the hardest navvies' work, food is required which can be digested and assimilated even when the body is tired. This quality is still more essential in the food of the higher grades of labour, whose work involves great nervous strain; though the quantity required by them is generally small.

After food, the next necessaries of life and labour are clothing, house-room and firing. When they are deficient, the mind becomes torpid, and ultimately the physical constitution is undermined. When clothing is very scanty, it is generally worn night and day; and the skin is allowed to be enclosed in a crust of dirt. A deficiency of house-room, or of fuel, causes people to live in a vitiated atmosphere which is injurious to health and vigour; and not the least of the benefits which English people derive from the cheapness of coal, is the habit, peculiar to them, of having well-ventilated rooms even in cold weather. Badly-built houses with imperfect drainage cause diseases which even in their slighter forms weaken vitality in a wonderful way; and overcrowding leads to moral evils which diminish the numbers and lower the character of the people.

Rest is as essential for the growth of a vigorous population as the more material necessaries of food, clothing, etc. Overwork of every form lowers vitality; while anxiety, worry, and excessive mental strain have a fatal influence in undermining the constitution, in impairing fecundity and diminishing the vigour of the race.

8sect; 4. Next come three closely allied conditions of vigour, namely, hopefulness, freedom, and change. All history is full of the record of inefficiency caused in varying degrees by slavery, serfdom, and other forms of civil and political oppression and repression67.

In all ages colonies have been apt to outstrip their mother countries in vigour and energy. This has been due partly to the abundance of land and the cheapness of necessaries at their command; partly to that natural selection of the strongest characters for a life of adventure, and partly to physiological causes connected with the mixture of races: but perhaps the most important cause of all is to be found in the hope, the freedom and the changefulness of their lives68.

Freedom so far has been regarded as freedom from external bonds. But that higher freedom, which comes of self-mastery, is an even more important condition for the highest work. The elevation of the ideals of life on which this depends, is due on the one side to political and economic causes, and on the other to personal and religious influences; among which the influence of the mother in early childhood is supreme.

8sect; 5. Bodily and mental health and strength are much influenced by occupation69. At the beginning of this century the conditions of factory work were needlessly unhealthy and oppressive for all, and especially for young children. But Factory and Education Acts have removed the worst of these evils from factories; though many of them still linger about domestic industries and the smaller workshops.

The higher wages, the greater intelligence, and the better medical facilities of townspeople should cause infant mortality to be much lower among them than in the country. But it is generally higher, especially where there are many mothers who neglect their family duties in order to earn money wages.

8sect; 6. In almost all countries there is a constant migration towards the towns70. The large towns and especially London absorb the very best blood from all the rest of England; the most enterprising, the most highly gifted, those with the highest physique and the strongest characters go there to find scope for their abilities. An increasing number of those who are most capable and have most strength of character, live in suburbs, where excellent systems of drainage, water supply and lighting, together with good schools and opportunities for open air play, give conditions at least as conducive to vigour as are to be found in the country; and though there are still many town districts only a little less injurious to vitality than were large towns generally some time ago, yet on the whole the increasing density of population seems to be for the present a diminishing source of danger. The recent rapid growth of facilities for living far from the chief centres of industry and trade must indeed slacken in time. But there seems no sign of any slackening in the movement of industries outwards to suburbs and even to new Garden Cities to seek and to bring with them vigorous workers.

Statistical averages are indeed unduly favourable to urban conditions, partly because many of the town influences which lower vigour do not much affect mortality; and partly because the majority of immigrants into the towns are in the full strength of youth, and of more than average energy and courage; while young people whose parents live in the country generally go home when they become seriously ill71.

There is no better use for public and private money than in providing public parks and playgrounds in large cities, in contracting with railways to increase the number of the workmen's trains run by them, and in helping those of the working classes who are willing to leave the large towns to do so, and to take their industries with them72.

8sect; 7. And there are yet other causes for anxiety. For there is some partial arrest of that selective influence of struggle and competition which in the earlier stages of civilization caused those who were strongest and most vigorous to leave the largest progeny behind them; and to which, more than any other single cause, the progress of the human race is due. In the later stages of civilization the rule has indeed long been that the upper classes marry late, and in consequence have fewer children than the working classes: but this has been compensated for by the fact that among the working classes themselves the old rule was held; and the vigour of the nation that is tending to be damped out among the upper classes is thus replenished by the fresh stream of strength that is constantly welling up from below. But in France for a long time, and recently in America, and England, some of the abler and more intelligent of the working class population have shown signs of a disinclination to have large families; and this is a source of danger73.

Thus there are increasing reasons for fearing, that while the progress of medical science and sanitation is saving from death a continually increasing number of the children of those who are feeble physically and mentally; many of those who are most thoughtful and best endowed with energy, enterprise and self-control are tending to defer their marriages and in other ways to limit the number of children whom they leave behind them. The motive is sometimes selfish, and perhaps it is best that hard and frivolous people should leave but few descendants of their own type. But more often it is a desire to secure a good social position for their children. This desire contains many elements that fall short of the highest ideals of human aims, and in some cases, a few that are distinctly base; but after all it has been one of the chief factors of progress, and those who are affected by it include many of those whose children would probably be among the best and strongest of the race.

It must be remembered that the members of a large family educate one another, they are usually more genial and bright, often more vigorous in every way than the members of a small family. Partly, no doubt, this is because their parents were of unusual vigour; and for a like reason they in their turn are likely to have large and vigorous families. The progress of the race is due to a much greater extent than appears at first sight to the descendants of a few exceptionally large and vigorous families.

But on the other hand there is no doubt that the parents can often do better in many ways for a small family than a large one. Other things being equal, an increase in the number of children who are born causes an increase of infantile mortality; and that is an unmixed evil. The birth of children who die early from want of care and adequate means is a useless strain to the mother and an injury to the rest of the family74.

8sect; 8. There are other considerations of which account ought to be taken; but so far as the points discussed in this chapter are concerned, it seems primâ facie advisable that people should not bring children into the world till they can see their way to giving them at least as good an education both physical and mental as they themselves had; and that it is best to marry moderately early provided there is sufficient self-control to keep the family within the requisite bounds without transgressing moral laws. The general adoption of these principles of action, combined with an adequate provision of fresh air and of healthy play for our town populations, could hardly fail to cause the strength and vigour of the race to improve. And we shall presently find reasons for believing that if the strength and vigour of the race improves, the increase of numbers will not for a long time to come cause a diminution of the average real income of the people.

Thus then the progress of knowledge, and in particular of medical science, the ever-growing activity and wisdom of Government in all matters relating to health, and the increase of material wealth, all tend to lessen mortality and to increase health and strength, and to lengthen life. On the other hand, vitality is lowered and the death-rate raised by the rapid increase of town life, and by the tendency of the higher strains of the population to marry later and to have fewer children than the lower. If the former set of causes were alone in action, but so regulated as to avoid the danger of over-population, it is probable that man would quickly rise to a physical and mental excellence superior to any that the world has yet known; while if the latter set acted unchecked, he would speedily degenerate.

As it is, the two sets hold one another very nearly in balance, the former slightly preponderating. While the population of England is growing nearly as fast as ever, those who are out of health in body or mind are certainly not an increasing part of the whole: the rest are much better fed and clothed, and, except in over-crowded industrial districts, are generally growing in strength. The average duration of life both for men and women has been increasing steadily for many years.

BOOK IV, CHAPTER VI: INDUSTRIAL TRAINING.

8sect; 1. Having discussed the causes which govern the growth of a numerous and vigorous population, we have next to consider the training that is required to develop its industrial efficiency.

The natural vigour that enables a man to attain great success in any one pursuit would generally have served him in good stead in almost any other. But there are exceptions. Some people, for instance, seem to be fitted from birth for an artistic career, and for no other; and occasionally a man of great practical genius is found to be almost devoid of artistic sensibility. But a race that has great nervous strength seems generally able, under favourable conditions, to develop in the course of a few generations ability of almost any kind that it holds in specially high esteem. A race that has acquired vigour in war or in the ruder forms of industry sometimes gains intellectual and artistic power of a high order very quickly; and nearly every literary and artistic epoch of classical and mediæval times has been due to a people of great nervous strength, who have been brought into contact with noble thoughts before they have acquired much taste for artificial comforts and luxuries.

The growth of this taste in our own age has prevented us from taking full advantage of the opportunities our largely increased resources give us of consecrating the greater part of the highest abilities of the race to the highest aims. But perhaps the intellectual vigour of the age appears less than it really is, in consequence of the growth of scientific pursuits. For in art and literature success is often achieved while genius still wears the fascinating aspect of youth; but in modern science so much knowledge is required for originality, that before a student can make his mark in the world, his mind has often lost the first bloom of its freshness; and further the real value of his work is not often patent to the multitude as that of a picture or poem generally is75. In the same way the solid qualities of the modern machine-tending artisan are rated more cheaply than the lighter virtues of the mediæval handicraftsman. This is partly because we are apt to regard as commonplace those excellences which are common in our own time; and to overlook the fact that the term "unskilled labourer" is constantly changing, its meaning.

8sect; 2. Very backward races are unable to keep on at any kind of work for a long time; and even the simplest form of what we regard as unskilled work is skilled work relatively to them; for they have not the requisite assiduity, and they can acquire it only by a long course of training. But where education is universal, an occupation may fairly be classed as unskilled, though it requires a knowledge of reading and writing. Again, in districts in which manufactures have long been domiciled, a habit of responsibility, of carefulness and promptitude in handling expensive machinery and materials becomes the common property of all; and then much of the work of tending machinery is said to be entirely mechanical and unskilled, and to call forth no human faculty that is worthy of esteem. But in fact it is probable that not one-tenth of the present populations of the world have the mental and moral faculties, the intelligence, and the self-control that are required for it: perhaps not one-half could be made to do the work well by steady training for two generations. Even of a manufacturing population only a small part are capable of doing many of the tasks that appear at first sight to be entirely monotonous. Machine-weaving, for instance, simple as it seems, is divided into higher and lower grades; and most of those who work in the lower grades have not "the stuff in them" that is required for weaving with several colours. And the differences are even great in industries that deal with hard materials, wood, metals, or ceramics.

Some kinds of manual work require long-continued practice in one set of operations, but these cases are not very common, and they are becoming rarer: for machinery is constantly taking over work that requires manual skill of this kind. It is indeed true that a general command over the use of one's fingers is a very important element of industrial efficiency; but this is the result chiefly of nervous strength, and self-mastery. It is of course developed by training, but the greater part of this may be of a general character and not special to the particular occupation; just as a good cricketer soon learns to play tennis well, so a skilled artisan can often move into other trades without any great and lasting loss of efficiency.

Manual skill that is so specialized that it is quite incapable of being transferred from one occupation to another is becoming steadily a less and less important factor in production. Putting aside for the present the faculties of artistic perception and artistic creation, we may say that what makes one occupation higher than another, what makes the workers of one town or country more efficient than those of another, is chiefly a superiority in general sagacity and energy which are not specialized to any one occupation.

To be able to bear in mind many things at a time, to have everything ready when wanted, to act promptly and show resource when anything goes wrong, to accommodate oneself quickly to changes in detail of the work done, to be steady and trustworthy, to have always a reserve of force which will come out in emergency, these are the qualities which make a great industrial people. They are not peculiar to any occupation, but are wanted in all; and if they cannot always be easily transferred from one trade to other kindred trades, the chief reason is that they require to be supplemented by some knowledge of materials and familiarity with special processes.

We may then use the term general ability to denote those faculties and that general knowledge and intelligence which are in varying degrees the common property of all the higher grades of industry: while that manual dexterity and that acquaintance with particular materials and processes which are required for the special purposes of individual trades may be classed as specialized ability.

8sect; 3. General ability depends largely on the surroundings of childhood and youth. In this the first and far the most powerful influence is that of the mother76. Next comes the influence of the father, of other children, and in some cases of servants77. As years pass on the child of the working man learns a great deal from what he sees and hears going on around him; and when we inquire into the advantages for starting in life which children of the well-to-do classes have over those of artisans, and which these in their turn have over the children of unskilled labourers, we shall have to consider these influences of home more in detail. But at present we may pass to consider the more general influences of school education.

Little need be said of general education; though the influence even of that on industrial efficiency is greater than it appears. It is true that the children of the working classes must very often leave school, when they have but learnt the elements of reading, writing, arithmetic and drawing; and it is sometimes argued that part of the little time spent on these subjects would be better given to practical work. But the advance made at school is important not so much on its own account, as for the power of future advance which a school education gives. For a truly liberal general education adapts the mind to use its best faculties in business and to use business itself as a means of increasing culture; though it does not concern itself with the details of particular trades: that is left for technical education78.

8sect; 4. Technical education has in like manner raised its aims in recent years. It used to mean little more than imparting that manual dexterity and that elementary knowledge of machinery and processes which an intelligent lad quickly picks up for himself when his work has begun; though if he has learnt it beforehand, he can perhaps earn a few shillings more at starting than if he had been quite ignorant. But such so-called education does not develop faculties; it rather hinders them from being developed. A lad, who has picked up the knowledge for himself, has educated himself by so doing; and he is likely to make better progress in the future than one who has been taught in a school of this old-fashioned kind. Technical education is however outgrowing its mistakes; and is aiming, firstly, at giving a general command over the use of eyes and fingers (though there are signs that this work is being taken over by general education, to which it properly belongs); and secondly at imparting artistic skill and knowledge, and methods of investigation, which are useful in particular occupations, but are seldom properly acquired in the course of practical work. It is however to be remembered that every advance in the accuracy and versatility of automatic machinery narrows the range of manual work in which command over hand and eye is at a high premium; and that those faculties which are trained by general education in its best forms are ever rising in importance79.

According to the best English opinions, technical education for the higher ranks of industry should keep the aim of developing the faculties almost as constantly before it as general education does. It should rest on the same basis as a thorough general education, but should go on to work out in detail special branches of knowledge for the benefit of particular trades80. Our aim should be to add the scientific training in which the countries of Western Europe are ahead of us to that daring and restless energy and those practical instincts, which seldom flourish unless the best years of youth are spent in the workshop; recollecting always that whatever a youth learns for himself by direct experience in well-conducted works, teaches him more and stimulates his mental activity more than if it were taught him by a master in a technical school with model instruments81.

The old apprenticeship system is not exactly suited to modern conditions and it has fallen into disuse; but a substitute for it is wanted. Within the last few years many of the ablest manufacturers have begun to set the fashion of making their sons work through every stage in succession of the business they will ultimately have to control; but this splendid education can be had only by a few. So many and various are the branches of any great modern industry that it would be impossible for the employers to undertake, as they used to do, that every youth committed to their care should learn all; and indeed a lad of ordinary ability would be bewildered by the attempt. But it does not seem impracticable to revive the apprenticeship system in a modified form82.

The great epoch-making inventions in industry came till recently almost exclusively from England. But now other nations are joining in the race. The excellence of the common schools of the Americans, the variety of their lives, the interchange of ideas between different races among them, and the peculiar conditions of their agriculture have developed a restless spirit of inquiry; while technical education is now being pushed on with great vigour. On the other hand, the diffusion of scientific knowledge among the middle and even the working classes of Germany, combined with their familiarity with modern languages and their habits of travelling in pursuit of instruction, has enabled them to keep up with English and American mechanics and to take the lead in many of the applications of chemistry to business83.

8sect; 5. It is true that there are many kinds of work which can be done as efficiently by an uneducated as by an educated workman: and that the higher branches of education are of little direct use except to employers and foremen and a comparatively small number of artisans. But a good education confers great indirect benefits even on the ordinary workman. It stimulates his mental activity; it fosters in him a habit of wise inquisitiveness: it makes him more intelligent, more ready, more trustworthy in his ordinary work; it raises the tone of his life in working hours and out of working hours; it is thus an important means towards the production of material wealth; at the same time that, regarded as an end in itself, it is inferior to none of those which the production of material wealth can be made to subserve.

We must however look in another direction for a part, perhaps the greater part, of the immediate economic gain which the nation may derive from an improvement in the general and technical education of the mass of the people. We must look not so much at those who stay in the rank and file of the working classes, as at those who rise from a humble birth to join the higher ranks of skilled artisans, to become foremen or employers, to advance the boundaries of science, or possibly to add to the national wealth in art and literature.

The laws which govern the birth of genius are inscrutable. It is probable that the percentage of children of the working classes who are endowed with natural abilities of the highest order is not so great as that of the children of people who have attained or have inherited a higher position in society. But since the manual labour classes are four or five times as numerous as all other classes put together, it is not unlikely that more than half the best natural genius that is born into the country belongs to them; and of this a great part is fruitless for want of opportunity. There is no extravagance more prejudicial to the growth of national wealth than that wasteful negligence which allows genius that happens to be born of lowly parentage to expend itself in lowly work. No change would conduce so much to a rapid increase of material wealth as an improvement in our schools, and especially those of the middle grades, provided it be combined with an extensive system of scholarships, which will enable the clever son of a working man to rise gradually from school to school till he has the best theoretical and practical education which the age can give.

To the abilities of children of the working classes may be ascribed the greater part of the success of the free towns in the Middle Ages and of Scotland in recent times. Even within England itself there is a lesson of the same kind to be learnt: progress is most rapid in those parts of the country in which the greatest proportion of the leaders of industry are the sons of working men. For instance, the beginning of the manufacturing era found social distinctions more closely marked and more firmly established in the South than in the North of England. In the South something of a spirit of caste has held back the working men and the sons of working men from rising to posts of command; and the old established families have been wanting in that elasticity and freshness of mind which no social advantages can supply, and which comes only from natural gifts. This spirit of caste, and this deficiency of new blood among the leaders of industry, have mutually sustained one another; and there are not a few towns in the South of England whose decadence within living memory can be traced in a great measure to this cause.

8sect; 6. Education in art stands on a somewhat different footing from education in hard thinking: for while the latter nearly always strengthens the character, the former not unfrequently fails to do this. Nevertheless the development of the artistic faculties of the people is in itself an aim of the very highest importance, and is becoming a chief factor of industrial efficiency.

We are here concerned almost exclusively with those branches of art which appeal to the eye. For though literature and music contribute as much and more to the fullness of life, yet their development does not directly affect, and does not depend upon, the methods of business, the processes of manufacture and the skill of artisans.

The artisan of Europe in the Middle Ages, and of eastern countries now, has perhaps obtained credit for more originality than he has really possessed. Eastern carpets, for instance, are full of grand conceptions: but if we examine a great many examples of the art of any one place, selected perhaps from the work of several centuries, we often find very little variety in their fundamental ideas. But in the modern era of rapid changes—some caused by fashion and some by the beneficial movements of industrial and social progress—everyone feels free to make a new departure, everyone has to rely in the main on his own resources: there is no slowly matured public criticism to guide him84.

This is however not the only, perhaps not the chief disadvantage under which artistic design labours in our own age. There is no good reason for believing that the children of ordinary workmen in the Middle Ages had more power of artistic origination than those of ordinary village carpenters or blacksmiths of to-day; but if one among ten thousand happened to have genius, it found vent in his work and was stimulated by the competition of the gilds and in other ways. But the modern artisan is apt to be occupied in the management of machinery; and though the faculties which he develops may be more solid and may help more in the long run towards the highest progress of the human race, than did the taste and fancy of his mediæval predecessor, yet they do not contribute directly towards the progress of art. And if he should find in himself a higher order of ability than among his fellows, he will probably endeavour to take a leading part in the management of a trades-union or some other society, or to collect together a little store of capital and to rise out of that trade in which he was educated. These are not ignoble aims; but his ambition would perhaps have been nobler and more fruitful of good to the world, if he had stayed in his old trade and striven to create works of beauty which should live after he had gone.

It must however be admitted that he would have great difficulties in doing this. The shortness of the time which we allow ourselves for changes in the arts of decoration is scarcely a greater evil than the width of the area of the world over which they are spread; for that causes a further distraction of the hasty and hurried efforts of the designer, by compelling him to be always watching the world movements of the supply of and demand for art products. This is a task for which the artisan, who works with his own hands, is not well fitted; and in consequence now-a-days the ordinary artisan finds it best to follow and not to lead. Even the supreme skill of the Lyons weaver shows itself now almost exclusively in an inherited power of delicate manipulation, and fine perception of colour, that enable him to carry out perfectly the ideas of professional designers.

Increasing wealth is enabling people to buy things of all kinds to suit the fancy, with but a secondary regard to their powers of wearing; so that in all kinds of clothing and furniture it is every day more true that it is the pattern which sells the things. The influence of the late William Morris and others, combined with the lead which many English designers have derived from Oriental and especially Persian and Indian masters of colour is acknowledged by Frenchmen themselves to have attained the first rank for certain classes of English fabrics and decorative products. But in other directions France is supreme. Some English manufacturers who hold their own against the world would, it is said, be driven out of the market if they had to depend on English patterns. This is partly due to the fact that Paris having the lead in fashions, as the result of an inherited quick and subtle taste in women's dress, a Parisian design is likely to be in harmony with the coming fashions and to sell better than a design of equal intrinsic worth from elsewhere85.

Technical education, then, though it cannot add much directly to the supply of genius in art, any more than it can in science or in business, can yet save much natural artistic genius from running to waste; and it is called on to do this all the more because the training that was given by the older forms of handicraft can never be revived on a large scale86.

8sect; 7. We may then conclude that the wisdom of expending public and private funds on education is not to be measured by its direct fruits alone. It will be profitable as a mere investment, to give the masses of the people much greater opportunities than they can generally avail themselves of. For by this means many, who would have died unknown, are enabled to get the start needed for bringing out their latent abilities. And the economic value of one great industrial genius is sufficient to cover the expenses of the education of a whole town; for one new idea, such as Bessemer's chief invention, adds as much to England's productive power as the labour of a hundred thousand men. Less direct, but not less in importance, is the aid given to production by medical discoveries such as those of Jenner or Pasteur, which increase our health and working power; and again by scientific work such as that of mathematics or biology, even though many generations may pass away before it bears visible fruit in greater material wellbeing. All that is spent during many years in opening the means of higher education to the masses would be well paid for if it called out one more Newton or Darwin, Shakespeare or Beethoven.

There are few practical problems in which the economist has a more direct interest than those relating to the principles on which the expense of the education of children should be divided between the State and the parents. But we must now consider the conditions that determine the power and the will of the parents to bear their share of the expense, whatever it may be.

Most parents are willing enough to do for their children what their own parents did for them; and perhaps even to go a little beyond it if they find themselves among neighbours who happen to have a rather higher standard. But to do more than this requires, in addition to the moral qualities of unselfishness and a warmth of affection that are perhaps not rare, a certain habit of mind which is as yet not very common. It requires the habit of distinctly realizing the future, of regarding a distant event as of nearly the same importance as if it were close at hand (discounting the future at a low rate of interest); this habit is at once a chief product and a chief cause of civilization, and is seldom fully developed except among the middle and upper classes of the more cultivated nations.

8sect; 8. Parents generally bring up their children to occupations in their own grade, and therefore the total supply of labour in any grade in one generation is in a great measure determined by the numbers in that grade in the preceding generation, yet within the grade itself there is greater mobility. If the advantages of any one occupation in it rise above the average, there is a quick influx of youth from other occupations within the grade. The vertical movement from one grade to another is seldom very rapid or on a very large scale; but, when the advantages of a grade have risen relatively to the difficulty of the work required of it, many small streams of labour, both youthful and adult, will begin to flow towards it; and though none of them may be very large, they will together have a sufficient volume to satisfy before long the increased demand for labour in that grade.

We must defer to a later stage a fuller discussion of the obstacles which the conditions of any place and time oppose to the free mobility of labour, and also of the inducements which they offer to anyone to change his occupation or to bring up his son to an occupation different from his own. But we have seen enough to conclude that, other things being equal, an increase in the earnings that are to be got by labour increases its rate of growth; or, in other words, a rise in its demand price increases the supply of it. If the state of knowledge, and of ethical, social and domestic habits be given; then the vigour of the people as a whole if not their numbers, and both the numbers and vigour of any trade in particular, may be said to have a supply price in this sense, that there is a certain level of the demand price which will keep them stationary; that a higher price would cause them to increase, and that a lower price would cause them to decrease. Thus economic causes play a part in governing the growth of population as a whole as well as the supply of labour in any particular grade. But their influence on the numbers of the population as a whole is largely indirect; and is exerted by way of the ethical, social and domestic habits of life. For these habits are themselves influenced by economic causes deeply, though slowly, and in ways some of which are difficult to trace, and impossible to predict87.

BOOK IV, CHAPTER VII: THE GROWTH OF WEALTH.

8sect; 1. In this chapter it is not necessary to distinguish the points of view in which wealth is regarded as the object of consumption and as an agent of production; we are concerned with the growth of wealth simply, and we have no need to emphasize its uses as capital.

The earliest forms of wealth were probably implements for hunting and fishing, and personal ornaments; and, in cold countries, clothing and huts88. During this stage the domestication of animals began; but at first they were probably cared for chiefly for their own sake, because they were beautiful, and it was pleasant to have them; they were, like articles of personal ornament, desired because of the immediate gratification to be derived from their possession rather than as a provision against future needs89. Gradually the herds of domesticated animals increased; and during the pastoral stage they were at once the pleasure and the pride of their possessors, the outward emblens of social rank, and by far the most important store of wealth accumulated as a provision against future needs.

As numbers thickened and the people settled down to agriculture, cultivated land took the first place in the inventory of wealth; and that part of the value of the land which was due to improvements (among which wells held a conspicuous place) became the chief element of capital, in the narrower sense of the term. Next in importance came houses, domesticated animals, and in some places boats and ships; but the implements of production, whether for use in agriculture or in domestic manufactures, remained for a long time of little value. In some places, however, precious stones and the precious metals in various forms became early a leading object of desire and a recognized means of hoarding wealth; while, to say nothing of the palaces of monarchs, a large part of social wealth in many comparatively rude civilizations took the form of edifices for public purposes, chiefly religious, and of roads and bridges, of canals and irrigation works.

For some thousands of years these remained the chief forms of accumulated wealth. In towns indeed houses and household furniture took the first place, and stocks of the more expensive of raw materials counted for a good deal; but though the inhabitants of the towns had often more wealth per head than those of the country, their total numbers were small; and their aggregate wealth was very much less than that of the country. During all this time the only trade that used very expensive implements was the trade of carrying goods by water: the weaver's looms, the husbandman's ploughs and the blacksmith's anvils were of simple construction and were of little account beside the merchant's ships. But in the eighteenth century England inaugurated the era of expensive implements.

The implements of the English farmer had been rising slowly in value for a long time; but the progress was quickened in the eighteenth century. After a while the use first of water power and then of steam power caused the rapid substitution of expensive machinery for inexpensive hand tools in one department of production after another. As in earlier times the most expensive implements were ships and in some cases canals for navigation and irrigation, so now they are the means of locomotion in general;—railways and tramways, canals, docks and ships, telegraph and telephone systems and water-works: even gas-works might almost come under this head, on the ground that a great part of their plant is devoted to distributing the gas. After these come mines and iron and chemical works, ship-building yards, printing-presses, and other large factories full of expensive machinery.

On whichever side we look we find that the progress and diffusion of knowledge are constantly leading to the adoption of new processes and new machinery which economize human effort on condition that some of the effort is spent a good while before the attainment of the ultimate ends to which it is directed. It is not easy to measure this progress exactly, because many modern industries had no counterpart in ancient times. But let us compare the past and present conditions of the four great industries the products of which have not changed their general character: viz. agriculture, the building, the cloth-making, and the carrying trades. In the first two of these hand work still retains an important place: but even in them there is a great development of expensive machinery. Compare for instance the rude implements of an Indian Ryot even of to-day with the equipment of a progressive Lowland farmer90; and consider the brick-making, mortar-making, sawing, planing, moulding and slotting machines of a modern builder, his steam cranes and his electric light. And if we turn to the textile trades, or at least to those of them which make the simpler products, we find each operative in early times content with implements the cost of which was equivalent to but a few months of his labour; while in modern times it is estimated that for each man, woman and child employed there is a capital in plant alone of more than £200, or say the equivalent of five years' labour. Again the cost of a steam-ship is perhaps equivalent to the labour for fifteen years or more of those who work her; while a capital of about £1000,000,000 invested in railways in England and Wales is equivalent to the work for more than twenty years of the 300,000 wage-earners employed on them.

8sect; 2. As civilization has progressed, man has always been developing new wants, and new and more expensive ways of gratifying them. The rate of progress has sometimes been slow, and occasionally there has even been a great retrograde movement; but now we are moving on at a rapid pace that grows quicker every year; and we cannot guess where it will stop. On every side further openings are sure to offer themselves, all of which will tend to change the character of our social and industrial life, and to enable us to turn to account vast stores of capital in providing new gratifications and new ways of economizing effort by expending it in anticipation of distant wants. There seems to be no good reason for believing that we are anywhere near a stationary state in which there will be no new important wants to be satisfied; in which there will be no more room for profitably investing present effort in providing for the future, and in which the accumulation of wealth will cease to have any reward. The whole history of man shows that his wants expand with the growth of his wealth and knowledge91.

And with the growth of openings for the investment of capital there is a constant increase in that surplus of production over the necessaries of life, which gives the power to save. When the arts of production were rude, there was very little surplus, except where a strong ruling race kept the subject masses hard at work on the bare necessaries of life, and where the climate was so mild that those necessaries were small and easily obtained. But every increase in the arts of production, and in the capital accumulated to assist and support labour in future production, increased the surplus out of which more wealth could be accumulated. After a time civilization became possible in temperate and even in cold climates; the increase of material wealth was possible under conditions which did not enervate the worker, and did not therefore destroy the foundations on which it rested92. Thus from step to step wealth and knowledge have grown, and with every step the power of saving wealth and extending knowledge has increased.

8sect; 3. The habit of distinctly realizing the future and providing for it has developed itself slowly and fitfully in the course of man's history. Travellers tell us of tribes who might double their resources and enjoyments without increasing their total labour, if they would only apply a little in advance the means that lie within their power and their knowledge; as, for instance, by fencing in their little plots of vegetables against the intrusion of wild animals.

But even this apathy is perhaps less strange than the wastefulness that is found now among some classes in our own country. Cases are not rare of men who alternate between earning two or three pounds a week and being reduced to the verge of starvation: the utility of a shilling to them when they are in employment is less than that of a penny when they are out of it, and yet they never attempt to make provision for the time of need93. At the opposite extreme there are misers, in some of whom the passion for saving borders on insanity; while, even among peasant proprietors and some other classes, we meet not unfrequently with people who carry thrift so far as to stint themselves of necessaries, and to impair their power of future work. Thus they lose every way: they never really enjoy life; while the income which their stored-up wealth brings them is less than they would have got from the increase of their earning power, if they had invested in themselves the wealth that they have accumulated in a material form.

In India, and to a less extent in Ireland, we find people who do indeed abstain from immediate enjoyment and save up considerable sums with great self-sacrifice, but spend all their savings in lavish festivities at funerals and marriages. They make intermittent provision for the near future, but scarcely any permanent provision for the distant future: the great engineering works by which their productive resources have been so much increased, have been made chiefly with the capital of the much less self-denying race of Englishmen.

Thus the causes which control the accumulation of wealth differ widely in different countries and different ages. They are not quite the same among any two races, and perhaps not even among any two social classes in the same race. They depend much on social and religious sanctions; and it is remarkable how, when the binding force of custom has been in any degree loosened, differences of personal character will cause neighbours brought up under like conditions to differ from one another more widely and more frequently in their habits of extravagance or thrift than in almost any other respect.

8sect; 4. The thriftlessness of early times was in a great measure due to the want of security that those who made provision for the future would enjoy it: only those who were already wealthy were strong enough to hold what they had saved; the laborious and self-denying peasant who had heaped up a little store of wealth only to see it taken from him by a stronger hand, was a constant warning to his neighbours to enjoy their pleasure and their rest when they could. The border country between England and Scotland made little progress so long as it was liable to incessant forays; there was very little saving by the French peasants in the eighteenth century when they could escape the plunder of the tax-gatherer only by appearing to be poor, or by Irish cottiers, who, on many estates, even forty years ago, were compelled to follow the same course in order to avoid the landlords' claims of exorbitant rents.

Insecurity of this kind has nearly passed away from the civilized world. But we are still suffering in England from the effects of the Poor-law which ruled at the beginning of last century, and which introduced a new form of insecurity for the working classes. For it arranged that part of their wages should, in effect, be given in the form of poor relief; and that this should be distributed among them in inverse proportion to their industry and thrift and forethought, so that many thought it foolish to make provision for the future. The traditions and instincts which were fostered by that evil experience are even now a great hindrance to the progress of the working classes; and the principle which nominally at least underlies the present Poor-law, that the State should take account only of destitution and not at all of merit, acts in the same direction, though with less force.

Insecurity of this kind also is being diminished: the growth of enlightened views as to the duties of the State and of private persons towards the poor, is tending to make it every day more true that those who have helped themselves and endeavoured to provide for their own future will be cared for by society better than the idle and the thoughtless. But the progress in this direction is still slow, and there remains much to be done yet.

8sect; 5. The growth of a money-economy and of modern habits of business does indeed hinder the accumulation of wealth by putting new temptations in the way of those who are inclined to live extravagantly. In old times if a man wanted a good house to live in he must build it himself; now he finds plenty of good houses to be hired at a rent. Formerly, if he wanted good beer he must have a good brewhouse, now he can buy it more cheaply and better than he could brew it. Now he can borrow books from a library instead of buying them; and he can even furnish his house before he is ready to pay for his furniture. Thus in many ways the modern systems of buying and selling, and lending and borrowing, together with the growth of new wants, lead to new extravagances, and to a subordination of the interests of the future to those of the present.

But on the other hand, a money-economy increases the variety of the uses between which a person can distribute his future expenditure. A person who in a primitive state of society stores up some things against a future need, may find that after all he does not need those things as much as others which he has not stored up: and there are many future wants against which it is impossible to provide directly by storing up goods. But he who has stored up capital from which he derives a money income can buy what he will to meet his needs as they arise94.

Again, modern methods of business have brought with them opportunities for the safe investment of capital in such ways as to yield a revenue to persons who have no good opportunity of engaging in any business,—not even in that of agriculture, where the land will under some conditions act as a trustworthy savings-bank. These new opportunities have induced some people who would not otherwise have attempted it to put by something for their own old age. And, what has had a far greater effect on the growth of wealth, it has rendered it far easier for a man to provide a secure income for his wife and children after his death: for, after all, family affection is the main motive of saving.

8sect; 6. There are indeed some who find an intense pleasure in seeing their hoards of wealth grow up under their hands, with scarcely any thought for the happiness that may be got from its use by themselves or by others. They are prompted partly by the instincts of the chase, by the desire to outstrip their rivals; by the ambition to have shown ability in getting the wealth, and to acquire power and social position by its possession. And sometimes the force of habit, started when they were really in need of money, has given them, by a sort of reflex action, an artificial and unreasoning pleasure in amassing wealth for its own sake. But were it not for the family affections, many who now work hard and save carefully would not exert themselves to do more than secure a comfortable annuity for their own lives; either by purchase from an insurance company, or by arranging to spend every year, after they had retired from work, part of their capital as well as all their income. In the one case they would leave nothing behind them: in the other only provision for that part of their hoped-for old age, from which they had been cut off by death. That men labour and save chiefly for the sake of their families and not for themselves, is shown by the fact that they seldom spend, after they have retired from work, more than the income that comes in from their savings, preferring to leave their stored-up wealth intact for their families; while in this country alone twenty millions a year are saved in the form of insurance policies and are available only after the death of those who save them.

A man can have no stronger stimulus to energy and enterprise than the hope of rising in life, and leaving his family to start from a higher round of the social ladder than that on which he began. It may even give him an overmastering passion which reduces to insignificance the desire for ease, and for all ordinary pleasures, and sometimes even destroys in him the finer sensibilities and nobler aspirations. But, as is shown by the marvellous growth of wealth in America during the present generation, it makes him a mighty producer and accumulator of riches; unless indeed he is in too great a hurry to grasp the social position which his wealth will give him: for his ambition may then lead him into as great extravagance as could have been induced by an improvident and self-indulgent temperament.

The greatest savings are made by those who have been brought up on narrow means to stern hard work, who have retained their simple habits, in spite of success in business, and who nourish a contempt for showy expenditure and a desire to be found at their death richer than they had been thought to be. This type of character is frequent in the quieter parts of old but vigorous countries, and it was very common among the middle classes in the rural districts of England for more than a generation after the pressure of the great French war and the heavy taxes that lingered in its wake.

8sect; 7. Next, as to the sources of accumulation. The power to save depends on an excess of income over necessary expenditure; and this is greatest among the wealthy. In this country most of the larger incomes, but only a few of the smaller, are chiefly derived from capital. And, early in the present century, the commercial classes in England had much more saving habits than either the country gentlemen or the working classes. These causes combined to make English economists of the last generation regard savings as made almost exclusively from the profits of capital.

But even in modern England rent and the earnings of professional men and hired workers are an important source of accumulation: and they have been the chief source of it in all the earlier stages of civilization95. Moreover, the middle and especially the professional classes have always denied themselves much in order to invest capital in the education of their children; while a great part of the wages of the working classes is invested in the physical health and strength of their children. The older economists took too little account of the fact that human faculties are as important a means of production as any other kind of capital; and we may conclude, in opposition to them, that any change in the distribution of wealth which gives more to the wage receivers and less to the capitalists is likely, other things being equal, to hasten the increase of material production, and that it will not perceptibly retard the storing-up of material wealth. Of course other things would not be equal if the change were brought about by violent methods which gave a shock to public security. But a slight and temporary check to the accumulation of material wealth need not necessarily be an evil, even from a purely economic point of view, if, being made quietly and without disturbance, it provided better opportunities for the great mass of the people, increased their efficiency, and developed in them such habits of self-respect as to result in the growth of a much more efficient race of producers in the next generation. For then it might do more in the long-run to promote the growth of even material wealth than great additions to our stock of factories and steam-engines.

A people among whom wealth is well distributed, and who have high ambitions, are likely to accumulate a great deal of public property; and the savings made in this form alone by some well-to-do democracies form no inconsiderable part of the best possessions which our own age has inherited from its predecessors. The growth of the co-operative movement in all its many forms, of building societies, friendly societies, trades-unions, of working men's savings-banks etc., shows that, even so far as the immediate accumulation of material wealth goes, the resources of the country are not, as the older economists assumed, entirely lost when they are spent in paying wages96.

8sect; 8. Having looked at the development of the methods of saving and the accumulation of wealth, we may now return to that analysis of the relations between present and deferred gratifications, which we began from another point of view in our study of Demand97.

We there saw that anyone, who has a stock of a commodity which is applicable to several uses, endeavours to distribute it between them all in such a way as to give him the greatest satisfaction. If he thinks he could obtain more satisfaction by transferring some of it from one use to another he will do so. If, therefore, he makes his distribution rightly, he stops in applying it to each several use at such a point that he gets an equal amount of good out of the application that he is only just induced to make of it to each separate use; (in other words, he distributes it between the different uses in such a way that it has the same marginal utility in each).

We saw, further, that the principle remains the same whether all the uses are present, or some are present and others deferred: but that in this latter case some new considerations enter, of which the chief are, firstly, that the deferring of a gratification necessarily introduces some uncertainty as to its ever being enjoyed; and secondly, that, as human nature is constituted, a present gratification is generally, though not always, preferred to a gratification that is expected to be equal to it, and is as certain as anything can be in human life.

A prudent person who thought that he would derive equal gratifications from equal means at all stages of his life, would perhaps endeavour to distribute his means equally over his whole life: and if he thought that there was a danger that his power of earning income at a future date would run short, he would certainly save some of his means for a future date. He would do this not only if he thought that his savings would increase in his hands, but even if he thought they would diminish. He would put by a few fruit and eggs for the winter, because they would then be scarce, though they would not improve by keeping. If he did not see his way to investing his earnings in trade or on loan, so as to derive interest or profits from them, he would follow the example of some of our own forefathers who accumulated small stores of guineas which they carried into the country, when they retired from active life. They reckoned that the extra gratification which they could get by spending a few more guineas while money was coming in fast, would be of less service to them than the comfort which those guineas would buy for them in their old age. The care of the guineas cost them a great deal of trouble; and no doubt they would have been willing to pay some small charge to any one who would have relieved them from the trouble without occasioning them any sort of risk.

We can therefore imagine a state of things in which stored-up wealth could be put to but little good use; in which many persons wanted to make provision for their own future; while but few of those who wanted to borrow goods, were able to offer good security for returning them, or equivalent goods, at a future date. In such a state of things the postponement of, and waiting for enjoyments would be an action that incurred a penalty rather than reaped a reward: by handing over his means to another to be taken care of, a person could only expect to get a sure promise of something less, and not of something more than that which he lent: the rate of interest would be negative98.

Such a state of things is conceivable. But it is also conceivable, and almost equally probable, that people may be so anxious to work that they will undergo some penalty as a condition of obtaining leave to work. For, as deferring the consumption of some of his means is a thing which a prudent person would desire on its own account, so doing some work is a desirable object on its own account to a healthy person. Political prisoners, for instance, generally regard it as a favour to be allowed to do a little work. And human nature being what it is, we are justified in speaking of the interest on capital as the reward of the sacrifice involved in the waiting for the enjoyment of material resources, because few people would save much without reward; just as we speak of wages as the reward of labour, because few people would work hard without reward.

The sacrifice of present pleasure for the sake of future, has been called abstinence by economists. But this term has been misunderstood: for the greatest accumulators of wealth are very rich persons, some of whom live in luxury, and certainly do not practise abstinence in that sense of the term in which it is convertible with abstemiousness. What economists meant was that, when a person abstained from consuming anything which he had the power of consuming, with the purpose of increasing his resources in the future, his abstinence from that particular act of consumption increased the accumulation of wealth. Since, however, the term is liable to be misunderstood, we may with advantage avoid its use, and say that the accumulation of wealth is generally the result of a postponement of enjoyment, or of a waiting for it99. Or, in other words again, it is dependent on man's prospectiveness; that is, his faculty of realizing the future.

The "demand price" of accumulation, that is, the future pleasure which his surroundings enable a person to obtain by working and waiting for the future, takes many forms: but the substance is always the same. The extra pleasure which a peasant who has built a weatherproof hut derives from its usance, while the snow is drifting into those of his neighbours who have spent less labour on building theirs, is the price earned by his working and waiting. It represents the extra productiveness of efforts wisely spent in providing against distant evils, or for the satisfaction of future wants, as compared with that which would have been derived from an impulsive grasping at immediate satisfactions. Thus it is similar in all fundamental respects to the interest which the retired physician derives from the capital he has lent to a factory or a mine to enable it to improve its machinery; and on account of the numerical definiteness of the form in which it is expressed, we may take that interest to be the type of and to represent the usance of wealth in other forms.

It matters not for our immediate purpose whether the power over the enjoyment for which the person waits, was earned by him directly by labour, which is the original source of nearly all enjoyment; or was acquired by him from others, by exchange or by inheritance, by legitimate trade or by unscrupulous forms of speculation, by spoliation or by fraud: the only points with which we are just now concerned are that the growth of wealth involves in general a deliberate waiting for a pleasure which a person has (rightly or wrongly) the power of commanding in the immediate present, and that his willingness so to wait depends on his habit of vividly realizing the future and providing for it.

8sect; 9. But let us look more closely at the statement that, as human nature is constituted, an increase in the future pleasure which can be secured by a present given sacrifice will in general increase the amount of present sacrifice that people will make. Suppose, for instance, that villagers have to get timber for building their cottages from the forests; the more distant these are, the smaller will be the return of future comfort got by each day's work in fetching the wood, the less will be their future gain from the wealth accumulated probably by each day's work: and this smallness of the return of future pleasure, to be got at a given present sacrifice, will tend to prevent them from increasing the size of their cottages; and will perhaps diminish on the whole the amount of labour they spend in getting timber. But this rule is not without exception. For, if custom has made them familiar with cottages of only one fashion, the further they are from the woods, and the smaller the usance to be got from the produce of one day's work, the more days' work will they give.

And similarly if a person expects, not to use his wealth himself, but to let it out on interest, the higher the rate of interest the higher his reward for saving. If the rate of interest on sound investments is 4 per cent., and he gives up £100 worth of enjoyment now, he may expect an annuity of £4 worth of enjoyment: but he can expect only £3 worth, if the rate is 3 per cent. And a fall in the rate of interest will generally lower the margin at which a person finds it just not worth while to give up present pleasures for the sake of those future pleasures that are to be secured by saving some of his means. It will therefore generally cause people to consume a little more now, and to make less provision for future enjoyment. But this rule is not without exception.

Sir Josiah Child remarked more than two centuries ago, that in countries in which the rate of interest is high, merchants "when they have gotten great wealth, leave trading" and lend out their money at interest, "the gain thereof being so easy, certain and great; whereas in other countries where interest is at a lower rate, they continue merchants from generation to generation, and enrich themselves and the state." And it is as true now, as it was then, that many men retire from business when they are yet almost in the prime of life, and when their knowledge of men and things might enable them to conduct their business more efficiently than ever. Again, as Sargant has pointed out, if a man has decided to go on working and saving till he has provided a certain income for his old age, or for his family after his death, he will find that he has to save more if the rate of interest is low than if it is high. Suppose, for instance, that he wishes to provide an income of £400 a year on which he may retire from business, or to insure £400 a year for his wife and children after his death: if then the current rate of interest is 5 per cent., he need only put by £8,000, or insure his life for £8,000; but if it is 4 per cent., he must save £10,000, or insure his life for £10,000.

It is then possible that a continued fall in the rate of interest may be accompanied by a continued increase in the yearly additions to the world's capital. But none the less is it true that a fall in the distant benefits to be got by a given amount of working and waiting for the future does tend on the whole to diminish the provision which people make for the future; or in more modern phrase, that a fall in the rate of interest tends to check the accumulation of wealth. For though with man's growing command over the resources of nature, he may continue to save much even with a low rate of interest; yet while human nature remains as it is every fall in that rate is likely to cause many more people to save less than to save more than they would otherwise have done100.

8sect; 10. The causes which govern the accumulation of wealth and its relation to the rate of interest have so many points of contact with various parts of economic science, that the study of them cannot easily be brought together in one part of our inquiry. And although in the present Book we are concerned mainly with the side of supply; it has seemed necessary to indicate provisionally here something of the general relations between the demand for and the supply of capital. And we have seen that:—

The accumulation of wealth is governed by a great variety of causes: by custom, by habits of self-control and realizing the future, and above all by the power of family affection. Security is a necessary condition for it, and the progress of knowledge and intelligence furthers it in many ways.

A rise in the rate of interest offered for capital, i.e., in the demand price for saving, tends to increase the volume of saving. For in spite of the fact that a few people who have determined to secure an income of a certain fixed amount for themselves or their family will save less with a high rate of interest than with a low rate, it is a nearly universal rule that a rise in the rate increases the desire to save; and it often increases the power to save, or rather it is often an indication of an increased efficiency of our productive resources: but the older economists went too far in suggesting that a rise of interest (or of profits) at the expense of wages always increased the power of saving: they forgot that from the national point of view the investment of wealth in the child of the working man is as productive as its investment in horses or machinery.

It must however be recollected that the annual investment of wealth is a small part of the already existing stock, and that therefore the stock would not be increased perceptibly in any one year by even a considerable increase in the annual rate of saving.

Note on the Statistics of the Growth of Wealth.

8sect; 11. The statistical history of the growth of wealth is singularly poor and misleading. This is partly due to difficulties inherent in any attempt to give a numerical measure of wealth which shall be applicable to different places and times, partly to the absence of systematic attempts to collect the necessary facts. The Government of the United States does indeed ask for returns of every person's property; and though the results thus obtained are not satisfactory, yet they are perhaps the best we have.

Estimates of the wealth of other countries have to be based almost exclusively on estimates of income, which are capitalized at various numbers of years' purchase; this number being chosen with reference (i) to the general rate of interest current at the time, (ii) to the extent to which the income derived from the use of wealth in any particular form is to be credited (a) to the permanent income-yielding power of the wealth itself; and (b) to either the labour spent in applying it, or the using up of the capital itself. This last head is specially important in the case of ironworks which depreciate rapidly, and still more in the case of such mines as are likely to be speedily exhausted; both must be capitalized at only a few years' purchase. On the other hand, the income-yielding power of land is likely to increase; and where that is the case, the income from land has to be capitalized at a great number of years' purchase (which may be regarded as making a negative provision under the head of ii. b).

Land, houses, and live stock are the three forms of wealth which have been in the first rank of importance always and everywhere. But land differs from other things in this, that an increase in its value is often chiefly due to an increase in its scarcity; and is therefore a measure rather of growing wants, than of growing means of meeting wants. Thus the land of the United States in 1880 counted as of about equal value with the land of the United Kingdom, and about half that of France. Its money value was insignificant a hundred years ago; and if the density of population two or three hundred years hence is nearly the same in the United States as in the United Kingdom, the land of the former will then be worth at least twenty times as much as that of the latter.

In the early middle ages the whole value of the land of England was much less than that of the few large-boned but small-sized animals that starved through the winter on it: now, though much of the best land is entered under the heads of houses, railways, etc.; though the live stock is now probably more than ten times as heavy in aggregate weight, and of better quality; and though there is now abundant farming capital of kinds which were then unknown; yet agricultural land is now worth more than three times as much as the farm stock. The few years of the pressure of the great French war nearly doubled the nominal value of the land of England. Since then free trade, improvements in transport, the opening of new countries, and other causes have lowered the nominal value of that part of the land which is devoted to agriculture. And they have made the general purchasing power of money in terms of commodities rise in England relatively to the Continent. Early in the last century 25 fr. would buy more, and especially more of the things needed by the working classes, in France and Germany than £1 would in England. But now the advantage is the other way: and this causes the recent growth of the wealth of France and Germany to appear to be greater relatively to that of England than it really is.

When account is taken of facts of this class, and also of the fact that a fall in the rate of interest increases the number of years' purchase at which any income has to be capitalized, and therefore increases the value of a property which yields a given income; we see that the estimates of national wealth would be very misleading, even if the statistics of income on which they were based were accurate. But still such estimates are not wholly without value.

Sir R. Giffen's Growth of Capital and Mr Chiozza Money's Riches and Poverty contain suggestive discussions on many of the figures in the following table. But their divergences show the great uncertainty of all such estimates. Mr Money's estimate of the value of land, i.e. agricultural land with farm buildings, is probably too low. Sir R. Giffen estimates the value of public property at £m. 500: and he omits public loans held at home, on the ground that the entries for them would cancel one another, as much being debited under the head of public property as is credited under that of private property. But Mr Money reckons the gross value of public roads, parks, buildings, bridges, sewers, lighting and water works, tramways etc. at £m. 1,650: and, after deducting from this £m. 1,200 for public loans, he gets £m. 450 for the net value of public property; and he thus becomes free to count public loans held at home under private property. He estimates the value of foreign stock exchange securities and other foreign property held in the United Kingdom at £m. 1,821. These estimates of wealth are mainly based on estimates of income: and, as regards the statistics of income, attention may be directed to Mr Bowley's instructive analysis in National progress since 1882; and in The Economic Journal for September 1904.

Country and Author of Estimate.Land.
£ million.
Houses, 8c.
£ million.
Farm-capital.
£ million.
Other wealth
£ million.
Total wealth.
£ million.
Wealth. per cap.
£
England.
 1679 (Petty)14430364025042
 1690 (Gregory King)18045257032058
 1812 (Colquhoun)7503001436531,846180
 1885 (Giffen)1,3331,7003823,0126,427315
United Kingdom.
 1812 (Colquhoun)1,2004002289082,736160
 1855 (Edleston)1,7005504721,0483,760130
 1865 (Giffen)1,8641,0316202,5986,113200
 1875   —2,0071,4206684,4538,548260
 1885   —1,6911,9275225,89710,037270
 1905 (Money)9662,8272857,32611,413265
United States.
 1880 (Census)2,0402,0004804,2088,728175
 1890   —13,200208
 1900   —18,860247
France.
 1892 (de Foville)3,0002,0004004,0009,400247
Italy.
 1884 (Pantaleoni)1,1603601,92065

Sir R. Giffen estimates the wealth of the British Empire in 1903 (Statistical Journal, Vol. 66, p. 584) thus:

United Kingdom......£m. 15,000
Canada ........."     1,350
Australasia ........."     1,100
India ............"     3,000
South Africa ........."      600
Remainder of Empire..."     1,200

A tentative history of changes in the relative wealth of different parts of England has been deduced by Rogers from the assessment of the several counties for the purpose of taxation. Le Vicomte d'Avenel's great work L'Histoire Économique de la Propriété 8c. 1200–1800 contains a rich store of materials as to France; and comparative studies of the growth of wealth in France and other nations have been made by Levasseur, Leroy Beaulieu, Neymarck and de Foville.

Mr Crammond, addressing the Institute of Bankers in March 1919, estimated the national wealth of the United Kingdom to be £m. 24,000, and the national income to be £m. 3,600. He reckoned the net value of the country's foreign investments to have fallen to £m. 1,600, she having recently sold securities amounting to £m. 1,600; and borrowed another £m. 1,400. On the balance she appeared to be a creditor to the amount of £m. 2,600: but a great part of this amount cannot be reckoned as adequately secured.

BOOK IV, CHAPTER VIII: INDUSTRIAL ORGANIZATION.

8sect; 1. Writers on social science from the time of Plato downwards have delighted to dwell on the increased efficiency which labour derives from organization. But in this, as in other cases, Adam Smith gave a new and larger significance to an old doctrine by the philosophic thoroughness with which he explained it, and the practical knowledge with which he illustrated it. After insisting on the advantages of the division of labour, and pointing out how they render it possible for increased numbers to live in comfort on a limited territory, he argued that the pressure of population on the means of subsistence tends to weed out those races who through want of organization or for any other cause are unable to turn to the best account the advantages of the place in which they live.

Before Adam Smith's book had yet found many readers, biologists were already beginning to make great advances towards understanding the real nature of the differences in organization which separate the higher from the lower animals; and before two more generations had elapsed, Malthus' historical account of man's struggle for existence started Darwin on that inquiry as to the effects of the struggle for existence in the animal and vegetable world, which issued in his discovery of the selective influence constantly played by it. Since that time biology has more than repaid her debt; and economists have in their turn owed much to the many profound analogies which have been discovered between social and especially industrial organization on the one side and the physical organization of the higher animals on the other. In a few cases indeed the apparent analogies disappeared on closer inquiry: but many of those which seemed at first sight most fanciful, have gradually been supplemented by others, and have at last established their claim to illustrate a fundamental unity of action between the laws of nature in the physical and in the moral world. This central unity is set forth in the general rule, to which there are not very many exceptions, that the development of the organism, whether social or physical, involves an increasing subdivision of functions between its separate parts on the one hand, and on the other a more intimate connection between them101. Each part gets to be less and less self-sufficient, to depend for its wellbeing more and more on other parts, so that any disorder in any part of a highly-developed organism will affect other parts also.

This increased subdivision of functions, or "differentiation," as it is called, manifests itself with regard to industry in such forms as the division of labour, and the development of specialized skill, knowledge and machinery: while "integration," that is, a growing intimacy and firmness of the connections between the separate parts of the industrial organism, shows itself in such forms as the increase of security of commercial credit, and of the means and habits of communication by sea and road, by railway and telegraph, by post and printing-press.

The doctrine that those organisms which are the most highly developed, in the sense in which we have just used the phrase, are those which are most likely to survive in the struggle for existence, is itself in process of development. It is not yet completely thought out either in its biological or its economic relations. But we may pass to consider the main bearings in economics of the law that the struggle for existence causes those organisms to multiply which are best fitted to derive benefit from their environment.

The law requires to be interpreted carefully: for the fact that a thing is beneficial to its environment will not by itself secure its survival either in the physical or in the moral world. The law of "survival of the fittest" states that those organisms tend to survive which are best fitted to utilize the environment for their own purposes. Those that utilize the environment most, often turn out to be those that benefit those around them most; but sometimes they are injurious.

Conversely, the struggle for survival may fail to bring into existence organisms that would be highly beneficial: and in the economic world the demand for any industrial arrangement is not certain to call forth a supply, unless it is something more than a mere desire for the arrangement, or a need for it. It must be an efficient demand; that is, it must take effect by offering adequate payment or some other benefit to those who supply it102. A mere desire on the part of employees for a share in the management and the profits of the factory in which they work, or the need on the part of clever youths for a good technical education, is not a demand in the sense in which the term is used when it is said that supply naturally and surely follows demand. This seems a hard truth: but some of its harshest features are softened down by the fact that those races, whose members render services to one another without exacting direct recompense are not only the most likely to flourish for the time, but most likely to rear a large number of descendants who inherit their beneficial habits.

8sect; 2. Even in the vegetable world a species of plants, however vigorous in its growth, which should be neglectful of the interests of its seeds, would soon perish from the earth. The standard of family and race duty is often high in the animal kingdom; and even those predatory animals which we are accustomed to regard as the types of cruelty, which fiercely utilize the environment and do nothing for it in return, must yet be willing as individuals to exert themselves for the benefit of their offspring. And going beyond the narrower interests of the family to those of the race, we find that among so-called social animals, such as bees and ants, those races survive in which the individual is most energetic in performing varied services for the society without the prompting of direct gain to himself.

But when we come to human beings, endowed with reason and speech, the influence of a tribal sense of duty in strengthening the tribe takes a more varied form. It is true that in the ruder stages of human life many of the services rendered by the individual to others are nearly as much due to hereditary habit and unreasoning impulse, as are those of the bees and ants. But deliberate, and therefore moral, self-sacrifice soon makes its appearance; it is fostered by the far-seeing guidance of prophets and priests and legislators, and is inculcated by parable and legend. Gradually the unreasoning sympathy, of which there are germs in the lower animals, extends its area and gets to be deliberately adopted as a basis of action: tribal affection, starting from a level hardly higher than that which prevails in a pack of wolves or a horde of banditti, gradually grows into a noble patriotism; and religious ideals are raised and purified. The races in which these qualities are the most highly developed are sure, other things being equal, to be stronger than others in war and in contests with famine and disease; and ultimately to prevail. Thus the struggle for existence causes in the long run those races of men to survive in which the individual is most willing to sacrifice himself for the benefit of those around him; and which are consequently the best adapted collectively to make use of their environment.

Unfortunately however not all the qualities which enable one race to prevail over another benefit mankind as a whole. It would no doubt be wrong to lay very much stress on the fact that warlike habits have often enabled half-savage races to reduce to submission others who were their superiors in every peaceful virtue; for such conquests have gradually increased the physical vigour of the world, and its capacity for great things, and ultimately perhaps have done more good than harm. But there is no such qualification to the statement that a race does not establish its claim to deserve well of the world by the mere fact that it flourishes in the midst or on the surface of another race. For, though biology and social science alike show that parasites sometimes benefit in unexpected ways the race on which they thrive; yet in many cases they turn the peculiarities of that race to good account for their own purposes without giving any good return. The fact that there is an economic demand for the services of Jewish and Armenian money-dealers in Eastern Europe and Asia, or for Chinese labour in California, is not by itself a proof, nor even a very strong ground for believing, that such arrangements tend to raise the quality of human life as a whole. For, though a race entirely dependent on its own resources can scarcely prosper unless it is fairly endowed with the most important social virtues; yet a race, which has not these virtues and which is not capable of independent greatness, may be able to thrive on its relations with another race. But on the whole, and subject to grave exceptions, those races survive and predominate in which the best qualities are most strongly developed.

8sect; 3. This influence of heredity shows itself nowhere more markedly than in social organization. For that must necessarily be a slow growth, the product of many generations: it must be based on those customs and aptitudes of the great mass of the people which are incapable of quick change. In early times when religious, ceremonial, political, military and industrial organization were intimately connected, and were indeed but different sides of the same thing, nearly all those nations which were leading the van of the world's progress were found to agree in having adopted a more or less strict system of caste: and this fact by itself proved that the distinction of castes was well suited to its environment, and that on the whole it strengthened the races or nations which adopted it. For since it was a controlling factor of life, the nations which adopted it could not have generally prevailed over others, if the influence exerted by it had not been in the main beneficial. Their pre-eminence proved not that it was free from defects, but that its excellences, relatively to that particular stage of progress, outweighed its defects.

Again we know that an animal or a vegetable species may differ from its competitors by having two qualities, one of which is of great advantage to it; while the other is unimportant, perhaps even slightly injurious, and that the former of these qualities will make the species succeed in spite of its having the latter: the survival of which will then be no proof that it is beneficial. Similarly the struggle for existence has kept alive many qualities and habits in the human race which were in themselves of no advantage, but which are associated by a more or less permanent bond with others that are great sources of strength. Such instances are found in the tendency to an overbearing demeanour and a scorn for patient industry among nations that owe their advance chiefly to military victories; and again in the tendency among commercial nations to think too much of wealth and to use it for the purposes of display. But the most striking instances are found in matters of organization; the excellent adaptation of the system of caste for the special work which it had to do, enabled it to flourish in spite of its great faults, the chief of which were its rigidity, and its sacrifice of the individual to the interests of society, or rather to certain special exigencies of society.

Passing over intermediate stages and coming at once to the modern organization of the Western world, we find it offering a striking contrast, and a no less striking resemblance, to the system of caste. On the one hand, rigidity has been succeeded by plasticity: the methods of industry which were then stereotyped, now change with bewildering quickness; the social relations of classes, and the position of the individual in his class, which were then definitely fixed by traditional rules, are now perfectly variable and change their forms with the changing circumstances of the day. But on the other hand, the sacrifice of the individual to the exigencies of society as regards the production of material wealth seems in some respects to be a case of atavism, a reversion to conditions which prevailed in the far-away times of the rule of caste. For the division of labour between the different ranks of industry and between different individuals in the same rank is so thorough and uncompromising, that the real interests of the producer are sometimes in danger of being sacrificed for the sake of increasing the addition which his work makes to the aggregate production of material wealth.

8sect; 4. Adam Smith, while insisting on the general advantages of that minute division of labour and of that subtle industrial organization which were being developed with unexampled rapidity in his time, was yet careful to indicate many points in which the system failed, and many incidental evils which it involved103. But many of his followers with less philosophic insight, and in some cases with less real knowledge of the world, argued boldly that whatever is, is right. They argued for instance that, if a man had a talent for managing business, he would be surely led to use that talent for the benefit of mankind: that meanwhile a like pursuit of their own interests would lead others to provide for his use such capital as he could turn to best account; and that his own interest would lead him so to arrange those in his employment that everyone should do the highest work of which he was capable, and no other; and that it would lead him to purchase and use all machinery and other aids to production, which could in his hands contribute more than the equivalent of their own cost towards supplying the wants of the world.

This doctrine of natural organization contains more truth of the highest importance to humanity than almost any other which is equally likely to evade the comprehension of those who discuss grave social problems without adequate study: and it had a singular fascination for earnest and thoughtful minds. But its exaggeration worked much harm, especially to those who delighted most in it. For it prevented them from seeing and removing the evil that was intertwined with the good in the changes that were going on around them. It hindered them from inquiring whether many even of the broader features of modern industry might not be transitional, having indeed good work to do in their time, as the caste system had in its time; but being, like it, serviceable chiefly in leading the way towards better arrangements for a happier age. And it did harm by preparing the way for exaggerated reaction against it.

8sect; 5. Moreover the doctrine took no account of the manner in which organs are strengthened by being used. Herbert Spencer has insisted with much force on the rule that, if any physical or mental exercise gives pleasure and is therefore frequent, those physical or mental organs which are used in it are likely to grow rapidly. Among the lower animals indeed the action of this rule is so intimately interwoven with that of the survival of the fittest, that the distinction between the two need not often be emphasized. For as it might be guessed a priori, and as seems to be proved by observation, the struggle for survival tends to prevent animals from taking much pleasure in the exercise of functions which do not contribute to their wellbeing.

But man, with his strong individuality, has greater freedom. He delights in the use of his faculties for their own sake; sometimes using them nobly, whether with the abandon of the great Greek burst of life, or under the control of a deliberate and steadfast striving towards important ends; sometimes ignobly, as in the case of a morbid development of the taste for drink. The religious, the moral, the intellectual and the artistic faculties on which the progress of industry depends, are not acquired solely for the sake of the things that may be got by them; but are developed by exercise for the sake of the pleasure and the happiness which they themselves bring: and, in the same way, that greater factor of economic prosperity, the organization of a well-ordered state, is the product of an infinite variety of motives; many of which have no direct connection with the pursuit of national wealth104.

No doubt it is true that physical peculiarities acquired by the parents during their life-time are seldom if ever transmitted to their offspring. But no conclusive case seems to have been made out for the assertion that the children of those who have led healthy lives, physically and morally, will not be born with a firmer fibre than they would have been had the same parents grown up under unwholesome influences which had enfeebled the fibre of their minds and their bodies. And it is certain that in the former case the children are likely after birth to be better nourished, and better trained; to acquire more wholesome instincts; and to have more of that regard for others and that self-respect, which are the mainsprings of human progress, than in the latter case105.

It is needful then diligently to inquire whether the present industrial organization might not with advantage be so modified as to increase the opportunities, which the lower grades of industry have for using latent mental faculties, for deriving pleasure from their use, and for strengthening them by use; since the argument that if such a change had been beneficial, it would have been already brought about by the struggle for survival, must be rejected as invalid. Man's prerogative extends to a limited but effective control over natural development by forecasting the future and preparing the way for the next step.

Thus progress may be hastened by thought and work; by the application of the principles of Eugenics to the replenishment of the race from its higher rather than its lower strains, and by the appropriate education of the faculties of either sex: but however hastened it must be gradual and relatively slow. It must be slow relatively to man's growing command over technique and the forces of nature; a command which is making ever growing calls for courage and caution, for resource and steadfastness, for penetrating insight and for breadth of view. And it must be very much too slow to keep pace with the rapid inflow of proposals for the prompt reorganization of society on a new basis. In fact our new command over nature, while opening the door to much larger schemes for industrial organization than were physically possible even a short time ago, places greater responsibilities on those who would advocate new developments of social and industrial structure. For though, institutions may be changed rapidly; yet if they are to endure they must be appropriate to man: they cannot retain their stability if they change very much faster than he does. Thus progress itself increases the urgency of the warning that in the economic world, Natura non facit saltum106.

Progress must be slow; but even from the merely material point of view it is to be remembered that changes, which add only a little to the immediate efficiency of production, may be worth having if they make mankind ready and fit for an organization, which will be more effective in the production of wealth and more equal in its distribution; and that every system, which allows the higher faculties of the lower grades of industry to go to waste, is open to grave suspicion.

BOOK IV, CHAPTER IX: INDUSTRIAL ORGANIZATION, CONTINUED. DIVISION OF LABOUR. THE INFLUENCE OF MACHINERY.

8sect; 1. The first condition of an efficient organization of industry is that it should keep everyone employed at such work as his abilities and training fit him to do well, and should equip him with the best machinery and other appliances for his work. We shall leave on one side for the present the distribution of work between those who carry out the details of production on the one hand, and those who manage its general arrangement and undertake its risk on the other; and confine ourselves to the division of labour between different classes of operatives, with special reference to the influence of machinery. In the following chapter we shall consider the reciprocal effects of division of labour and localization of industry; in a third chapter we shall inquire how far the advantages of division of labour depend upon the aggregation of large capitals into the hands of single individuals or firms, or, as is commonly said, on production on a large scale; and lastly, we shall examine the growing specialization of the work of business management.

Everyone is familiar with the fact that "practice makes perfect," that it enables an operation, which at first seemed difficult, to be done after a time with comparatively little exertion, and yet much better than before; and physiology in some measure explains this fact. For it gives reasons for believing that the change is due to the gradual growth of new habits of more or less "reflex" or automatic action. Perfectly reflex actions, such as that of breathing during sleep, are performed by the responsibility of the local nerve centres without any reference to the supreme central authority of the thinking power, which is supposed to reside in the cerebrum. But all deliberate movements require the attention of the chief central authority: it receives information from the nerve centres or local authorities and perhaps in some cases direct from the sentient nerves, and sends back detailed and complex instructions to the local authorities, or in some cases direct to the muscular nerves, and so co-ordinates their action as to bring about the required results107.

The physiological basis of purely mental work is not yet well understood; but what little we do know of the growth of brain structure seems to indicate that practice in any kind of thinking develops new connections between different parts of the brain. Anyhow we know for a fact that practice will enable a person to solve quickly, and without any considerable exertion, questions which he could have dealt with but very imperfectly a little while before, even by the greatest effort. The mind of the merchant, the lawyer, the physician, and the man of science, becomes gradually equipped with a store of knowledge and a faculty of intuition, which can be obtained in no other way than by the continual application of the best efforts of a powerful thinker for many years together to one more or less narrow class of questions. Of course the mind cannot work hard for many hours a day in one direction: and a hard-worked man will sometimes find recreation in work that does not belong to his business, but would be fatiguing enough to a person who had to do it all day long.

Some social reformers have indeed maintained that those who do the most important brain work might do a fair share of manual work also, without diminishing their power of acquiring knowledge or thinking out hard questions. But experience seems to show that the best relief from overstrain is in occupations taken up to suit the mood of the moment and stopped when the mood is passed, that is, in what popular instinct classes as "relaxation." Any occupation which is so far business-like that a person must sometimes force himself by an effort of the will to go on with it, draws on his nervous force and is not perfect relaxation: and therefore it is not economical from the point of view of the community unless its value is sufficient to outweigh a considerable injury to his main work108.

8sect; 2. It is a difficult and unsettled question how far specialization should be carried in the highest branches of work. In science it seems to be a sound rule that the area of study should be broad during youth, and should gradually be narrowed as years go on. A medical man who has always given his attention exclusively to one class of diseases, may perhaps give less wise advice even in his special subject than another who, having learnt by wider experience to think of those diseases in relation to general health, gradually concentrates his study more and more on them, and accumulates a vast store of special experiences and subtle instincts. But there is no doubt that greatly increased efficiency can be attained through division of labour in those occupations in which there is much demand for mere manual skill.

Adam Smith pointed out that a lad who had made nothing but nails all his life could make them twice as quickly as a first-rate smith who only took to nail-making occasionally. Anyone who has to perform exactly the same set of operations day after day on things of exactly the same shape, gradually learns to move his fingers exactly as they are wanted, by almost automatic action and with greater rapidity than would be possible if every movement had to wait for a deliberate instruction of the will. One familiar instance is seen in the tying of threads by children in a cotton-mill. Again, in a clothing or a boot factory, a person who sews, whether by hand or machinery, just the same seam on a piece of leather or cloth of just the same size, hour after hour, day after day, is able to do it with far less effort and far more quickly than a worker with much greater quickness of eye and hand, and of a much higher order of general skill, who was accustomed to make the whole of a coat or the whole of a boot109.

Again, in the wood and the metal industries, if a man has to perform exactly the same operations over and over again on the same piece of material, he gets into the habit of holding it exactly in the way in which it is wanted, and of arranging the tools and other things which he has to handle in such positions that he is able to bring them to work on one another with the least possible loss of time and of force in the movements of his own body. Accustomed to find them always in the same position and to take them in the same order, his hands work in harmony with one another almost automatically: and with increased practice his expenditure of nervous force diminishes even more rapidly than his expenditure of muscular force.

But when the action has thus been reduced to routine it has nearly arrived at the stage at which it can be taken over by machinery. The chief difficulty to be overcome is that of getting the machinery to hold the material firmly in exactly the position in which the machine tool can be brought to bear on it in the right way, and without wasting too much time in taking grip of it. But this can generally be contrived when it is worth while to spend some labour and expense on it; and then the whole operation can often be controlled by a worker who, sitting before a machine, takes with the left hand a piece of wood or metal from a heap and puts it in a socket, while with the right he draws down a lever, or in some other way sets the machine tool at work, and finally with his left hand throws on to another heap the material which has been cut or punched or drilled or planed exactly after a given pattern. It is in these industries especially that we find the reports of modern trades-unions to be full of complaints that unskilled labourers, and even their wives and children, are put to do work which used to require the skill and judgment of a trained mechanic, but which has been reduced to mere routine by the improvement of machinery and the ever-increasing minuteness of the subdivision of labour.

8sect; 3. We are thus led to a general rule, the action of which is more prominent in some branches of manufacture than others, but which applies to all. It is, that any manufacturing operation that can be reduced to uniformity, so that exactly the same thing has to be done over and over again in the same way, is sure to be taken over sooner or later by machinery. There may be delays and difficulties; but if the work to be done by it is on a sufficient scale, money and inventive power will be spent without stint on the task till it is achieved110.

Thus the two movements of the improvement of machinery and the growing subdivision of labour have gone together and are in some measure connected. But the connection is not so close as is generally supposed. It is the largeness of markets, the increased demand for great numbers of things of the same kind, and in some cases of things made with great accuracy, that leads to subdivision of labour; the chief effect of the improvement of machinery is to cheapen and make more accurate the work which would anyhow have been subdivided. For instance, "in organizing the works at Soho, Boulton and Watt found it necessary to carry division of labour to the furthest practicable point. There were no slide-lathes, planing machines or boring tools, such as now render mechanical accuracy of construction almost a matter of certainty. Everything depended on the individual mechanic's accuracy of hand and eye; yet mechanics generally were much less skilled then than they are now. The way in which Boulton and Watt contrived partially to get over the difficulty was to confine their workmen to special classes of work, and make them as expert in them as possible. By continued practice in handling the same tools and fabricating the same articles, they thus acquired great individual proficiency111." Thus machinery constantly supplants and renders unnecessary that purely manual skill, the attainment of which was, even up to Adam Smith's time, the chief advantage of division of labour. But this influence is more than countervailed by its tendency to increase the scale of manufactures and to make them more complex; and therefore to increase the opportunities for division of labour of all kinds, and especially in the matter of business management.

8sect; 4. The powers of machinery to do work that requires too much accuracy to be done by hand are perhaps best seen in some branches of the metal industries in which the system of Interchangeable Parts is being rapidly developed. It is only after long training and with much care and labour that the hand can make one piece of metal accurately to resemble or to fit into another: and after all the accuracy is not perfect. But this is just the work which a well made machine can do most easily and most perfectly. For instance, if sowing and reaping machines had to be made by hand, their first cost would be very high; and when any part of them was broken, it could be replaced only at great cost by sending the machine back to the manufacturer or by bringing a highly skilled mechanic to the machine. But as it is, the manufacturer keeps in store many facsimiles of the broken part, which were made by the same machinery, and are therefore interchangeable with it. A farmer in the North-West of America, perhaps a hundred miles away from any good mechanic's shop, can yet use complicated machinery with confidence; since he knows that by telegraphing the number of the machine and the number of any part of it which he has broken, he will get by the next train a new piece which he can himself fit into its place. The importance of this principle of interchangeable parts has been but recently grasped; there are however many signs that it will do more than any other to extend the use of machine-made machinery to every branch of production, including even domestic and agricultural work112.

The influences which machinery exerts over the character of modern industry are well illustrated in the manufacture of watches. Some years ago the chief seat of this business was in French Switzerland; where the subdivision of labour was carried far, though a great part of the work was done by a more or less scattered population. There were about fifty distinct branches of trade each of which did one small part of the work. In almost all of them a highly specialized manual skill was required, but very little judgment; the earnings were generally low, because the trade had been established too long for those in it to have anything like a monopoly, and there was no difficulty in bringing up to it any child with ordinary intelligence. But this industry is now yielding ground to the American system of making watches by machinery, which requires very little specialized manual skill. In fact the machinery is becoming every year more and more automatic, and is getting to require less and less assistance from the human hand. But the more delicate the machine's power, the greater is the judgment and carefulness which is called for from those who see after it. Take for instance a beautiful machine which feeds itself with steel wire at one end, and delivers at the other tiny screws of exquisite form; it displaces a great many operatives who had indeed acquired a very high and specialized manual skill, but who lived sedentary lives, straining their eyesight through microscopes, and finding in their work very little scope for any faculty except a mere command over the use of their fingers. But the machine is intricate and costly, and the person who minds it must have an intelligence, and an energetic sense of responsibility, which go a long way towards making a fine character; and which, though more common than they were, are yet sufficiently rare to be able to earn a very high rate of pay. No doubt this is an extreme case; and the greater part of the work done in a watch factory is much simpler. But much of it requires higher faculties than the old system did, and those engaged in it earn on the average higher wages; at the same time it has already brought the price of a trustworthy watch within the range of the poorest classes of the community, and it is showing signs of being able soon to accomplish the very highest class of work113.

Those who finish and put together the different parts of a watch must always have highly specialized skill: but most of the machines which are in use in a watch factory are not different in general character from those which are used in any other of the lighter metal trades: in fact many of them are mere modifications of the turning lathes and of the slotting, punching, drilling, planing, shaping, milling machines and a few others, which are familiar to all engineering trades. This is a good illustration of the fact that while there is a constantly increasing subdivision of labour, many of the lines of division between trades which are nominally distinct are becoming narrower and less difficult to be passed. In old times it would have been very small comfort to watch-makers, who happened to be suffering from a diminished demand for their wares, to be told that the gun-making trade was in want of extra hands; but most of the operatives in a watch factory would find machines very similar to those with which they were familiar, if they strayed into a gun-making factory or sewing-machine factory, or a factory for making textile machinery. A watch factory with those who worked in it could be converted without any overwhelming loss into a sewing-machine factory: almost the only condition would be that in the new factory no one should be put to work which required a higher order of general intelligence, than that to which he was already accustomed.

8sect; 5. The printing trade affords another instance of the way in which an improvement of machinery and an increase in the volume of production causes an elaborate subdivision of labour. Everyone is familiar with the pioneer newspaper editor of newly settled districts of America, who sets up the type of his articles as he composes them; and with the aid of a boy prints off his sheets and distributes them to his scattered neighbours. When however the mystery of printing was new, the printer had to do all this for himself, and in addition to make all his own appliances114. These are now provided for him by separate "subsidiary" trades, from whom even the printer in the backwoods can obtain everything that he wants to use. But in spite of the assistance which it thus gets from outside, a large printing establishment has to find room for many different classes of workers within its walls. To say nothing of those who organize and superintend the business, of those who do its office work and keep its stores, of the skilled "readers" who correct any errors that may have crept into the "proofs," of its engineers and repairers of machinery, of those who cast, and who correct and prepare its stereotype plates; of the warehousemen and the boys and girls who assist them, and several other minor classes; there are the two great groups of the compositors who set up the type, and the machinists and pressmen who print impressions from them. Each of these two groups is divided into many smaller groups, especially in the large centres of the printing trade. In London, for instance, a minder who was accustomed to one class of machine, or a compositor who was accustomed to one class of work, if thrown out of employment would not willingly abandon the advantage of his specialized skill, and falling back on his general knowledge of the trade seek work at another kind of machine or in another class of work115. These barriers between minute subdivisions of a trade count for a great deal in many descriptions of the modern tendency towards specialization of industry; and to some extent rightly, because though many of them are so slight that a man thrown out of work in one subdivision could pass into one of its neighbours without any great loss of efficiency, yet he does not do so until he has tried for a while to get employment in his old lines; and therefore the barriers are as effective as stronger ones would be so far as the minor fluctuations of trade from week to week are concerned. But they are of an altogether different kind from the deep and broad partitions which divided one group of mediæval handicraftsmen from another, and which caused the lifelong suffering of the handloom-weavers when their trade had left them116.

In the printing trades, as in the watch trade, we see mechanical and scientific appliances attaining results that would be impossible without them; at the same time that they persistently take over work that used to require manual skill and dexterity, but not much judgment; while they leave for man's hand all those parts which do require the use of judgment, and open up all sorts of new occupations in which there is a great demand for it. Every improvement and cheapening of the printer's appliances increases the demand for the judgment and discretion and literary knowledge of the reader, for the skill and taste of those who know how to set up a good title-page, or how to make ready a sheet on which an engraving is to be printed, so that light and shade will be distributed properly. It increases the demand for the gifted and highly-trained artists who draw or engrave on wood and stone and metal, and for those who know how to give an accurate report in ten lines of the substance of a speech that occupied ten minutes—an intellectual feat the difficulty of which we underrate, because it is so frequently performed. And again, it tends to increase the work of photographers and electrotypers, and stereotypers, of the makers of printer's machinery, and many others who get a higher training and a higher income from their work than did those layers on and takers off, and those folders of newspapers who have found their work taken over by iron fingers and iron arms.

8sect; 6. We may now pass to consider the effects which machinery has in relieving that excessive muscular strain which a few generations ago was the common lot of more than half the working men even in such a country as England. The most marvellous instances of the power of machinery are seen in large iron-works, and especially in those for making armour plates, where the force to be exerted is so great that man's muscles count for nothing, and where every movement, whether horizontal or vertical, has to be effected by hydraulic or steam force, and man stands by ready to govern the machinery and clear away ashes or perform some such secondary task.

Machinery of this class has increased our command over nature, but it has not directly altered the character of man's work very much; for that which it does he could not have done without it. But in other trades machinery has lightened man's labours. The house carpenters, for instance, make things of the same kind as those used by our forefathers, with much less toil for themselves. They now give themselves chiefly to those parts of the task which are most pleasant and most interesting; while in every country town and almost every village there are found steam mills for sawing, planing and moulding, which relieve them of that grievous fatigue which not very long ago used to make them prematurely old117.

New machinery, when just invented, generally requires a great deal of care and attention. But the work of its attendant is always being sifted; that which is uniform and monotonous is gradually taken over by the machine, which thus becomes steadily more and more automatic and self-acting; till at last there is nothing for the hand to do, but to supply the material at certain intervals and to take away the work when finished. There still remains the responsibility for seeing that the machinery is in good order and working smoothly; but even this task is often made light by the introduction of an automatic movement, which brings the machine to a stop the instant anything goes wrong.

Nothing could be more narrow or monotonous than the occupation of a weaver of plain stuffs in the old time. But now one woman will manage four or more looms, each of which does many times as much work in the course of the day as the old hand-loom did; and her work is much less monotonous and calls for much more judgment than his did. So that for every hundred yards of cloth that are woven, the purely monotonous work done by human beings is probably not a twentieth part of what it was118.

Facts of this kind are to be found in the recent history of many trades: and they are of great importance when we are considering the way in which the modern organization of industry is tending to narrow the scope of each person's work, and thereby to render it monotonous. For those trades in which the work is most subdivided are those in which the chief muscular strain is most certain to be taken off by machinery; and thus the chief evil of monotonous work is much diminished. As Roscher says, it is monotony of life much more than monotony of work that is to be dreaded: monotony of work is an evil of the first order only when it involves monotony of life. Now when a person's employment requires much physical exertion, he is fit for nothing after his work; and unless his mental faculties are called forth in his work, they have little chance of being developed at all. But the nervous force is not very much exhausted in the ordinary work of a factory, at all events where there is not excessive noise, and where the hours of labour are not too long. The social surroundings of factory life stimulate mental activity in and out of working hours; and many of those factory workers, whose occupations are seemingly the most monotonous, have considerable intelligence and mental resource119.

It is true that the American agriculturist is an able man, and that his children rise rapidly in the world. But partly because land is plentiful, and he generally owns the farm that he cultivates, he has better social conditions than the English; he has always had to think for himself, and has long had to use and to repair complex machines. The English agricultural labourer has had many great disadvantages to contend with. Till recently he had little education; and he was in a great measure under a semi-feudal rule, which was not without its advantages, but which repressed enterprise and even in some degree self-respect. These narrowing causes are removed. He is now fairly well educated in youth. He learns to handle various machinery; he is less dependent on the good-will of any particular squire or group of farmers; and, since his work is more various, and educates intelligence more than the lowest grades of town work do, he is tending to rise both absolutely and relatively.

8sect; 7. We must now proceed to consider what are the conditions under which the economies in production arising from division of labour can best be secured. It is obvious that the efficiency of specialized machinery or specialized skill is but one condition of its economic use; the other is that sufficient work should be found to keep it well employed. As Babbage pointed out, in a large factory "the master manufacturer by dividing the work to be executed into different processes, each requiring different degrees of skill or force, can purchase exactly that precise quantity of both which is necessary for each process; whereas if the whole work were executed by one workman that person must possess sufficient skill to perform the most difficult and sufficient strength to execute the most laborious of the operations into which the work is divided." The economy of production requires not only that each person should be employed constantly in a narrow range of work, but also that, when it is necessary for him to undertake different tasks, each of these tasks should be such as to call forth as much as possible of his skill and ability. Just in the same way the economy of machinery requires that a powerful turning-lathe when specially arranged for one class of work should be kept employed as long as possible on that work; and if there is occasion to employ it on other work, that should be such as to be worthy of the lathe, and not such as could have been done equally well by a much smaller machine.

Here then, so far as the economy of production goes, men and machines stand on much the same footing: but while machinery is a mere implement of production, man's welfare is also its ultimate aim. We have already been occupied with the question whether the human race as a whole gains by carrying to an extreme that specialization of function which causes all the most difficult work to be done by a few people: but we have now to consider it more nearly with special reference to the work of business management. The main drift of the next three chapters is to inquire what are the causes which make different forms of business management the fittest to profit by their environment, and the most likely to prevail over others; but it is well that meanwhile we should have in our minds the question, how far they are severally fitted to benefit their environment.

Many of those economies in the use of specialized skill and machinery which are commonly regarded as within the reach of very large establishments, do not depend on the size of individual factories. Some depend on the aggregate volume of production of the kind in the neighbourhood; while others again, especially those connected with the growth of knowledge and the progress of the arts, depend chiefly on the aggregate volume of production in the whole civilized world. And here we may introduce two technical terms.

We may divide the economies arising from an increase in the scale of production of any kind of goods, into two classes—firstly, those dependent on the general development of the industry; and, secondly, those dependent on the resources of the individual houses of business engaged in it, on their organization and the efficiency of their management. We may call the former external economies, and the latter internal economies. In the present chapter we have been chiefly discussing internal economies; but we now proceed to examine those very important external economies which can often be secured by the concentration of many small businesses of a similar character in particular localities: or, as is commonly said, by the localization of industry.

BOOK IV, CHAPTER X: INDUSTRIAL ORGANIZATION, CONTINUED. THE CONCENTRATION OF SPECIALIZED INDUSTRIES IN PARTICULAR LOCALITIES.

8sect; 1. In an early stage of civilization every place had to depend on its own resources for most of the heavy wares which it consumed; unless indeed it happened to have special facilities for water carriage. But wants and customs changed slowly: and this made it easy for producers to meet the wants even of consumers with whom they had little communication; and it enabled comparatively poor people to buy a few expensive goods from a distance, in the security that they would add to the pleasure of festivals and holidays during a life-time, or perhaps even during two or three lifetimes. Consequently the lighter and more expensive articles of dress and personal adornment, together with spices and some kinds of metal implements used by all classes, and many other things for the special use of the rich, often came from astonishing distances. Some of these were produced only in a few places, or even only in one place; and they were diffused all over Europe partly by the agency of fairs120 and professional pedlers, and partly by the producers themselves, who would vary their work by travelling on foot for many thousand miles to sell their goods and see the world. These sturdy travellers took on themselves the risks of their little businesses; they enabled the production of certain classes of goods to be kept on the right track for satisfying the needs of purchasers far away; and they created new wants among consumers, by showing them at fairs or at their own houses new goods from distant lands. An industry concentrated in certain localities is commonly, though perhaps not quite accurately, described as a localized industry121.

This elementary localization of industry gradually prepared the way for many of the modern developments of division of labour in the mechanical arts and in the task of business management. Even now we find industries of a primitive fashion localized in retired villages of central Europe, and sending their simple wares even to the busiest haunts of modern industry. In Russia the expansion of a family group into a village has often been the cause of a localized industry; and there are an immense number of villages each of which carries on only one branch of production, or even only a part of one122.

8sect; 2. Many various causes have led to the localization of industries; but the chief causes have been physical conditions; such as the character of the climate and the soil, the existence of mines and quarries in the neighbourhood, or within easy access by land or water. Thus metallic industries have generally been either near mines or in places where fuel was cheap. The iron industries in England first sought those districts in which charcoal was plentiful, and afterwards they went to the neighbourhood of collieries.123. Staffordshire makes many kinds of pottery, all the materials of which are imported from a long distance; but she has cheap coal and excellent clay for making the heavy "seggars" or boxes in which the pottery is placed while being fired. Straw plaiting has its chief home in Bedfordshire, where straw has just the right proportion of silex to give strength without brittleness; and Buckinghamshire beeches have afforded the material for the Wycombe chairmaking. The Sheffield cutlery trade is due chiefly to the excellent grit of which its grindstones are made.

Another chief cause has been the patronage of a court. The rich fold there assembled make a demand for goods of specially high quality, and this attracts skilled workmen from a distance, and educates those on the spot. When an Eastern potentate changed his residence—and, partly for sanitary reasons, this was constantly done—the deserted town was apt to take refuge in the development of a specialized industry, which had owed its origin to the presence of the court. But very often the rulers deliberately invited artisans from a distance and settled them in a group together. Thus the mechanical faculty of Lancashire is said to be due to the influence of Norman smiths who were settled at Warrington by Hugo de Lupus in William the Conqueror's time. And the greater part of England's manufacturing industry before the era of cotton and steam had its course directed by settlements of Flemish and other artisans; many of which were made under the immediate direction of Plantagenet and Tudor kings. These immigrants taught us how to weave woollen and worsted stuffs, though for a long time we sent our cloths to the Netherlands to be fulled and dyed. They taught us how to cure herrings, how to manufacture silk, how to make lace, glass, and paper, and to provide for many other of our wants124.

But how did these immigrants learn their skill? Their ancestors had no doubt profited by the traditional arts of earlier civilizations on the shores of the Mediterranean and in the far East: for nearly all important knowledge has long deep roots stretching downwards to distant times; and so widely spread have been these roots, so ready to send up shoots of vigorous life, that there is perhaps no part of the old world in which there might not long ago have flourished many beautiful and highly skilled industries, if their growth had been favoured by the character of the people, and by their social and political institutions. This accident or that may have determined whether any particular industry flourished in any one town; the industrial character of a whole country even may have been largely influenced by the richness of her soil and her mines, and her facilities for commerce. Such natural advantages may themselves have stimulated free industry and enterprise: but it is the existence of these last, by whatever means they may have been promoted, which has been the supreme condition for the growth of noble forms of the arts of life. In sketching the history of free industry and enterprise we have already incidentally traced the outlines of the causes which have localized the industrial leadership of the world now in this country and now in that. We have seen how physical nature acts on man's energies, how he is stimulated by an invigorating climate, and how he is encouraged to bold ventures by the opening out of rich fields for his work: but we have also seen how the use he makes of these advantages depends on his ideals of life, and how inextricably therefore the religious, political and economic threads of the world's history are interwoven; while together they have been bent this way or that by great political events and the influence of the strong personalities of individuals.

The causes which determine the economic progress of nations belong to the study of international trade and therefore lie outside of our present view. But for the present we must turn aside from these broader movements of the localization of industry, and follow the fortunes of groups of skilled workers who are gathered within the narrow boundaries of a manufacturing town or a thickly peopled industrial district.

8sect; 3. When an industry has thus chosen a locality for itself, it is likely to stay there long: so great are the advantages which people following the same skilled trade get from near neighbourhood to one another. The mysteries of the trade become no mysteries; but are as it were in the air, and children learn many of them unconsciously. Good work is rightly appreciated, inventions and improvements in machinery, in processes and the general organization of the business have their merits promptly discussed: if one man starts a new idea, it is taken up by others and combined with suggestions of their own; and thus it becomes the source of further new ideas. And presently subsidiary trades grow up in the neighbourhood, supplying it with implements and materials, organizing its traffic, and in many ways conducing to the economy of its material.

Again, the economic use of expensive machinery can sometimes be attained in a very high degree in a district in which there is a large aggregate production of the same kind, even though no individual capital employed in the trade be very large. For subsidiary industries devoting themselves each to one small branch of the process of production, and working it for a great many of their neighbours, are able to keep in constant use machinery of the most highly specialized character, and to make it pay its expenses, though its original cost may have been high, and its rate of depreciation very rapid.

Again, in all but the earliest stages of economic development a localized industry gains a great advantage from the fact that it offers a constant market for skill. Employers are apt to resort to any place where they are likely to find a good choice of workers with the special skill which they require; while men seeking employment naturally go to places where there are many employers who need such skill as theirs and where therefore it is likely to find a good market. The owner of an isolated factory, even if he has access to a plentiful supply of general labour, is often put to great shifts for want of some special skilled labour; and a skilled workman, when thrown out of employment in it, has no easy refuge. Social forces here co-operate with economic: there are often strong friendships between employers and employed: but neither side likes to feel that in case of any disagreeable incident happening between them, they must go on rubbing against one another: both sides like to be able easily to break off old associations should they become irksome. These difficulties are still a great obstacle to the success of any business in which special skill is needed, but which is not in the neighbourhood of others like it: they are however being diminished by the railway, the printing-press and the telegraph.

On the other hand a localized industry has some disadvantages as a market for labour if the work done in it is chiefly of one kind, such for instance as can be done only by strong men. In those iron districts in which there are no textile or other factories to give employment to women and children, wages are high and the cost of labour dear to the employer, while the average money earnings of each family are low. But the remedy for this evil is obvious, and is found in the growth in the same neighbourhood of industries of a supplementary character. Thus textile industries are constantly found congregated in the neighbourhood of mining and engineering industries, in some cases having been attracted by almost imperceptible steps; in others, as for instance at Barrow, having been started deliberately on a large scale in order to give variety of employment in a place where previously there had been but little demand for the work of women and children.

The advantages of variety of employment are combined with those of localized industries in some of our manufacturing towns, and this is a chief cause of their continued growth. But on the other hand the value which the central sites of a large town have for trading purposes, enables them to command much higher ground-rents than the situations are worth for factories, even when account is taken of this combination of advantages: and there is a similar competition for dwelling space between the employees of the trading houses and the factory workers. The result is that factories now congregate in the outskirts of large towns and in manufacturing districts in their neighbourhood rather than in the towns themselves125.

A district which is dependent chiefly on one industry is liable to extreme depression, in case of a falling-off in the demand for its produce, or of a failure in the supply of the raw material which it uses. This evil again is in a great measure avoided by those large towns or large industrial districts in which several distinct industries are strongly developed. If one of them fails for a time, the others are likely to support it indirectly; and they enable local shopkeepers to continue their assistance to workpeople in it.

So far we have discussed localization from the point of view of the economy of production. But there is also the convenience of the customer to be considered. He will go to the nearest shop for a trifling purchase; but for an important purchase he will take the trouble of visiting any part of the town where he knows that there are specially good shops for his purpose. Consequently shops which deal in expensive and choice objects tend to congregate together; and those which supply ordinary domestic needs do not126.

8sect; 4. Every cheapening of the means of communication, every new facility for the free interchange of ideas between distant places alters the action of the forces which tend to localize industries. Speaking generally we must say that a lowering of tariffs, or of freights for the transport of goods, tends to make each locality buy more largely from a distance what it requires; and thus tends to concentrate particular industries in special localities: but on the other hand everything that increases people's readiness to migrate from one place to another tends to bring skilled artisans to ply their crafts near to the consumers who will purchase their wares. These two opposing tendencies are well illustrated by the recent history of the English people.

On the one hand the steady cheapening of freights, the opening of railways from the agricultural districts of America and India to the sea-board, and the adoption by England of a free-trade policy, have led to a great increase in her importation of raw produce. But on the other hand the growing cheapness, rapidity and comfort of foreign travel, are inducing her trained business men and her skilled artisans to pioneer the way for new industries in other lands, and to help them to manufacture for themselves goods which they have been wont to buy from England. English mechanics have taught people in almost every part of the world how to use English machinery, and even how to make similar machinery; and English miners have opened out mines of ore which have diminished the foreign demand for many of England's products.

One of the most striking movements towards the specialization of a country's industries, which history records, is the rapid increase of the non-agricultural population of England in recent times. The exact nature of this change is however liable to be misunderstood; and its interest is so great, both for its own sake, and on account of the illustrations it affords of the general principles which we have been discussing in the preceding chapter and in this, that we may with advantage pause here to consider it a little.

In the first place, the real diminution of England's agricultural industries is not so great as at first sight appears. It is true that in the Middle Ages three-fourths of the people were reckoned as agriculturists; that only one in nine was returned to the last census as engaged in agriculture, and that perhaps not more than one in twelve will be so returned at the next census. But it must be remembered that the so-called agricultural population of the Middle Ages were not exclusively occupied with agriculture; they did for themselves a great part of the work that is now done by brewers and bakers, by spinners and weavers, by bricklayers and carpenters, by dressmakers and tailors and by many other trades. These self-sufficing habits died slowly; but most of them had nearly disappeared by the beginning of the last century; and it is probable that the labour spent on the land at this time was not a much less part of the whole industry of the country than in the Middle Ages: for, in spite of her ceasing to export wool and wheat, there was so great an increase in the produce forced from her soil, that the rapid improvement in the arts of her agriculturists scarcely availed to hold in check the action of the law of diminishing return. But gradually a great deal of labour has been diverted from the fields to making expensive machinery for agricultural purposes. This change did not exert its full influence upon the numbers of those who were reckoned as agriculturists so long as the machinery was drawn by horses: for the work of tending them and supplying them with food was regarded as agricultural. But in recent years a rapid growth of the use of steam power in the fields has coincided with the increased importation of farm produce. The coal-miners who supply these steam-engines with fuel, and the mechanics who make them and manage them in the fields are not reckoned as occupied on the land, though the ultimate aim of their labour is to promote its cultivation. The real diminution then of England's agriculture is not so great as at first sight appears; but there has been a change in its distribution. Many tasks which used once to be performed by agricultural labourers are now done by specialized workers who are classed as in the building, or road-making industries, as carriers and so on. And, partly for this reason the number of people who reside in purely agricultural districts has seldom diminished fast; and has often increased, even though the number of those engaged in agriculture has been diminishing rapidly.

Attention has already been called to the influence which the importation of agricultural produce exerts in altering the relative values of different soils: those falling most in value which depended chiefly on their wheat crops, and which were not naturally fertile, though they were capable of being made to yield fairly good crops by expensive methods of cultivation. Districts in which such soils predominate, have contributed more than their share to the crowds of agricultural labourers who have migrated to the large towns; and thus the geographical distribution of industries within the country has been still further altered. A striking instance of the influence of the new means of transport is seen in those pastoral districts in the remoter parts of the United Kingdom, which send dairy products by special express trains to London and other large towns, meanwhile drawing their own supplies of wheat from the further shores of the Atlantic or even the Pacific Ocean.

But next, the changes of recent years have not, as would at first sight appear probable, increased the proportion of the English people who are occupied in manufactures. The output of England's manufactures is certainly many times as great now as it was at the middle of the last century; but those occupied in manufacture of every kind were as large a percentage of the population in 1851 as in 1901; although those who make the machinery and implements which do a great part of the work of English agriculture, swell the numbers of the manufacturers.

The chief explanation of this result lies in the wonderful increase in recent years of the power of machinery. This has enabled us to produce ever increasing supplies of manufactures of almost every kind both for our own use and for exportation without requiring any considerable increase in the number of people who tend the machines. And therefore we have been able to devote the labour set free from agriculture chiefly to supplying those wants in regard to which the improvements of machinery help us but little: the efficiency of machinery has prevented the industries localized in England from becoming as exclusively mechanical as they otherwise would. Prominent among the occupations which have increased rapidly since 1851 in England at the expense of agriculture are the service of Government, central and local; education of all grades; medical service; musical, theatrical and other entertainments, besides mining, building, dealing and transport by road and railway. In none of these is very much direct help got from new inventions: man's labour is not much more efficient in them now than it was a century ago: and therefore if the wants for which they make provision increase in proportion to our general wealth, it is only to be expected that they should absorb a constantly growing proportion of the industrial population. Domestic servants increased rapidly for some years; and the total amount of work which used to fall to them is now increasing faster than ever. But much of it is now done, often with the aid of machinery, by persons in the employment of clothiers of all kinds, of hotel proprietors, confectioners, and even by various messengers from grocers, fishmongers and others who call for orders, unless they are sent by telephone. These changes have tended to increase the specialization and the localization of industries.

Passing away from this illustration of the action of modern forces on the geographical distribution of industries, we will resume our inquiry as to how far the full economies of division of labour can be obtained by the concentration of large numbers of small businesses of a similar kind in the same locality; and how far they are attainable only by the aggregation of a large part of the business of the country into the hands of a comparatively small number of rich and powerful firms, or, as is commonly said, by production on a large scale; or, in other words, how far the economies of production on a large scale must needs be internal, and how far they can be external127.

BOOK IV, CHAPTER XI: INDUSTRIAL ORGANIZATION, CONTINUED. PRODUCTION ON A LARGE SCALE.

8sect; 1. The advantages of production on a large scale are best shown in manufacture; under which head we may include all businesses engaged in working up material into forms in which it will be adapted for sale in distant markets. The characteristic of manufacturing industries which makes them offer generally the best illustrations of the advantages of production on a large scale, is their power of choosing freely the locality in which they will do their work. They are thus contrasted on the one hand with agriculture and other extractive industries (mining, quarrying, fishing, etc.), the geographical distribution of which is determined by nature; and on the other hand with industries that make or repair things to suit the special needs of individual consumers, from whom they cannot be far removed, at all events without great loss128.

The chief advantages of production on a large scale are economy of skill, economy of machinery and economy of materials: but the last of these is rapidly losing importance relatively to the other two. It is true that an isolated workman often throws away a number of small things which would have been collected and turned to good account in a factory129; but waste of this kind can scarcely occur in a localized manufacture even if it is in the hands of small men; and there is not very much of it in any branch of industry in modern England, except agriculture and domestic cooking. No doubt many of the most important advances of recent years have been due to the utilizing of what had been a waste product; but this has been generally due to a distinct invention, either chemical or mechanical, the use of which has been indeed promoted by minute subdivision of labour, but has not been directly dependent on it130.

Again, it is true that when a hundred sets of furniture, or of clothing, have to be cut out on exactly the same pattern, it is worth while to spend great care on so planning the cutting out of the boards or the cloth, that only a few small pieces are wasted. But this is properly an economy of skill; one planning is made to suffice for many tasks, and therefore can be done well and carefully. We may pass then to the economy of machinery.

8sect; 2. In spite of the aid which subsidiary industries can give to small manufactures, where many in the same branch of trade are collected in one neighbourhood131, they are still placed under a great disadvantage by the growing variety and expensiveness of machinery. For in a large establishment there are often many expensive machines each made specially for one small use. Each of them requires space in a good light, and thus stands for something considerable in the rent and general expenses of the factory; and independently of interest and the expense of keeping it in repair, a heavy allowance must be made for depreciation in consequence of its being probably improved upon before long132. A small manufacturer must therefore have many things done by hand or by imperfect machinery, though he knows how to have them done better and cheaper by special machinery, if only he could find constant employment for it.

But next, a small manufacturer may not always be acquainted with the best machinery for his purpose. It is true that if the industry in which he is engaged has been long established on a large scale, his machinery will be well up to the mark, provided he can afford to buy the best in the market. In agriculture and the cotton industries, for instance, improvements in machinery are devised almost exclusively by machine makers; and they are accessible to all, at any rate on the payment of a royalty for patent right. But this is not the case in industries that are as yet in an early stage of development or are rapidly changing their form; such as the chemical industries, the watchmaking industry and some branches of the jute and silk manufactures; and in a host of trades that are constantly springing up to supply some new want or to work up some new material.

In all such trades new machinery and new processes are for the greater part devised by manufacturers for their own use. Each new departure is an experiment which may fail; those which succeed must pay for themselves and for the failure of others; and though a small manufacturer may think he sees his way to an improvement, he must reckon on having to work it out tentatively, at considerable risk and expense and with much interruption to his other work: and even if he should be able to perfect it, he is not likely to be able to make the most of it. For instance, he may have devised a new speciality, which would get a large sale if it could be brought under general notice: but to do this would perhaps cost many thousand pounds; and, if so, he will probably have to turn his back on it. For it is almost impossible for him to discharge, what Roscher calls a characteristic task of the modern manufacturer, that of creating new wants by showing people something which they had never thought of having before; but which they want to have as soon as the notion is suggested to them: in the pottery trade for example the small manufacturer cannot afford even to make experiments with new patterns and designs except in a very tentative way. His chance is better with regard to an improvement in making things for which there is already a good market. But even here he cannot get the full benefit of his invention unless he patents it; and sells the right to use it; or borrows some capital and extends his business; or lastly changes the character of his business and devotes his capital to that particular stage of the manufacture to which his improvement applies. But after all such cases are exceptional: the growth of machinery in variety and expensiveness presses hard on the small manufacturer everywhere. It has already driven him completely out of some trades and is fast driving him out of others133.

There are however some trades in which the advantages which a large factory derives from the economy of machinery almost vanish as soon as a moderate size has been reached. For instance in cotton spinning, and calico weaving, a comparatively small factory will hold its own and give constant employment to the best known machines for every process: so that a large factory is only several parallel smaller factories under one roof; and indeed some cotton-spinners, when enlarging their works, think it best to add a weaving department. In such cases the large business gains little or no economy in machinery; and even then it generally saves something in building, particularly as regards chimneys, and in the economy of steam power, and in the management and repairs of engines and machinery. Large soft-goods factories have carpenters' and mechanics' shops, which diminish the cost of repairs, and prevent delays from accidents to the plant134.

Akin to these last, there are a great many advantages which a large factory, or indeed a large business of almost any kind, nearly always has over a small one. A large business buys in great quantities and therefore cheaply; it pays low freights and saves on carriage in many ways, particularly if it has a railway siding. It often sells in large quantities, and thus saves itself trouble; and yet at the same time it gets a good price, because it offers conveniences to the customer by having a large stock from which he can select and at once fill up a varied order; while its reputation gives him confidence. It can spend large sums on advertising by commercial travellers and in other ways; its agents give it trustworthy information on trade and personal matters in distant places, and its own goods advertise one another.

The economies of highly organized buying and selling are among the chief causes of the present tendency towards the fusion of many businesses in the same industry or trade into single huge aggregates; and also of trading federations of various kinds, including German cartels and centralized co-operative associations. They have also always promoted the concentration of business risks in the hands of large capitalists who put out the work to be done by smaller men135.

8sect; 3. Next, with regard to the economy of skill. Everything that has been said with regard to the advantages which a large establishment has in being able to afford highly specialized machinery applies equally with regard to highly specialized skill. It can contrive to keep each of its employees constantly engaged in the most difficult work of which he is capable, and yet so to narrow the range of his work that he can attain that facility and excellence which come from long-continued practice. But enough has already been said on the advantage of division of labour: and we may pass to an important though indirect advantage which a manufacturer derives from having a great many men in his employment.

The large manufacturer has a much better chance than a small one has, of getting hold of men with exceptional natural abilities, to do the most difficult part of his work—that on which the reputation of his establishment chiefly depends. This is occasionally important as regards mere handiwork in trades which require much taste and originality, as for instance that of a house decorator, and in those which require exceptionally fine workmanship, as for instance that of a manufacturer of delicate mechanism136. But in most businesses its chief importance lies in the facilities which it gives to the employer for the selection of able and tried men, men whom he trusts and who trust him, to be his foremen and heads of departments. We are thus brought to the central problem of the modern organization of industry, viz. that which relates to the advantages and disadvantages of the subdivision of the work of business management.

8sect; 4. The head of a large business can reserve all his strength for the broadest and most fundamental problems of his trade: he must indeed assure himself that his managers, clerks and foremen are the right men for their work, and are doing their work well; but beyond this he need not trouble himself much about details. He can keep his mind fresh and clear for thinking out the most difficult and vital problems of his business; for studying the broader movements of the markets, the yet undeveloped results of current events at home and abroad; and for contriving how to improve the organization of the internal and external relations of his business.

For much of this work the small employer has not the time if he has the ability; he cannot take so broad a survey of his trade, or look so far ahead; he must often be content to follow the lead of others. And he must spend much of his time on work that is below him; for if he is to succeed at all, his mind must be in some respects of a high quality, and must have a good deal of originating and organizing force; and yet he must do much routine work.

On the other hand the small employer has advantages of his own. The master's eye is everywhere; there is no shirking by his foremen or workmen, no divided responsibility, no sending half-understood messages backwards and forwards from one department to another. He saves much of the book-keeping, and nearly all of the cumbrous system of checks that are necessary in the business of a large firm; and the gain from this source is of very great importance in trades which use the more valuable metals and other expensive materials.

And though he must always remain at a great disadvantage in getting information and in making experiments, yet in this matter the general course of progress is on his side. For External economies are constantly growing in importance relatively to Internal in all matters of Trade-knowledge: newspapers, and trade and technical publications of all kinds are perpetually scouting for him and bringing him much of the knowledge he wants—knowledge which a little while ago would have been beyond the reach of anyone who could not afford to have well-paid agents in many distant places. Again, it is to his interest also that the secrecy of business is on the whole diminishing, and that the most important improvements in method seldom remain secret for long after they have passed from the experimental stage. It is to his advantage that changes in manufacture depend less on mere rules of thumb and more on broad developments of scientific principle; and that many of these are made by students in the pursuit of knowledge for its own sake, and are promptly published in the general interest. Although therefore the small manufacturer can seldom be in the front of the race of progress, he need not be far from it, if he has the time and the ability for availing himself of the modern facilities for obtaining knowledge. But it is true that he must be exceptionally strong if he can do this without neglecting the minor but necessary details of the business.

8sect; 5. In agriculture and other trades in which a man gains no very great new economies by increasing the scale of his production, it often happens that a business remains of about the same size for many years, if not for many generations. But it is otherwise in trades in which a large business can command very important advantages, which are beyond the reach of a small business. A new man, working his way up in such a trade, has to set his energy and flexibility, his industry and care for small details, against the broader economies of his rivals with their larger capital, their higher specialization of machinery and labour, and their larger trade connection. If then he can double his production, and sell at anything like his old rate, he will have more than doubled his profits. This will raise his credit with bankers and other shrewd lenders; and will enable him to increase his business further, and to attain yet further economies, and yet higher profits: and this again will increase his business and so on. It seems at first that no point is marked out at which he need stop. And it is true that, if, as his business increased, his faculties adapted themselves to his larger sphere, as they had done to his smaller; if he retained his originality, and versatility and power of initiation, his perseverance, his tact and his good luck for very many years together; he might then gather into his hands the whole volume of production in his branch of trade for his district. And if his goods were not very difficult of transport, nor of marketing, he might extend this district very wide, and attain something like a limited monopoly; that is, of a monopoly limited by the consideration that a very high price would bring rival producers into the field.

But long before this end is reached, his progress is likely to be arrested by the decay, if not of his faculties, yet of his liking for energetic work. The rise of his firm may be prolonged if he can hand down his business to a successor almost as energetic as himself137. But the continued very rapid growth of his firm requires the presence of two conditions which are seldom combined in the same industry. There are many trades in which an individual producer could secure much increased "internal" economies by a great increase of his output; and there are many in which he could market that output easily; yet there are few in which he could do both. And this is not an accidental, but almost a necessary result.

For in most of those trades in which the economies of production on a large scale are of first-rate importance, marketing is difficult. There are, no doubt, important exceptions. A producer may, for instance, obtain access to the whole of a large market in the case of goods which are so simple and uniform that they can be sold wholesale in vast quantities. But, most goods of this kind are raw produce; and nearly all the rest are plain and common, such as steel rails or calico; and their production can be reduced to routine, for the very reason that they are plain and common. Therefore in the industries which produce them, no firm can hold its own at all unless equipped with expensive appliances of nearly the latest type for its main work; while subordinate operations can be performed by subsidiary industries; and in short there remains no very great difference between the economies available by a large and by a very large firm; and the tendency of large firms to drive out small ones has already gone so far as to exhaust most of the strength of those forces by which it was originally promoted.

But many commodities with regard to which the tendency to increasing return acts strongly are, more or less, specialities: some of them aim at creating a new want, or at meeting an old want in a new way. Some of them are adapted to special tastes, and can never have a very large market; and some have merits that are not easily tested, and must win their way to general favour slowly. In all such cases the sales of each business are limited, more or less according to circumstances, to the particular market which it has slowly and expensively acquired; and though the production itself might be economically increased very fast, the sale could not.

Lastly, the very conditions of an industry which enable a new firm to attain quickly command over new economies of production, render that firm liable to be supplanted quickly by still younger firms with yet newer methods. Especially where the powerful economies of production on a large scale are associated with the use of new appliances and new methods, a firm which has lost the exceptional energy which enabled it to rise, is likely ere long quickly to decay; and the full life of a large firm seldom lasts very long.

8sect; 6. The advantages which a large business has over a small one are conspicuous in manufacture, because, as we have noticed, it has special facilities for concentrating a great deal of work in a small area. But there is a strong tendency for large establishments to drive out small ones in many other industries. In particular the retail trade is being transformed, the small shopkeeper is losing ground daily.

Let us look at the advantages which a large retail shop or store has in competing with its smaller neighbours. To begin with, it can obviously buy on better terms, it can get its goods carried more cheaply, and can offer a larger variety to meet the taste of customers. Next, it has a great economy of skill: the small shopkeeper, like the small manufacturer, must spend much of his time in routine work that requires no judgment: whereas the head of a large establishment, and even in some cases his chief assistants, spend their whole time in using their judgment. Until lately these advantages have been generally outweighed by the greater facilities which the small shopkeeper has for bringing his goods to the door of his customers; for humouring their several tastes; and for knowing enough of them individually to be able safely to lend them capital, in the form of selling them goods on credit.

But within recent years there have been many changes all telling on the side of large establishments. The habit of buying on credit is passing away; and the personal relations between shopkeeper and customer are becoming more distant. The first change is a great step forwards: the second is on some accounts to be regretted, but not on all; for it is partly due to the fact that the increase of true self-respect among the wealthier classes is making them no longer care for the subservient personal attentions they used to require. Again, the growing value of time makes people less willing than they were to spend several hours in shopping; they now often prefer to spend a few minutes in writing out a long list of orders from a varied and detailed price-list; and this they are enabled to do easily by the growing facilities for ordering and receiving parcels by post and in other ways. And when they do go shopping, tramcars and local trains are often at hand to take them easily and cheaply to the large central shops of a neighbouring town. All these changes render it more difficult than it was for the small shopkeeper to hold his own even in the provision trade, and others in which no great variety of stock is required.

But in many trades the ever-growing variety of commodities, and those rapid changes of fashion which now extend their baneful influence through almost every rank of society, weight the balance even more heavily against the small dealer, for he cannot keep a sufficient stock to offer much variety of choice, and if he tries to follow any movement of fashion closely, a larger proportion of his stock will be left stranded by the receding tide than in the case of a large shopkeeper. Again, in some branches of the clothing and furniture and other trades the increasing cheapness of machine-made goods is leading people to buy ready-made things from a large store instead of having them made to order by some small maker and dealer in their neighbourhood. Again, the large shopkeeper, not content with receiving travellers from the manufacturers, makes tours either himself or by his agent in the most important manufacturing districts at home and abroad; and he thus often dispenses with middlemen between him and the manufacturer. A tailor with moderate capital shows his customers specimens of many hundreds of the newest cloths, and perhaps orders by telegraph the selected cloth to be sent by parcels' post. Again, ladies often buy their materials direct from the manufacturer, and get them made up by dressmakers who have scarcely any capital. Small shopkeepers seem likely always to retain some hold of the minor repairing trades: and they keep their own fairly well in the sale of perishable food, especially to the working classes, partly in consequence of their being able to sell goods on credit and to collect small debts. In many trades however a firm with a large capital prefers having many small shops to one large one. Buying, and whatever production is desirable, is concentrated under a central management; and exceptional demands are met from a central reserve, so that each branch has large resources, without the expense of keeping a large stock. The branch manager has nothing to divert his attention from his customers; and, if an active man, with direct interest in the success of his branch, may prove himself a formidable rival to the small shopkeeper; as has been shown in many trades connected with clothing and food.

8sect; 7. We may next consider those industries whose geographical position is determined by the nature of their work.

Country carriers and a few cabmen are almost the only survivals of small industry in the carrying trade. Railways and tramways are constantly increasing in size, and the capital required to work them is increasing at an even greater rate. The growing intricacy and variety of commerce is adding to the advantages which a large fleet of ships under one management derives from its power of delivering goods promptly, and without breach of responsibility, in many different ports; and as regards the vessels themselves time is on the side of large ships, especially in the passenger trade138. As a consequence the arguments in favour of the State's undertaking business are stronger in some branches of the carrying trade than in any other, except the allied undertakings of carrying away refuse, and bringing in water, gas, etc.139

The contest between large and small mines and quarries has not so clearly marked a tendency. The history of the State management of mines is full of very dark shadows; for the business of mining depends too much on the probity of its managers and their energy and judgment in matters of detail as well as of general principle, to be well managed by State officials: and for the same reason the small mine or quarry may fairly be expected, other things being equal, to hold its own against the large one. But in some cases the cost of deep shafts, of machinery and of establishing means of communication, are too great to be borne by any but a very large business.

In agriculture there is not much division of labour, and there is no production on a very large scale; for a so-called "large farm" does not employ a tenth part of the labour which is collected in a factory of moderate dimensions. This is partly due to natural causes, to the changes of the seasons and to the difficulty of concentrating a great deal of labour in any one place; but it is partly also due to causes connected with varieties of land tenure. And it will be best to postpone discussion of all of them till we come to study demand and supply in relation to land in the sixth Book.

BOOK IV, CHAPTER XII: INDUSTRIAL ORGANIZATION, CONTINUED. BUSINESS MANAGEMENT.

8sect; 1. Hitherto we have been considering the work of management chiefly in regard to the operations of a manufacturing or other business employing a good deal of manual labour. But we now have to consider more carefully the variety of the functions which business men discharge; the manner in which they are distributed among the heads of a large business, and again between different classes of business which co-operate in allied branches of production and marketing. And incidentally we have to inquire how it occurs that, though in manufacturing at least nearly every individual business, so long as it is well managed, tends to become stronger the larger it has grown; and though primâ facie we might therefore expect to see large firms driving their smaller rivals completely out of many branches of industry, yet they do not in fact do so.

"Business" is taken here broadly to include all provision for the wants of others which is made in the expectation of payment direct or indirect from those who are to be benefited. It is thus contrasted with the provision for his wants which each one makes for himself, and with those kindly services which are prompted by friendship and family affection.

The primitive handicraftsman managed his whole business for himself; but since his customers were with few exceptions his immediate neighbours, since he required very little capital, since the plan of production was arranged for him by custom, and since he had no labour to superintend outside of his own household, these tasks did not involve any very great mental strain. He was far from enjoying unbroken prosperity; war and scarcity were constantly pressing on him and his neighbours, hindering his work and stopping their demand for his wares. But he was inclined to take good and evil fortune, like sunshine and rain, as things beyond his control: his fingers worked on, but his brain was seldom weary.

Even in modern England we find now and then a village artisan who adheres to primitive methods, and makes things on his own account for sale to his neighbours; managing his own business and undertaking all its risks. But such cases are rare: the most striking instances of an adherence to old-fashioned methods of business are supplied by the learned professions; for a physician or a solicitor manages as a rule his own business and does all its work. This plan is not without its disadvantages: much valuable activity is wasted or turned to but slight account by some professional men of first-rate ability, who have not the special aptitude required for obtaining a business connection; they would be better paid, would lead happier lives, and would do more good service for the world if their work could be arranged for them by some sort of a middleman. But yet on the whole things are probably best as they are: there are sound reasons behind the popular instinct which distrusts the intrusion of the middleman in the supply of those services which require the highest and most delicate mental qualities, and which can have their full value only where there is complete personal confidence.

English solicitors however act, if not as employers or undertakers, yet as agents for hiring that branch of the legal profession which ranks highest, and whose work involves the hardest mental strain. Again, many of the best instructors of youth sell their services, not directly to the consumer, but to the governing body of a college or school, or to a head master, who arranges for their purchase: the employer supplies to the teacher a market for his labour; and is supposed to give to the purchaser, who may not be a good judge himself, some sort of guarantee as to the quality of the teaching supplied.

Again, artists of every kind, however eminent, often find it to their advantage to employ someone else to arrange for them with customers; while those of less established repute are sometimes dependent for their living on capitalist traders, who are not themselves artists, but who understand how to sell artistic work to the best advantage.

8sect; 2. But in the greater part of the business of the modern world the task of so directing production that a given effort may be most effective in supplying human wants has to be broken up and given into the hands of a specialized body of employers, or to use a more general term, of business men. They "adventure" or "undertake" its risks; they bring together the capital and the labour required for the work; they arrange or "engineer" its general plan, and superintend its minor details. Looking at business men from one point of view we may regard them as a highly skilled industrial grade, from another as middlemen intervening between the manual worker and the consumer.

There are some kinds of business men who undertake great risks, and exercise a large influence over the welfare both of the producers and of the consumers of the wares in which they deal, but who are not to any considerable extent direct employers of labour. The extreme type of these is the dealer on the stock exchange or the produce markets, whose daily purchases and sales are of vast dimensions, and who yet has neither factory nor warehouse, but at most an office with a few clerks in it. The good and the evil effects of the action of speculators such as these are however very complex; and we may give our attention at present to those forms of business in which administration counts for most and the subtler forms of speculation for least. Let us then take some illustrations of the more common types of business, and watch the relations in which the undertaking of risks stands to the rest of the work of the business man.

8sect; 3. The building trade will serve our purpose well, partly because it adheres in some respects to primitive methods of business. Late in the Middle Ages it was quite common for a private person to build a house for himself without the aid of a master builder; and the habit is not even now altogether extinct. A person who undertakes his own building must hire separately all his workmen, he must watch them and check their demands for payment; he must buy his materials from many quarters, and he must hire, or dispense with the use of, expensive machinery. He probably pays more than the current wages; but here others gain what he loses. There is however great waste in the time he spends in bargaining with the men and testing and directing their work by his imperfect knowledge; and again in the time that he spends in finding out what kinds and quantities he wants of different materials, and where to get them best, and so on. This waste is avoided by that division of labour which assigns to the professional builder the task of superintending details, and to the professional architect the task of drawing plans.

The division of labour is often carried still further when houses are built not at the expense of those who are to live in them, but as a building speculation. When this is done on a large scale, as for instance in opening out a new suburb, the stakes at issue are so large as to offer an attractive field to powerful capitalists with a very high order of general business ability, but perhaps with not much technical knowledge of the building trade. They rely on their own judgment for the decision as to what are likely to be the coming relations of demand and supply for different kinds of houses; but they entrust to others the management of details. They employ architects and surveyors to make plans in accordance with their general directions; and then enter into contracts with professional builders for carrying them out. But they themselves undertake the chief risks of the business, and control its general direction.

8sect; 4. It is well known that this division of responsibility prevailed in the woollen trade just before the beginning of the era of large factories: the more speculative work and the broader risks of buying and selling being taken over by the undertakers, who were not themselves employers of labour; while the detailed work of superintendence and the narrower risks of carrying out definite contracts were handed over to small masters140. This plan is still extensively followed in some branches of the textile trades, especially those in which the difficulty of forecasting the future is very great. Manchester warehousemen give themselves to studying the movements of fashion, the markets for raw materials, the general state of trade, of the money market and of politics, and all other causes that are likely to influence the prices of different kinds of goods during the coming season; and after employing, if necessary, skilled designers to carry out their ideas (just as the building speculator in the previous case employed architects), they give out to manufacturers in different parts of the world contracts for making the goods on which they have determined to risk their capital.

In the clothing trades especially we see a revival of what has been called the "house industry," which prevailed long ago in the textile industries; that is, the system in which, large undertakers give out work to be done in cottages and very small workshops to persons who work alone or with the aid of some members of their family, or who perhaps employ two or three hired assistants141. In remote villages in almost every county of England agents of large undertakers come round to give out to the cottagers partially prepared materials for goods of all sorts, but especially clothes such as shirts and collars and gloves; and take back with them the finished goods. It is however in the great capital cities of the world, and in other large towns, especially old towns, where there is a great deal of unskilled and unorganized labour, with a somewhat low physique and morale, that the system is most fully developed, especially in the clothing trades, which employ two hundred thousand people in London alone, and in the cheap furniture trades. There is a continual contest between the factory and the domestic system, now one gaining ground and now the other: for instance just at present the growing use of sewing machines worked by steam power is strengthening the position of the factories in the boot trade; while factories and workshops are getting an increased hold of the tailoring trade. On the other hand the hosiery trade is being tempted back to the dwelling-house by recent improvements in hand knitting machines; and it is possible that new methods of distributing power by gas and petroleum and electric engines may exercise a like influence on many other industries.

Or there may be a movement towards intermediate plans, similar to those which are largely followed in the Sheffield trades. Many cutlery firms for instance put out grinding and other parts of their work, at piece-work prices, to working men who rent the steam power which they require, either from the firm from whom they take their contract or from someone else: these workmen sometimes employing others to help them, sometimes working alone.

Again, the foreign merchant very often has no ships of his own, but gives his mind to studying the course of trade, and undertakes himself its chief risks; while he gets his carrying done for him by men who require more administrative ability, but need not have the same power of forecasting the subtler movements of trade; though it is true that as purchasers of ships they have great and difficult trade risks of their own. Again, the broader risks of publishing a book are borne by the publisher, perhaps in company with the author; while the printer is the employer of labour and supplies the expensive types and machinery required for the business. And a somewhat similar plan is adopted in many branches of the metal trades, and of those which supply furniture, clothing, etc.

Thus there are many ways in which those who undertake the chief risks of buying and selling may avoid the trouble of housing and superintending those who work for them. They all have their advantages; and when the workers are men of strong character, as at Sheffield, the results are on the whole not unsatisfactory. But unfortunately it is often the weakest class of workers, those with the least resource and the least self-control who drift into work of this kind. The elasticity of the system which recommends it to the undertaker, is really the means of enabling him to exercise, if he chooses, an undesirable pressure on those who do his work.

For while the success of a factory depends in a great measure on its having a set of operatives who adhere steadily to it, the capitalist who gives out work to be done at home has an interest in retaining a great many persons on his books; he is tempted to give each of them a little employment occasionally and play them off one against another; and this he can easily do because they do not know one another, and cannot arrange concerted action.

8sect; 5. When the profits of business are under discussion they are generally connected in people's minds with the employer of labour: "the employer" is often taken as a term practically coextensive with the receiver of business profits. But the instances which we have just considered are sufficient to illustrate the truth that the superintendence of labour is but one side, and often not the most important side of business work; and that the employer who undertakes the whole risks of his business really performs two entirely distinct services on behalf of the community, and requires a twofold ability.

To return to a class of considerations already noticed (IV. XI. 4 and 5), the manufacturer who makes goods not to meet special orders but for the general market, must, in his first rôle as merchant and organizer of production, have a thorough knowledge of things in his own trade. He must have the power of forecasting the broad movements of production and consumption, of seeing where there is an opportunity for supplying a new commodity that will meet a real want or improving the plan of producing an old commodity. He must be able to judge cautiously and undertake risks boldly; and he must of course understand the materials and machinery used in his trade.

But secondly in this rôle of employer he must be a natural leader of men. He must have a power of first choosing his assistants rightly and then trusting them fully; of interesting them in the business and of getting them to trust him, so as to bring out whatever enterprise and power of origination there is in them; while he himself exercises a general control over everything, and preserves order and unity in the main plan of the business.

The abilities required to make an ideal employer are so great and so numerous that very few persons can exhibit them all in a very high degree. Their relative importance however varies with the nature of the industry and the size of the business; and while one employer excels in one set of qualities, another excels in another; scarcely any two owe their success to exactly the same combination of advantages. Some men make their way by the use of none but noble qualities, while others owe their prosperity to qualities in which there is very little that is really admirable except sagacity and strength of purpose.

Such then being the general nature of the work of business management, we have next to inquire what opportunities different classes of people have of developing business ability; and, when they have obtained that, what opportunities they have of getting command over the capital required to give it scope. We may thus come a little closer to the problem stated at the beginning of the chapter, and examine the course of development of a business firm during several consecutive generations. And this inquiry may conveniently be combined with some examination of the different forms of business management. Hitherto we have considered almost exclusively that form in which the whole responsibility and control rests in the hands of a single individual. But this form is yielding ground to others in which the supreme authority is distributed among several partners or even a great number of shareholders. Private firms and joint-stock companies, co-operative societies and public corporations are taking a constantly increasing share in the management of business; and one chief reason of this is that they offer an attractive field to people who have good business abilities, but have not inherited any great business opportunities.

8sect; 6. It is obvious that the son of a man already established in business starts with very great advantages over others. He has from his youth up special facilities for obtaining the knowledge and developing the faculties that are required in the management of his father's business: he learns quietly and almost unconsciously about men and manners in his father's trade and in those from which that trade buys and to which it sells; he gets to know the relative importance and the real significance of the various problems and anxieties which occupy his father's mind: and he acquires a technical knowledge of the processes and the machinery of the trade142. Some of what he learns will be applicable only to his father's trade; but the greater part will be serviceable in any trade that is in any way allied with that; while those general faculties of judgment and resource, of enterprise and caution, of firmness and courtesy, which are trained by association with those who control the larger issues of any one trade, will go a long way towards fitting him for managing almost any other trade. Further, the sons of successful business men start with more material capital than almost anyone else except those who by nurture and education are likely to be disinclined for business and unfitted for it: and if they continue their fathers' work, they have also the vantage ground of established trade connections.

It would therefore at first sight seem likely that business men should constitute a sort of caste; dividing out among their sons the chief posts of command, and founding hereditary dynasties, which should rule certain branches of trade for many generations together. But the actual state of things is very different. For when a man has got together a great business, his descendants often fail, in spite of their great advantages, to develop the high abilities and the special turn of mind and temperament required for carrying it on with equal success. He himself was probably brought up by parents of strong earnest character; and was educated by their personal influence and by struggle with difficulties in early life. But his children, at all events if they were born after he became rich, and in any case his grandchildren, are perhaps left a good deal to the care of domestic servants who are not of the same strong fibre as the parents by whose influence he was educated. And while his highest ambition was probably success in business, they are likely to be at least equally anxious for social or academic distinction143.

For a time indeed all may go well. His sons find a firmly established trade connection, and what is perhaps even more important, a well-chosen staff of subordinates with a generous interest in the business. By mere assiduity and caution, availing themselves of the traditions of the firm, they may hold together for a long time. But when a full generation has passed, when the old traditions are no longer a safe guide, and when the bonds that held together the old staff have been dissolved, then the business almost invariably falls to pieces unless it is practically handed over to the management of new men who have meanwhile risen to partnership in the firm.

But in most cases his descendants arrive at this result by a shorter route. They prefer an abundant income coming to them without effort on their part, to one which though twice as large could be earned only by incessant toil and anxiety; and they sell the business to private persons or a joint-stock company; or they become sleeping partners in it; that is sharing in its risks and in its profits, but not taking part in its management: in either case the active control over their capital falls chiefly into the hands of new men.

8sect; 7. The oldest and simplest plan for renovating the energies of a business is that of taking into partnership some of its ablest employees. The autocratic owner and manager of a large manufacturing or trading concern finds that, as years go on, he has to delegate more and more responsibility to his chief subordinates; partly because the work to be done is growing heavier, and partly because his own strength is becoming less than it was. He still exercises a supreme control, but much must depend on their energy and probity: so, if his sons are not old enough, or for any other reason are not ready to take part of the burden off his shoulders, he decides to take one of his trusted assistants into partnership: he thus lightens his own labours, at the same time that he secures that the task of his life will be carried on by those whose habits he has moulded, and for whom he has perhaps acquired something like a fatherly affection144.

But there are now, and there always have been, private partnerships on more equal terms, two or more people of about equal wealth and ability combining their resources for a large and difficult undertaking. In such cases there is often a distinct partition of the work of management: in manufactures for instance one partner will sometimes give himself almost exclusively to the work of buying raw material and selling the finished product, while the other is responsible for the management of the factory: and in a trading establishment one partner will control the wholesale and the other the retail department. In these and other ways private partnership is capable of adapting itself to a great variety of problems: it is very strong and very elastic; it has played a great part in the past, and it is full of vitality now.

8sect; 8. But from the end of the Middle Ages to the present time there has been in some classes of trades a movement towards the substitution of public joint-stock companies, the shares of which can be sold to anybody in the open market, for private companies, the shares in which are not transferable without the leave of all concerned. The effect of this change has been to induce people, many of whom have no special knowledge of trade, to give their capital into the hands of others employed by them: and there has thus arisen a new distribution of the various parts of the work of business management.

The ultimate undertakers of the risks incurred by a joint-stock company are the shareholders; but as a rule they do not take much active part in engineering the business and controlling its general policy; and they take no part in superintending its details. After the business has once got out of the hands of its original promoters, the control of it is left chiefly in the hands of Directors; who, if the company is a very large one, probably own but a very small proportion of its shares, while the greater part of them have not much technical knowledge of the work to be done. They are not generally expected to give their whole time to it; but they are supposed to bring wide general knowledge and sound judgment to bear on the broader problems of its policy; and at the same time to make sure that the "Managers" of the company are doing their work thoroughly145. To the Managers and their assistants is left a great part of the work of engineering the business, and the whole of the work of superintending it: but they are not required to bring any capital into it; and they are supposed to be promoted from the lower ranks to the higher according to their zeal and ability. Since the joint-stock companies in the United Kingdom do a very great part of the business of all kinds that is done in the country, they offer very large opportunities to men with natural talents for business management, who have not inherited any material capital, or any business connection.

8sect; 9. Joint-stock companies have great elasticity and can expand themselves without limit when the work to which they have set themselves offers a wide scope; and they are gaining ground in nearly all directions. But they have one great source of weakness in the absence of any adequate knowledge of the business on the part of the shareholders who undertake its chief risks. It is true that the head of a large private firm undertakes the chief risks of the business, while he entrusts many of its details to others; but his position is secured by his power of forming a direct judgment as to whether his subordinates serve his interests faithfully and discreetly. If those to whom he has entrusted the buying or selling of goods for him take commissions from those with whom they deal, he is in a position to discover and punish the fraud. If they show favouritism and promote incompetent relations or friends of their own, or if they themselves become idle and shirk their work, or even if they do not fulfil the promise of exceptional ability which induced him to give them their first lift, he can discover what is going wrong and set it right.

But in all these matters the great body of the shareholders of a joint-stock company are, save in a few exceptional instances, almost powerless; though a few of the larger shareholders often exert themselves to find out what is going on; and are thus able to exercise an effective and wise control over the general management of the business. It is a strong proof of the marvellous growth in recent times of a spirit of honesty and uprightness in commercial matters, that the leading officers of great public companies yield as little as they do to the vast temptations to fraud which lie in their way. If they showed an eagerness to avail themselves of opportunities for wrong-doing at all approaching that of which we read in the commercial history of earlier civilization, their wrong uses of the trusts imposed in them would have been on so great a scale as to prevent the development of this democratic form of business. There is every reason to hope that the progress of trade morality will continue, aided in the future as it has been in the past, by a diminution of trade secrecy and by increased publicity in every form; and thus collective and democratic forms of business management may be able to extend themselves safely in many directions in which they have hitherto failed, and may far exceed the great services they already render in opening a large career to those who have no advantages of birth.

The same may be said of the undertakings of Governments imperial and local: they also may have a great future before them, but up to the present time the tax-payer who undertakes the ultimate risks has not generally succeeded in exercising an efficient control over the businesses, and in securing officers who will do their work with as much energy and enterprise as is shown in private establishments.

The problems of large joint-stock company administration, as well as of Governmental business, involve however many complex issues into which we cannot enter here. They are urgent, because very large businesses have recently increased fast, though perhaps not quite so fast as is commonly supposed. The change has been brought about chiefly by the development of processes and methods in manufacture and mining, in transport and banking, which are beyond the reach of any but very large capitals; and by the increase in the scope and functions of markets, and in the technical facilities for handling large masses of goods. The democratic element in Governmental enterprise was at first almost wholly vivifying: but experience shows creative ideas and experiments in business technique, and in business organization, to be very rare in Governmental undertakings, and not very common in private enterprises which have drifted towards bureaucratic methods as the result of their great age and large size. A new danger is thus threatened by the narrowing of the field of industry which is open to the vigorous initiative of smaller businesses.

Production on the largest scale of all is to be seen chiefly in the United States, where giant businesses, with some touch of monopoly, are commonly called "trusts." Some of these trusts have grown from a single root. But most of them have been developed by the amalgamation of many independent businesses; and a first step towards this combination was generally an association, or "cartel" to use a German term, of a rather loose kind.

8sect; 10. The system of co-operation aims at avoiding the evils of these two methods of business management. In that ideal form of co-operative society, for which many still fondly hope, but which as yet has been scantily realized in practice, a part or the whole of those shareholders who undertake the risks of the business are themselves employed by it. The employees, whether they contribute towards the material capital of the business or not, have a share in its profits, and some power of voting at the general meetings at which the broad lines of its policy are laid down, and the officers appointed who are to carry that policy into effect. They are thus the employers and masters of their own managers and foremen; they have fairly good means of judging whether the higher work of engineering the business is conducted honestly and efficiently, and they have the best possible opportunities for detecting any laxity or incompetence in its detailed administration. And lastly they render unnecessary some of the minor work of superintendence that is required in other establishments; for their own pecuniary interests and the pride they take in the success of their own business make each of them averse to any shirking of work either by himself or by his fellow-workmen.

But unfortunately the system has very great difficulties of its own. For human nature being what it is, the employees themselves are not always the best possible masters of their own foremen and managers; jealousies and frettings at reproof are apt to act like sand, that has got mixed with the oil in the bearings of a great and complex machinery. The hardest work of business management is generally that which makes the least outward show; those who work with their hands are apt to underrate the intensity of the strain involved in the highest work of engineering the business, and to grudge its being paid for at anything like as high a rate as it could earn elsewhere. And in fact the managers of a co-operative society seldom have the alertness, the inventiveness and the ready versatility of the ablest of those men who have been selected by the struggle for survival, and who have been trained by the free and unfettered responsibility of private business. Partly for these reasons the co-operative system has seldom been carried out in its entirety; and its partial application has not yet attained a conspicuous success except in retailing commodities consumed by working men. But within the last few years more hopeful signs have appeared of the success of bonâ fide productive associations, or "co-partnerships."

Those working men indeed whose tempers are strongly individualistic, and whose minds are concentrated almost wholly on their own affairs, will perhaps always find their quickest and most congenial path to material success by commencing business as small independent "undertakers," or by working their way upwards in a private firm or a public company. But co-operation has a special charm for those in whose tempers the social element is stronger, and who desire not to separate themselves from their old comrades, but to work among them as their leaders. Its aspirations may in some respects be higher than its practice; but it undoubtedly does rest in a great measure on ethical motives. The true co-operator combines a keen business intellect with a spirit full of an earnest faith; and some co-operative societies have been served excellently by men of great genius both mentally and morally—men who for the sake of the co-operative faith that is in them, have worked with great ability and energy, and with perfect uprightness, being all the time content with lower pay than they could have got as business managers on their own account or for a private firm. Men of this stamp are more common among the officers of co-operative societies than in other occupations; and though they are not very common even there, yet it may be hoped that the diffusion of a better knowledge of the true principles of co-operation, and the increase of general education, are every day fitting a larger number of co-operators for the complex problems of business management.

Meanwhile many partial applications of the co-operative principle are being tried under various conditions, each of which presents some new aspect of business management. Thus under the scheme of Profit-Sharing, a private firm while retaining the unfettered management of its business, pays its employees the full market rate of wages, whether by Time or Piece-work, and agrees in addition to divide among them a certain share of any profits that may be made above a fixed minimum; it being hoped that the firm will find a material as well as a moral reward in the diminution of friction, in the increased willingness of its employees to go out of their way to do little things that may be of great benefit comparatively to the firm, and lastly in attracting to itself workers of more than average ability and industry146.

Another partially co-operative scheme is that of some Oldham cotton-mills: they are really joint-stock companies; but among their shareholders are many working men who have a special knowledge of the trade, though they often prefer not to be employed in the mills of which they are part owners. And another is that of the Productive establishments, owned by the main body of co-operative stores, through their agents, the co-operative Wholesale Societies. In the Scotch Wholesale, but not in the English, the workers, as such, have some share in the management and in the profits of the works.

At a later stage we shall have to study all those various co-operative and semi-co-operative forms of business more in detail, and to inquire into the causes of their success or failure in different classes of business, wholesale and retail, agricultural, manufacturing and trading. But we must not pursue this inquiry further now. Enough has been said to show that the world is only just beginning to be ready for the higher work of the co-operative movement; and that its many different forms may therefore be reasonably expected to attain a larger success in the future than in the past; and to offer excellent opportunities for working men to practise themselves in the work of business management, to grow into the trust and confidence of others, and gradually rise to posts in which their business abilities will find scope.

8sect; 11. In speaking of the difficulty that a working man has in rising to a post in which he can turn his business ability to full account, the chief stress is commonly laid upon his want of capital: but this is not always his chief difficulty. For instance the co-operative distributive societies have accumulated a vast capital, on which they find it difficult to get a good rate of interest; and which they would be rejoiced to lend to any set of working men who could show that they had the capacity for dealing with difficult business problems. Co-operators who have firstly a high order of business ability and probity, and secondly the "personal capital" of a great reputation among their fellows for these qualities, will have no difficulty in getting command of enough material capital for a considerable undertaking: the real difficulty is to convince a sufficient number of those around them that they have these rare qualities. And the case is not very different when an individual endeavours to obtain from the ordinary sources the loan of the capital required to start him in business.

It is true that in almost every business there is a constant increase in the amount of capital required to make a fair start; but there is a much more rapid increase in the amount of capital which is owned by people who do not want to use it themselves, and are so eager to lend it out that they will accept a constantly lower and lower rate of interest for it. Much of this capital passes into the hands of bankers who promptly lend it to anyone of whose business ability and honesty they are convinced. To say nothing of the credit that can be got in many businesses from those who supply the requisite raw material or stock in trade, the opportunities for direct borrowing are now so great that a moderate increase in the amount of capital required for a start in business is no very serious obstacle in the way of a person who has once got over the initial difficulty of earning a reputation for being likely to use it well.

But perhaps a greater though less conspicuous hindrance to the rise of the working man is the growing complexity of business. The head of a business has now to think of many things about which he never used to trouble himself in earlier days; and these are just the kind of difficulties for which the training of the workshop affords the least preparation. Against this must be set the rapid improvement of the education of the working man not only at school, but what is more important, in after life by newspapers, and from the work of co-operative societies and trades-unions, and in other ways.

About three-fourths of the whole population of England belong to the wage-earning classes; and at all events when they are well fed, properly housed and educated, they have their fair share of that nervous strength which is the raw material of business ability. Without going out of their way they are all consciously or unconsciously competitors for posts of business command. The ordinary workman if he shows ability generally becomes a foreman, from that he may rise to be a manager, and to be taken into partnership with his employer. Or having saved a little of his own he may start one of those small shops which still can hold their own in a working man's quarter, stock it chiefly on credit, and let his wife attend to it by day, while he gives his evenings to it. In these or in other ways he may increase his capital till he can start a small workshop, or factory. Once having made a good beginning he will find the banks eager to give him generous credit. He must have time; and since he is not likely to start in business till after middle age he must have a long as well as a strong life; but if he has this and has also "patience, genius and good fortune" he is pretty sure to command a goodly capital before he dies147. In a factory those who work with their hands have better opportunities of rising to posts of command than the book-keepers and many others to whom social tradition has assigned a higher place. But in trading concerns it is otherwise; what manual work is done in them has as a rule no educating character, while the experience of the office is better adapted for preparing a man to manage a commercial than a manufacturing business.

There is then on the whole a broad movement from below upwards. Perhaps not so many as formerly rise at once from the position of working men to that of employers: but there are more who get on sufficiently far to give their sons a good chance of attaining to the highest posts. The complete rise is not so very often accomplished in one generation; it is more often spread over two; but the total volume of the movement upwards is probably greater than it has ever been. And perhaps it is better for society as a whole that the rise should be distributed over two generations. The workmen who at the beginning of the last century rose in such large numbers to become employers were seldom fit for posts of command: they were too often harsh and tyrannical; they lost their self-control, and were neither truly noble nor truly happy; while their children were often haughty, extravagant, and self-indulgent, squandering their wealth on low and vulgar amusements, having the worst faults of the older aristocracy without their virtues. The foreman or superintendent who has still to obey as well as to command, but who is rising and sees his children likely to rise further, is in some ways more to be envied than the small master. His success is less conspicuous, but his work is often higher and more important for the world, while his character is more gentle and refined and not less strong. His children are well-trained; and if they get wealth, they are likely to make a fairly good use of it.

It must however be admitted that the rapid extension of vast businesses, and especially of joint-stock companies in many branches of industry, is tending to make the able and thrifty workman, with high ambitions for his sons, seek to put them to office work. There they are in danger of losing the physical vigour and the force of character which attaches to constructive work with the hands, and to become commonplace members of the lower middle classes. But, if they can keep their force unimpaired, they are likely to become leaders in the world, though not generally in their father's industry; and therefore without the benefit of specially appropriate traditions and aptitude.

8sect; 12. When a man of great ability is once at the head of an independent business, whatever be the route by which he has got there, he will with moderate good fortune soon be able to show such evidence of his power of turning capital to good account as to enable him to borrow in one way or another almost any amount that he may need. Making good profits he adds to his own capital, and this extra capital of his own is a material security for further borrowings; while the fact that he has made it himself tends to make lenders less careful to insist on a full security for their loans. Of course fortune tells for much in business: a very able man may find things going against him; the fact that he is losing money may diminish his power of borrowing. If he is working partly on borrowed capital, it may even make those who have lent it refuse to renew their loans, and may thus cause him to succumb to what would have been but a passing misfortune, if he had been using no capital but his own148 : and in fighting his way upwards he may have a chequered life full of great anxieties, and even misfortunes. But he can show his ability in misfortune as well as in success: human nature is sanguine; and it is notorious that men are abundantly willing to lend to those who have passed through commercial disaster without loss to their business reputation. Thus, in spite of vicissitudes, the able business man generally finds that in the long run the capital at his command grows in proportion to his ability.

Meanwhile, as we have seen, he, who with small ability is in command of a large capital, speedily loses it: he may perhaps be one who could and would have managed a small business with credit, and left it stronger than he had found it: but if he has not the genius for dealing with great problems, the larger it is the more speedily will he break it up. For as a rule a large business can be kept going only by transactions which, after allowing for ordinary risks, leave but a very small percentage of gain. A small profit on a large turn-over quickly made, will yield a rich income to able men: and in those businesses which are of such a nature as to give scope to very large capitals, competition generally cuts the rate of profits on the turn-over very fine. A village trader may make five per cent. less profits on his turn-over than his able rival, and yet be able to hold his head above water. But in those large manufacturing and trading businesses in which there is a quick return and a straightforward routine, the whole profits on the turn-over are often so very small that a person who falls behind his rivals by even a small percentage loses a large sum at every turn-over; while in those large businesses which are difficult and do not rely on routine, and which afford high profits on the turn-over to really able management, there are no profits at all to be got by anyone who attempts the task with only ordinary ability.

These two sets of forces, the one increasing the capital at the command of able men, and the other destroying the capital that is in the hands of weaker men, bring about the result that there is a far more close correspondence between the ability of business men and the size of the businesses which they own than at first sight would appear probable. And when to this fact we add all the many routes, which we have already discussed, by which a man of great natural business ability can work his way up high in some private firm or public company, we may conclude that wherever there is work on a large scale to be done in such a country as England, the ability and the capital required for it are pretty sure to be speedily forthcoming.

Further, just as industrial skill and ability are getting every day to depend more and more on the broad faculties of judgment, promptness, resource, carefulness and steadfastness of purpose—faculties which are not specialized to any one trade, but which are more or less useful in all—so it is with regard to business ability. In fact business ability consists more of these non-specialized faculties than do industrial skill and ability in the lower grades: and the higher the grade of business ability the more various are its applications.

Since then business ability in command of capital moves with great ease horizontally from a trade which is overcrowded to one which offers good openings for it: and since it moves with great ease vertically, the abler men rising to the higher posts in their own trade, we see, even at this early stage of our inquiry, some good reasons for believing that in modern England the supply of business ability in command of capital accommodates itself, as a general rule, to the demand for it; and thus has a fairly defined supply price.

Finally, we may regard this supply price of business ability in command of capital as composed of three elements. The first is the supply price of capital; the second is the supply price of business ability and energy; and the third is the supply price of that organization by which the appropriate business ability and the requisite capital are brought together. We have called the price of the first of these three elements interest; we may call the price of the second taken by itself net earnings of management, and that of the second and third, taken together, gross earnings of management.

BOOK IV, CHAPTER XIII: CONCLUSION. CORRELATION OF THE TENDENCIES TO INCREASING AND TO DIMINISHING RETURN.

8sect; 1. At the beginning of this Book we saw how the extra return of raw produce which nature affords to an increased application of capital and labour, other things being equal, tends in the long run to diminish. In the remainder of the Book and especially in the last four chapters we have looked at the other side of the shield, and seen how man's power of productive work increases with the volume of the work that he does. Considering first the causes that govern the supply of labour, we saw how every increase in the physical, mental and moral vigour of a people makes them more likely, other things being equal, to rear to adult age a large number of vigorous children. Turning next to the growth of wealth, we observed how every increase of wealth tends in many ways to make a greater increase more easy than before. And lastly we saw how every increase of wealth and every increase in the numbers and intelligence of the people increased the facilities for a highly developed industrial organization, which in its turn adds much to the collective efficiency of capital and labour.

Looking more closely at the economies arising from an increase in the scale of production of any kind of goods, we found that they fell into two classes—those dependent on the general development of the industry, and those dependent on the resources of the individual houses of business engaged in it and the efficiency of their management; that is, into external and internal economies.

We saw how these latter economies are liable to constant fluctuations so far as any particular house is concerned. An able man, assisted perhaps by some strokes of good fortune, gets a firm footing in the trade, he works hard and lives sparely, his own capital grows fast, and the credit that enables him to borrow more capital grows still faster; he collects around him subordinates of more than ordinary zeal and ability; as his business increases they rise with him, they trust him and he trusts them, each of them devotes himself with energy to just that work for which he is specially fitted, so that no high ability is wasted on easy work, and no difficult work is entrusted to unskilful hands. Corresponding to this steadily increasing economy of skill, the growth of his business brings with it similar economies of specialized machines and plant of all kinds; every improved process is quickly adopted and made the basis of further improvements; success brings credit and credit brings success; credit and success help to retain old customers and to bring new ones; the increase of his trade gives him great advantages in buying; his goods advertise one another, and thus diminish his difficulty in finding a vent for them. The increase in the scale of his business increases rapidly the advantages which he has over his competitors, and lowers the price at which he can afford to sell. This process may go on as long as his energy and enterprise, his inventive and organizing power retain their full strength and freshness, and so long as the risks which are inseparable from business do not cause him exceptional losses; and if it could endure for a hundred years, he and one or two others like him would divide between them the whole of that branch of industry in which he is engaged. The large scale of their production would put great economies within their reach; and provided they competed to their utmost with one another, the public would derive the chief benefit of these economies, and the price of the commodity would fall very low.

But here we may read a lesson from the young trees of the forest as they struggle upwards through the benumbing shade of their older rivals. Many succumb on the way, and a few only survive; those few become stronger with every year, they get a larger share of light and air with every increase of their height, and at last in their turn they tower above their neighbours, and seem as though they would grow on for ever, and for ever become stronger as they grow. But they do not. One tree will last longer in full vigour and attain a greater size than another; but sooner or later age tells on them all. Though the taller ones have a better access to light and air than their rivals, they gradually lose vitality; and one after another they give place to others, which, though of less material strength, have on their side the vigour of youth.

And as with the growth of trees, so was it with the growth of businesses as a general rule before the great recent development of vast joint-stock companies, which often stagnate, but do not readily die. Now that rule is far from universal, but it still holds in many industries and trades. Nature still presses on the private business by limiting the length of the life of its original founders, and by limiting even more narrowly that part of their lives in which their faculties retain full vigour. And so, after a while, the guidance of the business falls into the hands of people with less energy and less creative genius, if not with less active interest in its prosperity. If it is turned into a joint-stock company, it may retain the advantages of division of labour, of specialized skill and machinery: it may even increase them by a further increase of its capital; and under favourable conditions it may secure a permanent and prominent place in the work of production. But it is likely to have lost so much of its elasticity and progressive force, that the advantages are no longer exclusively on its side in its competition with younger and smaller rivals.

When therefore we are considering the broad results which the growth of wealth and population exert on the economies of production, the general character of our conclusions is not very much affected by the facts that many of these economies depend directly on the size of the individual establishments engaged in the production, and that in almost every trade there is a constant rise and fall of large businesses, at any one moment some firms being in the ascending phase and others in the descending. For in times of average prosperity decay in one direction is sure to be more than balanced by growth in another.

Meanwhile an increase in the aggregate scale of production of course increases those economies, which do not directly depend on the size of individual houses of business. The most important of these result from the growth of correlated branches of industry which mutually assist one another, perhaps being concentrated in the same localities, but anyhow availing themselves of the modern facilities for communication offered by steam transport, by the telegraph and by the printing-press. The economies arising from such sources as this, which are accessible to any branch of production, do not depend exclusively upon its own growth: but yet they are sure to grow rapidly and steadily with that growth; and they are sure to dwindle in some, though not in all respects, if it decays.

8sect; 2. These results will be of great importance when we come to discuss the causes which govern the supply price of a commodity. We shall have to analyse carefully the normal cost of producing a commodity, relatively to a given aggregate volume of production; and for this purpose we shall have to study the expenses of a representative producer for that aggregate volume. On the one hand we shall not want to select some new producer just struggling into business, who works under many disadvantages, and has to be content for a time with little or no profits, but who is satisfied with the fact that he is establishing a connection and taking the first steps towards building up a successful business; nor on the other hand shall we want to take a firm which by exceptionally long-sustained ability and good fortune has got together a vast business, and huge well-ordered workshops that give it a superiority over almost all its rivals. But our representative firm must be one which has had a fairly long life, and fair success, which is managed with normal ability, and which has normal access to the economies, external and internal, which belong to that aggregate volume of production; account being taken of the class of goods produced, the conditions of marketing them and the economic environment generally.

Thus a representative firm is in a sense an average firm. But there are many ways in which the term "average" might be interpreted in connection with a business. And a Representative firm is that particular sort of average firm, at which we need to look in order to see how far the economies, internal and external, of production on a large scale have extended generally in the industry and country in question. We cannot see this by looking at one or two firms taken at random: but we can see it fairly well by selecting, after a broad survey, a firm, whether in private or joint-stock management (or better still, more than one), that represents, to the best of our judgment, this particular average.

The general argument of the present Book shows that an increase in the aggregate volume of production of anything will generally increase the size, and therefore the internal economies possessed by such a representative firm; that it will always increase the external economies to which the firm has access; and thus will enable it to manufacture at a less proportionate cost of labour and sacrifice than before.

In other words, we say broadly that while the part which nature plays in production shows a tendency to diminishing return, the part which man plays shows a tendency to increasing return. The law of increasing return may be worded thus:—An increase of labour and capital leads generally to improved organization, which increases the efficiency of the work of labour and capital.

Therefore in those industries which are not engaged in raising raw produce an increase of labour and capital generally gives a return increased more than in proportion; and further this improved organization tends to diminish or even override any increased resistance which nature may offer to raising increased amounts of raw produce. If the actions of the laws of increasing and diminishing return are balanced we have the law of constant return, and an increased produce is obtained by labour and sacrifice increased just in proportion.

For the two tendencies towards increasing and diminishing return press constantly against one another. In the production of wheat and wool, for instance, the latter tendency has almost exclusive sway in an old country, which cannot import freely. In turning the wheat into flour, or the wool into blankets, an increase in the aggregate volume of production brings some new economies, but not many; for the trades of grinding wheat and making blankets are already on so great a scale that any new economies that they may attain are more likely to be the result of new inventions than of improved organization. In a country however in which the blanket trade is but slightly developed, these latter may be important; and then it may happen that an increase in the aggregate production of blankets diminishes the proportionate difficulty of manufacturing by just as much as it increases that of raising the raw material. In that case the actions of the laws of diminishing and of increasing return would just neutralize one another; and blankets would conform to the law of constant return. But in most of the more delicate branches of manufacturing, where the cost of raw material counts for little, and in most of the modern transport industries the law of increasing return acts almost unopposed149.

Increasing Return is a relation between a quantity of effort and sacrifice on the one hand, and a quantity of product on the other. The quantities cannot be taken out exactly, because changing methods of production call for machinery, and for unskilled and skilled labour of new kinds and in new proportions. But, taking a broad view, we may perhaps say vaguely that the output of a certain amount of labour and capital in an industry has increased by perhaps a quarter or a third in the last twenty years. To measure outlay and output in terms of money is a tempting, but a dangerous resource: for a comparison of money outlay with money returns is apt to slide into an estimate of the rate of profit on capital150.

8sect; 3. We may now sum up provisionally the relations of industrial expansion to social wellbeing. A rapid growth of population has often been accompanied by unhealthy and enervating habits of life in overcrowded towns. And sometimes it has started badly, outrunning the material resources of the people, causing them with imperfect appliances to make excessive demands on the soil; and so to call forth the stern action of the law of diminishing return as regards raw produce, without having the power of minimizing its effects. Having thus begun with poverty, an increase in numbers may go on to its too frequent consequences in that weakness of character which unfits a people for developing a highly organized industry.

These are serious perils: but yet it remains true that the collective efficiency of a people with a given average of individual strength and energy may increase more than in proportion to their numbers. If they can for a time escape from the pressure of the law of diminishing return by importing food and other raw produce on easy terms; if their wealth is not consumed in great wars, and increases at least as fast as their numbers; and if they avoid habits of life that would enfeeble them; then every increase in their numbers is likely for the time to be accompanied by a more than proportionate increase in their power of obtaining material goods. For it enables them to secure the many various economies of specialized skill and specialized machinery, of localized industries and production on a large scale: it enables them to have increased facilities of communication of all kinds; while the very closeness of their neighbourhood diminishes the expense of time and effort involved in every sort of traffic between them, and gives them new opportunities of getting social enjoyments and the comforts and luxuries of culture in every form. No doubt deduction must be made for the growing difficulty of finding solitude and quiet and even fresh air: but there is in most cases some balance of good151.

Taking account of the fact that an increasing density of population generally brings with it access to new social enjoyments we may give a rather broader scope to this statement and say:—An increase of population accompanied by an equal increase in the material sources of enjoyment and aids to production is likely to lead to a more than proportionate increase in the aggregate income of enjoyment of all kinds; provided firstly, an adequate supply of raw produce can be obtained without great difficulty, and secondly there is no such overcrowding as causes physical and moral vigour to be impaired by the want of fresh air and light and of healthy and joyous recreation for the young.

The accumulated wealth of civilized countries is at present growing faster than the population: and though it may be true that the wealth per head would increase somewhat faster if the population did not increase quite so fast; yet as a matter of fact an increase of population is likely to continue to be accompanied by a more than proportionate increase of the material aids to production: and in England at the present time, with easy access to abundant foreign supplies of raw material, an increase of population is accompanied by a more than proportionate increase of the means of satisfying human wants other than the need for light, fresh air, etc. Much of this increase is however attributable not to the increase of industrial efficiency but to the increase of wealth by which it is accompanied: and therefore it does not necessarily benefit those who have no share in that wealth. And further, England's foreign supplies of raw produce may at any time be checked by changes in the trade regulations of other countries, and may be almost cut off by a great war, while the naval and military expenditure which would be necessary to make the country fairly secure against this last risk, would appreciably diminish the benefits that she derives from the action of the law of increasing return.

BOOK V: GENERAL RELATIONS OF DEMAND, SUPPLY AND VALUE.

BOOK V, CHAPTER I: INTRODUCTORY. ON MARKETS.

8sect; 1. A BUSINESS firm grows and attains great strength, and afterwards perhaps stagnates and decays; and at the turning point there is a balancing or equilibrium of the forces of life and decay: the latter part of Book IV. has been chiefly occupied with such balancing of forces in the life and decay of a people, or of a method of industry or trading. And as we reach to the higher stages of our work, we shall need ever more and more to think of economic forces as resembling those which make a young man grow in strength, till he reaches his prime; after which he gradually becomes stiff and inactive, till at last he sinks to make room for other and more vigorous life. But to prepare the way for this advanced study we want first to look at a simpler balancing of forces which corresponds rather to the mechanical equilibrium of a stone hanging by an elastic string, or of a number of balls resting against one another in a basin.

We have now to examine the general relations of demand and supply; especially those which are connected with that adjustment of price, by which they are maintained in "equilibrium." This term is in common use and may be used for the present without special explanation. But there are many difficulties connected with it, which can only be handled gradually: and indeed they will occupy our attention during a great part of this Book.

Illustrations will be taken now from one class of economic problems and now from another, but the main course of the reasoning will be kept free from assumptions which specially belong to any particular class.

Thus it is not descriptive, nor does it deal constructively with real problems. But it sets out the theoretical backbone of our knowledge of the causes which govern value, and thus prepares the way for the construction which is to begin in the following Book. It aims not so much at the attainment of knowledge, as at the power to obtain and arrange knowledge with regard to two opposing sets of forces, those which impel man to economic efforts and sacrifices, and those which hold him back.

We must begin with a short and provisional account of markets: for that is needed to give precision to the ideas in this and the following Books. But the organization of markets is intimately connected both as cause and effect with money, credit, and foreign trade; a full study of it must therefore be deferred to a later volume, where it will be taken in connection with commercial and industrial fluctuations, and with combinations of producers and of merchants, of employers and employed.

8sect; 2. When demand and supply are spoken of in relation to one another, it is of course necessary that the markets to which they refer should be the same. As Cournot says, "Economists understand by the term Market, not any particular market place in which things are bought and sold, but the whole of any region in which buyers and sellers are in such free intercourse with one another that the prices of the same goods tend to equality easily and quickly1." Or again as Jevons says:—"Originally a market was a public place in a town where provisions and other objects were exposed for sale; but the word has been generalized, so as to mean any body of persons who are in intimate business relations and carry on extensive transactions in any commodity. A great city may contain as many markets as there are important branches of trade, and these markets may or may not be localized. The central point of a market is the public exchange, mart or auction rooms, where the traders agree to meet and transact business. In London the Stock Market, the Corn Market, the Coal Market, the Sugar Market, and many others are distinctly localized; in Manchester the Cotton Market, the Cotton Waste Market, and others. But this distinction of locality is not necessary. The traders may be spread over a whole town, or region of country, and yet make a market, if they are, by means of fairs, meetings, published price lists, the post-office or otherwise, in close communication with each other2."

Thus the more nearly perfect a market is, the stronger is the tendency for the same price to be paid for the same thing at the same time in all parts of the market: but of course if the market is large, allowance must be made for the expense of delivering the goods to different purchasers; each of whom must be supposed to pay in addition to the market price a special charge on account of delivery3.

8sect; 3. In applying economic reasonings in practice it is often difficult to ascertain how far the movements of supply and demand in any one place are influenced by those in another. It is clear that the general tendency of the telegraph, the printing-press and steam traffic is to extend the area over which such influences act and to increase their force. The whole Western World may, in a sense, be regarded as one market for many kinds of stock exchange securities, for the more valuable metals, and to a less extent for wool and cotton and even wheat; proper allowance being made for expenses of transport, in which may be included taxes levied by any customs houses through which the goods have to pass. For in all these cases the expenses of transport, including customs duties, are not sufficient to prevent buyers from all parts of the Western World from competing with one another for the same supplies.

There are many special causes which may widen or narrow the market of any particular commodity: but nearly all those things for which there is a very wide market are in universal demand, and capable of being easily and exactly described. Thus for instance cotton, wheat, and iron satisfy wants that are urgent and nearly universal. They can be easily described, so that they can be bought and sold by persons at a distance from one another and at a distance also from the commodities. If necessary, samples can be taken of them which are truly representative: and they can even be "graded," as is the actual practice with regard to grain in America, by an independent authority; so that the purchaser may be secure that what he buys will come up to a given standard, though he has never seen a sample of the goods which he is buying and perhaps would not be able himself to form an opinion on it if he did4.

Commodities for which there is a very wide market must also be such as will bear a long carriage: they must be somewhat durable, and their value must be considerable in proportion to their bulk. A thing which is so bulky that its price is necessarily raised very much when it is sold far away from the place in which it is produced, must as a rule have a narrow market. The market for common bricks for instance is practically confined to the near neighbourhood of the kilns in which they are made: they can scarcely ever bear a long carriage by land to a district which has any kilns of its own. But bricks of certain exceptional kinds have markets extending over a great part of England.

8sect; 4. Let us then consider more closely the markets for things which satisfy in an exceptional way these conditions of being in general demand, cognizable and portable. They are, as we have said, stock exchange securities and the more valuable metals.

Any one share or bond of a public company, or any bond of a government is of exactly the same value as any other of the same issue: it can make no difference to any purchaser which of the two he buys. Some securities, principally those of comparatively small mining, shipping, and other companies, require local knowledge, and are not very easily dealt in except on the stock exchanges of provincial towns in their immediate neighbourhood. But the whole of England is one market for the shares and bonds of a large English railway. In ordinary times a dealer will sell, say, Midland Railway shares, even if he has not them himself; because he knows they are always coming into the market, and he is sure to be able to buy them.

But the strongest case of all is that of securities which are called "international," because they are in request in every part of the globe. They are the bonds of the chief governments, and of very large public companies such as those of the Suez Canal and the New York Central Railway. For bonds of this class the telegraph keeps prices at almost exactly the same level in all the stock exchanges of the world. If the price of one of them rises in New York or in Paris, in London or in Berlin, the mere news of the rise tends to cause a rise in other markets; and if for any reason the rise is delayed, that particular class of bonds is likely soon to be offered for sale in the high priced market under telegraphic orders from the other markets, while dealers in the first market will be making telegraphic purchases in other markets. These sales on the one hand, and purchases on the other, strengthen the tendency which the price has to seek the same level everywhere; and unless some of the markets are in an abnormal condition, the tendency soon becomes irresistible.

On the stock exchange also a dealer can generally make sure of selling at nearly the same price as that at which he buys; and he is often willing to buy first class stocks at a half, or a quarter, or an eighth, or in some cases even a sixteenth per cent. less than he offers in the same breath to sell them at. If there are two securities equally good, but one of them belongs to a large issue of bonds, and the other to a small issue by the same government, so that the first is constantly coming on the market, and the latter but seldom, then the dealers will on this account alone require a larger margin between their selling price and their buying price in the latter case than in the former5. This illustrates well the great law, that the larger the market for a commodity the smaller generally are the fluctuations in its price, and the lower is the percentage on the turnover which dealers charge for doing business in it.

Stock exchanges then are the pattern on which markets have been, and are being formed for dealing in many kinds of produce which can be easily and exactly described, are portable and in general demand. The material commodities however which possess these qualities in the highest degree are gold and silver. For that very reason they have been chosen by common consent for use as money, to represent the value of other things: the world market for them is most highly organized, and will be found to offer many subtle illustrations of the actions of the laws which we are now discussing.

8sect; 5. At the opposite extremity to international stock exchange securities and the more valuable metals are, firstly, things which must be made to order to suit particular individuals, such as well-fitting clothes; and, secondly, perishable and bulky goods, such as fresh vegetables, which can seldom be profitably carried long distances. The first can scarcely be said to have a wholesale market at all; the conditions by which their price is determined are those of retail buying and selling, and the study of them may be postponed6.

There are indeed wholesale markets for the second class, but they are confined within narrow boundaries; we may find our typical instance in the sale of the commoner kinds of vegetables in a country town. The market-gardeners in the neighbourhood have probably to arrange for the sale of their vegetables to the townspeople with but little external interference on either side. There may be some check to extreme prices by the power on the one side of selling, and on the other of buying elsewhere; but under ordinary circumstances the check is inoperative, and it may happen that the dealers in such a case are able to combine, and thus fix an artificial monopoly price; that is, a price determined with little direct reference to cost of production, but chiefly by a consideration of what the market will bear.

On the other hand, it may happen that some of the market-gardeners are almost equally near a second country town, and send their vegetables now to one and now to the other; and some people who occasionally buy in the first town may have equally good access to the second. The least variation in price will lead them to prefer the better market; and thus make the bargainings in the two towns to some extent mutually dependent. It may happen that this second town is in close communication with London or some other central market, so that its prices are controlled by the prices in the central market; and in that case prices in our first town also must move to a considerable extent in harmony with them. As news passes from mouth to mouth till a rumour spreads far away from its forgotten sources, so even the most secluded market is liable to be influenced by changes of which those in the market have no direct cognizance, changes that have had their origin far away and have spread gradually from market to market.

Thus at the one extreme are world markets in which competition acts directly from all parts of the globe; and at the other those secluded markets in which all direct competition from afar is shut out, though indirect and transmitted competition may make itself felt even in these; and about midway between these extremes lie the great majority of the markets which the economist and the business man have to study.

8sect; 6. Again, markets vary with regard to the period of time which is allowed to the forces of demand and supply to bring themselves into equilibrium with one another, as well as with regard to the area over which they extend. And this element of Time requires more careful attention just now than does that of Space. For the nature of the equilibrium itself, and that of the causes by which it is determined, depend on the length of the period over which the market is taken to extend. We shall find that if the period is short, the supply is limited to the stores which happen to be at hand: if the period is longer, the supply will be influenced, more or less, by the cost of producing the commodity in question; and if the period is very long, this cost will in its turn be influenced, more or less, by the cost of producing the labour and the material things required for producing the commodity. These three classes of course merge into one another by imperceptible degrees. We will begin with the first class; and consider in the next chapter those temporary equilibria of demand and supply, in which "supply" means in effect merely the stock available at the time for sale in the market; so that it cannot be directly influenced by the cost of production.

BOOK V, CHAPTER II: TEMPORARY EQUILIBRIUM OF DEMAND AND SUPPLY.

8sect; 1. The simplest case of balance or equilibrium between desire and effort is found when a person satisfies one of his wants by his own direct work. When a boy picks blackberries for his own eating, the action of picking is probably itself pleasurable for a while; and for some time longer the pleasure of eating is more than enough to repay the trouble of picking. But after he has eaten a good deal, the desire for more diminishes; while the task of picking begins to cause weariness, which may indeed be a feeling of monotony rather than of fatigue. Equilibrium is reached when at last his eagerness to play and his disinclination for the work of picking counterbalance the desire for eating. The satisfaction which he can get from picking fruit has arrived at its maximum: for up to that time every fresh picking has added more to his pleasure than it has taken away; and after that time any further picking would take away from his pleasure more than it would add7.

In a casual bargain that one person makes with another, as for instance when two backwoodsmen barter a rifle for a canoe, there is seldom anything that can properly be called an equilibrium of supply and demand: there is probably a margin of satisfaction on either side; for probably the one would be willing to give something besides the rifle for the canoe, if he could not get the canoe otherwise; while the other would in case of necessity give something besides the canoe for the rifle.

It is indeed possible that a true equilibrium may be arrived at under a system of barter; but barter, though earlier in history than buying and selling, is in some ways more intricate; and the simplest cases of a true equilibrium value are found in the markets of a more advanced state of civilization.

We may put aside as of little practical importance a class of dealings which has been much discussed. They relate to pictures by old masters, rare coins and other things, which cannot be "graded" at all. The price at which each is sold, will depend much on whether any rich persons with a fancy for it happen to be present at its sale. If not, it will probably be bought by dealers who reckon on being able to sell it at a profit; and the variations in the price for which the same picture sells at successive auctions, great as they are, would be greater still if it were not for the steadying influence of professional purchasers.

8sect; 2. Let us then turn to the ordinary dealings of modern life; and take an illustration from a corn-market in a country town, and let us assume for the sake of simplicity that all the corn in the market is of the same quality. The amount which each farmer or other seller offers for sale at any price is governed by his own need for money in hand, and by his calculation of the present and future conditions of the market with which he is connected. There are some prices which no seller would accept, some which no one would refuse. There are other intermediate prices which would be accepted for larger or smaller amounts by many or all of the sellers. Everyone will try to guess the state of the market and to govern his actions accordingly. Let us suppose that in fact there are not more than 600 quarters, the holders of which are willing to accept as low a price as 35s.; but that holders of another hundred would be tempted by 36s.; and holders of yet another three hundred by 37s. Let us suppose also that a price of 37s. would tempt buyers for only 600 quarters; while another hundred could be sold at 36s., and yet another two hundred at 35s. These facts may be put out in a table thus:—

At the priceHolders will be willing to sellBuyers will be willing to buy
37s.1000 quarters,600 quarters.
36s. 700  " 700  "
35s. 600  " 900  "

Of course some of those who are really willing to take 36s. rather than leave the market without selling, will not show at once that they are ready to accept that price. And in like manner buyers will fence, and pretend to be less eager than they really are. So the price may be tossed hither and thither like a shuttlecock, as one side or the other gets the better in the "higgling and bargaining" of the market. But unless they are unequally matched; unless, for instance, one side is very simple or unfortunate in failing to gauge the strength of the other side, the price is likely to be never very far from 36s.; and it is nearly sure to be pretty close to 36s. at the end of the market. For if a holder thinks that the buyers will really be able to get at 36s. all that they care to take at that price, he will be unwilling to let slip past him any offer that is well above that price.

Buyers on their part will make similar calculations; and if at any time the price should rise considerably above 36s. they will argue that the supply will be much greater than the demand at that price: therefore even those of them who would rather pay that price than go unserved, wait; and by waiting they help to bring the price down. On the other hand, when the price is much below 36s., even those sellers who would rather take the price than leave the market with their corn unsold, will argue that at that price the demand will be in excess of the supply: so they will wait, and by waiting help to bring the price up.

The price of 36s. has thus some claim to be called the true equilibrium price: because if it were fixed on at the beginning, and adhered to throughout, it would exactly equate demand and supply (i.e. the amount which buyers were willing to purchase at that price would be just equal to that for which sellers were willing to take that price); and because every dealer who has a perfect knowledge of the circumstances of the market expects that price to be established. If he sees the price differing much from 36s. he expects that a change will come before long, and by anticipating it he helps it to come quickly.

It is not indeed necessary for our argument that any dealers should have a thorough knowledge of the circumstances of the market. Many of the buyers may perhaps underrate the willingness of the sellers to sell, with the effect that for some time the price rules at the highest level at which any buyers can be found; and thus 500 quarters may be sold before the price sinks below 37s. But afterwards the price must begin to fall and the result will still probably be that 200 more quarters will be sold, and the market will close on a price of about 36s. For when 700 quarters have been sold, no seller will be anxious to dispose of any more except at a higher price than 36s., and no buyer will be anxious to purchase any more except at a lower price than 36s. In the same way if the sellers had underrated the willingness of the buyers to pay a high price, some of them might begin to sell at the lowest price they would take, rather than have their corn left on their hands, and in this case much corn might be sold at a price of 35s.; but the market would probably close on a price of 36s. and a total sale of 700 quarters8.

8sect; 3. In this illustration there is a latent assumption which is in accordance with the actual conditions of most markets; but which ought to be distinctly recognized in order to prevent its creeping into those cases in which it is not justifiable. We tacitly assumed that the sum which purchasers were willing to pay, and which sellers were willing to take, for the seven hundredth quarter would not be affected by the question whether the earlier bargains had been made at a high or a low rate. We allowed for the diminution in the buyers' need of corn [its marginal utility to them] as the amount bought increased. But we did not allow for any appreciable change in their unwillingness to part with money [its marginal utility]; we assumed that that would be practically the same whether the early payments had been at a high or a low rate.

This assumption is justifiable with regard to most of the market dealings with which we are practically concerned. When a person buys anything for his own consumption, he generally spends on it a small part of his total resources; while when he buys it for the purposes of trade, he looks to re-selling it, and therefore his potential resources are not diminished. In either case there is no appreciable change in his willingness to part with money. There may indeed be individuals of whom this is not true; but there are sure to be present some dealers with large stocks of money at their command; and their influence steadies the market9.

The exceptions are rare and unimportant in markets for commodities; but in markets for labour they are frequent and important. When a workman is in fear of hunger, his need of money [its marginal utility to him] is very great; and, if at starting, he gets the worst of the bargaining, and is employed at low wages, it remains great, and he may go on selling his labour at a low rate. That is all the more probable because, while the advantage in bargaining is likely to be pretty well distributed between the two sides of a market for commodities, it is more often on the side of the buyers than on that of the sellers in a market for labour. Another difference between a labour market and a market for commodities arises from the fact that each seller of labour has only one unit of labour to dispose of. These are two among many facts, in which we shall find, as we go on, the explanation of much of that instinctive objection which the working classes have felt to the habit of some economists, particularly those of the employer class, of treating labour simply as a commodity and regarding the labour market as like every other market; whereas in fact the differences between the two cases, though not fundamental from the point of view of theory, are yet clearly marked, and in practice often very important.

The theory of buying and selling becomes therefore much more complex when we take account of the dependence of marginal utility on amount in the case of money as well as of the commodity itself. The practical importance of this consideration is not very great. But a contrast is drawn in Appendix F between barter and dealings in which one side of each exchange is in the form of general purchasing power. In barter a person's stock of either commodity exchanged needs to be adjusted closely to his individual wants. If his stock is too large he may have no good use for it. If his stock is too small he may have some difficulty in finding any one who can conveniently give him what he wants and is also in need of the particular things of which he himself has a superfluity. But any one who has a stock of general purchasing power, can obtain any thing he wants as soon as he meets with any one who has a superfluity of that thing: he needs not to hunt about till he comes across "the double coincidence" of a person who can spare what he wants, and also wants what he can spare. Consequently every one, and especially a professional dealer, can afford to keep command over a large stock of money; and can therefore make considerable purchases without depleting his stock of money or greatly altering its marginal value.

BOOK V, CHAPTER III: EQUILIBRIUM OF NORMAL DEMAND AND SUPPLY.

8sect; 1. We have next to inquire what causes govern supply prices, that is prices which dealers are willing to accept for different amounts. In the last chapter we looked at the affairs of only a single day; and supposed the stocks offered for sale to be already in existence. But of course these stocks are dependent on the amount of wheat sown in the preceding year; and that, in its turn, was largely influenced by the farmers' guesses as to the price which they would get for it in this year. This is the point at which we have to work in the present chapter.

Even in the corn-exchange of a country town on a market-day the equilibrium price is affected by calculations of the future relations of production and consumption; while in the leading corn-markets of America and Europe dealings for future delivery already predominate and are rapidly weaving into one web all the leading threads of trade in corn throughout the whole world. Some of these dealings in "futures" are but incidents in speculative manœuvres; but in the main they are governed by calculations of the world's consumption on the one hand, and of the existing stocks and coming harvests in the Northern and Southern hemispheres on the other. Dealers take account of the areas sown with each kind of grain, of the forwardness and weight of the crops, of the supply of things which can be used as substitutes for grain, and of the things for which grain can be used as a substitute. Thus, when buying or selling barley, they take account of the supplies of such things as sugar, which can be used as substitutes for it in brewing, and again of all the various feeding stuffs, a scarcity of which might raise the value of barley for consumption on the farm. If it is thought that the growers of any kind of grain in any part of the world have been losing money, and are likely to sow a less area for a future harvest; it is argued that prices are likely to rise as soon as that harvest comes into sight, and its shortness is manifest to all. Anticipations of that rise exercise an influence on present sales for future delivery, and that in its turn influences cash prices; so that these prices are indirectly affected by estimates of the expenses of producing further supplies.

But in this and the following chapters we are specially concerned with movements of price ranging over still longer periods than those for which the most far-sighted dealers in futures generally make their reckoning: we have to consider the volume of production adjusting itself to the conditions of the market, and the normal price being thus determined at the position of stable equilibrium of normal demand and normal supply.

8sect; 2. In this discussion we shall have to make frequent use of the terms cost and expenses of production; and some provisional account of them must be given before proceeding further.

We may revert to the analogy between the supply price and the demand price of a commodity. Assuming for the moment that the efficiency of production depends solely upon the exertions of the workers, we saw that "the price required to call forth the exertion necessary for producing any given amount of a commodity may be called the supply price for that amount, with reference of course to a given unit of time10." But now we have to take account of the fact that the production of a commodity generally requires many different kinds of labour and the use of capital in many forms. The exertions of all the different kinds of labour that are directly or indirectly involved in making it; together with the abstinences or rather the waitings required for saving the capital used in making it: all these efforts and sacrifices together will be called the real cost of production of the commodity. The sums of money that have to be paid for these efforts and sacrifices will be called either its money cost of production, or, for shortness, its expenses of production; they are the prices which have to be paid in order to call forth an adequate supply of the efforts and waitings that are required for making it; or, in other words, they are its supply price11.

The analysis of the expenses of production of a commodity might be carried backward to any length; but it is seldom worth while to go back very far. It is for instance often sufficient to take the supply prices of the different kinds of raw materials used in any manufacture as ultimate facts, without analysing these supply prices into the several elements of which they are composed; otherwise indeed the analysis would never end. We may then arrange the things that are required for making a commodity into whatever groups are convenient, and call them its factors of production. Its expenses of production when any given amount of it is produced are thus the supply prices of the corresponding quantities of its factors of production. And the sum of these is the supply price of that amount of the commodity.

8sect; 3. The typical modern market is often regarded as that in which manufacturers sell goods to wholesale dealers at prices into which but few trading expenses enter. But taking a broader view, we may consider that the supply price of a commodity is the price at which it will be delivered for sale to that group of persons whose demand for it we are considering; or, in other words, in the market which we have in view. On the character of that market will depend how many trading expenses have to be reckoned to make up the supply price12. For instance, the supply price of wood in the neighbourhood of Canadian forests often consists almost exclusively of the price of the labour of lumber men: but the supply price of the same wood in the wholesale London market consists in a large measure of freights; while its supply price to a small retail buyer in an English country town is more than half made up of the charges of the railways and middlemen who have brought what he wants to his doors, and keep a stock of it ready for him. Again, the supply price of a certain kind of labour may for some purposes be divided up into the expenses of rearing, of general education and of special trade education. The possible combinations are numberless; and though each may have incidents of its own which will require separate treatment in the complete solution of any problem connected with it, yet all such incidents may be ignored, so far as the general reasonings of this Book are concerned.

In calculating the expenses of production of a commodity we must take account of the fact that changes in the amounts produced are likely, even when there is no new invention, to be accompanied by changes in the relative quantities of its several factors of production. For instance, when the scale of production increases, horse or steam power is likely to be substituted for manual labour; materials are likely to be brought from a greater distance and in greater quantities, thus increasing those expenses of production which correspond to the work of carriers, middlemen and traders of all kinds.

As far as the knowledge and business enterprise of the producers reach, they in each case choose those factors of production which are best for their purpose; the sum of the supply prices of those factors which are used is, as a rule, less than the sum of the supply prices of any other set of factors which could be substituted for them; and whenever it appears to the producers that this is not the case, they will, as a rule, set to work to substitute the less expensive method. And further on we shall see how in a somewhat similar way society substitutes one undertaker for another who is less efficient in proportion to his charges. We may call this, for convenience of reference, The principle of substitution.

The applications of this principle extend over almost every field of economic inquiry13.

8sect; 4. The position then is this: we are investigating the equilibrium of normal demand and normal supply in their most general form; we are neglecting those features which are special to particular parts of economic science, and are confining our attention to those broad relations which are common to nearly the whole of it. Thus we assume that the forces of demand and supply have free play; that there is no close combination among dealers on either side, but each acts for himself, and there is much free competition; that is, buyers generally compete freely with buyers, and sellers compete freely with sellers. But though everyone acts for himself, his knowledge of what others are doing is supposed to be generally sufficient to prevent him from taking a lower or paying a higher price than others are doing. This is assumed provisionally to be true both of finished goods and of their factors of production, of the hire of labour and of the borrowing of capital. We have already inquired to some extent, and we shall have to inquire further, how far these assumptions are in accordance with the actual facts of life. But meanwhile this is the supposition on which we proceed; we assume that there is only one price in the market at one and the same time; it being understood that separate allowance is made, when necessary, for differences in the expense of delivering goods to dealers in different parts of the market; including allowance for the special expenses of retailing, if it is a retail market.

In such a market there is a demand price for each amount of the commodity, that is, a price at which each particular amount of the commodity can find purchasers in a day or week or year. The circumstances which govern this price for any given amount of the commodity vary in character from one problem to another; but in every case the more of a thing is offered for sale in a market the lower is the price at which it will find purchasers; or in other words, the demand price for each bushel or yard diminishes with every increase in the amount offered.

The unit of time may be chosen according to the circumstances of each particular problem: it may be a day, a month, a year, or even a generation: but in every case it must be short relatively to the period of the market under discussion. It is to be assumed that the general circumstances of the market remain unchanged throughout this period; that there is, for instance, no change in fashion or taste, no new substitute which might affect the demand, no new invention to disturb the supply.

The conditions of normal supply are less definite; and a full study of them must be reserved for later chapters. They will be found to vary in detail with the length of the period of time to which the investigation refers; chiefly because both the material capital of machinery and other business plant, and the immaterial capital of business skill and ability and organization, are of slow growth and slow decay.

Let us call to mind the "representative firm," whose economies of production, internal and external, are dependent on the aggregate volume of production of the commodity that it makes14; and, postponing all further study of the nature of this dependence, let us assume that the normal supply price of any amount of that commodity may be taken to be its normal expenses of production (including gross earnings of management15) by that firm. That is, let us assume that this is the price the expectation of which will just suffice to maintain the existing aggregate amount of production; some firms meanwhile rising and increasing their output, and others falling and diminishing theirs; but the aggregate production remaining unchanged. A price higher than this would increase the growth of the rising firms, and slacken, though it might not arrest, the decay of the falling firms; with the net result of an increase in the aggregate production. On the other hand, a price lower than this would hasten the decay of the falling firms, and slacken the growth of the rising firms; and on the whole diminish production: and a rise or fall of price would affect in like manner though perhaps not in an equal degree those great joint-stock companies which often stagnate, but seldom die.

8sect; 5. To give definiteness to our ideas let us take an illustration from the woollen trade. Let us suppose that a person well acquainted with the woollen trade sets himself to inquire what would be the normal supply price of a certain number of millions of yards annually of a particular kind of cloth. He would have to reckon (i) the price of the wool, coal, and other materials which would be used up in making it, (ii) wear-and-tear and depreciation of the buildings, machinery and other fixed capital, (iii) interest and insurance on all the capital, (iv) the wages of those who work in the factories, and (v) the gross earnings of management (including insurance against loss), of those who undertake the risks, who engineer and superintend the working. He would of course estimate the supply prices of all these different factors of production of the cloth with reference to the amounts of each of them that would be wanted, and on the supposition that the conditions of supply would be normal; and he would add them all together to find the supply price of the cloth.

Let us suppose a list of supply prices (or a supply schedule) made on a similar plan to that of our list of demand prices16 : the supply price of each amount of the commodity in a year, or any other unit of time, being written against that amount17. As the flow, or (annual) amount of the commodity increases, the supply price may either increase or diminish; or it may even alternately increase and diminish18. For if nature is offering a sturdy resistance to man's efforts to wring from her a larger supply of raw material, while at that particular stage there is no great room for introducing important new economies into the manufacture, the supply price will rise; but if the volume of production were greater, it would perhaps be profitable to substitute largely machine work for hand work and steam power for muscular force; and the increase in the volume of production would have diminished the expenses of production of the commodity of our representative firm. But those cases in which the supply price falls as the amount increases involve special difficulties of their own; and they are postponed to chapter XII. of this Book.

8sect; 6. When therefore the amount produced (in a unit of time) is such that the demand price is greater than the supply price, then sellers receive more than is sufficient to make it worth their while to bring goods to market to that amount; and there is at work an active force tending to increase the amount brought forward for sale. On the other hand, when the amount produced is such that the demand price is less than the supply price, sellers receive less than is sufficient to make it worth their while to bring goods to market on that scale; so that those who were just on the margin of doubt as to whether to go on producing are decided not to do so, and there is an active force at work tending to diminish the amount brought forward for sale. When the demand price is equal to the supply price, the amount produced has no tendency either to be increased or to be diminished; it is in equilibrium.

When demand and supply are in equilibrium, the amount of the commodity which is being produced in a unit of time may be called the equilibrium-amount, and the price at which it is being sold may be called the equilibrium-price.

Such an equilibrium is stable; that is, the price, if displaced a little from it, will tend to return, as a pendulum oscillates about its lowest point; and it will be found to be a characteristic of stable equilibria that in them the demand price is greater than the supply price for amounts just less than the equilibrium amount, and vice versâ. For when the demand price is greater than the supply price, the amount produced tends to increase. Therefore, if the demand price is greater than the supply price for amounts just less than an equilibrium amount; then, if the scale of production is temporarily diminished somewhat below that equilibrium amount, it will tend to return; thus the equilibrium is stable for displacements in that direction. If the demand price is greater than the supply price for amounts just less than the equilibrium amount, it is sure to be less than the supply price for amounts just greater: and therefore, if the scale of production is somewhat increased beyond the equilibrium position, it will tend to return; and the equilibrium will be stable for displacements in that direction also.

When demand and supply are in stable equilibrium, if any accident should move the scale of production from its equilibrium position, there will be instantly brought into play forces tending to push it back to that position; just as, if a stone hanging by a string is displaced from its equilibrium position, the force of gravity will at once tend to bring it back to its equilibrium position. The movements of the scale of production about its position of equilibrium will be of a somewhat similar kind19.

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But in real life such oscillations are seldom as rhythmical as those of a stone hanging freely from a string; the comparison would be more exact if the string were supposed to hang in the troubled waters of a mill-race, whose stream was at one time allowed to flow freely, and at another partially cut off. Nor are these complexities sufficient to illustrate all the disturbances with which the economist and the merchant alike are forced to concern themselves. If the person holding the string swings his hand with movements partly rhythmical and partly arbitrary, the illustration will not outrun the difficulties of some very real and practical problems of value. For indeed the demand and supply schedules do not in practice remain unchanged for a long time together, but are constantly being changed; and every change in them alters the equilibrium amount and the equilibrium price, and thus gives new positions to the centres about which the amount and the price tend to oscillate.

These considerations point to the great importance of the element of time in relation to demand and supply, to the study of which we now proceed. We shall gradually discover a great many different limitations of the doctrine that the price at which a thing can be produced represents its real cost of production, that is, the efforts and sacrifices which have been directly and indirectly devoted to its production. For, in an age of rapid change such as this, the equilibrium of normal demand and supply does not thus correspond to any distinct relation of a certain aggregate of pleasures got from the consumption of the commodity and an aggregate of efforts and sacrifices involved in producing it: the correspondence would not be exact, even if normal earnings and interest were exact measures of the efforts and sacrifices for which they are the money payments. This is the real drift of that much quoted, and much-misunderstood doctrine of Adam Smith and other economists that the normal, or "natural," value of a commodity is that which economic forces tend to bring about in the long run. It is the average value which economic forces would bring about if the general conditions of life were stationary for a run of time long enough to enable them all to work out their full effect20.

But we cannot foresee the future perfectly. The unexpected may happen; and the existing tendencies may be modified before they have had time to accomplish what appears now to be their full and complete work. The fact that the general conditions of life are not stationary is the source of many of the difficulties that are met with in applying economic doctrines to practical problems.

Of course Normal does not mean Competitive. Market prices and Normal prices are alike brought about by a multitude of influences, of which some rest on a moral basis and some on a physical; of which some are competitive and some are not. It is to the persistence of the influences considered, and the time allowed for them to work out their effects that we refer when contrasting Market and Normal price, and again when contrasting the narrower and the broader use of the term Normal price21.

8sect; 7. The remainder of the present volume will be chiefly occupied with interpreting and limiting this doctrine that the value of a thing tends in the long run to correspond to its cost of production. In particular the notion of equilibrium, which has been treated rather slightly in this chapter, will be studied more carefully in chapters V. and XII. of this Book: and some account of the controversy whether "cost of production" or "utility" governs value will be given in Appendix I. But it may be well to say a word or two here on this last point.

We might as reasonably dispute whether it is the upper or the under blade of a pair of scissors that cuts a piece of paper, as whether value is governed by utility or cost of production. It is true that when one blade is held still, and the cutting is effected by moving the other, we may say with careless brevity that the cutting is done by the second; but the statement is not strictly accurate, and is to be excused only so long as it claims to be merely a popular and not a strictly scientific account of what happens.

In the same way, when a thing already made has to be sold, the price which people will be willing to pay for it will be governed by their desire to have it, together with the amount they can afford to spend on it. Their desire to have it depends partly on the chance that, if they do not buy it, they will be able to get another thing like it at as low a price: this depends on the causes that govern the supply of it, and this again upon cost of production. But it may so happen that the stock to be sold is practically fixed. This, for instance, is the case with a fish market, in which the value of fish for the day is governed almost exclusively by the stock on the slabs in relation to the demand: and if a person chooses to take the stock for granted, and say that the price is governed by demand, his brevity may perhaps be excused so long as he does not claim strict accuracy. So again it may be pardonable, but it is not strictly accurate to say that the varying prices which the same rare book fetches, when sold and resold at Christie's auction room, are governed exclusively by demand.

Taking a case at the opposite extreme, we find some commodities which conform pretty closely to the law of constant return; that is to say, their average cost of production will be very nearly the same whether they are produced in small quantities or in large. In such a case the normal level about which the market price fluctuates will be this definite and fixed (money) cost of production. If the demand happens to be great, the market price will rise for a time above the level; but as a result production will increase and the market price will fall: and conversely, if the demand falls for a time below its ordinary level.

In such a case, if a person chooses to neglect market fluctuations, and to take it for granted that there will anyhow be enough demand for the commodity to insure that some of it, more or less, will find purchasers at a price equal to this cost of production, then he may be excused for ignoring the influence of demand, and speaking of (normal) price as governed by cost of production—provided only he does not claim scientific accuracy for the wording of his doctrine, and explains the influence of demand in its right place.

Thus we may conclude that, as a general rule, the shorter the period which we are considering, the greater must be the share of our attention which is given to the influence of demand on value; and the longer the period, the more important will be the influence of cost of production on value. For the influence of changes in cost of production takes as a rule a longer time to work itself out than does the influence of changes in demand. The actual value at any time, the market value as it is often called, is often more influenced by passing events and by causes whose action is fitful and short lived, than by those which work persistently. But in long periods these fitful and irregular causes in large measure efface one another's influence; so that in the long run persistent causes dominate value completely. Even the most persistent causes are however liable to change. For the whole structure of production is modified, and the relative costs of production of different things are permanently altered, from one generation to another.

When considering costs from the point of view of the capitalist employer, we of course measure them in money; because his direct concern with the efforts needed for the work of his employees lies in the money payments he must make. His concern with the real costs of their effort and of the training required for it is only indirect, though a monetary assessment of his own labour is necessary for some problems, as will be seen later on. But when considering costs from the social point of view, when inquiring whether the cost of attaining a given result is increasing or diminishing with changing economic conditions, then we are concerned with the real costs of efforts of various qualities, and with the real cost of waiting. If the purchasing power of money, in terms of effort has remained about constant, and if the rate of remuneration for waiting has remained about constant, then the money measure of costs corresponds to the real costs: but such a correspondence is never to be assumed lightly. These considerations will generally suffice for the interpretation of the term Cost in what follows, even where no distinct indication is given in the context.

BOOK V, CHAPTER IV: THE INVESTMENT AND DISTRIBUTION OF RESOURCES.

8sect; 1. The first difficulty to be cleared up in our study of normal values, is the nature of the motives which govern the investment of resources for a distant return. It will be well to begin by watching the action of a person who neither buys what he wants nor sells what he makes, but works on his own behalf; and who therefore balances the efforts and sacrifices which he makes on the one hand against the pleasures which he expects to derive from their fruit on the other, without the intervention of any money payments at all.

Let us then take the case of a man who builds a house for himself on land, and of materials, which nature supplies gratis; and who makes his implements as he goes, the labour of making them being counted as part of the labour of building the house. He would have to estimate the efforts required for building on any proposed plan; and to allow almost instinctively an amount increasing in geometrical proportion (a sort of compound interest) for the period that would elapse between each effort and the time when the house would be ready for his use. The utility of the house to him when finished would have to compensate him not only for the efforts, but for the waitings22.

If the two motives, one deterring, the other impelling, seemed equally balanced, he would be on the margin of doubt. Probably the gain would much more than outweigh the "real" cost with regard to some part of the house. But as he turned over more and more ambitious plans, he would at last find the advantages of any further extension balanced by the efforts and waitings required for making it; and that extension of the building would be on the outer limit, or margin of profitableness of the investment of his capital.

There would probably be several ways of building parts of the house; some parts for instance might almost equally well be built of wood or of rough stones: the investment of capital on each plan for each part of the accommodation would be compared with the advantages offered thereby, and each would be pushed forward till the outer limit or margin of profitableness had been reached. Thus there would be a great many margins of profitableness: one corresponding to each kind of plan on which each kind of accommodation might be provided.

8sect; 2. This illustration may serve to keep before us the way in which the efforts and sacrifices which are the real cost of production of a thing, underlie the expenses which are its money cost. But, as has just been remarked, the modern business man commonly takes the payments which he has to make, whether for wages or raw material, as he finds them; without staying to inquire how far they are an accurate measure of the efforts and sacrifices to which they correspond. His expenditure is generally made piece-meal; and the longer he expects to wait for the fruit of any outlay, the richer must that fruit be in order to compensate him. The anticipated fruit may not be certain; and in that case he will have to allow for the risk of failure. After making that allowance, the fruit of the outlay must be expected to exceed the outlay itself by an amount which, independently of his own remuneration, increases at compound interest in proportion to the time of waiting23. Under this head are to be entered the heavy expenses, direct and indirect, which every business must incur in building up its connection.

For brevity we may speak of any element of outlay (allowance being made for the remuneration of the undertaker himself) when increased by compound interest in this way, as accumulated; just as we used the term discounted to represent the present value of a future gratification. Each element of outlay has then to be accumulated for the time which will elapse between its being incurred and its bearing fruit; and the aggregate of these accumulated elements is the total outlay involved in the enterprise. The balance between efforts and the satisfactions resulting from them may be made up to any day that is found convenient. But whatever day is chosen, one simple rule must be followed:—Every element whether an effort or a satisfaction, which dates from a time anterior to that day, must have compound interest for the interval accumulated upon it: and every element, which dates from a time posterior to that day, must have compound interest for the interval discounted from it. If the day be anterior to the beginning of the enterprise, then every element must be discounted. But if, as is usual in such cases, the day be that when the efforts are finished, and the house is ready for use; then the efforts must carry compound interest up to that day, and the satisfactions must all be discounted back to that day.

Waiting is an element of cost as truly as effort is, and it is entered in the cost when accumulated: it is therefore of course not counted separately. Similarly, on the converse side, whatever money or command over satisfaction "comes in" at any time is part of the income of that time: if the time is before the day for which accounts are balanced up, then it must be accumulated up to that day; if after, it must be discounted back. If, instead of being converted to immediate enjoyment, it is used as a stored up source of future income, that later income must not be counted as an additional return to the investment24.

If the enterprise were, say, to dig out a dock-basin on a contract, the payment for which would be made without fail when the work was finished; and if the plant used in the work might be taken to be worn out in the process, and valueless at the end of it; then the enterprise would be just remunerative if this aggregate of outlays, accumulated up to the period of payment, were just equal to that payment.

But, as a rule, the proceeds of the sales come in gradually; and we must suppose a balance-sheet struck, looking both backwards and forwards. Looking backwards we should sum up the net outlays, and add in accumulated compound interest on each element of outlay. Looking forwards we should sum up all net incomings, and from the value of each subtract compound interest for the period during which it would be deferred. The aggregate of the net incomings so discounted would be balanced against the aggregate of the accumulated outlays: and if the two were just equal, the business would be just remunerative. In calculating the outgoings the head of the business must reckon in the value of his own work25.

8sect; 3. At the beginning of his undertaking, and at every successive stage, the alert business man strives so to modify his arrangements as to obtain better results with a given expenditure, or equal results with a less expenditure. In other words, he ceaselessly applies the principle of substitution, with the purpose of increasing his profits; and, in so doing, he seldom fails to increase the total efficiency of work, the total power over nature which man derives from organization and knowledge.

Every locality has incidents of its own which affect in various ways the methods of arrangement of every class of business that is carried on in it: and even in the same place and the same trade no two persons pursuing the same aims will adopt exactly the same routes. The tendency to variation is a chief cause of progress; and the abler are the undertakers in any trade the greater will this tendency be. In some trades, as for instance cotton-spinning, the possible variations are confined within narrow limits; no one can hold his own at all who does not use machinery, and very nearly the latest machinery, for every part of the work. But in others, as for instance in some branches of the wood and metal trades, in farming, and in shopkeeping, there can be great variations. For instance, of two manufacturers in the same trade, one will perhaps have a larger wages bill and the other heavier charges on account of machinery: of two retail dealers one will have a larger capital locked up in stock and the other will spend more on advertisements and other means of building up the immaterial capital of a profitable trade connection. And in minor details the variations are numberless.

Each man's actions are influenced by his special opportunities and resources, as well as by his temperament and his associations: but each, taking account of his own means, will push the investment of capital in his business in each several direction until what appears in his judgment to be the outer limit, or margin, of profitableness is reached; that is, until there seems to him no good reason for thinking that the gains resulting from any further investment in that particular direction would compensate him for his outlay. The margin of profitableness, even in regard to one and the same branch or sub-branch of industry, is not to be regarded as a mere point on any one fixed line of possible investment; but as a boundary line of irregular shape cutting one after another every possible line of investment.

8sect; 4. This principle of substitution is closely connected with, and is indeed partly based on, that tendency to a diminishing rate of return from any excessive application of resources or of energies in any given direction, which is in accordance with general experience. It is thus linked up with the broad tendency of a diminishing return to increased applications of capital and labour to land in old countries which plays a prominent part in classical economics. And it is so closely akin to the principle of the diminution of marginal utility that results in general from increased expenditure, that some applications of the two principles are almost identical. It has already been observed that new methods of production bring into existence new commodities, or lower the price of old commodities so as to bring them within the reach of increased numbers of consumers: that on the other hand changes in the methods and volume of consumption cause new developments of production, and new distribution of the resources of production: and that though some methods of consumption which contribute most to man's higher life, do little if anything towards furthering the production of material wealth, yet production and consumption are intimately correlated26. But now we are to consider more in detail how the distribution of the resources of production between different industrial undertakings is the counterpart and reflex of the distribution of the consumers' purchases between different classes of commodities27.

Let us revert to the primitive housewife, who having "a limited number of hanks of yarn from the year's shearing, considers all the domestic wants for clothing and tries to distribute the yarn between them in such a way as to contribute as much as possible to the family wellbeing. She will think she has failed if, when it is done, she has reason to regret that she did not apply more to making, say, socks, and less to vests. But if, on the other hand, she hit on the right points to stop at, then she made just so many socks and vests that she got an equal amount of good out of the last bundle of yarn that she applied to socks, and the last she applied to vests28." If it happened that two ways of making a vest were open to her, which were equally satisfactory as regards results, but of which one, while using up a little more yarn, involved a little less trouble than the other; then her problems would be typical of those of the larger business world. They would include first decisions as to the relative urgency of various ends; secondly, decisions as to the relative advantages of various means of attaining each end; thirdly, decisions, based on these two sets of decisions, as to the margin up to which she could most profitably carry the application of each means towards each end.

These three classes of decisions have to be taken on a larger scale by the business man, who has more complex balancings and adjustments to make before reaching each decision29. Let us take an illustration from the building trade. Let us watch the operations of a "speculative builder" in the honourable sense of the term: that is, a man who sets out to erect honest buildings in anticipation of general demand; who bears the penalty of any error in his judgment; and who, if his judgment is approved by events, benefits the community as well as himself. Let him be considering whether to erect dwelling houses, or warehouses, or factories or shops. He is trained to form at once a fairly good opinion as to the method of working most suitable for each class of building, and to make a rough estimate of its cost. He estimates the cost of various sites adapted for each class of building: and he reckons in the price that he would have to pay for any site as a part of his capital expenditure, just as he does the expense to which he would be put for laying foundations in it, and so on. He brings this estimate of cost into relation with his estimate of the price he is likely to get for any given building, together with its site. If he can find no case in which the demand price exceeds his outlays by enough to yield him a good profit, with some margin against risks, he may remain idle. Or he may possibly build at some risk in order to keep his most trusty workmen together, and to find some occupation for his plant and his salaried assistance: but more on this later on.

Suppose him now to have decided that (say) villa residences of a certain type, erected on a plot of ground which he can buy, are likely to yield him a good profit. The main end to be sought being thus settled, he sets himself to study more carefully the means by which it is to be obtained, and, in connection with that study, to consider possible modifications in the details of his plans.

Given the general character of the houses to be built, he will have to consider in what proportions to use various materials—brick, stone, steel, cement, plaster, wood, etc., with a view to obtaining the result which will contribute most, in proportion to its cost, to the efficiency of the house in gratifying the artistic taste of purchasers and in ministering to their comfort. In thus deciding what is the best distribution of his resources between various commodities, he is dealing with substantially the same problem as the primitive housewife, who has to consider the most economic distribution of her yarn between the various needs of her household.

Like her, he has to reflect that the yield of benefit which any particular use gave would be relatively large up to a certain point, and would then gradually diminish. Like her, he has so to distribute his resources that they have the same marginal utility in each use: he has to weigh the loss that would result from taking away a little expenditure here, with the gain that would result from adding a little there. In effect both of them work on lines similar to those which guide the farmer in so adjusting the application of his capital and labour to land, that no field is stinted of extra cultivation to which it would have given a generous return, and none receives so great an expenditure as to call into strong activity the tendency to diminishing return in agriculture30.

Thus it is that the alert business man, as has just been said, "pushes the investment of capital in his business in each several direction until what appears in his judgment to be the outer limit, or margin, of profitableness is reached; that is, until there seems to him no good reason for thinking that the gains resulting from any further investment in that particular direction would compensate him for his outlay." He never assumes that roundabout methods will be remunerative in the long run. But he is always on the look out for roundabout methods that promise to be more effective in proportion to their cost than direct methods: and he adopts the best of them, if it lies within his means.

8sect; 5. Some technical terms relating to costs may be considered here. When investing his capital in providing the means of carrying on an undertaking, the business man looks to being recouped by the price obtained for its various products; and he expects to be able under normal conditions to charge for each of them a sufficient price; that is, one which will not only cover the special, direct, or prime cost, but also bear its proper share of the general expenses of the business; and these we may call its general, or supplementary cost. These two elements together make its total cost.

There are great variations in the usage of the term Prime cost in business. But it is taken here in a narrow sense. Supplementary costs are taken to include standing charges on account of the durable plant in which much of the capital of the business has been invested, and also the salaries of the upper employees: for the charges to which the business is put on account of their salaries cannot generally be adapted quickly to changes in the amount of work there is for them to do. There remains nothing but the (money) cost of the raw material used in making the commodity and the wages of that part of the labour spent on it which is paid by the hour or the piece and the extra wear-and-tear of plant. This is the special cost which a manufacturer has in view, when his works are not fully employed, and he is calculating the lowest price at which it will be worth his while to accept an order, irrespectively of any effect that his action may have in spoiling the market for future orders, and trade being slack at the time. But in fact he must as a rule take account of this effect: the price at which it is just worth his while to produce, even when trade is slack, is in practice generally a good deal above this prime cost, as we shall see later on31.

8sect; 6. Supplementary cost must generally be covered by the selling price to some considerable extent in the short run. And they must be completely covered by it in the long run; for, if they are not, production will be checked. Supplementary costs are of many different kinds; and some of them differ only in degree from prime costs. For instance, if an engineering firm is in doubt whether to accept an order at a rather low price for a certain locomotive, the absolute prime costs include the value of the raw material and the wages of the artisans and labourers employed on the locomotive. But there is no clear rule as to the salaried staff: for, if work is slack, they will probably have some time on their hands; and their salaries will therefore commonly be classed among general or supplementary costs. The line of division is however often blurred over. For instance, foremen and other trusted artisans are seldom dismissed merely because of a temporary scarcity of work; and therefore an occasional order may be taken to fill up idle time, even though its price does not cover their salaries and wages. That is they may not be regarded as prime costs in such a case. But, of course the staff in the office can be in some measure adjusted to variations in the work of the firm by leaving vacancies unfilled and even by weeding out inefficient men during slack times; and by getting extra help or putting out some of the work in busy times.

If we pass from such tasks to larger and longer tasks, as for instance the working out a contract to deliver a great number of locomotives gradually over a period of several years, then most of the office work done in connection with that order must be regarded as special to it: for if it had been declined and nothing else taken in its place, the expenses under the head of salaries could have been reduced almost to a proportionate extent.

The case is much stronger when we consider a fairly steady market for any class of staple manufactures extending over a long time. For then the outlay incurred for installing specialized skill and organization, the permanent office staff, and the durable plant of the workshops can all be regarded as part of the costs necessary for the process of production. That outlay will be increased up to a margin at which the branch of manufacture seems in danger of growing too fast for its market.

In the next chapter the argument of Chapter III. and of this chapter is continued. It is shown in more detail how those costs which most powerfully act on supply and therefore on price, are limited to a narrow and arbitrary group in the case of a single contract for, say, a locomotive; but are much fuller, and correspond much more truly to the broad features of industrial economy in the case of a continuous supply to a fairly steady general market: the influence of cost of production on value does not show itself clearly except in relatively long periods; and it is to be estimated with regard to a whole process of production rather than a particular locomotive, or a particular parcel of goods. And a similar study is made in Chapters VIII.—X. of variations in the character of those prime and supplementary costs which consist of charges for interest (or profits) on investments in agents of production, according as the periods of the market under consideration are long or short.

Meanwhile it may be noticed that the distinction between prime and supplementary costs operates in every phase of civilization, though it is not likely to attract much attention except in a capitalistic phase. Robinson Crusoe had to do only with real costs and real satisfactions: and an old-fashioned peasant family, which bought little and sold little, arranged its investments of present "effort and waiting" for future benefits on nearly the same lines. But, if either were doubting whether it was worth while to take a light ladder on a trip to gather wild fruits, the prime costs alone would be weighed against the expected benefits: and yet the ladder would not have been made, unless it had been expected to render sufficient service in the aggregate of many little tasks, to remunerate the cost of making it. In the long run it had to repay its total costs, supplementary as well as prime.

Even the modern employer has to look at his own labour as a real cost in the first instance. He may think that a certain enterprise is likely to yield a surplus of money incomings over money outgoings (after proper allowances for risks and for discountings of future happenings); but that the surplus will amount to less than the money equivalent of the trouble and worry that the enterprise will cause to himself: and, in that case, he will avoid it32.

BOOK V, CHAPTER V: EQUILIBRIUM OF NORMAL DEMAND AND SUPPLY, CONTINUED, WITH REFERENCE TO LONG AND SHORT PERIODS.

8sect; 1. The variations in the scope of the term Normal, according as the periods of time under discussion are long or short, were indicated in Chapter III. We are now ready to study them more closely.

In this case, as in others, the economist merely brings to light difficulties that are latent in the common discourse of life, so that by being frankly faced they may be thoroughly overcome. For in ordinary life it is customary to use the word Normal in different senses, with reference to different periods of time; and to leave the context to explain the transition from one to another. The economist follows this practice of every-day life: but, by taking pains to indicate the transition, he sometimes seems to have created a complication which in fact he has only revealed.

Thus, when it is said that the price of wool on a certain day was abnormally high though the average price for the year was abnormally low, that the wages of coal-miners were abnormally high in 1872 and abnormally low in 1879, that the (real) wages of labour were abnormally high at the end of the fourteenth century and abnormally low in the middle of the sixteenth; everyone understands that the scope of the term normal is not the same in these various cases.

The best illustrations of this come from manufactures where the plant is long-lived, and the product is short-lived. When a new textile fabric is first introduced into favour, and there is very little plant suitable for making it, its normal price for some months may be twice as high as those of other fabrics which are not less difficult to make, but for making which there is an abundant stock of suitable plant and skill. Looking at long periods we may say that its normal price is on a par with that of the others: but if during the first few months a good deal of it were offered for sale in a bankrupt's stock we might say that its price was abnormally low even when it was selling for half as much again as the others. Everyone takes the context as indicating the special use of the term in each several case; and a formal interpretation clause is seldom necessary, because in ordinary conversation misunderstandings can be nipped in the bud by question and answer. But let us look at this matter more closely.

We have noticed33 how a cloth manufacturer would need to calculate the expenses of producing all the different things required for making cloth with reference to the amounts of each of them that would be wanted; and on the supposition in the first instance that the conditions of supply would be normal. But we have yet to take account of the fact that he must give to this term a wider or narrower range, according as he was looking more or less far ahead.

Thus in estimating the wages required to call forth an adequate supply of labour to work a certain class of looms, he might take the current wages of similar work in the neighbourhood: or he might argue that there was a scarcity of that particular class of labour in the neighbourhood, that its current wages there were higher than in other parts of England, and that looking forward over several years so as to allow for immigration, he might take the normal rate of wages at a rather lower rate than that prevailing there at the time. Or lastly, he might think that the wages of weavers all over the country were abnormally low relatively to others of the same grade, in consequence of a too sanguine view having been taken of the prospects of the trade half a generation ago. He might argue that this branch of work was overcrowded, that parents had already begun to choose other trades for their children which offered greater net advantages and yet were not more difficult; that in consequence a few years would see a falling-off in the supply of labour suited for his purpose; so that looking forward a long time he must take normal wages at a rate rather higher than the present average34.

Again, in estimating the normal supply price of wool, he would take the average of several past years. He would make allowance for any change that would be likely to affect the supply in the immediate future; and he would reckon for the effect of such droughts as from time to time occur in Australia and elsewhere; since their occurrence is too common to be regarded as abnormal. But he would not allow here for the chance of our being involved in a great war, by which the Australian supplies might be cut off; he would consider that any allowance for this should come under the head of extraordinary trade risks, and not enter into his estimate of the normal supply price of wool.

He would deal in the same way with the risk of civil tumult or any violent and long-continued disturbance of the labour market of an unusual character; but in his estimate of the amount of work that could be got out of the machinery, etc. under normal conditions, he would probably reckon for minor interruptions from trade disputes such as are continually occurring, and are therefore to be regarded as belonging to the regular course of events, that is as not abnormal.

In all these calculations he would not concern himself specially to inquire how far mankind are under the exclusive influence of selfish or self-regarding motives. He might be aware that anger and vanity, jealousy and offended dignity are still almost as common causes of strikes and lockouts, as the desire for pecuniary gain: but that would not enter into his calculations. All that he would want to know about them would be whether they acted with sufficient regularity for him to be able to make a reasonably good allowance for their influence in interrupting work and raising the normal supply price of the goods35.

8sect; 2. The element of time is a chief cause of those difficulties in economic investigations which make it necessary for man with his limited powers to go step by step; breaking up a complex question, studying one bit at a time, and at last combining his partial solutions into a more or less complete solution of the whole riddle. In breaking it up, he segregates those disturbing causes, whose wanderings happen to be inconvenient, for the time in a pound called Cœteris Paribus. The study of some group of tendencies is isolated by the assumption other things being equal: the existence of other tendencies is not denied, but their disturbing effect is neglected for a time. The more the issue is thus narrowed, the more exactly can it be handled: but also the less closely does it correspond to real life. Each exact and firm handling of a narrow issue, however, helps towards treating broader issues, in which that narrow issue is contained, more exactly than would otherwise have been possible. With each step more things can be let out of the pound; exact discussions can be made less abstract, realistic discussions can be made less inexact than was possible at an earlier stage36.

Our first step towards studying the influences exerted by the element of time on the relations between cost of production and value may well be to consider the famous fiction of the "Stationary state" in which those influences would be but little felt; and to contrast the results which would be found there with those in the modern world.

This state obtains its name from the fact that in it the general conditions of production and consumption, of distribution and exchange remain motionless; but yet it is full of movement; for it is a mode of life. The average age of the population may be stationary; though each individual is growing up from youth towards his prime, or downwards to old age. And the same amount of things per head of the population will have been produced in the same ways by the same classes of people for many generations together; and therefore this supply of the appliances for production will have had full time to be adjusted to the steady demand.

Of course we might assume that in our stationary state every business remained always of the same size, and with the same trade connection. But we need not go so far as that; it will suffice to suppose that firms rise and fall, but that the "representative" firm remains always of about the same size, as does the representative tree of a virgin forest, and that therefore the economies resulting from its own resources are constant: and since the aggregate volume of production is constant, so also are those economies resulting from subsidiary industries in the neighbourhood, etc. [That is, its internal and external economies are both constant. The price, the expectation of which just induced persons to enter the trade, must be sufficient to cover in the long run the cost of building up a trade connection; and a proportionate share of it must be added in to make up the total cost of production.]

In a stationary state then the plain rule would be that cost of production governs value. Each effect would be attributable mainly to one cause; there would not be much complex action and reaction between cause and effect. Each element of cost would be governed by "natural" laws, subject to some control from fixed custom. There would be no reflex influence of demand; no fundamental difference between the immediate and the later effects of economic causes. There would be no distinction between long-period and short-period normal value, at all events if we supposed that in that monotonous world the harvests themselves were uniform: for the representative firm being always of the same size, and always doing the same class of business to the same extent and in the same way, with no slack times, and no specially busy times, its normal expenses by which the normal supply price is governed would be always the same. The demand lists of prices would always be the same, and so would the supply lists; and normal price would never vary.

But nothing of this is true in the world in which we live. Here every economic force is constantly changing its action, under the influence of other forces which are acting around it. Here changes in the volume of production, in its methods, and in its cost are ever mutually modifying one another; they are always affecting and being affected by the character and the extent of demand. Further all these mutual influences take time to work themselves out, and, as a rule, no two influences move at equal pace. In this world therefore every plain and simple doctrine as to the relations between cost of production, demand and value is necessarily false: and the greater the appearance of lucidity which is given to it by skilful exposition, the more mischievous it is. A man is likely to be a better economist if he trusts to his common sense, and practical instincts, than if he professes to study the theory of value and is resolved to find it easy.

8sect; 3. The Stationary state has just been taken to be one in which population is stationary. But nearly all its distinctive features may be exhibited in a place where population and wealth are both growing, provided they are growing at about the same rate, and there is no scarcity of land: and provided also the methods of production and the conditions of trade change but little; and above all, where the character of man himself is a constant quantity. For in such a state by far the most important conditions of production and consumption, of exchange and distribution will remain of the same quality, and in the same general relations to one another, though they are all increasing in volume37.

This relaxation of the rigid bonds of a purely stationary state brings us one step nearer to the actual conditions of life: and by relaxing them still further we get nearer still. We thus approach by gradual steps towards the difficult problem of the interaction of countless economic causes. In the stationary state all the conditions of production and consumption are reduced to rest: but less violent assumptions are made by what is, not quite accurately, called the statical method. By that method we fix our minds on some central point: we suppose it for the time to be reduced to a stationary state; and we then study in relation to it the forces that affect the things by which it is surrounded, and any tendency there may be to equilibrium of these forces. A number of these partial studies may lead the way towards a solution of problems too difficult to be grasped at one effort38.

8sect; 4. We may roughly classify problems connected with fishing industries as those which are affected by very quick changes, such as uncertainties of the weather; or by changes of moderate length, such as the increased demand for fish caused by the scarcity of meat during the year or two following a cattle plague; or lastly, we may consider the great increase during a whole generation of the demand for fish which might result from the rapid growth of a high-strung artisan population making little use of their muscles.

The day to day oscillations of the price of fish resulting from uncertainties of the weather, etc., are governed by practically the same causes in modern England as in the supposed stationary state. The changes in the general economic conditions around us are quick; but they are not quick enough to affect perceptibly the short-period normal level about which the price fluctuates from day to day: and they may be neglected [impounded in cœteris paribus] during a study of such fluctuations.

Let us then pass on; and suppose a great increase in the general demand for fish, such for instance as might arise from a disease affecting farm stock, by which meat was made a dear and dangerous food for several years together. We now impound fluctuations due to the weather in cœteris paribus, and neglect them provisionally: they are so quick that they speedily obliterate one another, and are therefore not important for problems of this class. And for the opposite reason we neglect variations in the numbers of those who are brought up as seafaring men: for these variations are too slow to produce much effect in the year or two during which the scarcity of meat lasts. Having impounded these two sets for the time, we give our full attention to such influences as the inducements which good fishing wages will offer to sailors to stay in their fishing homes for a year or two, instead of applying for work on a ship. We consider what old fishing boats, and even vessels that were not specially made for fishing, can be adapted and sent to fish for a year or two. The normal price for any given daily supply of fish, which we are now seeking, is the price which will quickly call into the fishing trade capital and labour enough to obtain that supply in a day's fishing of average good fortune; the influence which the price of fish will have upon capital and labour available in the fishing trade being governed by rather narrow causes such as these. This new level about which the price oscillates during these years of exceptionally great demand, will obviously be higher than before. Here we see an illustration of the almost universal law that the term Normal being taken to refer to a short period of time an increase in the amount demanded raises the normal supply price. This law is almost universal even as regards industries which in long periods follow the tendency to increasing return39.

But if we turn to consider the normal supply price with reference to a long period of time, we shall find that it is governed by a different set of causes, and with different results. For suppose that the disuse of meat causes a permanent distaste for it, and that an increased demand for fish continues long enough to enable the forces by which its supply is governed to work out their action fully (of course oscillation from day to day and from year to year would continue: but we may leave them on one side). The source of supply in the sea might perhaps show signs of exhaustion, and the fishermen might have to resort to more distant coasts and to deeper waters, Nature giving a Diminishing Return to the increased application of capital and labour of a given order of efficiency. On the other hand, those might turn out to be right who think that man is responsible for but a very small part of the destruction of fish that is constantly going on; and in that case a boat starting with equally good appliances and an equally efficient crew would be likely to get nearly as good a haul after the increase in the total volume of the fishing trade as before. In any case the normal cost of equipping a good boat with an efficient crew would certainly not be higher, and probably be a little lower after the trade had settled down to its now increased dimensions than before. For since fishermen require only trained aptitudes, and not any exceptional natural qualities, their number could be increased in less than a generation to almost any extent that was necessary to meet the demand; while the industries connected with building boats, making nets, etc. being now on a larger scale would be organized more thoroughly and economically. If therefore the waters of the sea showed no signs of depletion of fish, an increased supply could be produced at a lower price after a time sufficiently long to enable the normal action of economic causes to work itself out: and, the term Normal being taken to refer to a long period of time, the normal price of fish would decrease with an increase in demand40.

Thus we may emphasize the distinction already made between average price and normal price. An average may be taken of the prices of any set of sales extending over a day or a week or a year or any other time: or it may be the average of sales at any time in many markets; or it may be the average of many such averages. But the conditions which are normal to any one set of sales are not likely to be exactly those which are normal to the others: and therefore it is only by accident that an average price will be a normal price; that is, the price which any one set of conditions tends to produce. In a stationary state alone, as we have just seen, the term normal always means the same thing: there, but only there, "average price" and "normal price" are convertible terms41.

8sect; 5. To go over the ground in another way. Market values are governed by the relation of demand to stocks actually in the market; with more or less reference to "future" supplies, and not without some influence of trade combinations.

But the current supply is in itself partly due to the action of producers in the past; and this action has been determined on as the result of a comparison of the prices which they expect to get for their goods with the expenses to which they will be put in producing them. The range of expenses of which they take account depends on whether they are merely considering the extra expenses of certain extra production with their existing plant, or are considering whether to lay down new plant for the purpose. In the case, for instance, of an order for a single locomotive, which was discussed a little while ago42, the question of readjusting the plant to demand would hardly arise: the main question would be whether more work could conveniently be got out of the existing plant. But in view of an order for a large number of locomotives to be delivered gradually over a series of years, some extension of plant "specially" made for the purpose, and therefore truly to be regarded as prime marginal costs would almost certainly be carefully considered.

Whether the new production for which there appears to be a market be large or small, the general rule will be that unless the price is expected to be very low that portion of the supply which can be most easily produced, with but small prime costs, will be produced: that portion is not likely to be on the margin of production. As the expectations of price improve, an increased part of the production will yield a considerable surplus above prime costs, and the margin of production will be pushed outwards. Every increase in the price expected will, as a rule, induce some people who would not otherwise have produced anything, to produce a little; and those, who have produced something for the lower price, will produce more for the higher price. That part of their production with regard to which such persons are on the margin of doubt as to whether it is worth while for them to produce it at the price, is to be included together with that of the persons who are in doubt whether to produce at all; the two together constitute the marginal production at that price. The producers, who are in doubt whether to produce anything at all, may be said to lie altogether on the margin of production (or, if they are agriculturists, on the margin of cultivation). But as a rule they are very few in number, and their action is less important than that of those who would in any case produce something.

The general drift of the term normal supply price is always the same whether the period to which it refers is short or long; but there are great differences in detail. In every case reference is made to a certain given rate of aggregate production; that is, to the production of a certain aggregate amount daily or annually. In every case the price is that the expectation of which is sufficient and only just sufficient to make it worth while for people to set themselves to produce that aggregate amount; in every case the cost of production is marginal; that is, it is the cost of production of those goods which are on the margin of not being produced at all, and which would not be produced if the price to be got for them were expected to be lower. But the causes which determine this margin vary with the length of the period under consideration. For short periods people take the stock of appliances for production as practically fixed; and they are governed by their expectations of demand in considering how actively they shall set themselves to work those appliances. In long periods they set themselves to adjust the flow of these appliances to their expectations of demand for the goods which the appliances help to produce. Let us examine this difference closely.

8sect; 6. The immediate effect of the expectation of a high price is to cause people to bring into active work all their appliances of production, and to work them full time and perhaps overtime. The supply price is then the money cost of production of that part of the produce which forces the undertaker to hire such inefficient labour (perhaps tired by working overtime) at so high a price, and to put himself and others to so much strain and inconvenience that he is on the margin of doubt whether it is worth his while to do it or not. The immediate effect of the expectation of a low price is to throw many appliances for production out of work, and slacken the work of others; and if the producers had no fear of spoiling their markets, it would be worth their while to produce for a time for any price that covered the prime costs of production and rewarded them for their own trouble.

But, as it is, they generally hold out for a higher price; each man fears to spoil his chance of getting a better price later on from his own customers; or, if he produces for a large and open market, he is more or less in fear of incurring the resentment of other producers, should he sell needlessly at a price that spoils the common market for all. The marginal production in this case is the production of those whom a little further fall of price would cause, either from a regard to their own interest or by formal or informal agreement with other producers, to suspend production for fear of further spoiling the market. The price which, for these reasons, producers are just on the point of refusing, is the true marginal supply price for short periods. It is nearly always above, and generally very much above the special or prime cost for raw materials, labour and wear-and-tear of plant, which is immediately and directly involved by getting a little further use out of appliances which are not fully employed. This point needs further study.

In a trade which uses very expensive plant, the prime cost of goods is but a small part of their total cost; and an order at much less than their normal price may leave a large surplus above their prime cost. But if producers accept such orders in their anxiety to prevent their plant from being idle, they glut the market and tend to prevent prices from reviving. In fact however they seldom pursue this policy constantly and without moderation. If they did, they might ruin many of those in the trade, themselves perhaps among the number; and in that case a revival of demand would find little response in supply, and would raise violently the prices of the goods produced by the trade. Extreme variations of this kind are in the long run beneficial neither to producers nor to consumers; and general opinion is not altogether hostile to that code of trade morality which condemns the action of anyone who "spoils the market" by being too ready to accept a price that does little more than cover the prime cost of his goods, and allows but little on account of his general expenses43.

For example, if at any time the prime cost, in the narrowest sense of the word, of a bale of cloth is £100; and if another £100 are needed to make the cloth pay its due share of the general expenses of the establishment, including normal profits to its owners, then the practically effective supply price is perhaps not very likely to fall below £150 under ordinary conditions, even for short periods; though of course a few special bargains may be made at lower prices without much affecting the general market.

Thus, although nothing but prime cost enters necessarily and directly into the supply price for short periods, it is yet true that supplementary costs also exert some influence indirectly. A producer does not often isolate the cost of each separate small parcel of his output; he is apt to treat a considerable part of it, even in some cases the whole of it, more or less as a unit. He inquires whether it is worth his while to add a certain new line to his present undertakings, whether it is worth while to introduce a new machine and so on. He treats the extra output that would result from the change more or less as a unit beforehand; and afterwards he quotes the lowest prices, which he is willing to accept, with more or less reference to the whole cost of that extra output regarded as a unit.

In other words he regards an increase in his processes of production, rather than an individual parcel of his products, as a unit in most of his transactions. And the analytical economist must follow suit, if he would keep in close touch with actual conditions. These considerations tend to blur the sharpness of outline of the theory of value: but they do not affect its substance44.

To sum up then as regards short periods. The supply of specialized skill and ability, of suitable machinery and other material capital, and of the appropriate industrial organization has not time to be fully adapted to demand; but the producers have to adjust their supply to the demand as best they can with the appliances already at their disposal. On the one hand there is not time materially to increase those appliances if the supply of them is deficient; and on the other, if the supply is excessive, some of them must remain imperfectly employed, since there is not time for the supply to be much reduced by gradual decay, and by conversion to other uses. Variations in the particular income derived from them do not for the time affect perceptibly the supply; and do not directly affect the price of the commodities produced by them. The income is a surplus of total receipts over prime cost; [that is, it has something of the nature of a rent as will be seen more clearly in chapter VIII.]. But unless it is sufficient to cover in the long run a fair share of the general costs of the business, production will gradually fall off. In this way a controlling influence over the relatively quick movements of supply price during short periods is exercised by causes in the background which range over a long period; and the fear of "spoiling the market" often makes those causes act more promptly than they otherwise would.

8sect; 7. In long periods on the other hand all investments of capital and effort in providing the material plant and the organization of a business, and in acquiring trade knowledge and specialized ability, have time to be adjusted to the incomes which are expected to be earned by them: and the estimates of those incomes therefore directly govern supply, and are the true long-period normal supply price of the commodities produced.

A great part of the capital invested in a business is generally spent on building up its internal organization and its external trade connections. If the business does not prosper all that capital is lost, even though its material plant may realize a considerable part of its original cost. And anyone proposing to start a new business in any trade must reckon for the chance of this loss. If himself a man of normal capacity for that class of work, he may look forward ere long to his business being a representative one, in the sense in which we have used this term, with its fair share of the economies of production on a large scale. If the net earnings of such a representative business seem likely to be greater than he could get by similar investments in other trades to which he has access, he will choose this trade. Thus that investment of capital in a trade, on which the price of the commodity produced by it depends in the long run, is governed by estimates on the one hand of the outgoings required to build up and to work a representative firm, and on the other of the incomings, spread over a long period of time, to be got by such a price.

At any particular moment some businesses will be rising and others falling: but when we are taking a broad view of the causes which govern normal supply price, we need not trouble ourselves with these eddies on the surface of the great tide. Any particular increase of production may be due to some new manufacturer who is struggling against difficulties, working with insufficient capital, and enduring great privations in the hope that he may gradually build up a good business. Or it may be due to some wealthy firm which by enlarging its premises is enabled to attain new economies, and thus obtain a larger output at a lower proportionate cost: and, as this additional output will be small relatively to the aggregate volume of production in the trade, it will not much lower the price; so that the firm will reap great gains from its successful adaptation to its surroundings. But while these variations are occurring in the fortunes of individual businesses, there may be a steady tendency of the long-period normal supply price to diminish, as a direct consequence of an increase in the aggregate volume of production.

8sect; 8. Of course there is no hard and sharp line of division between "long" and "short" periods. Nature has drawn no such lines in the economic conditions of actual life; and in dealing with practical problems they are not wanted. Just as we contrast civilized with uncivilized races, and establish many general propositions about either group, though no hard and fast division can be drawn between the two; so we contrast long and short periods without attempting any rigid demarcation between them. If it is necessary for the purposes of any particular argument to divide one case sharply from the other, it can be done by a special interpretation clause: but the occasions on which this is necessary are neither frequent nor important.

Four classes stand out. In each, price is governed by the relations between demand and supply. As regards market prices, Supply is taken to mean the stock of the commodity in question which is on hand, or at all events "in sight." As regards normal prices, when the term Normal is taken to relate to short periods of a few months or a year, Supply means broadly what can be produced for the price in question with the existing stock of plant, personal and impersonal, in the given time. As regards normal prices, when the term Normal is to refer to long periods of several years, Supply means what can be produced by plant, which itself can be remuneratively produced and applied within the given time; while lastly, there are very gradual or Secular movements of normal price, caused by the gradual growth of knowledge, of population and of capital, and the changing conditions of demand and supply from one generation to another45.

The remainder of the present volume is chiefly concerned with the third of the above classes: that is, with the normal relations of wages, profits, prices, etc., for rather long periods. But occasionally account has to be taken of changes that extend over very many years; and one chapter, Book VI. ch. XII., is given up to "The Influence of Progress on Value," that is, to the study of secular changes of value.

BOOK V, CHAPTER VI: JOINT AND COMPOSITE DEMAND. JOINT AND COMPOSITE SUPPLY.

8sect; 1. Bread satisfies man's wants directly: and the demand for it is said to be direct. But a flour mill and an oven satisfy wants only indirectly, by helping to make bread, etc., and the demand for them is said to be indirect. More generally:—

The demand for raw materials and other means of production is indirect and is derived from the direct demand for those directly serviceable products which they help to produce.

The services of the flour mill and the oven are joined together in the ultimate product, bread: the demand for them is therefore called a joint demand. Again, hops and malt are complementary to one another; and are joined together in the common destination of ale: and so on. Thus the demand for each of several complementary things is derived from the services which they jointly render in the production of some ultimate product, as for instance a loaf of bread, a cask of ale. In other words there is a joint demand for the services which any of these things render in helping to produce a thing which satisfies wants directly and for which there is therefore a direct demand: the direct demand for the finished product is in effect split up into many derived demands for the things used in producing it46.

To take another illustration, the direct demand for houses gives rise to a joint demand for the labour of all the various building trades, and for bricks, stone, wood, etc. which are factors of production of building work of all kinds, or as we may say for shortness, of new houses. The demand for any one of these, as for instance the labour of plasterers, is only an indirect or derived demand.

Let us pursue this last illustration with reference to a class of events that are of frequent occurrence in the labour market; the period over which the disturbance extends being short, and the causes of which we have to take account as readjusting demand and supply being only such as are able to operate within that short period.

This case has important practical bearings, which give it a special claim on our attention; but we should notice that, referring as it does to short periods, it is an exception to our general rule of selecting illustrations in this and the neighbouring chapters from cases in which there is time enough for the full long-period action of the forces of supply to be developed.

Let us then suppose that the supply and demand for building being in equilibrium, there is a strike on the part of one group of workers, say the plasterers, or that there is some other disturbance to the supply of plasterers' labour. In order to isolate and make a separate study of the demand for that factor, we suppose firstly that the general conditions of the demand for new houses remain unchanged (that is, that the demand schedule for new houses remains valid); and secondly we assume that there is no change in the general conditions of supply of the other factors, two of which are of course the business faculties and the business organizations of the master builders; (that is, we assume that their lists of supply prices also remain valid). Then a temporary check to the supply of plasterers' labour will cause a proportionate check to the amount of building: the demand price for the diminished number of houses will be a little higher than before; and the supply prices for the other factors of production will not be greater than before47. Thus new houses can now be sold at prices which exceed by a good margin the sum of the prices at which these other requisites for the production of houses can be bought; and that margin gives the limit to the possible rise of the price that will be offered for plasterers' labour, on the supposition that plasterers' labour is indispensable. The different amounts of this margin, corresponding to different checks to the supply of plasterers' labour, are governed by the general rule that:— The price that will be offered for any thing used in producing a commodity is, for each separate amount for the commodity, limited by the excess of the price at which that amount of the commodity can find purchasers, over the sum of the prices at which the corresponding supplies of the other things needed for making it will be forthcoming.

To use technical terms, the demand schedule for any factor of production of a commodity can be derived from that for the commodity by subtracting from the demand price of each separate amount of the commodity the sum of the supply prices for corresponding amounts of the other factors48.

8sect; 2. When however we come to apply this theory to the actual conditions of life, it will be important to remember that if the supply of one factor is disturbed, the supply of others is likely to be disturbed also. In particular, when the factor of which the supply is disturbed is one class of labour, as that of the plasterers, the employers' earnings generally act as a buffer. That is to say, the loss falls in the first instance on them; but by discharging some of their workmen and lowering the wages of others, they ultimately distribute a great part of it among the other factors of production. The details of the process by which this is effected are various, and depend on the action of trade combinations, on the higgling and bargaining of the market, and on other causes with which we are not just at present concerned.

Let us inquire what are the conditions, under which a check to the supply of a thing that is wanted not for direct use, but as a factor of production of some commodity, may cause a very great rise in its price. The first condition is that the factor itself should be essential, or nearly essential to the production of the commodity, no good substitute being available at a moderate price.

The second condition is that the commodity in the production of which it is a necessary factor, should be one for which the demand is stiff and inelastic; so that a check to its supply will cause consumers to offer a much increased price for it rather than go without it; and this of course includes the condition that no good substitutes for the commodity are available at a price but little higher than its equilibrium price. If the check to house building raises the price of houses very much, builders, anxious to secure the exceptional profits, will bid against one another for such plasterers' labour as there is in the market49.

The third condition is that only a small part of the expenses of production of the commodity should consist of the price of this factor. Since the plasterer's wages are but a small part of the total expenses of building a house, a rise of even 50 per cent. in them would add but a very small percentage to the expenses of production of a house and would check demand but little50.

The fourth condition is that even a small check to the amount demanded should cause a considerable fall in the supply prices of other factors of production; as that will increase the margin available for paying a high price for this one51. If, for instance, bricklayers and other classes of workmen, or the employers themselves cannot easily find other things to do, and cannot afford to remain idle, they may be willing to work for much lower earnings than before, and this will increase the margin available for paying higher wages to plasterers. These four conditions are independent, and the effects of the last three are cumulative.

The rise in plasterers' wages would be checked if it were possible either to avoid the use of plaster, or to get the work done tolerably well and at a moderate price by people outside the plasterers' trade: the tyranny, which one factor of production of a commodity might in some cases exercise over the other factors through the action of derived demand, is tempered by the principle of substitution52.

Again, an increased difficulty in obtaining one of the factors of a finished commodity can often be met by modifying the character of the finished product. Some plasterers' labour may be indispensable; but people are often in doubt how much plaster work it is worth while to have in their houses, and if there is a rise in its price they will have less of it. The intensity of the satisfaction of which they would be deprived if they had a little less of it, is its marginal utility; the price which they are just willing to pay in order to have it, is the true demand price for plasterers' work up to the amount which is being used.

So again there is a joint demand for malt and hops in ale. But their proportions can be varied. A higher price can be got for an ale which differs from others only in containing more hops; and this excess price represents the demand for hops53.

The relations between plasterers, bricklayers, etc., are representative of much that is both instructive and romantic in the history of alliances and conflicts between trades-unions in allied trades. But the most numerous instances of joint demand are those of the demand for a raw material and the operatives who work it up; as for instance cotton or jute or iron or copper, and those who work up these several materials. Again, the relative prices of different articles of food vary a good deal with the supply of skilled cooks' labour: thus for instance many kinds of meat and many parts of vegetables which are almost valueless in America, where skilled cooks are rare and expensive, have a good value in France, where the art of cooking is widely diffused.

8sect; 3. We have already54 discussed the way in which the aggregate demand for any commodity is compounded of the demands of the different groups of people who may need it. But we now may extend this notion of composite demand to requisites of production which are needed by several groups of producers.

Nearly every raw material and nearly every kind of labour is applied in many different branches of industry, and contributes to the production of a great variety of commodities. Each of these commodities has its own direct demand; and from that the derived demand for any of the things used in making it can be found, and the thing is "distributed between its various uses" in the manner which we have already discussed55. The various uses are rivals, or competitors with one another; and the corresponding derived demands are rival or competitive demands relatively to one another. But in relation to the supply of the product, they co-operate with one another; being "compounded" into the total demand that carries off the supply: in just the same way as the partial demands of several classes of society for a finished commodity are aggregated, or compounded together into the total demand for it56.

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8sect; 4. We may now pass to consider the case of joint products: i.e. of things which cannot easily be produced separately; but are joined in a common origin, and may therefore be said to have a joint supply, such as beef and hides, or wheat and straw57. This case corresponds to that of things which have a joint demand, and it may be discussed almost in the same words, by merely substituting "demand" for "supply," and vice versâ. As there is a joint demand for things joined in a common destination: so there is a joint supply of things which have a common origin. The single supply of the common origin is split up into so many derived supplies of the things that proceed from it58.

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For instance, since the repeal of the Corn Laws much of the wheat consumed in England has been imported, of course without any straw. This has caused a scarcity and a consequent rise in the price of straw, and the farmer who grows wheat looks to the straw for a great part of the value of the crop. The value of straw then is high in countries which import wheat, and low in those which export wheat. In the same way the price of mutton in the wool-producing districts of Australia was at one time very low. The wool was exported, the meat had to be consumed at home; and as there was no great demand for it, the price of the wool had to defray almost the whole of the joint expenses of production of the wool and the meat. Afterwards the low price of meat gave a stimulus to the industries of preserving meat for exportation, and now its price in Australia is higher.

There are very few cases of joint products the cost of production of both of which together is exactly the same as that of one of them alone. So long as any product of a business has a market value, it is almost sure to have devoted to it some special care and expense, which would be diminished, or dispensed with if the demand for that product were to fall very much. Thus, for instance, if straw were valueless, farmers would exert themselves more than they do to make the ear bear as large a proportion as possible to the stalk. Again, the importation of foreign wool has caused English sheep to be adapted by judicious crossing and selection so as to develop heavy weights of good meat at an early age, even at the expense of some deterioration of their wool. It is only when one of two things produced by the same process is valueless, unsaleable, and yet does not involve any expense for its removal, that there is no inducement to attempt to alter its amount; and, it is only in these exceptional cases that we have no means of assigning its separate supply price to each of the joint products. For when it is possible to modify the proportions of these products, we can ascertain what part of the whole expense of the process of production would be saved, by so modifying these proportions as slightly to diminish the amount of one of the joint products without affecting the amounts of the others. That part of the expense is the expense of production of the marginal element of that product; it is the supply price of which we are in search59.

But these are exceptional cases. It more frequently happens that a business, or even an industry finds its advantage in using a good deal of the same plant, technical skill, and business organization for several classes of products. In such cases the cost of anything used for several purposes has to be defrayed by its fruits in all of them: but there is seldom any rule of nature to determine either the relative importance of these uses, or the proportions in which the total cost should be distributed among them: much depends on the changing features of markets60.

8sect; 5. We may pass to the problem of composite supply which is analogous to that of composite demand. A demand can often be satisfied by any one of several routes, according to the principle of substitution. These various routes are rivals or competitors with one another; and the corresponding supplies of commodities are rival, or competitive supplies relatively to one another. But in relation to the demand they co-operate with one another; being "compounded" into the total supply that meets the demand61.

If the causes which govern their production are nearly the same, they may for many purposes be treated as one commodity62. For instance, beef and mutton may be treated as varieties of one commodity for many purposes; but they must be treated as separate for others, as for instance for those in which the question of the supply of wool enters. Rival things are however often not finished commodities, but factors of production: for instance, there are many rival fibres which are used in making ordinary printing paper. We have just noticed how the fierce action of derived demand for one of several complementary supplies, as e.g. for the supply of plasterers' labour, was liable to be moderated, when the demand was met by the competitive supply of a rival thing, which could be substituted for it63.

8sect; 6. All the four chief problems which have been discussed in this chapter have some bearing on the causes that govern the value of almost every commodity: and many of the most important cross connections between the values of different commodities are not obvious at first sight.

Thus when charcoal was generally used in making iron, the price of leather depended in some measure on that of iron; and the tanners petitioned for the exclusion of foreign iron in order that the demand on the part of English iron smelters for oak charcoal might cause the production of English oak to be kept up, and thus prevent oak bark from becoming dear64. This instance may serve to remind us of the way in which an excessive demand for a thing may cause its sources of supply to be destroyed, and thus render scarce any joint products that it may have: for the demand for wood on the part of the ironmakers led to a relentless destruction of many forests in England. Again, an excessive demand for lamb was assigned as a cause of the prevailing scarcity of sheep some years ago; while some argued on the contrary that the better the price to be got for spring lamb sold to the rich, the more profitable would be the production of sheep, and the cheaper would mutton be for the people. The fact is that an increase of demand may have opposite effects according as it does or does not act so suddenly as to prevent producers from adapting their action to it.

Again, the development of railways and other means of communication for the benefit of one trade, as for instance wheat growing in some parts of America and silver mining in others, greatly lowers some of the chief expenses of production of nearly every other product of those districts. Again, the prices of soda, and bleaching materials and other products of industries, the chief raw material of which is salt, move up and down relatively to one another with almost every improvement in the various processes which are used in those industries; and every change in those prices affects the prices of many other goods, for the various products of the salt industries are more or less important factors in many branches of manufacture.

Again, cotton and cotton-seed oil are joint products, and the recent fall in the price of cotton is largely due to the improved manufacture and uses of cotton-seed oil: and further, as the history of the cotton famine shows, the price of cotton largely affects that of wool, linen and other things of its own class; while cotton-seed oil is ever opening up new rivalries with things of its own class. Again, many new uses have been found for straw in manufacture; and these inventions are giving value to straw that used to be burnt in the West of America, and tend to hinder the rise in the marginal cost of producing wheat65.

BOOK V, CHAPTER VII: PRIME AND TOTAL COST IN RELATION TO JOINT PRODUCTS. COST OF MARKETING. INSURANCE AGAINST RISK. COST OF REPRODUCTION.

8sect; 1. We may now return to the consideration of prime and supplementary costs, with special reference to the proper distribution of the latter between the joint products of a business.

It often happens that a thing made in one branch of a business is used as a raw material in another, and then the question of the relative profitableness of the two branches can be accurately ascertained only by an elaborate system of book-keeping by double entry; though in practice it is more common to rely on rough estimates made by an almost instinctive guess. Some of the best illustrations of this difficulty are found in agriculture, especially when the same farm combines permanent pasture and arable land worked on long rotation66.

Another difficult case is that of the shipowner who has to apportion the expenses of his ship between heavy goods and goods that are bulky but not heavy. He tries, as far as may be, to get a mixed cargo of both kinds; and an important element in the struggle for existence of rival ports is the disadvantage under which those ports lie which are able to offer a cargo only of bulky or only of heavy goods: while a port whose chief exports are weighty but not bulky, attracts to its neighbourhood industries which make for export goods that can be shipped from it at low freights. The Staffordshire Potteries, for example, owe part of their success to the low freights at which their goods are carried by ships sailing from the Mersey with iron and other heavy cargoes.

But there is free competition in the shipowning trade, and it has great powers of variation as regards the size and shape of ships, the routes which they take, and the whole method of trading; and thus in many ways the general principle can be applied, that the relative proportions of the joint products of a business should be so modified that the marginal expenses of production of either product should be equal to its marginal demand price67. Or, in other words, the amount of carrying power for each kind of cargo has a constant tendency to move towards equilibrium at a point at which the demand price for that amount in a normal state of trade is just sufficient to cover the expenses of providing it; these expenses being reckoned so as to include not only its (money) prime cost, but also all those general expenses of the business which are in the long run incurred on its account, whether directly or indirectly68.

In some branches of manufacture it is customary to make a first approximation to the total cost of producing any class of goods, by assuming that their share of the general expenses of the business is proportionate either to their prime cost, or to the special labour bill that is incurred in making them. Corrections can then be made to meet such cases as those of goods which require either more or less than an average share of space or light, or of the use of expensive machinery; and so on.

8sect; 2. There are two elements of the general expenses of a business, the sharing of which between the different branches requires some special attention. They are the expense of marketing and that of insurance against risk.

Some kinds of goods are easily marketed; there is a steady demand for them, and it is always safe to make them for stock. But for that very reason competition cuts their price "very fine," and does not allow a large margin above the direct cost of making them. Sometimes the tasks of making and selling them can be rendered almost automatic, so as to require very little to be charged on their account under the heads of the expenses of management and marketing. But in practice it is not uncommon to charge such goods with even less than the small share that would properly fall to them, and to use them as a means of obtaining and maintaining a business connection, that will facilitate the marketing of other classes of goods, the production of which cannot so well be reduced to routine; for as to these there is not so close a competition. Manufacturers, especially in trades connected with furniture and dress, and retailers in almost all trades, frequently find it best to use certain of their goods as a means of advertising others, and to charge the first with less and the second with more than their proportionate share of Supplementary expenses. In the former class they put those goods which are so uniform in character and so largely consumed that nearly all purchasers know their value well, in the second those with regard to which purchasers think more of consulting their fancy than of buying at the lowest possible price.

All difficulties of this kind are much increased by that instability of supply price, which results whenever the tendency to increasing return is acting strongly. We have seen that in seeking the normal supply price in such cases we must select as representative a business which is managed with normal ability and so as to get its fair share of the economies, both internal and external, resulting from industrial organization: also that these economies, though they fluctuate with the fortunes of particular businesses, yet increase generally when the aggregate production increases. Now it is obvious that if a manufacturer makes a commodity the increased production of which would put largely increased internal economies within his reach, it is worth his while to sacrifice a great deal in order to push its sales in a new market. If he has a large capital, and the commodity is one in much demand, his expenditure for this purpose may be very great, even exceeding that which he devotes directly to the manufacture: and if, as is likely, he is pushing at the same time several other commodities, nothing more than a very rough guess can be made as to what share of this expenditure should be charged to the sales of each of them in the current year, and what share should be charged to the connection which he is endeavouring to build up for them in the future.

In fact when the production of a commodity conforms to the law of increasing return in such a way as to give a very great advantage to large producers, it is apt to fall almost entirely into the hands of a few large firms; and then the normal marginal supply price cannot be isolated on the plan just referred to, because that plan assumes the existence of a great many competitors with businesses of all sizes, some of them being young and some old, some in the ascending and some in the descending phase. The production of such a commodity really partakes in a great measure of the nature of a monopoly; and its price is likely to be so much influenced by the incidents of the campaign between rival producers, each struggling for an extension of territory, as scarcely to have a true normal level.

Economic progress is constantly offering new facilities for marketing goods at a distance: it not only lowers cost of carriage, but what is often more important, it enables producers and consumers in distant places to get in touch with one another. In spite of this, the advantages of the producer who lives on the spot are very great in many trades; they often enable him to hold his own against competitors at a distance whose methods of production are more economical. He can sell in his own neighbourhood as cheaply as they can, because though the cost of making is greater for his goods than for theirs, he escapes much of the cost which they incur for marketing. But time is on the side of the more economic methods of production; his distant competitors will gradually get a stronger footing in the place, unless he or some new man adopts their improved methods.

It remains to make a closer study of the relation in which insurance against the risks of a business stands to the supply price of any particular commodity produced in it.

8sect; 3. The manufacturer and the trader commonly insure against injury by fire and loss at sea; and the premiums which they pay are among the general expenses, a share of which has to be added to the prime cost in order to determine the total cost of their goods. But no insurance can be effected against the great majority of business risks.

Even as regards losses by fire and sea, insurance companies have to allow for possible carelessness and fraud; and must therefore, independently of all allowances for their own expenses and profits, charge premiums considerably higher than the true equivalent of the risks run by the buildings or the ships of those who manage their affairs well. The injury done by fire or sea however is likely, if it occurs at all, to be so very great that it is generally worth while to pay this extra charge; partly for special trade reasons, but chiefly because the total utility of increasing wealth increases less than in proportion to its amount. But the greater part of business risks are so inseparably connected with the general management of the business that an insurance company which undertook them would really make itself responsible for the business: and in consequence every firm has to act as its own insurance office with regard to them. The charges to which it is put under this head are part of its general expenses, and a share of them has to be added to the prime cost of each of its products.

But here there are two difficulties. In some cases insurance against risk is apt to be left out of account altogether, in others it is apt to be counted twice over. Thus a large shipowner sometimes declines to insure his ships with the underwriters: and sets aside part at least of the premiums that he might have paid to them, to build up an insurance fund of his own. But he must still, when calculating the total cost of working a ship, add to its prime cost a charge on account of insurance. And he must do the same thing, in some form or other, with regard to those risks against which he could not buy an insurance policy on reasonable terms even if he wanted to. At times, for instance, some of his ships will be idle in port, or will earn only nominal freights: and to make his business remunerative in the long run he must, in some form or other, charge his successful voyages with an insurance premium to make up for his losses on those which are unsuccessful.

In general, however, he does this, not by making a formal entry in his accounts under a separate head, but by the simple plan of taking the average of successful and unsuccessful voyages together; and when that has once been done, insurance against these risks cannot be entered as a separate item in cost of production, without counting the same thing twice over. Having decided to run these risks himself, he is likely to spend a little more than the average of his competitors, in providing against their occurrence; and this extra expense enters in the ordinary way into his balance-sheet. It is really an insurance premium in another form; and therefore he must not count insurance against this part of the risk separately, for then he would be counting it twice over69.

When a manufacturer has taken the average of his sales of dress materials over a long time, and bases his future action on the results of his past experience, he has already allowed for the risk that the machinery will be depreciated by new inventions rendering it nearly obsolete, and for the risk that his goods will be depreciated by changes in fashion. If he were to allow separately for insurance against these risks, he would be counting the same thing twice over70.

8sect; 4. Thus, though when we have counted up the average receipts of a risky trade, we must not make a separate full allowance for insurance against risk; though there may be something to be allowed as a charge on account of uncertainty. It is true that an adventurous occupation, such as gold mining, has special attractions for some people: the deterrent force of risks of loss in it is less than the attractive force of changes of great gain, even when the value of the latter estimated on the actuarial principle is much less than that of the former; and as Adam Smith pointed out, a risky trade, in which there is an element of romance, often becomes so overcrowded that the average earnings in it are lower than if there were no risks to be run71. But in the large majority of cases the influence of risk is in the opposite direction; a railway stock that is certain to pay four per cent. will sell for a higher price than one which is equally likely to pay one or seven per cent. or any intermediate amount.

Every trade then has its own peculiarities, but in most cases the evils of uncertainty count for something, though not very much: in some cases a slightly higher average price is required to induce a given outlay, if that average is the mean of widely divergent and uncertain results, than if the adventurer may reckon confidently on a return that differs but little from that average. To the average price therefore we must add a recompense for uncertainty, if that is unusually great; though if we added insurance against risk we should be counting the greater part of that twice over72.

8sect; 5. This discussion of the risks of trade has again brought before us the fact that the value of a thing, though it tends to equal its normal (money) cost of production, does not coincide with it at any particular time, save by accident. Carey, observing this, suggested that we should speak of value in relation to (money) cost of reproduction instead of in relation to cost of production.

The suggestion has, however, no significance so far as normal values are concerned. For normal cost of production and normal cost of reproduction are convertible terms; and no real change is made by saying that the normal value of a thing tends to equal its normal (money) cost of reproduction instead of its normal (money) cost of production. The former phrase is less simple than the latter, but means the same thing.

And no valid argument for the change can be founded on the fact, which may be readily admitted, that there are some few cases in which the market value of a thing is nearer its cost of reproduction than the cost that was actually incurred in producing that particular thing. The present price of an iron ship for instance, made before the great recent improvements in the manufacture of iron, might diverge less from the cost of reproducing it, that is of producing another just like it by modern methods, than from that which was actually incurred in producing it. But the price of the old ship would be less than the cost of reproduction of the ship, because the art of designing ships has improved as fast as that of manufacturing iron; and moreover steel has displaced iron as the material of shipbuilding. It may still be urged that the price of the ship is equal to that of producing a ship, which would be equally serviceable, on a modern plan and by modern methods. But that would not be the same thing as saying that the value of the ship is equal to its cost of reproduction; and, as a matter of fact, when, as often happens, an unexpected scarcity of ships causes freights to increase very rapidly, those who are anxious to reap the harvest of profitable trade, will pay for a ship in sailing order a price much above that for which a shipbuilding firm would contract to produce another equally good and deliver it some time hence. Cost of reproduction exerts little direct influence on value, save when purchasers can conveniently wait for the production of new supplies.

Again, there is no connection between cost of reproduction and price in the cases of food in a beleaguered city, of quinine the supply of which has run short in a fever-stricken island, of a picture by Raphael, of a book that nobody cares to read, of an armour-clad ship of obsolete pattern, of fish when the market is glutted, of fish when the market is nearly empty, of a cracked bell, of a dress material that has gone out of fashion, or of a house in a deserted mining village.

The reader, unless already experienced in economic analysis, is recommended to omit the next seven chapters, and pass at once to Chapter XV., which contains a brief summary of this Book. It is true that the four chapters on marginal costs in relation to values, and especially Chapters VIII. and IX., bear upon some difficulties which are latent in the phrase "the net product of labour"; and that this phrase is used in Book VI. But the broad explanation of it given there will suffice provisionally for most purposes; and the intricacies connected with it may be best appreciated at a somewhat advanced stage of economic studies.

BOOK V, CHAPTER VIII: MARGINAL COSTS IN RELATION TO VALUES. GENERAL PRINCIPLES.

8sect; 1. This Chapter and the three following are given to a study of the marginal costs of products in relation to the values of those products on the one hand, and on the other hand to the values of the land, machinery, and other appliances used in making them. The study relates to normal conditions and long period results. This fact must ever be borne in mind. The market value of anything may be much above or much below the normal cost of production: and the marginal costs of a particular producer at any time may stand in no close relation to marginal costs under normal conditions73.

It was indicated at the end of Chapter VI. that no one part of the problem can be isolated from the rest. There are comparatively few things the demand for which is not greatly affected by the demand for other things to the usefulness of which they contribute; and it may even be said that the demand for the majority of articles of commerce is not direct but is derived from the demand for those commodities to the making of which they contribute, as materials or as implements. And again this demand, because it is so derived, is largely dependent on the supply of other things which will work with them in making those commodities. And again the supply of anything available for use in making any commodity is apt to be greatly influenced by the demand for that thing derived from its uses in making other commodities: and so on. These inter-relations can be and must be ignored in rapid and popular discussions on the business affairs of the world. But no study that makes any claim to thoroughness can escape from a close investigation of them. This requires many things to be borne in mind at the same time: and for that reason economics can never become a simple science74.

The contribution which this group of chapters aims at making covers little ground: but that ground is difficult: and we shall need to work over it carefully, and from more than one point of view; for it is thickly strewn with pitfalls and stumbling blocks. It deals primarily with the earnings of land, machinery, and other material agents of production. Its main argument applies to the earnings of human beings; but they are influenced by some causes which do not affect the earnings of material agents of production: and the matter in hand is sufficiently difficult without further complicating it by side issues.

8sect; 2. Let us begin by recalling the action of the principle of substitution. In the modern world nearly all the means of production pass through the hands of employers and other business men, who specialize themselves in organizing the economic forces of the population. Each of them chooses in every case those factors of production which seem best for his purpose. And the sum of the prices which he pays for those factors which he uses is, as a rule, less than the sum of the prices which he would have to pay for any other set of factors which could be substituted for them: for, whenever it appears that this is not the case, he will, as a rule, set to work to substitute the less expensive arrangement or process75.

This statement is in close harmony with such common sayings of every-day life, as that "everything tends to find its own level," that "most men earn just about what they are worth," that "if one man can earn twice as much as another, that shows that his work is worth twice as much," that "machinery will displace manual labour whenever it can do the work cheaper." The principle does not indeed act without hindrance. It may be restricted by custom or law, by professional etiquette or trade-union regulation: it may be weakened by want of enterprise, or it may be softened by a generous unwillingness to part with old associates. But it never ceases to act, and it permeates all the economic adjustments of the modern world.

Thus there are some kinds of field work for which horse-power is clearly more suitable than steam-power, and vice versâ. If we may now suppose that there have been no great recent improvements in horse or steam machinery, and that therefore the experience of the past has enabled farmers gradually to apply the law of substitution; then, on this supposition the application of steam-power will have been pushed just so far that any further use of it in the place of horse-power would bring no net advantage. There will however remain a margin on which they could be indifferently applied (as Jevons would have said); and on that margin the net efficiency of either in adding to the money value of the total product will be proportionate to the cost of applying it76.

Similarly, if there are two methods of obtaining the same result, one by skilled and the other by unskilled labour, that one will be adopted which is the more efficient in proportion to its cost. There will be a margin on which either will be indifferently applied77. On that line the efficiency of each will be in proportion to the price paid for it, account being taken of the special circumstances of different districts and of different workshops in the same district. In other words, the wages of skilled and unskilled labour will bear to one another the same ratio that their efficiencies do at the margin of indifference.

Again, there will be a rivalry between hand-power and machine-power similar to that between two different kinds of hand-power or two different kinds of machine-power. Thus hand-power has the advantage for some operations, as, for instance, for weeding out valuable crops that have an irregular growth; horse-power in its turn has a clear advantage for weeding an ordinary turnip field; and the application of each of them will be pushed in each district till any further use of it would bring no net advantage there. On the margin of indifference between hand-power and horse-power their prices must be proportionate to their efficiency; and thus the influence of substitution will tend to establish a direct relation between the wages of labour and the price that has to be paid for horse-power.

8sect; 3. As a rule many kinds of labour, of raw material, of machinery and other plant, and of business organization, both internal and external, go to the production of a commodity: and the advantages of economic freedom are never more strikingly manifest than when a business man endowed with genius is trying experiments, at his own risk, to see whether some new method, or combination of old methods, will be more efficient than the old. Every business man indeed, according to his energy and ability, is constantly endeavouring to obtain a notion of the relative efficiency of every agent of production that he employs; as well as of others that might possibly be substituted for some of them. He estimates as best he can how much net product (i.e. net addition to the value of his total product) will be caused by a certain extra use of any one agent; net that is after deducting for any extra expenses that may be indirectly caused by the change, and adding for any incidental savings. He endeavours to employ each agent up to that margin at which its net product would no longer exceed the price he would have to pay for it. He works generally by trained instinct rather than formal calculation; but his processes are substantially similar to those indicated in our study of derived demand; and, from another point of view, they may be described as those which might be reaped by a complex and refined system of book-keeping by double entry78.

We have already followed some simple estimates of this sort. We have noticed, for instance, how the proportion of hops and malt in ale can be varied, how the extra price which can be got for ale by increasing the quantity of hops in it is a representative of the causes which govern the demand price for hops. Assuming that no further trouble or expense of any kind is involved by this additional use of hops, and that the expediency of using this extra amount is doubtful, the extra value thus given to the ale is the marginal net product of the hops of which we are in search. In this case, as in most others, the net product is an improvement in quality or a general contribution to the value of the product; it is not a definite part of the produce which can be separated from the rest. But in exceptional instances that can be done79.

8sect; 4. The notion of the marginal employment of any agent of production implies a possible tendency to diminishing return from its increased employment.

Excessive applications of any means to the attainment of any end are indeed sure to yield diminishing returns in every branch of business; and, one may say, in all the affairs of life. We may take some additional examples of a principle that has already been illustrated80. In the manufacture of sewing machines some parts may well be made of cast iron; for others a common kind of steel will suffice; there are yet others for which a specially expensive steel-compound is needed; and all parts should be finished off more or less smoothly, so that the machine may work easily. Now if any one devoted a disproportionate care and expense to the selection of materials for the less important uses, it might truly be said that that expenditure was yielding a rapidly diminishing return; and that he would have done better to give some of it to making his machines work smoothly, or even to producing more machines: and the case might be even worse if he devoted an excessive expenditure to mere brilliancy of finish, and put low grade metal to work for which a higher grade was needed.

This consideration seems at first to simplify economic problems; but on the contrary it is a chief source of difficulty and confusion. For though there is some analogy between all these various tendencies to diminishing return, they yet are not identical. Thus the diminishing return which arises from an ill-proportioned application of the various agents of production into a particular task has little in common with that broad tendency to the pressure of a crowded and growing population on the means of subsistence. The great classical Law of Diminishing Return has its chief application, not to any one particular crop, but to all the chief food crops. It takes for granted that farmers raise, as a rule, those crops for which their land and other resources are best adapted, account being taken of the relative demands for the several crops; and that they distribute their resources appropriately between different routes. It does not attribute to them unlimited intelligence and wisdom, but it assumes that, taking one with another, they have shown a reasonable amount of care and discretion in the distribution of these resources. It refers to a country the whole land of which is already in the hands of active business men, who can supplement their own capital by loans from banks wherever they can show it is likely to be well applied; and asserts that an increase in the total amount of capital applied to agriculture in that country will yield diminishing returns of produce in general. This statement is akin to, but yet quite distinct from, the statement that if any farmer makes a bad distribution of his resources between different plans of cultivation, he will get a markedly diminishing return from those elements of expenditure which he has driven to excess.

For instance, in any given case, there is a certain proportion between the amounts which may with best advantage be spent on ploughing and harrowing, or manuring. There might be some differences of opinion on the matter, but only within narrow limits. An inexperienced person who ploughed many times over land, which was already in fairly good mechanical condition, while he gave it little or none of the manure which it was craving, would be generally condemned as having so over applied ploughing as to make it yield a rapidly diminishing return. But this result of the misapplication of resources has no very close connection with the tendency of agriculture in an old country to yield a diminishing return to a general increase of resources well applied in cultivation: and indeed exactly parallel cases can be found of a diminishing return to particular resources when applied in undue proportion, even in industries which yield an increasing return to increased applications of capital and labour when appropriately distributed81.

8sect; 5. The part played by the net product at the margin of production in the modern doctrine of Distribution is apt to be misunderstood. In particular many able writers have supposed that it represents the marginal use of a thing as governing the value of the whole. It is not so; the doctrine says we must go to the margin to study the action of those forces which govern the value of the whole: and that is a very different affair. Of course the withdrawal of (say) iron from any of its necessary uses would have just the same influence on its value as its withdrawal from its marginal uses; in the same way as the pressure in a boiler for cooking under high pressure would be affected by the escape of any other steam just as it would by the escape of the steam in one of the safety valves: but in fact the steam does not escape except through the safety valves. In like manner iron, or any other agent of production, is not (under ordinary circumstances) thrown out of use except at points at which its use yields no clear surplus of profit; that is, it is thrown out from its marginal uses only.

Again, the finger of an automatic weighing machine determines, in the sense of indicating, the weight sought for. So the escape of steam from a safety valve, governed by a spring representing a pressure of a hundred pounds to the square inch, determines the pressure of steam in the boiler, in the sense of indicating that it has reached a hundred pounds to the inch. The pressure is caused by the heat; the spring in the valve governs the pressure by yielding and letting out some of the steam when its amount is so great, at the existing heat, as to overbear the resistance of the spring.

Similarly, with regard to machinery and other appliances of production made by man, there is a margin through which additional supplies come in after overcoming the resistance of a spring, called "cost of production." For when the supply of those appliances is so small relatively to the demand that the earnings expected from new supplies are more than sufficient to yield normal interest (or profits, if earnings of management are reckoned in) on their cost of production, besides allowing for depreciation, etc., then the valve opens, and the new supplies come in. When the earnings are less than this, the valve remains shut: and as anyhow the existing supply is always in process of slow destruction by use and the lapse of time, the supply is always shrinking when the valve is closed. The valve is that part of the machinery by which the general relations of demand and supply govern value. But marginal uses do not govern value; because they, together with value, are themselves governed by those general relations.

8sect; 6. Thus, so long as the resources of an individual producer are in the form of general purchasing power, he will push every investment up to the margin at which he no longer expects from it a higher net return than he could get by investing in some other material, or machine, or advertisement, or in the hire of some additional labour: every investment will, as it were, be driven up to a valve which offers to it a resistance equal to its own expanding force. If he invests in material or in labour, that is soon embodied in some saleable product: the sale replenishes his fluid capital, and that again is invested up to the margin at which any further investment would yield a return so diminished as not to be profitable.

But if he invests in land, or in a durable building or machine, the return which he gets from his investment may vary widely from his expectation. It will be governed by the market for his products, which may change its character largely through new inventions, changes in fashion, etc., during the life of a machine, to say nothing of the perpetual life of land. The incomes which he thus may derive from investments in land and in machinery differ from his individual point of view mainly in the longer life of the land. But in regard to production in general, a dominant difference between the two lies in the fact that the supply of land is fixed (though in a new country, the supply of land utilized in man's service may be increased); while the supply of machines may be increased without limit. And this difference reacts on the individual producer. For if no great new invention renders his machines obsolete, while there is a steady demand for the things made by them, they will be constantly on sale at about their cost of production; and his machines will generally yield him normal profits on that cost of production, with deductions corresponding to their wear and tear.

Thus the rate of interest is a ratio: and the two things which it connects are both sums of money. So long as capital is "free," and the sum of money or general purchasing power over which it gives command is known, the net money income, expected to be derived from it, can be represented at once as bearing a given ratio (four or five or ten per cent.) to that sum. But when the free capital has been invested in a particular thing, its money value cannot as a rule be ascertained except by capitalizing the net income which it will yield: and therefore the causes which govern it are likely to be akin in a greater or less degree to those which govern rents.

We are thus brought to the central doctrine of this part of economics, viz.:—"That which is rightly regarded as interest on 'free' or 'floating' capital, or on new investments of capital, is more properly treated as a sort of rent—a Quasi-rent—on old investments of capital. And there is no sharp line of division between floating capital and that which has been 'sunk' for a special branch of production, nor between new and old investments of capital; each group shades into the other gradually. And thus even the rent of land is seen, not as a thing by itself, but as the leading species of a large genus; though indeed it has peculiarities of its own which are of vital importance from the point of view of theory as well as of practice82."

BOOK V, CHAPTER IX: MARGINAL COSTS IN RELATION TO VALUES. GENERAL PRINCIPLES, CONTINUED.

8sect; 1. The incidents of the tenure of land are so complex: and so many practical issues connected with them have raised controversies on side issues of the problem of value, that it will be well to supplement our previous illustration from land. We may take another from an imaginary commodity so chosen that sharp outlines can be assigned to each stage of the problem, without inviting the objection that such sharp outlines are not found in the actual relations between landlord and tenant.

But before entering on this, we may prepare the way for using, as we go, illustrations drawn from the incidence of taxation to throw side-lights on the problem of value. For indeed a great part of economic science is occupied with the diffusion throughout the community of economic changes which primarily affect some particular branch of production or consumption; and there is scarcely any economic principle which cannot be aptly illustrated by a discussion of the shifting of the effects of some tax "forwards," i.e. towards the ultimate consumer, and away from the producer of raw material and implements of production; or else in the opposite direction, "backwards." But especially is this true of the class of problems now under discussion83.

It is a general principle that if a tax impinges on anything used by one set of persons in the production of goods or services to be disposed of to other persons, the tax tends to check production. This tends to shift a large part of the burden of the tax forwards on to consumers, and a small part backwards on to those who supply the requirements of this set of producers. Similarly, a tax on the consumption of anything is shifted in a greater or less degree backwards on to its producer.

For instance, an unexpected and heavy tax upon printing would strike hard upon those engaged in the trade, for if they attempted to raise prices much, demand would fall off quickly: but the blow would bear unevenly on various classes engaged in the trade. Since printing machines and compositors cannot easily find employment out of the trade, the prices of printing machines and wages of compositors would be kept low for some time. On the other hand, the buildings and steam engines, the porters, engineers, and clerks would not wait for their numbers to be adjusted by the slow process of natural decay to the diminished demand; some of them would be quickly at work in other trades, and very little of the burden would stay long on those of them who remained in the trade. A considerable part of the burden, again, would fall on subsidiary industries, such as those engaged in making paper and type; because the market for their products would be curtailed. Authors and publishers would also suffer a little; because they would be forced either to raise the price of books, with a consequent diminution of sales, or to see a greater proportion of their gross receipts swallowed up by costs. Finally, the total turnover of the booksellers would diminish, and they would suffer a little.

So far it has been assumed that the tax spreads its net very wide, and covers every place to which the printing industry in question could be easily transferred. But, if the tax were only local, the compositors would migrate beyond its reach; and the owners of printing houses might bear a larger and not a smaller proportionate share of the burden than those whose resources were more specialized but more mobile. If the local tax were uncompensated by any effect which tended to attract population, part of the burden would be thrown on local bakers, grocers, etc., whose sales would be diminished.

Next suppose the tax to be levied on printing presses instead of on printed matter. In that case, if the printers had no semi-obsolete presses which they were inclined to destroy or to leave idle, the tax would not strike marginal production: it would not immediately affect the output of printing, nor therefore its price. It would merely intercept some of the earnings of the presses on the way to the owners, and lower the quasi-rents of the presses. But it would not affect the rate of net profits which was needed to induce people to invest fluid capital in presses: and therefore, as the old presses wore out, the tax would add to marginal expenses, that is to expenses which the producer was free to incur or not as he liked, and which he was in doubt whether to incur. Therefore the supply of printing would be curtailed; its price would rise: and new presses would be introduced only up to the margin at which they would be able, in the judgment of printers generally, to pay the tax and yet yield normal profits on the outlay. When this stage had been reached the distribution of the burden of a tax upon presses would henceforth be nearly the same as that of a tax upon printing: excepting only that there would be more inducement to get a great deal of work out of each press. For instance more of the presses might be made to work double shifts; in spite of the fact that night work involves special expenses.

We now pass to apply these principles of shifting of taxes to our main illustration.

8sect; 2. Let us suppose that a meteoric shower of a few thousand large stones harder than diamonds fell all in one place; so that they were all picked up at once, and no amount of search could find any more. These stones, able to cut every material, would revolutionize many branches of industry; and the owners of them would have a differential advantage in production, that would afford a large producer's surplus. This surplus would be governed wholly by the urgency and volume of the demand for their services on the one hand and the number of the stones on the other hand: it could not be affected by the cost of obtaining a further supply, because none could be had at any price. A cost of production might indeed influence their value indirectly: but it would be the cost of tools made of hard steel and other materials of which the supply can be increased to keep pace with demand. So long as any of the stones were habitually used by intelligent producers for work which could be done equally well by such tools, the value of a stone could not much exceed the cost of producing tools (allowance being made for wear and tear) equally efficient with it in these inferior uses.

The stones, being so hard as not to be affected by wear, would probably be kept in operation during all the working hours of the day. And if their services were very valuable, it might be worth while to keep people working overtime, or even in double or triple shifts, in order to extract the utmost service from them. But the more intensively they were applied, the less net return would be reaped from each additional service forced from them; thus illustrating the law that the intensive working not only of land, but of every other appliance of production is likely to yield a diminishing return if pressed far enough.

The total supply of stones is fixed. But of course any particular manufacturer might obtain almost as many as he liked to pay for: and in the long run he would expect his outlay on them to be returned with interest (or profits, if the remuneration for his own work were not reckoned separately), just in the same way as if he were buying machinery, the total stock of which could be increased indefinitely, so that its price conformed pretty closely to its cost of production.

But when he had once bought the stones, changes in the processes of production or of demand for the things made by their aid, might cause the income yielded by them to become twice as great or only half as great as he had expected. In the latter case it would resemble the income derived from a machine, which had not the latest improvements and could earn only half as much as a new machine of equal cost. The values of the stone and of the machine alike would be reached by capitalizing the income which they were capable of earning, and that income would be governed by the net value of the services rendered by them. The income earning power and therefore the value of each would be independent of its own costs of production, but would be governed by the general demand for its products in relation to the general supply of those products. But in the case of the machine that supply would be controlled by the cost of supply of new machines equally efficient with it; and in the case of the stone there would be no such limit, so long as all the stones in existence were employed on work that could not be done by anything else.

This argument may be put in another way. Since any one, who bought stones, would take them from other producers, his purchase would not materially affect the general relations of demand for the services of the stones to the supply of those services. It would not therefore affect the price of the stones; which would still be the capitalized value of the services which they rendered in those uses, in which the need for them was the least urgent: and to say that the purchaser expected normal interest on the price which represented the capitalized value of the services, would be a circular statement that the value of the services rendered by stones is governed by the value of those very services84.

Next let us suppose that the stones were not all found at once but were scattered over the surface of the earth on public ground, and that a laborious search might expect to be rewarded by finding one here and there. Then people would hunt for the stones only up to that point, or margin, at which the probable gain of so doing would in the long run just reward the outlay of labour and capital involved; and in the long run, the normal value of the stones would be such as to maintain equilibrium between demand and supply, the number of the stones gathered annually being in the long run just that for which the normal demand price was equal to the normal supply price.

Finally, let us bring the case of the stones into accord with that of the lighter machinery and other plant ordinarily used in manufacture, by supposing that the stones were brittle, and were soon destroyed; and that an inexhaustible store existed from which additional supplies could be obtained quickly and certainly at a nearly uniform cost. In this case the value of the stones would always correspond closely to that cost: variations in demand would have but little influence on their price, because even a slight change in price would quickly effect a great change in the stock of them in the market. In this case the income derived from a stone (allowance being made for wear-and-tear) would always adhere closely to interest on its cost of production.

8sect; 3. This series of hypotheses stretches continuously from the one extreme in which the income derived from the stones is a rent in the strictest sense of the term, to the other extreme in which it is to be classed rather with interest on free or floating capital. In the first extreme case the stones cannot be worn out or destroyed, and no more can be found. They of course tend to be distributed among the various uses to which they are applicable in such a way that there is no use to which an increased supply of them could be applied, without taking them away from some other use in which they were rendering net services at least as valuable. These margins of application of the several uses are thus governed by the relation in which the fixed stock of stones stands to the aggregate of demands for them in different uses. And the margins being thus governed, the prices that will be paid for their use are indicated by the value of the services which they render at any one of those margins.

A uniform tax on them, collected from the user, will lower their net service in each use by the same amount: it will not affect their distribution between several uses; and it will fall wholly on the owner, after perhaps some little delay caused by a frictional resistance to readjustments.

At the opposite extreme of our chain of hypotheses, the stones perish so quickly, and are so quickly reproduced at about a uniform cost, that variations in the urgency and volume of the uses to which the stones can be put will be followed so promptly by changes in the stock of them available, that those services can never yield much more or much less than normal interest on the money cost of obtaining additional stones. In this case a business man, when making his estimates for the cost of any undertaking in which stones will be used, may enter interest (or if he is counting his own work in, profits), for the time during which those stones will be used (together with wear-and-tear), as part of the prime, special, or direct expenses of his undertaking. A tax on the stones under these conditions would fall entirely on any one who even a little while after the tax had come into force, gave out a contract for anything in making which the stones would be used.

Taking an intermediate hypothesis as to the length of life of the stones and the rapidity with which new supplies could be obtained; we find that the charges which the borrower of stones must expect to pay, and the revenue which the owner of the stones could reckon on deriving from them at any time, might temporarily diverge some way from interest (or profits) on their cost. For changes in the urgency and volume of the uses to which they could be applied, might have caused the value of the services rendered by them in their marginal uses to rise or fall a great deal, even though there had been no considerable change in the difficulty of obtaining them. And if this rise or fall, arising from variations in demand, and not from variations in the cost of the stones, is likely to be great during the period of any particular enterprise, or any particular problem of value that is under discussion; then for that discussion the income yielded by the stones is to be regarded as more nearly akin to a rent than to interest on the cost of producing the stones. A tax upon the stones in such a case would tend to diminish the rental which people would pay for their use, and therefore to diminish the inducements towards investing capital and effort in obtaining additional supplies. It would therefore check the supply, and compel those who needed the stones to pay gradually increasing rentals for their use, up to the point at which the rentals fully covered the costs of producing the stones. But the time needed for this readjustment might be long: and in the interval a great part of the tax would fall upon the owners of the stones.

If the life of the stones was long relatively to that process of production in which the stones were used which was under discussion, the stock of stones might be in excess of that needed to do all the work for which they were specially fitted. Some of them might be lying almost idle, and the owner of these stones might make up his estimate of the marginal price for which he was just willing to work without entering in that estimate interest on the value of the stones. That is to say, some costs which would have been classed as prime costs in relation to contracts, or other affairs, which lasted over a long period, would be classed as supplementary costs in relation to a particular affair which would last but a short time, and which came under consideration when business was slack.

It is of course just as essential in the long run that the price obtained should cover general or supplementary costs as that it should cover prime costs. An industry will be driven out of existence in the long run as certainly by failing to return even a moderate interest on capital invested in steam engines, as by failing to replace the price of the coal or the raw material used up from day to day: just as a man's work will be stopped as certainly by depriving him of food as by putting him in chains. But the man can go on working fairly well for a day without food; while if he is put in chains the check to his work comes at once. So an industry may, and often does, keep tolerably active during a whole year or even more, in which very little is earned beyond prime costs, and the fixed plant has "to work for nothing." But when the price falls so low that it does not pay for the out of pocket expenses during the year for wages and raw material, for coal and for lighting, etc., then the production is likely to come to a sharp stop.

This is the fundamental difference between those incomes yielded by agents of production which are to be regarded as rents or quasi-rents and those which (after allowing for the replacement of wear-and-tear and other destruction) may be regarded as interest (or profits) on current investments. The difference is fundamental, but it is only one of degree. Biology tends to show that the animal and vegetable kingdoms have a common origin. But yet there are fundamental differences between mammals and trees; while in a narrower sense the differences between an oak tree and an apple tree are fundamental; and so are in a still narrower sense those between an apple tree and a rose bush, though they are both classed as rosaceæ. Thus our central doctrine is that interest on free capital and quasi-rent on an old investment of capital shade into one another gradually; even the rent of land being not a thing by itself, but the leading species of a large genus85.

8sect; 4. Again, pure elements are seldom isolated from all others by nature either in the physical or moral world. Pure rent in the strict sense of the term is scarcely ever met with: nearly all income from land contains more or less important elements which are derived from efforts invested in building houses and sheds, in draining the land and so on. But economists have learnt to recognize diversity of nature in those composite things to which the names of rent, profits, wages etc. are given in popular language; they have learnt that there is an element of true rent in the composite product that is commonly called wages, an element of true earnings in what is commonly called rent and so on. They have learnt in short to follow the example of the chemist who seeks for the true properties of each element; and who is thus prepared to deal with the common oxygen or soda of commerce, though containing admixtures of other elements86.

They recognize that nearly all land in actual use contains an element of capital; that separate reasonings are required for those parts of its value which are, and those which are not, due to efforts of man invested in the land for the purposes of production; and that the results of these reasonings must be combined in dealing with any particular case of that income which commonly goes by the name "rent," but not all of which is rent in the narrower sense of the term. The manner in which the reasonings are to be combined depends on the nature of the problem. Sometimes the mere mechanical "composition of forces" suffices; more often allowance must be made for a quasi-chemical interaction of the various forces; while in nearly all problems of large scope and importance, regard must be had to biological conceptions of growth.

8sect; 5. Finally a little may be said on a distinction that is sometimes made between "scarcity rents" and "differential rents." In a sense all rents are scarcity rents, and all rents are differential rents. But in some cases it is convenient to estimate the rent of a particular agent by comparing its yield to that of an inferior (perhaps a marginal) agent, when similarly worked with appropriate appliances. And in other cases it is best to go straight to the fundamental relations of demand to the scarcity or abundance of the means for the production of those commodities for making which the agent is serviceable.

Suppose for instance that all the meteoric stones in existence were equally hard and imperishable; and that they were in the hands of a single authority: further that this authority decided, not to make use of its monopolistic power to restrict production so as to raise the price of its services artificially, but to work each of the stones to the full extent it could be profitably worked (that is up to the margin of pressure so intensive that the resulting product could barely be marketed at a price which covered, with profits, its expenses without allowing anything for the use of the stone). Then the price of the services rendered by the stones would have been governed by the natural scarcity of the aggregate output of their services in relation to the demand for those services; and the aggregate surplus or rent would most easily be reckoned as the excess of this scarcity price over the aggregate expenses of working the stones. It would therefore generally be regarded as a scarcity rent. But on the other hand it could have been reckoned as the differential excess of the aggregate value of the net services of the stones over that which would have been reached if all their uses had been as unproductive as their marginal uses. And exactly the same would be true if the stones were in the hands of different producers, impelled by competition with one another to work each stone up to the margin at which its further use ceased to be profitable.

This last instance has been so chosen as to bring out the fact that the "differential" as well as the "scarcity" routes for estimating rent are independent of the existence of inferior agents of production: for the differential comparison in favour of the more advantageous uses of the stones can be made by reference to the marginal uses of good stones, as clearly as by reference to the use of inferior stones which are on the margin of not being worth using at all.

In this connection it may be noted that the opinion that the existence of inferior land, or other agents of production, tends to raise the rents of the better agents is not merely untrue. It is the reverse of the truth. For, if the bad land were to be flooded and rendered incapable of producing anything at all, the cultivation of other land would need to be more intensive; and therefore the price of the product would be higher, and rents generally would be higher, than if that land had been a poor contributor to the total stock of produce87.

BOOK V, CHAPTER X: MARGINAL COSTS IN RELATION TO AGRICULTURAL VALUES.

8sect; 1. We now pass from general considerations to those relating to land; and we begin with those specially applicable to agricultural land in an old country.

Suppose, that a war, which was not expected to last long, were to cut off part of the food supplies of England. Englishmen would set themselves to raise heavier crops by such extra application of capital or labour as was likely to yield a speedy return; they would consider the results of artificial manures, of the use of clod-crushing machines, and so on; and the more favourable these results were, the less would be the rise in the price of produce in the coming year which they regarded as necessary to make it worth their while to incur additional outlay in these directions. But the war would have very little effect on their action as to those improvements which would not bear fruit till it was over. In any inquiry then as to the causes that will determine the prices of corn during a short period, that fertility which the soil derives from slowly made improvements has to be taken for granted as it then is, almost in the same way as if it had been made by nature. Thus, the income derived from these permanent improvements gives a surplus above the prime or special costs needed for raising extra produce. But it is not a true surplus, in the same sense that rent proper is; i.e. it is not a surplus above the total costs of the produce: it is needed to cover the general expenses of the business.

To speak more exactly:—If the extra income derived from improvements that have been made in the land by its individual owner is so reckoned as not to include any benefit which would have been conferred on the land by the general progress of society independently of his efforts and sacrifices; then, as a rule, the whole of it is required to remunerate him for those efforts and sacrifices. He may have underestimated the gains which will result from them; but he is about equally likely to have made an overestimate. If he has estimated them rightly, his interest has urged him to make the investment as soon as it showed signs of being profitable: and in the absence of any special reason to the contrary we may suppose him to have done this. In the long run, then, the net returns to the investment of capital in the land, taking successful and unsuccessful returns together, do not afford more than an adequate motive to such investment. If poorer returns had been expected than those on which people actually based their calculations, fewer improvements would have been made.

That is to say:—for periods which are long in comparison with the time needed to make improvements of any kind, and bring them into full operation, the net incomes derived from them are but the price required to be paid for the efforts and sacrifices of those who make them: the expenses of making them thus directly enter into marginal expenses of production, and take a direct part in governing long-period supply price. But in short periods, that is, in periods short relatively to the time required to make and bring into full bearing improvements of the class in question, no such direct influence on supply price is exercised by the necessity that such improvements should in the long run yield net incomes sufficient to give normal profits on their cost. And therefore when we are dealing with such periods, these incomes may be regarded as quasi-rents which depend on the price of the produce88.

We may conclude then:—(1) The amount of produce raised, and therefore the position of the margin of cultivation (i.e. the margin of the profitable application of capital and labour to good and bad land alike) are both governed by the general conditions of demand and supply. They are governed on the one hand by demand; that is, by the numbers of the population who consume the produce, the intensity of their need for it, and their means of paying for it; and on the other hand by supply; that is, by the extent and fertility of the available land, and the numbers and resources of those ready to cultivate it. Thus cost of production, eagerness of demand, margin of production, and price of the produce mutually govern one another: and no circular reasoning is involved in speaking of any one as in part governed by the others. (2) That part of the produce which goes as rent is of course thrown on the market, and acts on prices, in just the same way as any other part. But the general conditions of demand and supply, or their relations to one another, are not affected by the division of the produce into the share of rent and the share needed to render the farmer's expenditure profitable. The amount of that rent is not a governing cause; but is itself governed by the fertility of land, the price of the produce, and the position of the margin: it is the excess of the value of the total returns which capital and labour applied to land do obtain, over those which they would have obtained under circumstances as unfavourable as those on the margin of cultivation. (3) If the cost of production were estimated for parts of the produce which do not come from the margin, a charge on account of rent would of course need to be entered in this estimate; and if this estimate were used in an account of the causes which govern the price of the produce; then the reasoning would be circular. For that, which is wholly an effect, would be reckoned up as part of the cause of those things of which it is an effect. (4) The cost of production of the marginal produce can be ascertained without reasoning in a circle. The cost of production of other parts of the produce cannot. The cost of production on the margin of the profitable application of capital and labour is that to which the price of the whole produce tends, under the control of the general conditions of demand and supply: it does not govern price, but it focusses the causes which do govern price.

8sect; 2. It has sometimes been suggested that if all land were equally advantageous and all were occupied, the income derived from it would partake of the nature of a monopoly rent: but this seems to be an error. Of course the landowners might conceivably combine to stint production, whether their properties were of equal fertility or not; the raised prices which would thus be obtained for the produce would be monopoly prices; and the incomes of the owners would be monopoly revenues rather than rents. But, with a free market, the revenues from land would be rents, governed by the same causes and in the same way in a country where the land was all of equal advantage, as in those where good and bad land were intermingled89.

It is, indeed, true that if there were more than enough land, all of about the same fertility, to enable everyone to have as much of it as was needed to give full scope to the capital he was prepared to apply to it, then it could yield no rent. But that merely illustrates the old paradox that water, when abundant, has no market value: for though the services of some part of it are essential to support life, yet everyone can get without effort to that margin of satiety at which any further supplies would be of no service to him. When every cottager has a well from which he can draw as much water as he needs, with no more labour than is required at his neighbour's well, the water in the well has no market value. But let a drought set in, so that the shallow wells are exhausted, and even the deeper wells are threatened, then the owners of those wells can exact a charge for every bucket which they allow anyone to draw for his own use. The denser population becomes, the more numerous will be the occasions on which such charges can be made (it being supposed that no new wells are developed): and at last every owner of a well may find in it a permanent source of revenue.

In the same way the scarcity value of land in a new country gradually emerges. The early settler exercises no exclusive privilege, for he only does what anyone else is at liberty to do. He undergoes many hardships, if not personal dangers; and perhaps he runs some risks that the land may turn out badly, and that he may have to abandon his improvements. On the other hand, his venture may turn out well; the flow of population may trend his way, and the value of his land may soon give as large a surplus over the normal remuneration of his outlay on it as the fishermen's haul does when they come home with their boat full. But in this there is no surplus above the rewards needed for his venture. He has engaged in a risky business which was open to all, and his energy and good fortune have given him an exceptionally high reward: anyone else might have taken the same chance as he did. Thus the income which he expects the land to afford in the future enters into the calculations of the settler, and adds to the motives which determine his action when in doubt as to how far to carry his enterprise. He regards its "discounted value90 " as profits on his capital, and as earnings of his own labour, in so far as his improvements are made with his own hands.

A settler often takes up land with the expectation that the produce which it affords while in his possession, will fall short of an adequate reward for his hardships, his labour and his expenditure. He looks for part of his reward to the value of the land itself, which he may perhaps after a while sell to some new-comer who has no turn for the life of a pioneer. Sometimes even, as the British farmer learns to his cost, the new settler regards his wheat almost as a by-product; the main product for which he works is a farm, the title-deeds to which he will earn by improving the land: he reckons that its value will steadily rise, not through his own efforts so much as through the growth of those comforts and resources, and of those markets in which to buy and in which to sell, that are the product of the growing public prosperity.

This may be put in another way. People are generally unwilling to face the hardships and isolation of pioneer agriculture, unless they can look forward with some confidence to much higher earnings, measured in terms of the necessaries of life, than they could get at home. Miners cannot be attracted to a rich mine, isolated from other conveniences and varied social opportunities of civilization, except by the promise of high wages: and those who superintend the investment of their own capital in such mines expect very high profits. For similar reasons pioneer farmers require high aggregate gains made up of receipts for the sale of their produce, together with the acquisition of valuable title-deeds, to remunerate them for their labour and endurance of hardships. And the land is peopled up to that margin at which it just yields gains adequate for this purpose, without leaving any surplus for rent, when no charge is made for the land. When a charge is made, immigration spreads only up to that margin, at which the gains will leave a surplus, of the nature of rent, to cover such charges, in addition to rewarding the pioneer's endurance.

8sect; 3. With all this it is to be remembered that land is but a particular form of capital from the point of view of the individual producer. The question whether a farmer has carried his cultivation of a particular piece of land as far as he profitably can; and whether he should try to force more from it, or to take in another piece of land; is of the same kind as the question whether he should buy a new plough, or try to get a little more work out of his present stock of ploughs, using them sometimes when the soil is not in a very favourable condition, and feeding his horses a little more lavishly. He weighs the net product of a little more land against the other uses to which he could put the capital sum that he would have to expend in order to obtain it: and in like manner he weighs the net product, to be got by working his ploughs under unfavourable circumstances, against that got by increasing his stock of ploughs, and thus working under more favourable conditions. That part of his produce which he is in doubt whether to raise by extra use of his existing ploughs, or by introducing a new plough, may be said to be derived from a marginal use of the plough. It pays nothing net (i.e. nothing beyond a charge for actual wear-and-tear) towards the net income earned by the plough.

So again a manufacturer or trader, owning both land and buildings, regards the two as bearing similar relations to his business. Either will afford him aid and accommodation at first liberally; and afterwards with diminishing return, as he endeavours to force more and more from them: till at last he will doubt whether the overcrowding of his workshops or his storerooms is not so great a source of trouble, that it would answer his purpose to obtain more space. And when he comes to decide whether to obtain that space by taking in an extra piece of land or by building his factory a floor higher, he weighs the net income to be derived from further investments in the one against that to be derived from the other. That part of his production which he just forces out of his existing appliances (being in doubt whether it would not be better worth his while to increase those appliances than to work so intensively those which he has), does not contribute to the net income which those appliances yield him. This argument says nothing as to whether the appliances were made by man, or part of a stock given by nature; it applies to rents and quasi-rents alike.

But there is this difference from the point of view of society. If one person has possession of a farm, there is less land for others to have. His use of it is not in addition to, but in lieu of the use of a farm by other people: whereas if he invests in improvements of land or in buildings on it, he will not appreciably curtail the opportunities of others to invest capital in like improvements. Thus there is likeness amid unlikeness between land and appliances made by man. There is unlikeness because land in an old country is approximately (and in some senses absolutely) a permanent and fixed stock: while appliances made by man, whether improvements in land, or in buildings, or machinery, etc., are a flow capable of being increased or diminished according to variations in the effective demand for the products which they help in raising. So far there is unlikeness. But on the other hand there is likeness, in that, since some of them cannot be produced quickly, they are a practically fixed stock for short periods: and for those periods the incomes derived from them stand in the same relation to the value of the products raised by them, as do true rents91.

8sect; 4. Let us apply these considerations to the supposition that a permanent tax is to be levied on "corn," in the sense in which it was used by the classical economists as short for all agricultural produce. It is obvious that the farmer would try to make the consumer pay some part at least of the tax. But any rise in the price charged to the consumer would check demand, and thus react on the farmer. In order to decide how much of this tax would be shifted on to the consumer, we must study the margin of profitable expenditure, whether that be the margin of a little expenditure applied to poor land and land far removed from good markets, or the margin of a large expenditure applied to rich land, and land near to dense industrial districts.

If only a little corn had been raised near the margin, a moderate fall in the net price received by the farmer would not cause a great check to the supply of corn. There would therefore be no great rise in the price paid for it by the consumer; and the consumer would bear very little of the tax. But the surplus value of the corn over its expenses of production would fall considerably. The farmer, if cultivating his own land, would bear the greater part of the tax. And, if he were renting the land, he could demand a great reduction of his rent.

If, on the other hand, a great deal of corn had been raised near the margin of cultivation, the tax would tend to cause a great shrinkage of production. The consequent rise of price would arrest that shrinkage, leaving the farmer in a position to cultivate nearly as intensively as before: and the landlord's rent would suffer but little92.

Thus, on the one hand, a tax which is so levied as to discourage the cultivation of land or the erection of farm buildings on it, tends to be shifted forward on to the consumers of the produce of land. But, on the other hand, a tax on that part of the (annual) value of land, which arises from its position, its extension, its yearly income of sunlight and heat and rain and air, cannot settle anywhere except on the landlord; a lessee being, of course, landlord for the time. This (annual) value of the land is commonly called its "original value" or its "inherent value"; but much of that value is the result of the action of men, though not of its individual holders. For instance, barren heath land may suddenly acquire a high value from the growth of an industrial population near it; though its owners have left it untouched as it was made by nature. It is, therefore, perhaps more correct to call this part of the annual value of land its "public value"; while that part which can be traced to the work and outlay of its individual holders may be called its "private value." The old terms "inherent value" and "original value" may however be retained for general use, with a note of caution as to their partial inaccuracy. And, using another term that has precedent in its favour, we may speak of this annual public value of the land as "true rent."

A tax on the public value of land does not greatly diminish the inducements to cultivate the land highly, nor to erect farm buildings on it. Such a tax therefore does not greatly diminish the supply of agricultural produce offered on the market, nor raise the price of produce; and it is not therefore shifted away from the owners of land.

This assumes that the true rent of land on which the tax is levied is assessed with reference to its general capabilities, and not to the special use which the owner makes of it: its net product is supposed to be that which could be got by a cultivator of normal ability and enterprise, turning it to good account to the best of his judgment. If an improved method of cultivation develops latent resources of the soil, so as to yield an increased return much in excess of what is required to remunerate the outlay with a good rate of profits; this excess of net return above normal profits belongs properly to true rent: and yet, if it is known, or even expected, that a very heavy special tax on true rent will be made to apply to this excess income, that expectation may deter the owner from making the improvement93.

8sect; 5. A little has been said incidentally of the competition between different branches of industry for the same raw material or appliances for production. But now we have to consider the competition between various branches of agriculture for the same land. This case is simpler than that of urban land, because farming is a single business so far as the main crops are concerned; though the rearing of choice trees (including vines), flowers, vegetables etc. affords scope for various kinds of specialized business ability. The classical economists were therefore justified in provisionally supposing that all kinds of agricultural produce can be regarded as equivalent to certain quantities of corn; and that all the land will be used for agricultural purposes, with the exception of building sites which are a small and nearly fixed part of the whole. But when we concentrate our attention on any one product, as for instance, hops, it may seem that a new principle is introduced. That is however not the case. Let us look into this.

Hops are grown in varying rotations with other crops; and the farmer is often in doubt whether he shall grow hops or something else on one of his fields. Thus each crop strives against others for the possession of the land; and if any one crop shows signs of being more remunerative than before relatively to others, the cultivators will devote more of their land and resources to it. The change may be retarded by habit, or diffidence, or obstinacy, or limitations of the cultivator's knowledge; or by the terms of his lease. But it will still be true in the main that each cultivator—to recall once more the dominant principle of substitution—"taking account of his own means, will push the investment of capital in his business in each several direction until what appears in his judgment to be the margin of profitableness is reached; that is, until there seems to him no good reason for thinking that the gains resulting from any further investment in that particular direction would compensate him for his outlay."

Thus in equilibrium, oats and hops and every other crop will yield the same net return to that outlay of capital and labour, which the cultivator is only just induced to apply. For otherwise he would have miscalculated; he would have failed to get the maximum reward which his outlay can be made to yield: and it would still be open to him to increase his gains by redistributing his crops, by increasing or diminishing his cultivation of oats or some other crop94.

This brings us to consider taxation in reference to the competition of different crops for the use of the same land. Let us suppose that a tax is imposed on hops, wherever grown; it is not to be a mere local rate or tax. The farmer can evade a part of the pressure of the tax by lessening the intensity of his cultivation of the land which he plants with hops; and a yet further part by substituting another crop on land which he had proposed to devote to hops. He will have recourse to this second plan in so far as he considers that he would get a better result by growing another crop, and selling it free from the tax, than by growing hops and selling them in spite of the tax. In this case the surplus which he could obtain from the land by growing, say, oats upon it would come into his mind when deciding where to set the limit to his production of hops. But even here there would be no simple numerical relation between the surplus, or rent, which the land would yield under oats, and the marginal costs which the price of hops must cover. And a farmer whose land produced hops of exceptionally high quality, and which happened to be in good condition at the time for hops, would have no doubt at all that it was best to grow hops on the land; though in consequence of the tax he might decide to curtail a little his expenditure on it95.

Meanwhile the tendency towards a general restriction in the supply of hops would tend to raise their price. If the demand for them were very rigid, and hops of adequate quality could not easily be imported from beyond the range of this special tax, the price might rise by nearly the full amount of the tax. In that case the tendency would be checked, and very nearly as much hops would be grown as before the tax had been levied. And here, as in the case of a tax on printing, recently discussed, the effect of a local tax is in strong contrast to that of a general tax. For unless the local tax covered most of the ground in the country on which good hops could be grown, its effect would be to drive them beyond its boundary: very little revenue would be got from it, local farmers would suffer a good deal, and the public would pay a rather higher price for their hops.

8sect; 6. The argument of the last section applies, so far as short periods are concerned, to the earning power of farm-buildings and to other quasi-rents. When existing farm-buildings, or other appliances which could be used in producing one commodity are diverted to producing another because the demand for that is such as to enable them to earn a higher income by producing it, then for the time the supply of the first will be less, and its price higher than if the appliances had not been able to earn a higher income by another use. Thus, when appliances are capable of being used in more than one branch of agriculture, the marginal cost in each branch will be affected by the extent to which these appliances are called off for work in other branches. Other agents of production will be pushed to more intensive uses in the first branch, in spite of a diminishing return; and the value of its product will rise, because only at a higher value will the price be in equilibrium. The increased earning power of the appliances due to the external demand will appear to be the cause of this increase in value: for it will cause a relative scarcity of the appliances in that branch of production, and therefore raise marginal costs. And from this statement it appears superficially to be a simple transition to the statement that the increased earning power of the appliances enter into those costs which govern value. But the transition is illegitimate. There will be no direct or numerical relation between the increase in the price of the first commodity and the income that the appliances can earn when they have been transferred to the second industry and adapted for service in it.

Similarly, if a tax be put on factories used in one industry, some of them will be diverted to other industries; and consequently the marginal costs and therefore the values of the products in those industries will fall; simultaneously with a temporary fall in net rental values of factories in all uses. But these falls will vary in amount, and there will be no numerical relation between the fall in the prices of the product and in these rents, or rather quasi-rents.

These principles are not applicable to mines, whether for short periods or for long. A royalty is not a rent, though often so called. For, except when mines, quarries, etc., are practically inexhaustible, the excess of their income over their direct outgoings has to be regarded, in part at least, as the price got by the sale of stored-up goods—stored up by nature indeed, but now treated as private property; and therefore the marginal supply price of minerals includes a royalty in addition to the marginal expenses of working the mine. Of course the owner desires to receive the royalty without undue delay; and the contract between him and the lessee often provides, partly for this reason, for the payment of a rent as well as a royalty. But the royalty itself on a ton of coal, when accurately adjusted, represents that diminution in the value of the mine, regarded as a source of wealth in the future, which is caused by taking the ton out of nature's storehouse96.

BOOK V, CHAPTER XI: MARGINAL COSTS IN RELATION TO URBAN VALUES.

8sect; 1. The last three chapters examined the relation in which cost of production stands to the income derived from the ownership of the "original powers" of land and other free gifts of nature, and also to that which is directly due to the investment of private capital. There is a third class, holding an intermediate position between these two, which consists of those incomes, or rather those parts of incomes which are the indirect result of the general progress of society, rather than the direct result of the investment of capital and labour by individuals for the sake of gain. This class has to be studied now, with special reference to the value of urban sites.

We have already noted that, though nature nearly always gives a less than proportionate return, when measured by the amount of the produce raised, to increasing applications of capital and labour in the cultivation of land; yet, on the other hand, if the more intensive cultivation is the result of the growth of a non-agricultural population in the neighbourhood, this very concourse of people is likely to raise the value of produce. We have seen how this influence opposes, and usually outweighs the action of the law of diminishing return when the produce is measured according to its value to the producer and not according to its amount; the cultivator gets good markets in which to supply his wants, as well as good markets in which to sell, he buys more cheaply while he sells more dearly, and the conveniences and enjoyments of social life are ever being brought more within his reach97.

Again, we have seen how the economies which result from a high industrial organization98 often depend only to a small extent on the resources of individual firms. Those internal economies which each establishment has to arrange for itself are frequently very small as compared with those external economies which result from the general progress of the industrial environment; the situation of a business nearly always plays a great part in determining the extent to which it can avail itself of external economies; and the situation value which a site derives from the growth of a rich and active population close to it, or from the opening up of railways and other good means of communication with existing markets, is the most striking of all the influences which changes in the industrial environment exert on cost of production.

If in any industry, whether agricultural or not, two producers have equal facilities in all respects, except that one has a more convenient situation than the other, and can buy or sell in the same markets with less cost of carriage, the differential advantage which his situation gives him is the aggregate of the excess charges for cost of carriage to which his rival is put. And we may suppose that other advantages of situation, such for instance as the near access to a labour market specially adapted to his trade, can be translated in like manner into money values. When this is done, and all are added together we have the money value of the advantages of situation which the first business has over the second: and this becomes its special situation value, if the second has no situation value and its site is reckoned merely at agricultural value. The extra income which can be earned on the more favoured site gives rise to what may be called a special situation rent: and the aggregate site value of any piece of building land is that which it would have if cleared of buildings and sold in a free market. The "annual site value"—to use a convenient, though not strictly correct form of speaking—is the income which that price would yield at the current rate of interest. It obviously exceeds the special situation value, merely by agricultural value; which is often an almost negligible quantity in comparison99.

8sect; 2. It is obvious that the greater part of situation value is "public value." (See above, p. 434.) There are however exceptional cases, which call for notice. Sometimes the settlement of a whole town, or even district is planned on business principles, and carried out as an investment at the expense and risk of a single person or company. The movement may be partly due to philanthropic or religious motives, but its financial basis will in any case be found in the fact that the concourse of numbers is itself a cause of increased economic efficiency. Under ordinary circumstances the chief gains arising from this efficiency would accrue to those who are already in possession of the place: but the chief hopes of commercial success, by those who undertake to colonize a new district or build a new town, are usually founded on securing these gains for themselves.

When, for instance, Mr Salt and Mr Pullman determined to take their factories into the country and to found Saltaire and Pullman City, they foresaw that the land, which they could purchase at its value for agricultural purposes, would obtain the special situation value which town property derives from the immediate neighbourhood of a dense population. And similar considerations have influenced those, who, having fixed upon a site adapted by nature to become a favourite watering-place, have bought the land and spent large sums in developing its resources: they have been willing to wait long for any net income from their investment in the hope that ultimately their land would derive a high situation value from the concourse of people attracted to it100.

In all such cases the yearly income derived from the land (or at all events that part of it which is in excess of the agricultural rent) is for many purposes to be regarded as profits rather than rent. And this is equally true, whether the land is that on which the factory itself at Saltaire or Pullman City is built, or that which affords a high "ground-rent" as the site of a shop or store, whose situation will enable it to do a brisk trade with those who work in the factory. For in such cases great risks have to be run; and in all undertakings in which there are risks of great losses, there must also be hopes of great gains. The normal expenses of production of a commodity must include payment for the ventures required for producing it, sufficient to cause those who are on the margin of doubt whether to venture or not, to regard the probable net amount of their gains—net, that is, after deducting the probable amount of their losses—as compensating them for their trouble and their outlay. And that the gains resulting from such ventures are not much more than sufficient for this purpose is shown by the fact that they are not as yet very common. They are however likely to be more frequent in those industries which are in the hands of very powerful corporations. A large railway company, for instance, can found a Crewe or a New Swindon for manufacturing railway plant without running any great risk101.

Somewhat similar instances are those of a group of landowners who combine to make a railway, the net traffic receipts of which are not expected to pay any considerable interest on the capital invested in making it; but which will greatly raise the value of their land. In such cases part of the increase of their incomes as landowners ought to be regarded as profits on capital which they have invested in the improvement of their land: though the capital has gone towards making a railway instead of being applied directly to their own property.

Other cases of like nature are main drainage schemes, and other plans for improving the general condition of agricultural or town property, in so far as they are carried out by the landowners at their own expense, whether by private agreement or by the levying of special rates on themselves. Similar cases again are found in the investment of capital by a nation in building up its own social and political organization as well as in promoting the education of the people and in developing its sources of material wealth.

Thus that improvement of the environment, which adds to the value of land and of other free gifts of nature, is in a good many cases partly due to the deliberate investment of capital by the owners of the land for the purpose of raising its value; and therefore a portion of the consequent increase of income may be regarded as profits when we are considering long periods. But in many cases it is not so; and any increase in the net income derived from the free gifts of nature which was not brought about by, and did not supply the direct motive to, any special outlay on the part of the landowners, is to be regarded as rent for all purposes.

Cases somewhat analogous to these arise when the owner of a score or more of acres in the neighbourhood of a growing town "develops" them for building. He probably lays out the roads, decides where houses are to be continuous, and where detached; and prescribes the general style of architecture, and perhaps the minimum expenditure on each house; for the beauty of each adds to the general value of all. This collective value, thus created by him, is of the nature of public value; and it is dependent, for the greater part, on that dormant public value, which the site as a whole derived from the growth of a prosperous town in its neighbourhood. But yet that share of it which results from his forethought, constructive faculty and outlay, is to be regarded as the reward of business enterprise, rather than as the appropriation of public value by a private person.

These exceptional cases must be reckoned with. But the general rule holds that the amount and character of the building put upon each plot of land is, in the main (subject to the local building bylaws), that from which the most profitable results are anticipated, with little or no reference to its reaction on the situation value of the neighbourhood. In other words the site value of the plot is governed by causes which are mostly beyond the control of him who determines what buildings shall be put on it: and he adjusts his expenditure on it to his estimates of the income to be derived from various descriptions of buildings on it.

8sect; 3. The owner of building land sometimes builds on it himself: sometimes he sells it outright: very often he lets it at a fixed ground-rent for ninety-nine years, after which the land and the buildings on it (which by covenant must be kept in good repair) revert to his successor in title. Let us consider what governs the value at which he can sell the land and the ground-rent at which he can let it.

The capitalized value of any plot of land is the actuarial "discounted" value of all the net incomes which it is likely to afford, allowance being made on the one hand for all incidental expenses, including those of collecting the rents, and on the other for its mineral wealth, its capabilities of development for any kind of business, and its advantages, material, social and æsthetic, for the purposes of residence. The money equivalent of that social status and those other personal gratifications which the ownership of land affords, does not appear in the returns of the money income derived from it, but does enter into its capital money value102.

Next let us consider what governs the "ground-rent" which the owner can obtain for a plot which he lets on, say, a ninety-nine years' building lease. The present discounted value of all the fixed money payments under that lease tends to be equal to the present capital value of the land; after deducting, firstly, for the obligation to return the land with the buildings on it to the successor in title of the present owner at the end of the lease, and secondly for the possible inconvenience of any restrictions on the use of the land contained in the lease. In consequence of these deductions the ground-rent would be rather less than the "annual site value" of the land, if that site value were expected to remain fixed throughout. But in fact the site value is expected to rise in consequence of the growth of population, and other causes: and therefore the ground-rent is generally a little above the annual site value at the beginning of the lease, and much below it towards the end103.

Among the estimated outgoings on account of any building, which have to be deducted from its estimated gross yield before deciding what is the value of the privilege of erecting it on any given plot of land, are the taxes (central and local) which may be expected to be levied on the property, and to be paid by the owner of the property. But this raises difficult side-issues, which are postponed to Appendix G.

8sect; 4. Let us revert to the fact that the law of diminishing return applies to the use of land for the purposes of living and working on it in all trades104. Of course in the trade of building, as in agriculture, it is possible to apply capital too thinly. Just as a homesteader may find that he can raise more produce by cultivating only a half of the 160 acres allotted to him than by spreading his labour over the whole, so even when ground has scarcely any value, a very low house may be dear in proportion to its accommodation. But, as in agriculture, there is a certain application of capital and labour to the acre which gives the highest return, and further applications after this give a less return, so it is in building. The amount of capital per acre which gives the maximum return varies in agriculture with the nature of the crops, with the state of the arts of production, and with the character of the markets to be supplied; and similarly in building, the capital per square foot which would give the maximum return, if the site had no scarcity value, varies with the purpose for which the building is wanted. But when the site has a scarcity value, it is worth while to go on applying capital beyond this maximum rather than pay the extra cost of land required for extending the site. In places where the value of land is high, each square foot is made to yield perhaps twice the accommodation, at more than twice the cost, that it would be made to give, if used for similar purposes where the value of land is low.

We may apply the phrase the margin of building to that accommodation which it is only just worth while to get from a given site, and which would not be got from it if land were less scarce. To fix the ideas, we may suppose this accommodation to be given by the top floor of the building105.

By erecting this floor, instead of spreading the building over more ground, a saving in the cost of land is effected, which just compensates for the extra expense and inconvenience of the plan. The accommodation given by this floor, when allowance has been made for its incidental disadvantages, is only just enough to be worth what it costs without allowing anything for the rent of land; and the expenses of production of the things raised on this floor, if it is part of a factory, are just covered by their price; there is no surplus for the rent of land. The expenses of production of manufactures may then be reckoned as those of the goods which are made on the margin of building, so as to pay no rent for land. That is to say the rent of the land does not enter into that set of expenses at the margin at which the action of the forces of demand and supply in governing value may be most clearly seen.

Suppose, for instance, that a person is planning a hotel or a factory; and considering how much land to take for the purpose. If land is cheap he will take much of it; if it is dear he will take less and build high. Suppose him to calculate the expenses of building and working his establishment with frontages of 100 and 110 feet respectively, in ways equally convenient on the whole to himself, his customers and employees, and therefore equally profitable to himself. Let him find that the difference between the two plans, after capitalizing future expenditure, shows an advantage of £500 in favour of the larger area; he will then be inclined to take the larger if the land is to be got at less than £50 per foot of frontage, but not otherwise; and £50 will be the marginal value of land to him. He might have reached this result by calculating the increased value of the business that could be done with the same outlay in other respects on the larger site as compared with the smaller, or again by building on less expensive ground instead of in a less favourable situation. But, by whatever route he makes his calculation, its character is similar to that by which he decides whether it is worth his while to buy business plant of any other kind: and he regards the net income (allowance being made for depreciation) which he expects to get from either investment as standing in the same general relation to his business; and if the advantages of the situation are such, that all the land available on it can find employments of different kinds in each of which its marginal use is represented by a capital value of £50 per foot of frontage, then that will be the current value of the land.

8sect; 5. This assumes that the competition for land for various uses will cause building in each locality and for each use to be carried up to that margin, at which it is no longer profitable to apply any more capital to the same site. As the demand for residential and business accommodation in a district increases, it becomes worth while to pay a higher and higher price for land, in order to avoid the expense and inconvenience of forcing more accommodation from the same ground area.

For instance, if the value of land in, say, Leeds rises because of the increased competition for it by shops, warehouses, iron works, etc.; then a woollen manufacturer finding his expenses of production increased, may move to another town or into the country; and thus leave the land on which he used to work to be build over with shops and warehouses, for which a town situation is more valuable than it is for factories. For he may think that the saving in the cost of land that he will make by moving into the country, together with other advantages of the change, will more than counter-balance its disadvantages. In a discussion as to whether it was worth while to do so, the rental value of the site of his factory would be reckoned among the expenses of production of his cloth; and rightly.

But we have to go behind that fact. The general relations of demand and supply cause production to be carried up to a margin at which the expenses of production (nothing being entered for rent) are so high that people are willing to pay a high value for additional land in order to avoid the inconvenience and expense of crowding their work on to a narrow site. These causes govern site value; and site value is therefore not properly regarded as governing marginal costs.

Thus the industrial demand for land is in all respects parallel to the agricultural. The expenses of production of oats are increased by the fact that land, which could yield good crops of oats, is in great demand for growing other crops that enable it to yield a higher rent: and in the same way the printing-presses, which may be seen at work in London some sixty feet above the ground, could afford to do their work a little cheaper if the demand for ground for other uses did not push the margin of building up so high. Again a hop-grower may find that on account of the high rent which he pays for his land, the price of his hops will not cover their expenses of production where he is, and he may abandon hop-growing, or seek other land for it; while the land that he leaves may perhaps be let to a market-gardener. After a while the demand for land in the neighbourhood may again become so great that the aggregate price which the market-gardener obtains for his produce will not pay its expenses of production, including rent; and so he in his turn makes room for, say, a building company.

In each case the rising demand for land alters the margin to which it is profitable to carry the intensive use of land: the costs at this margin indicate the action of those fundamental causes which govern the value of the land. And at the same time they are themselves those costs to which the general conditions of demand and supply compel value to conform: and therefore it is right for our purpose to go straight to them; though any such inquiry would be irrelevant to the purposes of a private balance sheet.

8sect; 6. The demand for exceptionally valuable urban land comes from traders of various kinds, wholesale and retail, more than from manufacturers; and it may be worth while to say something here as to the very interesting features of demand that are peculiar to their case.

If two factories in the same branch of trade have equal outputs they are sure to have nearly equal floor space. But there is no close relation between the size of trading establishments and their turn-overs. Plenty of space is for them a matter of convenience and a source of extra profit. It is not physically indispensable; but the larger their space, the greater the stock which they can keep on hand, and the greater the advantage to which they can display specimens of it; and especially is this the case in trades that are subject to changes of taste and fashion. In such trades the dealers exert themselves to collect within a comparatively small space representatives of all the best ideas that are in vogue, and still more of those that are likely soon to be so; and the higher the rental values of their sites the more prompt they must be in getting rid, even at a loss, of such things as are a little behind the time and do not improve the general character of their stocks. If the locality is one in which customers are more likely to be tempted by a well-chosen stock than by low prices, the traders will charge prices that give a high rate of profit on a comparatively small turn-over: but, if not, they will charge low prices and try to force a large business in proportion to their capital and the size of their premises; just as in some neighbourhoods the market-gardener finds it best to gather his peas young when they are full of flavour, and in others to let them grow till they weigh heavily in the scales. Whichever plan the traders follow, there will be some conveniences which they are in doubt whether it is worth while to offer to the public; since they calculate that the extra sales gained by such conveniences are only just remunerative, and do not contribute any surplus towards rent. The goods which they sell in consequence of these conveniences, are goods into whose expenses of marketing rent does not enter any more than it does into those of the peas which the market-gardener only just finds it worth his while to produce.

Prices are low in some very highly-rented shops, because their doors are passed by great numbers of people who cannot afford to pay high prices for the gratification of their fancy; and the shopkeeper knows that he must sell cheaply, or not sell at all. He has to be content with a low rate of profit each time he turns over his capital. But, as the wants of his customers are simple, he need not keep a large stock of goods; and he can turn over his capital many times a year. So his annual net profits are very great, and he is willing to pay a very high rent for the situation in which they can be earned. On the other hand, prices are very high in some of the quiet streets in the fashionable parts of London and in many villages; because in the one case customers must be attracted by a very choice stock, which can only be sold slowly; and in the other the aggregate turn-over is very small indeed. In neither place can the trader make profits that will enable him to pay as high a rent as those of some cheap but bustling shops in the East end of London.

It is however true that, if without any increase in traffic such as brings extra custom, a situation becomes more valuable for purposes other than shopkeeping; then only those shopkeepers will be able to pay their way who can manage to secure a large custom relatively to the prices which they charge and the class of business which they do. There will therefore be a smaller supply of shopkeepers in all trades for which the demand has not increased: and those who remain, will be able to charge a higher price than before, without offering any greater conveniences and attractions to their customers. The rise of ground values in the district will thus be an indication of a scarcity of space which, other things being equal, will raise the prices of retail goods; just in the same way as the rise of agricultural rents in any district will indicate a scarcity of land which will raise the marginal expenses of production, and therefore the price of any particular crop.

8sect; 7. The rent of a house (or other building) is a composite rent, of which one part belongs to the site and the other to the buildings themselves. The relations between these two are rather intricate, and may be deferred to Appendix G. A few words may however be said here as to composite rents in general. At starting there may appear to be some contradiction in the statement that a thing is yielding at the same time two rents: for its rent is in some sense a residual income after deducting the expenses of working it; and there cannot be two residues in regard to the same process of working and the same resulting revenue. But when the thing is composite each of its parts may be capable of being so worked as to yield a surplus of revenue over the expenses of working it. The corresponding rents can always be distinguished analytically, and sometimes they can be separated commercially106.

For instance, the rent of a flour-mill worked by water includes the rent of the site on which it is built, and the rent of the water power which it uses. Suppose that it is contemplated to build a mill in a place where there is a limited water power which could be applied equally well on any one of many sites; then the rent of the water power together with the site selected for it is the sum of two rents; which are respectively the equivalent of the differential advantages which possession of the site gives for production of any kind, and which the ownership of the water power gives for working a mill on any of the sites. And these two rents, whether they happen to be owned by the same person or not, can be clearly distinguished and separately estimated both in theory and in practice.

But this cannot be done if there are no other sites on which a mill can be built: and in that case, should the water power and the site belong to different persons, there is nothing but "higgling and bargaining" to settle how much of the excess of the value of the two together over that which the site has for other purposes shall go to the owner of the latter. And even if there were other sites at which the water power could be applied, but not with equal efficiency, there would still be no means of deciding how the owners of the site and the water power should share the excess of the producer's surplus which they got by acting together, over the sum of that which the site would yield for some other purpose, and of that which the water power would yield if applied elsewhere. The mill would probably not be put up till an agreement had been made for the supply of water power for a term of years: but at the end of that term similar difficulties would arise as to the division of the aggregate producer's surplus afforded by the water power and the site with the mill on it.

Difficulties of this kind are continually arising with regard to attempts by partial monopolists, such as railway, gas, water and electrical companies, to raise their charges on the consumer who has adapted his business arrangements to make use of their services, and perhaps laid down at his own expense a costly plant for the purpose. For instance, at Pittsburgh when manufacturers had just put up furnaces to be worked by natural gas instead of coal, the price of the gas was suddenly doubled. And the history of mines affords many instances of difficulties of this kind with neighbouring landowners as to rights of way, etc., and with the owners of neighbouring cottages, railways and docks107.

BOOK V, CHAPTER XII: EQUILIBRIUM OF NORMAL DEMAND AND SUPPLY, CONTINUED, WITH REFERENCE TO THE LAW OF INCREASING RETURN.

8sect; 1. We may now continue the study begun in chapters III. and V.; and examine some difficulties connected with the relations of demand and supply as regards commodities the production of which tends to increasing return.

We have noted that this tendency seldom shows itself immediately on an increase of demand. To take an example, the first effect of a sudden fashion for watch-shaped aneroids would be a temporary rise of price, in spite of the fact that they contain no material of which there is but a scanty stock. For highly paid labour, that had no special training for the work, would have to be drawn in from other trades; a good deal of effort would be wasted, and for a time the real and the money cost of production would be increased.

But yet, if the fashion lasted a considerable time, then even independently of any new invention, the cost of making aneroids would fall gradually. For specialized skill in abundance would be trained, and properly graduated to the various work to be done. With a large use of the method of interchangeable parts, specialized machinery would do better and more cheaply much of the work that is now done by hand; and thus a continued increase in the annual output of watch-shaped aneroids would lower their price very much.

Here there is to be noted an important difference between demand and supply. A fall in the price, at which a commodity is offered, acts on demand always in one direction. The amount of the commodity demanded may increase much or little according as the demand is elastic or inelastic: and a long or short time may be required for developing the new and extended uses of the commodity, which are rendered possible by the fall in price108. But—at all events if exceptional cases in which a thing is driven out of fashion by a fall in its price be neglected—the influence of price on demand is similar in character for all commodities: and, further, those demands which show high elasticity in the long run, show a high elasticity almost at once; so that, subject to a few exceptions, we may speak of the demand for a commodity as being of high or low elasticity without specifying how far we are looking ahead.

But there are no such simple rules with regard to supply. An increase in the price offered by purchasers does indeed always increase supply: and thus it is true that, if we have regard to short periods only, and especially to the transactions of a dealer's market, there is an "elasticity of supply" which corresponds closely to elasticity of demand. That is to say, a given rise in price will cause a great or a small increase in the offers which sellers accept, according as they have large or small reserves in the background, and as they have formed low or high estimates of the level of prices at the next market: and this rule applies nearly in the same way to things which in the long run have a tendency to diminishing return as to those which have a tendency to increasing return. In fact if the large plant needed in a branch of manufacture is fully occupied, and cannot be rapidly increased, an increase in the price offered for its products may have no perceptible effect in increasing the output for some considerable time: while a similar increase in the demand for a hand-made commodity might call forth quickly a great increase in supply, though in the long run its supply conformed to that of constant return or even of diminishing return.

In the more fundamental questions which relate to long periods, the matter is even more complex. For the ultimate output corresponding to an unconditional demand at even current prices would be theoretically infinite; and therefore the elasticity of supply of a commodity which conforms to the law of Increasing Return, or even to that of Constant Return, is theoretically infinite for long periods109.

8sect; 2. The next point to be observed is that this tendency to a fall in the price of a commodity as a result of a gradual development of the industry by which it is made, is quite a different thing from the tendency to the rapid introduction of new economies by an individual firm that is increasing its business.

We have seen how every step in the advance of an able and enterprising manufacturer makes the succeeding step easier and more rapid; so that his progress upwards is likely to continue so long as he has fairly good fortune, and retains his full energy and elasticity and his liking for hard work. But these cannot last for ever: and as soon as they decay, his business is likely to be destroyed through the action of some of those very causes which enabled it to rise; unless indeed he can pass it over into hands as strong as his used to be. Thus the rise and fall of individual firms may be frequent, while a great industry is going through one long oscillation, or even moving steadily forwards; as the leaves of a tree (to repeat an earlier illustration) grow to maturity, reach equilibrium, and decay many times, while the tree is steadily growing upwards year by year110.

The causes which govern the facilities for production at the command of a single firm, thus conform to quite different laws from those which control the whole output of an industry. And the contrast is perhaps heightened, when we take the difficulties of marketing into account. For instance, manufactures, which are adapted to special tastes, are likely to be on a small scale; and they are generally of such a character that the machinery and modes of organization already developed in other trades, could be easily adapted to them; so that a great increase in their scale of production would be sure to introduce vast economies at once. But these are the very industries in which each firm is likely to be confirmed more or less to its own particular market; and, if it is so confined, any hasty increase in its production is likely to lower the demand price in that market out of all proportion to the increased economies that it will gain; even though its production is but small relatively to the broad market for which in a more general sense it may be said to produce.

In fact, when trade is slack, a producer will often try to sell some of his surplus goods outside of his own particular market at prices that do little more than cover their prime costs: while within that market he still tries to sell at prices that nearly cover supplementary costs; and a great part of these are the returns expected on capital invested in building up the external organization of his business111.

Again supplementary costs are, as a rule, larger relatively to prime costs for things that obey the law of increasing return than for other things112; because their production needs the investment of a large capital in material appliances and in building up trade connections. This increases the intensity of those fears of spoiling his own peculiar market, or incurring odium from other producers for spoiling the common market; which we have already learnt to regard as controlling the short-period supply price of goods, when the appliances of production are not fully employed.

We cannot then regard the conditions of supply by an individual producer as typical of those which govern the general supply in a market. We must take account of the fact that very few firms have a long-continued life of active progress, and of the fact that the relations between the individual producer and his special market differ in important respects from those between the whole body of producers and the general market113.

8sect; 3. Thus the history of the individual firm cannot be made into the history of an industry any more than the history of an individual man can be made into the history of mankind. And yet the history of mankind is the outcome of the history of individuals; and the aggregate production for a general market is the outcome of the motives which induce individual producers to expand or contract their production. It is just here that our device of a representative firm comes to our aid. We imagine to ourselves at any time a firm that has its fair share of those internal and external economies, which appertain to the aggregate scale of production in the industry to which it belongs. We recognize that the size of such a firm, while partly dependent on changes in technique and in the costs of transport, is governed, other things being equal, by the general expansion of the industry. We regard the manager of it as reckoning up whether it would be worth his while to add a certain new line to his undertakings; whether he should introduce a certain new machine and so on. We regard him as treating the output which would result from that change more or less as a unit, and weighing in his mind the cost against the gain114.

This then is the marginal cost on which we fix our eyes. We do not expect it to fall immediately in consequence of a sudden increase of demand. On the contrary we expect the short-period supply price to increase with increasing output. But we also expect a gradual increase in demand to increase gradually the size and the efficiency of this representative firm; and to increase the economies both internal and external which are at its disposal.

That is to say, when making lists of supply prices (supply schedules) for long periods in these industries, we set down a diminished supply price against an increased amount of the flow of the goods; meaning thereby that a flow of that increased amount will in the course of time be supplied profitably at that lower price, to meet a fairly steady corresponding demand. We exclude from view any economies that may result from substantive new inventions; but we include those which may be expected to arise naturally out of adaptations of existing ideas; and we look towards a position of balance or equilibrium between the forces of progress and decay, which would be attained if the conditions under view were supposed to act uniformly for a long time. But such notions must be taken broadly. The attempt to make them precise over-reaches our strength. If we include in our account nearly all the conditions of real life, the problem is too heavy to be handled; if we select a few, then long-drawn-out and subtle reasonings with regard to them become scientific toys rather than engines for practical work.

The theory of stable equilibrium of normal demand and supply helps indeed to give definiteness to our ideas; and in its elementary stages it does not diverge from the actual facts of life, so far as to prevent its giving a fairly trustworthy picture of the chief methods of action of the strongest and most persistent group of economic forces. But when pushed to its more remote and intricate logical consequences, it slips away from the conditions of real life. In fact we are here verging on the high theme of economic progress; and here therefore it is especially needful to remember that economic problems are imperfectly presented when they are treated as problems of statical equilibrium, and not of organic growth. For though the statical treatment alone can give us definiteness and precision of thought, and is therefore a necessary introduction to a more philosophic treatment of society as an organism; it is yet only an introduction.

The Statical theory of equilibrium is only an introduction to economic studies; and it is barely even an introduction to the study of the progress and development of industries which show a tendency to increasing return. Its limitations are so constantly overlooked, especially by those who approach it from an abstract point of view, that there is a danger in throwing it into definite form at all. But, with this caution, the risk may be taken; and a short study of the subject is given in Appendix H.

BOOK V, CHAPTER XIII: THEORY OF CHANGES OF NORMAL DEMAND AND SUPPLY IN RELATION TO THE DOCTRINE OF MAXIMUM SATISFACTION.

8sect; 1. In earlier chapters of this Book, and especially in chapter XII., we have considered gradual changes in the adjustment of demand and supply. But any great and lasting change in fashion; any substantive new invention; any diminution of population by war or pestilence; or the development or dwindling away of a source of supply of the commodity in question, or of a raw material used in it, or of another commodity which is a rival and possible substitute for it:—such a change as any of these may cause the prices set against any given annual (or daily) consumption and production of the commodity to cease to be its normal demand and supply prices for that volume of consumption and production; or, in other words, they may render it necessary to make out a new demand schedule or a new supply schedule, or both of them. We proceed to study the problems thus suggested.

An increase of normal demand for a commodity involves an increase in the price at which each several amount can find purchasers; or, which is the same thing, an increase of the quantity which can find purchasers at any price. This increase of demand may be caused by the commodity's coming more into fashion, by the opening out of a new use for it or of new markets for it, by the permanent falling off in the supply of some commodity for which it can be used as a substitute, by a permanent increase in the wealth and general purchasing power of the community, and so on. Changes in the opposite direction will cause a falling off in demand and a sinking of the demand prices. Similarly an increase of normal supply means an increase of the amounts that can be supplied at each several price, and a diminution of the price at which each separate amount can be supplied115. This change may be caused by the opening up of a new source of supply, whether by improved means of transport or in any other way, by an advance in the arts of production, such as the invention of a new process or of new machinery, or again, by the granting of a bounty on production. Conversely, a diminution of normal supply (or a raising of the supply schedule) may be caused by the closing up of a new source of supply or by the imposition of a tax.

8sect; 2. We have, then, to regard the effects of an increase of normal demand from three points of view, according as the commodity in question obeys the law of constant or of diminishing or of increasing return: that is, its supply price is practically constant for all amounts, or increases or diminishes with an increase in the amount produced.

In the first case an increase of demand simply increases the amount produced without altering its price; for the normal price of a commodity which obeys the law of constant return is determined absolutely by its expenses of production: demand has no influence in the matter beyond this, that the thing will not be produced at all unless there is some demand for it at this fixed price.

If the commodity obeys the law of diminishing return an increase of demand for it raises its price and causes more of it to be produced; but not so much more as if it obeyed the law of constant return.

On the other hand, if the commodity obeys the law of increasing return, an increase of demand causes much more of it to be produced,—more than if the commodity obeyed the law of constant return,—and at the same time lowers its price. If, for instance, a thousand things of a certain kind have been produced and sold weekly at a price of 10s., while the supply price for two thousand weekly would be only 9s., a small rate of increase in normal demand may gradually cause this to become the normal price; since we are considering periods long enough for the full normal action of the causes that determine supply to work itself out. The converse holds in each case should normal demand fall off instead of increasing116.

The argument of this section has been thought by some writers to lend support to the claim that a Protective duty on manufactured imports in general increases the home market for those imports; and, by calling into play the Law of Increasing Return, ultimately lowers their price to the home consumer. Such a result may indeed ultimately be reached by a wisely chosen system of "Protection to nascent industries" in a new country; where manufactures, like young children, have a power of rapid growth. But even there the policy is apt to be wrenched from its proper uses, to the enrichment of particular interests: for those industries which can send the greatest number of votes to the poll, are those which are already on so large a scale, that a further increase would bring very few new economies. And of course the industries in a country so long familiar with machinery as England is, have generally passed the stage at which they can derive much real help from such Protection: while Protection to any one industry nearly always tends to narrow the markets, especially the foreign markets, for other industries. These few remarks show that the question is complex: they do not pretend to reach further than that.

8sect; 3. We have seen that an increase in normal demand, while leading in every case to an increased production, will in some cases raise and in others lower prices. But now we are to see that increased facilities for supply (causing the supply schedule to be lowered) will always lower the normal price at the same time that it leads to an increase in the amount produced. For so long as the normal demand remains unchanged an increased supply can be sold only at a diminished price; but the fall of price consequent on a given increase of supply will be much greater in some cases than in others. It will be small if the commodity obeys the law of diminishing return; because then the difficulties attendant on an increased production will tend to counteract the new facilities of supply. On the other hand, if the commodity obeys the law of increasing return, the increased production will bring with it increased facilities, which will co-operate with those arising from the change in the general conditions of supply; and the two together will enable a great increase in production and consequent fall in price to be attained before the fall of the supply price is overtaken by the fall of the demand price. If it happens that the demand is very elastic, then a small increase in the facilities of normal supply, such as a new invention, a new application of machinery, the opening up of new and cheaper sources of supply, the taking off a tax or granting a bounty, may cause an enormous increase of production and fall of price117.

If we take account of the circumstances of composite and joint supply and demand discussed in chapter VI., we have suggested to us an almost endless variety of problems which can be worked out by the methods adopted in these two chapters.

8sect; 4. We may now consider the effects which a change in the conditions of supply may exert on consumers' surplus or rent. For brevity of language a tax may be taken as representative of those changes which may cause a general increase, and a bounty as representative of those which may cause a general diminution in the normal supply price for each several amount of the commodity.

Firstly, if the commodity is one, the production of which obeys the law of constant return, so that the supply price is the same for all amounts of the commodity, consumers' surplus will be diminished by more than the increased payments to the producer; and therefore, in the special case of a tax, by more than the gross receipts of the State. For on that part of the consumption of the commodity, which is maintained, the consumer loses what the State receives: and on that part of the consumption which is destroyed by the rise in price, the consumers' surplus is destroyed; and of course there is no payment for it to the producer or to the State118. Conversely, the gain of consumers' surplus caused by a bounty on a commodity that obeys the law of constant return, is less than the bounty itself. For on that part of the consumption which existed before the bounty, consumers' surplus is increased by just the amount of the bounty; while on the new consumption that is caused by the bounty, the gain of the consumers' surplus is less than the bounty119.

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If however the commodity obeys the law of diminishing return; a tax by raising its price, and diminishing its consumption, will lower its expenses of production other than the tax: and the result will be to raise the supply price by something less than the full amount of the tax. In this case the gross receipts from the tax may be greater than the resulting loss of consumers' surplus, and they will be greater if the law of diminishing return acts so sharply that a small diminution of consumption causes a great falling-off in the expenses of production other than the tax120.

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On the other hand, a bounty on a commodity which obeys the law of diminishing return will lead to increased production, and will extend the margin of cultivation to places and conditions in which the expenses of production, exclusive of the bounty, are greater than before. Thus it will lower the price to the consumer and increase consumers' surplus less than if it were given for the production of a commodity which obeyed the law of constant return. In that case the increase of consumers' surplus was seen to be less than the direct cost of the bounty to the State; and therefore in this case it is much less121.

By similar reasoning it may be shown that a tax on a commodity which obeys the law of increasing return is more injurious to the consumer than if levied on one which obeys the law of constant return. For it lessens the demand and therefore the output. It thus probably increases the expenses of manufacture somewhat: sends up the price by more than the amount of the tax; and finally diminishes consumers' surplus by much more than the total payments which it brings in to the exchequer122. On the other hand, a bounty on such a commodity causes so great a fall in its price to the consumer, that the consequent increase of consumers' surplus may exceed the total payments made by the State to the producers; and certainly will do so in case the law of increasing return acts at all sharply123.

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These results are suggestive of some principles of taxation which require careful attention in any study of financial policy; when it will be necessary to take account of the expenses of collecting a tax and of administering a bounty, and of the many indirect effects, some economic and some moral, which a tax or a bounty is likely to produce. But these partial results are well adapted for our immediate purpose of examining a little more closely than we have done hitherto the general doctrine that a position of (stable) equilibrium of demand and supply is a position also of maximum satisfaction: and there is one abstract and trenchant form of that doctrine which has had much vogue, especially since the time of Bastiat's Economic Harmonics, and which falls within the narrow range of the present discussion.

8sect; 5. There is indeed one interpretation of the doctrine according to which every position of equilibrium of demand and supply may fairly be regarded as a position of maximum satisfaction124. For it is true that so long as the demand price is in excess of the supply price, exchanges can be effected at prices which give a surplus of satisfaction to buyer or to seller or to both. The marginal utility of what he receives is greater than that of what he gives up, to at least one of the two parties; while the other, if he does not gain by the exchange, yet does not lose by it. So far then every step in the exchange increases the aggregate satisfaction of the two parties. But when equilibrium has been reached, demand price being now equal to supply price, there is no room for any such surplus: the marginal utility of what each receives no longer exceeds that of what he gives up in exchange: and when the production increases beyond the equilibrium amount, the demand price being now less than the supply price, no terms can be arranged which will be acceptable to the buyer, and will not involve a loss to the seller.

It is true then that a position of equilibrium of demand and supply is a position of maximum satisfaction in this limited sense, that the aggregate satisfaction of the two parties concerned increases until that position is reached; and that any production beyond the equilibrium amount could not be permanently maintained so long as buyers and sellers acted freely as individuals, each in his own interest.

But occasionally it is stated, and very often it is implied, that a position of equilibrium of demand and supply is one of maximum aggregate satisfaction in the full sense of the term: that is, that an increase of production beyond the equilibrium level would directly (i.e. independently of the difficulties of arranging for it, and of any indirect evils it might cause) diminish the aggregate satisfaction of both parties. The doctrine so interpreted is not universally true.

In the first place it assumes that all differences in wealth between the different parties concerned may be neglected, and that the satisfaction which is rated at a shilling by any one of them, may be taken as equal to one that is rated at a shilling by any other. Now it is obvious that, if the producers were as a class very much poorer than the consumers, the aggregate satisfaction might be increased by a stinting of supply when it would cause a great rise in demand price (i.e. when the demand is inelastic); and that if the consumers were as a class much poorer than the producers, the aggregate satisfaction might be increased by extending the production beyond the equilibrium amount and selling the commodity at a loss125.

This point however may well be left for future consideration. It is in fact only a special case of the broad proposition that the aggregate satisfaction can primâ facie be increased by the distribution, whether voluntarily or compulsorily, of some of the property of the rich among the poor; and it is reasonable that the bearings of this proposition should be set aside during the first stages of an inquiry into existing economic conditions. This assumption therefore may be properly made, provided only it is not allowed to slip out of sight.

But in the second place the doctrine of maximum satisfaction assumes that every fall in the price which producers receive for the commodity, involves a corresponding loss to them; and this is not true of a fall in price which results from improvements in industrial organization. When a commodity obeys the law of increasing return, an increase in its production beyond equilibrium point may cause the supply price to fall much; and though the demand price for the increased amount may be reduced even more, so that the production would result in some loss to the producers, yet this loss may be very much less than that money value of the gain to purchasers which is represented by the increase of consumers' surplus.

In the case then of commodities with regard to which the law of increasing return acts at all sharply, or in other words, for which the normal supply price diminishes rapidly as the amount produced increases, the direct expense of a bounty sufficient to call forth a greatly increased supply at a much lower price, would be much less than the consequent increase of consumers' surplus. And if a general agreement could be obtained among consumers, terms might be arranged which would make such action amply remunerative to the producers, at the same time that they left a large balance of advantage to the consumers126.

8sect; 6. One simple plan would be the levying of a tax by the community on their own incomes, or on the production of goods which obey the law of diminishing return, and devoting the tax to a bounty on the production of those goods with regard to which the law of increasing return acts sharply. But before deciding on such a course they would have to take account of considerations, which are not within the scope of the general theory now before us, but are yet of great practical importance. They would have to reckon up the direct and indirect costs of collecting a tax and administering a bounty; the difficulty of securing that the burdens of the tax and the benefits of the bounty were equitably distributed; the openings for fraud and corruption; and the danger that in the trade which had got a bounty and in other trades which hoped to get one, people would divert their energies from managing their own businesses to managing those persons who control the bounties.

Besides these semi-ethical questions there will arise others of a strictly economic nature, relating to the effects which any particular tax or bounty may exert on the interests of landlords, urban or agricultural, who own land adapted for the production of the commodity in question. These are questions which must not be overlooked; but they differ so much in their detail that they cannot fitly be discussed here127.

8sect; 7. Enough has been said to indicate the character of the second great limitation which has to be introduced into the doctrine that the maximum satisfaction is generally to be attained by encouraging each individual to spend his own resources in that way which suits him best. It is clear that if he spends his income in such a way as to increase the demand for the services of the poor and to increase their incomes, he adds something more to the total happiness than if he adds an equal amount to the incomes of the rich, because the happiness which an additional shilling brings to a poor man is much greater than that which it brings to a rich one; and that he does good by buying things the production of which raises, in preference to things the production of which lowers the character of those who make them128. But further, even if we assume that a shilling's worth of happiness is of equal importance to whomsoever it comes, and that every shilling's worth of consumers' surplus is of equal importance from whatever commodity it is derived, we have to admit that the manner in which a person spends his income is a matter of direct economic concern to the community. For in so far as he spends it on things which obey the law of diminishing return, he makes those things more difficult to be obtained by his neighbours, and thus lowers the real purchasing power of their incomes; while in so far as he spends it on things which obey the law of increasing return, he makes those things more easy of attainment to others, and thus increases the real purchasing power of their incomes.

Again, it is commonly argued that an equal ad valorem tax levied on all economic commodities (material and immaterial), or which is the same thing a tax on expenditure, is primâ facie the best tax; because it does not divert the expenditure of individuals out of its natural channels: we have now seen that this argument is invalid. But ignoring for the time the fact that the direct economic effect of a tax or a bounty never constitutes the whole, and very often not even the chief part of the considerations which have to be weighed before deciding to adopt it, we have found:—firstly, that a tax on expenditure generally causes a greater destruction of consumers' surplus than one levied exclusively on commodities as to which there is but little room for the economies of production on a large scale, and which obey the law of diminishing return; and secondly, that it might even be for the advantage of the community that the government should levy taxes on commodities which obey the law of diminishing return, and devote part of the proceeds to bounties on commodities which obey the law of increasing return.

These conclusions, it will be observed, do not by themselves afford a valid ground for government interference. But they show that much remains to be done, by a careful collection of the statistics of demand and supply, and a scientific interpretation of their results, in order to discover what are the limits of the work that society can with advantage do towards turning the economic actions of individuals into those channels in which they will add the most to the sum total of happiness129.

BOOK V, CHAPTER XIV: THE THEORY OF MONOPOLIES.

8sect; 1. It has never been supposed that the monopolist in seeking his own advantage is naturally guided in that course which is most conducive to the wellbeing of society regarded as a whole, he himself being reckoned as of no more importance than any other member of it. The doctrine of Maximum Satisfaction has never been applied to the demand for and supply of monopolized commodities. But there is much to be learnt from a study of the relations in which the interests of the monopolist stand to those of the rest of society, and of the general conditions under which it might be possible to make arrangements more beneficial to society as a whole than those which he would adopt if he consulted only his own interests: and with this end in view we are now to seek for a scheme for comparing the relative quantities of the benefits which may accrue to the public and to the monopolist from the adoption of different courses of action by him.

In a later volume a study will be made of the Protean shapes of modern trade combinations and monopolies, some of the most important of which, as for example "Trusts," are of very recent growth. At present we consider only those general causes determining monopoly values, that can be traced with more or less distinctness in every case in which a single person or association of persons has the power of fixing either the amount of a commodity that is offered for sale or the price at which it is offered.

8sect; 2. The primâ facie interest of the owner of a monopoly is clearly to adjust the supply to the demand, not in such a way that the price at which he can sell his commodity shall just cover its expenses of production, but in such a way as to afford him the greatest possible total net revenue.

But here we meet with a difficulty as to the meaning of the term Net revenue. For the supply price of a freely-produced commodity includes normal profits; the whole of which, or at all events what remains of them after deducting interest on the capital employed and insurance against loss, is often classed indiscriminately as net revenue. And when a man manages his own business, he often does not distinguish carefully that portion of his profits, which really is his own earnings of management, from any exceptional gains arising from the fact that the business is to some extent of the nature of a monopoly.

This difficulty however is in a great measure avoided in the case of a public company; where all, or nearly all, the expenses of management are entered in the ledger as definite sums, and are subtracted from the total receipts of the company before its net income is declared.

The net income divided among the shareholders includes interest on the capital invested and insurance against risk of failure, but little or no earnings of management; so that the amount by which the dividends are in excess of what may fairly be allowed as interest and insurance, is the Monopoly Revenue which we are seeking.

Since then it is much easier to specify exactly the amount of this net revenue when a monopoly is owned by a public company than when it is owned by an individual or private firm, let us take as a typical instance the case of a gas company that has the monopoly of the supply of gas to a town. For the sake of simplicity the company may be supposed to have already invested the whole of its own capital in fixed plant, and to borrow any more capital, that it may want to extend its business, on debentures at a fixed rate of interest.

8sect; 3. The demand schedule for gas remains the same as it would be if gas were a freely-produced commodity; it specifies the price per thousand feet at which consumers in the town will among them use any given number of feet. But the supply schedule must represent the normal expenses of production of each several amount supplied; and these include interest on all its capital, whether belonging to its shareholders or borrowed on debentures, at a fixed normal rate; they include also the salaries of its directors, and permanent officials, adjusted (more or less accurately) to the work required of them, and therefore increasing with an increase in the output of gas. A monopoly revenue schedule may then be constructed thus:—Having set against each several amount of the commodity its demand price, and its supply price estimated on the plan just described, subtract each supply price from the corresponding demand price and set the residue in the monopoly revenue column against the corresponding amount of the commodity.

Thus for instance if a thousand million feet could be sold annually at a price of 3s. per thousand feet, and the supply price for this amount were 2s. 9d. per thousand feet, the monopoly revenue schedule would show 3d. against this amount; indicating an aggregate net revenue when this amount was sold, of three million pence, or £12,500. The aim of the company, having regard only to their own immediate dividends, will be to fix the price of their gas at such a level as to make this aggregate net revenue the largest possible130.

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8sect; 4. Now suppose that a change takes place in the conditions of supply; some new expense has to be incurred, or some old expense can be avoided; or perhaps a new tax is imposed on the undertaking or a bounty is awarded to it.

First let this increase or diminution of the expenses be a fixed sum, bearing on the undertaking as one undivided whole and not varying with the amount of the commodity produced. Then, whatever be the price charged and the amount of the commodity sold, the monopoly revenue will be increased or diminished, as the case may be, by this sum; and therefore that selling price which afforded the maximum monopoly revenue before the change will afford it afterwards; the change therefore will not offer to the monopolist any inducement to alter his course of action. Suppose for instance that the maximum monopoly revenue is got when twelve hundred million cubic feet are sold annually; and that this is done when the price is fixed at 30d. per thousand feet: suppose that the expenses of production for this amount are at the rate of 26d., leaving a monopoly revenue at the rate of four pence per thousand feet, that is £20,000 in all. This is its maximum value: if the company fixed the price higher at, say, 31d. and sold only eleven hundred million feet, they would perhaps get a monopoly revenue at the rate of 4.2 pence per thousand feet, that is £19,250 in all; while in order to sell thirteen hundred millions they would have to lower their price to, say, 28d. and would get a monopoly revenue at the rate of perhaps 3×6d. per thousand feet, that is £19,500 in all. Thus by fixing the price at 30d. they get £750 more than by fixing it at 31d., and £500 more than by fixing it at 28d. Now let a tax of £10,000 a year be levied on the gas company as a fixed sum independent of the amount they sell. Their monopoly revenue will become £10,000 if they charge 30d., £9,250 if they charge 31d., and £9,500 if they charge 28d. They will therefore continue to charge 30d.

The same is true of a tax or a bounty proportioned not to the gross receipts of the undertaking, but to its monopoly revenue. For suppose next that a tax is levied, not of one fixed sum, but a certain percentage, say 50 per cent. of the monopoly revenue. The company will then retain a monopoly revenue of £10,000 if they charge 30d., of £9,625 if they charge 31d., and of £9,750 if they charge 28d. They will therefore still charge 30d.131

On the other hand a tax proportional to the amount produced gives an inducement to the monopolist to lessen his output and raise his price. For by so doing he diminishes his expenses. And the excess of total receipts over total outlay may therefore be now increased by a diminution of output; though before the imposition of the tax it would have been lessened. Further, if before the imposition of the tax the net revenue was only a little greater than that which would have been afforded by much smaller sales, then the monopolist would gain by reducing his production very greatly; and hence in such cases as this, the change is likely to cause a very great diminution of production and rise of price. The opposite effects will be caused by a change which diminishes the expense of working the monopoly by a sum that varies directly with the amount produced under it.

In the last example, for instance, a tax of 2d. on each thousand feet sold would have reduced the monopoly revenue to £10,083 if the company charged 31d. per thousand feet and therefore sold eleven hundred millions; to £10,000 if they charged 30d. and therefore sold twelve hundred millions, and to £8,666 if they charged 28d. and therefore sold thirteen hundred million feet. Therefore the tax would induce the company to raise the price to something higher than 30d.; they would perhaps go to 31d., perhaps somewhat higher; for the figures before us do not show exactly how far it would be their interest to go.

On the other hand, if there were a bounty of 2d. on the sale of each thousand feet, the monopoly revenue would rise to £28,416 if they charged 31d., to £30,000 if they charged 30d., and to £30,333 if they charged 28d.: it would therefore cause them to lower the price. And of course the same result would follow from an improvement in the method of making gas, which lowered its cost of production to the monopolist company by 2d. per 1000 feet132.

8sect; 5. The monopolist would lose all his monopoly revenue if he produced for sale an amount so great that its supply price, as here defined, was equal to its demand price: the amount which gives the maximum monopoly revenue is always considerably less than that. It may therefore appear as though the amount produced under a monopoly is always less and its price to the consumer always higher than if there were no monopoly. But this is not the case.

For when the production is all in the hands of one person or company, the total expenses involved are generally less than would have to be incurred if the same aggregate production were distributed among a multitude of comparatively small rival producers. They would have to struggle with one another for the attention of consumers, and would necessarily spend in the aggregate a great deal more on advertising in all its various forms than a single firm would; and they would be less able to avail themselves of the many various economies which result from production on a large scale. In particular they could not afford to spend as much on improving methods of production and the machinery used in it, as a single large firm which knew that it was certain itself to reap the whole benefit of any advance it made.

This argument does indeed assume the single firm to be managed with ability and enterprise, and to have an unlimited command of capital—an assumption which cannot always be fairly made. But where it can be made, we may generally conclude that the supply schedule for the commodity, if not monopolized, would show higher supply prices than those of our monopoly supply schedule; and therefore the equilibrium amount of the commodity produced under free competition would be less than that for which the demand price is equal to the monopoly supply price133.

One of the most interesting and difficult applications of the theory of monopolies is to the question whether the public interest is best served by the allotment of a distinct basin to each great railway, and excluding competition there. For the proposal it is urged that a railway can afford to carry two million passengers, or tons of goods, cheaper than one million: and that a division of the public demand between two lines will prevent either of them from offering a cheap service. It must be admitted that, other things being equal, the "monopoly revenue price" fixed by a railway will be lowered by every increase in the demand for its services, and vice versâ. But, human nature being what it is, experience has shown that the breaking of a monopoly by the opening out of a competing line accelerates, rather than retards the discovery by the older line that it can afford to carry traffic at lower rates. There still remains the suggestion that after a while the railways will combine and charge the public with the expense wasted on duplicating the services. But this again only opens out new matters of controversy. The theory of monopolies starts rather than solves practical issues such as these: and we must defer their study134.

8sect; 6. So far we have supposed the owner of a monopoly to fix the price of his commodity with exclusive reference to the immediate net revenue which he can derive from it. But, in fact, even if he does not concern himself with the interests of the consumers, he is likely to reflect that the demand for a thing depends in a great measure on people's familiarity with it; and that if he can increase his sales by taking a price a little below that which would afford him the maximum net revenue, the increased use of his commodity will before long recoup him for his present loss. The lower the price of gas, the more likely people are to have it laid on to their houses; and when once it is there, they are likely to go on making some use of it, even though a rival, such as electricity or mineral oil, may be competing closely with it. The case is stronger when a railway company has a practical monopoly of the transport of persons and goods to a sea-port, or to a suburban district which is as yet but partly built over; the railway company may then find it worth while, as a matter of business, to levy charges much below those which would afford the maximum net revenue, in order to get merchants into the habit of using the port, to encourage the inhabitants of the port to develop their docks and warehouses; or to assist speculative builders in the new suburb to build houses cheaply and to fill them quickly with tenants, thus giving to the suburb an air of early prosperity which goes far towards insuring its permanent success. This sacrifice by a monopolist of part of his present gains in order to develop future business differs in extent rather than kind from the sacrifices which a young firm commonly makes in order to establish a connection.

In such cases as these a railway company though not pretending to any philanthropic motives, yet finds its own interests so closely connected with those of the purchasers of its services, that it gains by making some temporary sacrifice of net revenue with the purpose of increasing consumers' surplus. And an even closer connection between the interests of the producers and the consumers is found when the landowners of any district combine to make a branch railway through it, without much hope that the traffic will afford the current rate of interest on the capital which they invest—that is, without much hope that the monopoly revenue of the railway, as we have defined it, will be other than a negative quantity—but expecting that the railway will add so much to the value of their property as to make their venture on the whole a profitable one. And when a municipality undertakes the supply of gas or water, or facilities for transport by improved roads, by new bridges, or by tramways, the question always arises whether the scale of charges should be high, so as to afford a good net revenue and relieve the pressure on the rates; or should be low, so as to increase consumers' surplus.

8sect; 7. It is clear then that some study is wanted of calculations by which a monopolist should govern his actions, on the supposition that he regards an increase of consumers' surplus as equally desirable to him, if not with an equal increase of his own monopoly revenue, yet with an increase, say, one-half or one-quarter as great.

If the consumers' surplus which arises from the sale of the commodity at any price, is added to the monopoly revenue derived from it, the sum of the two is the money measure of the net benefits accruing from the sale of the commodity to producers and consumers together, or as we may say the total benefit of its sale. And if the monopolist regards a gain to the consumers as of equal importance with an equal gain to himself, his aim will be to produce just that amount of the commodity which will make this total benefit a maximum135.

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But it will seldom happen that the monopolist can and will treat £1 of consumers' surplus as equally desirable with £1 of monopoly revenue. Even a government which considers its own interests coincident with those of the people has to take account of the fact that, if it abandons one source of revenue, it must in general fall back on others which have their own disadvantages. For they will necessarily involve friction and expense in collection, together with some injury to the public, of the kind which we have described as a loss of consumers' surplus: and they can never be adjusted with perfect fairness, especially when account is taken of the unequal shares that different members of the community will get of the benefits for the sake of which it is proposed that the government should forego some of its revenue.

Suppose then that the monopolist makes a compromise, and reckons £1 of consumers' surplus as equivalent to say 10s. of monopoly revenue. Let him calculate the monopoly revenue to be got from selling his commodity at any given price, and to it let him add one half the corresponding consumers' surplus: the sum of the two may be called the compromise benefit; and his aim will be to fix on that price which will make the compromise benefit as large as possible136.

The following general results are capable of exact proof; but on a little consideration they will appear so manifestly true as hardly to require proof. Firstly, the amount which the monopolist will offer for sale will be greater (and the price at which he will sell it will be less) if he is to any extent desirous to promote the interests of consumers than if his sole aim is to obtain the greatest possible monopoly revenue; and secondly, the amount produced will be greater (and the selling price will be less) the greater be the desire of the monopolist to promote the interests of consumers; i.e. the larger be the percentage of its actual value at which he counts in consumers' surplus with his own revenue137.

8sect; 8. Not many years ago it was commonly argued that: "An English ruler, who looks upon himself as the minister of the race he rules, is bound to take care that he impresses their energies in no work that is not worth the labour that is spent upon it, or—to translate the sentiment into plainer language—that he engages in nothing that will not produce an income sufficient to defray the interest on its cost138." Such phrases as this may sometimes have meant little more than that a benefit which consumers were not willing to purchase at a high price and on a large scale, was likely to exist for the greater part only in the specious counsels of those who had some personal interest in the proposed undertakings; but probably they more often indicated a tendency to under-estimate the magnitude of that interest which consumers have in a low price, and which we call consumers' surplus139.

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One of the chief elements of success in private business is the faculty of weighing the advantages and disadvantages of any proposed course, and of assigning to them their true relative importance. He who by practice and genius has acquired the power of attributing to each factor its right quantity, is already well on the way to fortune; and the increase in the efficiency of our productive forces is in a great measure due to the large number of able minds who are devoting themselves ceaselessly to acquiring these business instincts. But unfortunately the advantages thus weighed against one another are nearly all regarded from one point of view, that of the producer; and there are not many who concern themselves to weigh against one another the relative quantities of the interests which the consumers and the producers have in different courses of action. For indeed the requisite facts come within the direct experience of only a very few persons, and even in the case of those few, only to a very limited extent and in a very imperfect way. Moreover when a great administrator has acquired those instincts with regard to public interests which able business men have with regard to their own affairs, he is not very likely to be able to carry his plans with a free hand. At all events in a democratic country no great public undertaking is secure of being sustained on consistent lines of policy, unless its advantages can be made clear, not only to the few who have direct experience of high public affairs, but also to the many who have no such experience and have to form their judgment on the materials set before them by others.

Judgments of this kind must always be inferior to those which an able business man forms, by the aid of instincts based on long experience with regard to his own business. But they may be made much more trustworthy than they are at present, if they can be based on statistical measures of the relative quantities of the benefits and the injuries which different courses of public action are likely to cause to the several classes of the community. Much of the failure and much of the injustice, in which the economic policies of governments have resulted, have been due to the want of statistical measurement. A few people who have been strongly interested on one side have raised their voices loudly, persistently and all together; while little has been heard from the great mass of people whose interests have lain in the opposite direction; for, even if their attention has been fairly called to the matter, few have cared to exert themselves much for a cause in which no one of them has more than a small stake. The few therefore get their way, although if statistical measures of the interests involved were available, it might prove that the aggregate of the interests of the few was only a tenth or a hundredth part of the aggregate of the interests of the silent many.

No doubt statistics can be easily misinterpreted; and are often very misleading when first applied to new problems. But many of the worst fallacies involved in the misapplications of statistics are definite and can be definitely exposed, till at last no one ventures to repeat them even when addressing an uninstructed audience: and on the whole arguments which can be reduced to statistical forms, though still in a backward condition, are making more sure and more rapid advances than any others towards obtaining the general acceptance of all who have studied the subjects to which they refer. The rapid growth of collective interests, and the increasing tendency towards collective action in economic affairs, make it every day more important that we should know what quantitative measures of public interests are most needed and what statistics are required for them, and that we should set ourselves to obtain these statistics.

It is perhaps not unreasonable to hope that as time goes on, the statistics of consumption will be so organized as to afford demand schedules sufficiently trustworthy, to show in diagrams that will appeal to the eye, the quantities of consumers' surplus that will result from different courses of public and private action. By the study of these pictures the mind may be gradually trained to get juster notions of the relative magnitudes of the interests which the community has in various schemes of public and private enterprise; and sounder doctrines may replace those traditions of an earlier generation, which had perhaps a wholesome influence in their time, but which damped social enthusiasm by throwing suspicion on all projects for undertakings by the public on its own behalf which would not show a balance of direct pecuniary profit.

The practical bearings of many of the abstract reasonings in which we have recently been engaged will not be fully apparent till we approach the end of this treatise. But there seemed to be advantages in introducing them thus early, partly because of their close connection with the main theory of equilibrium of demand and supply, and partly because they throw side lights on the character and the purposes of that investigation of the causes which determine distribution on which we are about to enter.

8sect; 9. So far it has been assumed that the monopolist can buy and sell freely. But in fact monopolistic combinations in one branch of industry foster the growth of monopolistic combinations in those which have occasion to buy from or sell to it: and the conflicts and alliances between such associations play a rôle of ever increasing importance in modern economics. Abstract reasoning of a general character has little to say on the subject. If two absolute monopolies are complementary, so that neither can turn its products to any good account, without the other's aid, there is no means of determining where the price of the ultimate product will be fixed. Thus if we supposed, following Cournot's lead, that copper and zinc were each of them useless except when combined to make brass: and if we supposed that one man, A, owned all the available sources of supply of copper; while another, B, owned all those of zinc; there would then be no means of determining beforehand what amount of brass would be produced, nor therefore the price at which it could be sold. Each would try to get the better of the other in bargaining; and though the issue of the contest would greatly affect the purchasers, they would not be able to influence it140.

Under the conditions supposed, A could not count on reaping the whole, nor even any share at all of the benefit, from increased sales, that would be got by lowering the price of copper in a market in which the price of zinc was fixed by natural causes rather than strategical higgling and bargaining. For, if he reduced his price, B might take the action as a sign of commercial weakness, and raise the price of zinc; thus causing A to lose both on price and on amount sold. Each would therefore be tempted to bluff the other; and consumers might find that less brass was put on the market, and that therefore a higher price could be exacted for it, than if a single monopolist owned the whole supplies both of copper and of zinc: for he might see his way to gaining in the long run by a low price which stimulated consumption. But neither A nor B could reckon on the effects of his own action, unless the two came together and agreed on a common policy: that is unless they made a partial, and perhaps temporary fusion of their monopolies. On this ground, and because monopolies are likely to disturb allied industries it may reasonably be urged that the public interest generally requires that complementary monopolies should be held in a single hand.

But there are other considerations of perhaps greater importance on the other side. For in real life there are scarcely any monopolies as absolute and permanent as that just discussed. On the contrary there is in the modern world an ever increasing tendency towards the substitution of new things and new methods for old, which are not being developed progressively in the interests of consumers; and the direct or indirect competition thus brought to bear is likely to weaken the position of one of the complementary monopolies more than the other. For instance if there be only one factory for spinning and only one for weaving in a small isolated country, it may be for the time to the public interest that the two should be in the same hands. But the monopoly so established will be much harder to shake than would either half of it separately. For a new venturer might push his way into the spinning business and compete with the old spinning mill for the custom of the old weaving sheds.

Consider again a through route, partly by rail and partly by sea, between two great centres of industry. If competition on either half of the route were permanently impossible, it would probably be to the public interest that the ships and the railway line should be in the same hands. But as things are, no such general statement can be made. Under some conditions it is more to the public interest that they should be in one hand; under others, and those perhaps the conditions that occur the more frequently, it is in the long run to the public interest that they should remain in different hands.

Similarly the primâ facie arguments in favour of the fusion of monopolistic cartels, or other associations, in complementary branches of industry, though often plausible and even strong, will generally be found on closer examination to be treacherous. They point to the removal of prominent social and industrial discords; but at the probable expense of larger and more enduring discords in the future141

BOOK V, CHAPTER XV: SUMMARY OF THE GENERAL THEORY OF EQUILIBRIUM OF DEMAND AND SUPPLY.

8sect; 1. The present chapter contains no new matter: it is a mere summary of the results of Book V. The second half of it may be of service to anyone who has omitted the later chapters: for it may indicate, though it cannot explain, their general drift.

In Book V. we have studied the theory of the mutual relations of demand and supply in their most general form; taking as little account as possible of the special incidents of particular applications of the theory, and leaving over for the following Book the study of the bearings of the general theory on the special features of the several agents of production, Labour, Capital, and Land.

The difficulties of the problem depend chiefly on variations in the area of space, and the period of time over which the market in question extends; the influence of time being more fundamental than that of space.

Even in a market of very short period, such as that of a provincial corn-exchange on market-day, the "higgling and bargaining" might probably oscillate about a mean position, which would have some sort of a right to be called the equilibrium price: but the action of dealers in offering one price or refusing another would depend little, if at all, on calculations with regard to cost of production. They would look chiefly at present demand on the one hand, and on the other at the stocks of the commodity already available. It is true that they would pay some attention to such movements of production in the near future as might throw their shadow before; but in the case of perishable goods they would look only a very little way beyond the immediate present. Cost of production has for instance no perceptible influence on the day's bargaining in a fish-market.

In a rigidly stationary state in which supply could be perfectly adjusted to demand in every particular, the normal expenses of production, the marginal expenses, and the average expenses (rent being counted in) would be one and the same thing, for long periods and for short. But, as it is, the language both of professed writers on economics and of men of business shows much elasticity in the use of the term Normal when applied to the causes that determine value. And one fairly well marked division needs study.

On the one side of this division are long periods, in which the normal action of economic forces has time to work itself out more fully; in which therefore a temporary scarcity of skilled labour, or of any other of the agents of production, can be remedied; and in which those economies that normally result from an increase in the scale of production—normally, that is without the aid of any substantive new invention—have time to develop themselves. The expenses of a representative firm, managed with normal ability and having normal access to the internal and external economies of production on a large scale, may be taken as a standard for estimating normal expenses of production: and when the period under survey is long enough to enable the investment of capital in building up a new business to complete itself and to bear full fruits; then the marginal supply price is that, the expectation of which in the long run just suffices to induce capitalists to invest their material capital, and workers of all grades to invest their personal capital in the trade.

On the other side of the line of division are periods of time long enough to enable producers to adapt their production to changes in demand, in so far as that can be done with the existing provision of specialized skill, specialized capital, and industrial organization; but not long enough to enable them to make any important changes in the supplies of these factors of production. For such periods the stock of material and personal appliances of production has to be taken in a great measure for granted; and the marginal increment of supply is determined by estimates of producers as to the amount of production it is worth their while to get out of those appliances. If trade is brisk all energies are strained to their utmost, overtime is worked, and then the limit to production is given by want of power rather than by want of will to go further or faster. But if trade is slack every producer has to make up his mind how near to prime cost it is worth his while to take fresh orders. And here there is no definite law, the chief operative force is the fear of spoiling the market; and that acts in different ways and with different strengths on different individuals and different industrial groups. For the chief motive of all open combinations and of all informal silent and "customary" understandings whether among employers or employed is the need for preventing individuals from spoiling the common market by action that may bring them immediate gains, but at the cost of a greater aggregate loss to the trade.

8sect; 2. We next turned aside to consider the relations of demand and supply with reference to things that need to be combined together for the purposes of satisfying a joint demand; of which the most important instance is that of the specialized material capital, and the specialized personal skill that must work together in any trade. For there is no direct demand on the part of consumers for either alone, but only for the two conjointly; the demand for either separately is a derived demand, which rises, other things being equal, with every increase in the demand for the common products, and with every diminution in the supply price of the joint factors of production. In like manner commodities of which there is a joint supply, such as gas and coke, or beef and hides, can each of them have only a derived supply price, governed by the expenses of the whole process of production on the one hand, and on the other by the demand for the remaining joint products.

The composite demand for a thing, resulting from its being used for several different purposes, and the composite supply of a thing, that has several sources of production, present no great difficulty; for the several amounts demanded for the different purposes, or supplied from different sources, can be added together, on the same plan as was adopted in Book III., for combining the demands of the rich, the middle classes and the poor for the same commodity.

Next we made some study of the division of the supplementary costs of a business,—and especially those connected with building up a trade connection, with marketing, and with insurance—among the various products of that business.

8sect; 3. Returning to those central difficulties of the equilibrium of normal demand and supply which are connected with the element of time, we investigated more fully the relation between the value of an appliance for production and that of the things produced by it.

When different producers have different advantages for producing a thing, its price must be sufficient to cover the expenses of production of those producers who have no special and exceptional facilities; for if not they will withhold or diminish their production, and the scarcity of the amount supplied, relatively to the demand, will raise the price. When the market is in equilibrium, and the thing is being sold at a price which covers these expenses, there remains a surplus beyond their expenses for those who have the assistance of any exceptional advantages. If these advantages arise from the command over free gifts of nature, the surplus is called a producer's surplus or producer's rent: there is a surplus in any case, and if the owner of a free gift of nature lends it out to another, he can generally get for its use a money income equivalent to this surplus.

The price of the produce is equal to the cost of production of that part of it, which is raised on the margin, that is under such unfavourable conditions as to yield no rent. The cost of this part can be reckoned up without reasoning in a circle; and the cost of other parts cannot.

If land which had been used for growing hops, is found capable of yielding a higher rent as market-garden land, the area under hops will undoubtedly be diminished; and this will raise their marginal cost of production and therefore their price. The rent which land will yield for one kind of produce, calls attention to the fact that a demand for the land for that kind of produce increases the difficulties of supply of other kinds; though it does not directly enter into those expenses. And similar arguments apply to the relation between the site values of urban land and the costs of things made on it.

Thus when we are taking a broad view of normal value, when we are investigating the causes which determine normal value "in the long run," when we are tracing the "ultimate" effects of economic causes; then the income that is derived from capital in these forms enters into the payments by which the expenses of production of the commodity in question have to be covered; and estimates as to the probable amount of that income directly control the action of the producers, who are on the margin of doubt as to whether to increase the means of production or not. But, on the other hand, when we are considering the causes which determine normal prices for a period which is short relatively to that required for largely increasing the supply of those appliances for production; then their influence on value is chiefly indirect and more or less similar to that exerted by the free gifts of nature. The shorter the period which we are considering, and the slower the process of production of those appliances, the less part will variations in the income derived from them play in checking or increasing the supply of the commodity produced by them, and in raising or lowering its supply price.

8sect; 4. This leads to the consideration of some difficulties of a technical character connected with the marginal expenses of production of a commodity that obeys the law of increasing return. The difficulties arise from the temptation to represent supply price as dependent on the amount produced, without allowing for the length of time that is necessarily occupied by each individual business in extending its internal, and still more its external organization; and in consequence they have been most conspicuous in mathematical and semi-mathematical discussions of the theory of value. For when changes of supply price and amount produced are regarded as dependent exclusively on one another without any reference to gradual growth, it appears reasonable to argue that the marginal supply price for each individual producer is the addition to his aggregate expenses of production made by producing his last element; that this marginal price is likely in many cases to be diminished by an increase in his output much more than the demand price in the general market would be by the same cause.

The statical theory of equilibrium is therefore not wholly applicable to commodities which obey the law of increasing return. It should however be noted that in many industries each producer has a special market in which he is well known, and which he cannot extend quickly; and that therefore, though it might be physically possible for him to increase his output rapidly, he would run the risk of forcing down very much the demand price in his special market, or else of being driven to sell his surplus production outside on less favourable terms. And though there are industries in which each producer has access to the whole of a large market, yet in these there remain but few internal economies to be got by an increase of output, when the existing plant is already well occupied. No doubt there are industries as to which neither of these statements is true: they are in a transitional state, and it must be conceded that the statical theory of equilibrium of normal demand and supply cannot be profitably applied to them. But such cases are not numerous; and with regard to the great bulk of manufacturing industries, the connection between supply price and amount shows a fundamentally different character for short periods and for long.

For short periods, the difficulties of adjusting the internal and external organization of a business to rapid changes in output are so great that the supply price must generally be taken to rise with an increase, and to fall with a diminution in the amount produced.

But in long periods both the internal and the external economies of production on a large scale have time to develop themselves. The marginal supply price is not the expenses of production of any particular bale of goods: but it is the whole expenses (including insurance, and gross earnings of management) of a marginal increment in the aggregate process of production and marketing.

8sect; 5. Some study of the effects of a tax, regarded as a special case of a change in the general conditions of demand and supply suggests that, when proper allowance is made for the interests of consumers, there is on abstract grounds rather less primâ facie cause than the earlier economists supposed, for the general doctrine of so-called "Maximum Satisfaction"; i.e. for the doctrine that the free pursuit by each individual of his own immediate interest, will lead producers to turn their capital and labour, and consumers to turn their expenditure into such courses as are most conducive to the general interests. We have nothing to do at this stage of our inquiry, limited as it is to analysis of the most general character, with the important question how far, human nature being constituted as it is at present, collective action is likely to be inferior to individualistic action in energy and elasticity, in inventiveness and directness of purpose; and whether it is not therefore likely to waste through practical inefficiency more than it could save by taking account of all the interests affected by any course of action. But even without taking account of the evils arising from the unequal distribution of wealth, there is primâ facie reason for believing that the aggregate satisfaction, so far from being already a maximum, could be much increased by collective action in promoting the production and consumption of things in regard to which the law of increasing return acts with especial force.

This position is confirmed by the study of the theory of monopolies. It is the immediate interest of the monopolist so to adjust the production and sale of his wares as to obtain for himself the maximum net revenue, and the course which he thus adopts is unlikely to be that which affords the aggregate maximum satisfaction. The divergence between individual and collective interests is primâ facie less important with regard to those things which obey the law of diminishing return, than with regard to those which obey the law of increasing return: but, in the case of the latter, there is strong primâ facie reason for believing that it might often be to the interest of the community directly or indirectly to intervene, because a largely increased production would add much more to consumers' surplus than to the aggregate expenses of production of the goods. More exact notions on the relations of demand and supply, particularly when expressed in the form of diagrams, may help us to see what statistics should be collected, and how they should be applied in the attempt to estimate the relative magnitudes of various conflicting economic interests, public and private.

Ricardo's theory of cost of production in relation to value occupies so important a place in the history of economics that any misunderstanding as to its real character must necessarily be very mischievous; and unfortunately it is so expressed as almost to invite misunderstanding. In consequence there is a widely spread belief that it has needed to be reconstructed by the present generation of economists. Cause is shown in Appendix I for not accepting this opinion; and for holding on the contrary that the foundations of the theory as they were left by Ricardo remain intact; that much has been added to them, and that very much has been built upon them, but that little has been taken from them. It is there argued that he knew that demand played an essential part in governing value, but that he regarded its action as less obscure than that of cost of production, and therefore passed it lightly over in the notes which he made for the use of his friends, and himself; for he never essayed to write a formal treatise: also that he regarded cost of production as dependent—not as Marx asserted him to have done on the mere quantity of labour used up in production, but—on the quality as well as quantity of that labour; together with the amount of stored up capital needed to aid labour, and the length of time during which such aid was invoked.

BOOK VI: THE DISTRIBUTION OF THE NATIONAL INCOME.

BOOK VI, CHAPTER I: PRELIMINARY SURVEY OF DISTRIBUTION.

8sect; 1. The keynote of this Book is in the fact that free human beings are not brought up to their work on the same principles as a machine, a horse, or a slave. If they were, there would be very little difference between the distribution and the exchange side of value; for every agent of production would reap a return adequate to cover its own expenses of production with wear-and-tear, etc.; at all events after allowance had been made for casual failures to adjust supply to demand. But as it is, our growing power over nature makes her yield an ever larger surplus above necessaries; and this is not absorbed by an unlimited increase of the population. There remain therefore the questions:—What are the general causes which govern the distribution of this surplus among the people? What part is played by conventional necessaries, i.e. the Standard of Comfort? What by the influence which methods of consumption and of living generally exert on efficiency; by wants and activities, i.e. by the Standard of Life? What by the many-sided action of the principle of substitution, and by the struggle for survival between hand-workers and brain-workers of different classes and grades? What by the power which the use of capital gives to those in whose hands it is? What share of the general flow is turned to remunerate those who work (including here the undertaking of ventures) and "wait," as contrasted with those who work and consume at once the fruits of their endeavours? An attempt is made to give a broad answer to those and some similar questions.

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

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

8sect; 2. The simplest account of the causes which determine the distribution of the national income is that given by the French economists who just preceded Adam Smith; and it is based upon the peculiar circumstances of France in the latter half of last century. The taxes, and other exactions levied from the French peasant, were then limited only by his ability to pay; and few of the labouring classes were far from starvation. So the Economists or Physiocrats, as they were called, assumed for the sake of simplicity, that there was a natural law of population according to which the wages of labour were kept at starvation limit1. They did not suppose that this was true of the whole working population, but the exceptions were so few, that they thought that the general impression given by their assumption was true: somewhat in the same way as it is well to begin an account of the shape of the earth, by saying that it is an oblate spheroid, although a few mountains do project as much as a thousandth part of its radius beyond the general level.

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

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

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

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

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

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

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

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

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

8sect; 3. Let us begin by studying the influence of demand on the earnings of labour, drawn from an imaginary world in which everyone owns the capital that aids him in his labour; so that the problem of the relations of capital and labour do not arise in it. That is, let us suppose but little capital to be used; while everyone owns whatever capital he does use, and the gifts of nature are so abundant that they are free and unappropriated. Let us suppose, further, that everyone is not only of equal capacity, but of equal willingness to work, and does in fact work equally hard: also that all work is unskilled,—or rather unspecialized in this sense, that if any two people were to change occupations, each would do as much and as good work as the other had done. Lastly, let us suppose that everyone produces things ready for sale without the aid of others, and that he himself disposes of them to their ultimate consumers: so that the demand for everything is direct.

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

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

8sect; 4. Nor will the position be greatly changed if we suppose that some specialized skill is required in each trade, provided other things remain as before: that is, provided the workers are still supposed to be all of equal capacity and industry; and all trades to be equally agreeable and equally easy to be learnt. The normal rate of earnings will still be the same in all trades; for if a day's labour in one trade produces things that sell for more than a day's labour in others, and this inequality shows any signs of lasting, people will bring up their children by preference to the favoured trade. It is true that there may be some slight irregularities. The drifting from one trade to another must occupy time; and some trades may for a while get more than their normal share of the earnings-stream, while others get less, or even lack work. But in spite of these disturbances, the current value of everything will fluctuate about its normal value; which will in this case, as in the preceding, depend simply on the amount of labour spent on the thing: for the normal value of all kinds of labour will still be equal. The productive power of the community will have been increased by the division of labour; the common national dividend or earnings-stream will be larger; and as all will, putting aside passing disturbances, share alike in it, each will be able to buy with the fruits of his own labour things more serviceable to him than he could have produced for himself.

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

8sect; 5. Next, let us still neglect the influence which the liberality of the expenditure on rearing and training workers exerts on their efficiency, leaving that matter to be discussed with other aspects of the supply side of distribution in the next chapter: and let us look at the influence that changes in the numbers of the population exert on the incomes which nature will yield. We suppose then that the growth of population proceeds at a rate, which is either fixed; or, at all events, not affected by the rate of wages: it may be influenced by changes in custom, in moral opinion and in medical knowledge. And we still suppose all labour to be of the same grade, and the national dividend to be divided out equally to each family, save for some slight passing inequalities. In this case every improvement in the arts of production or transport, every new discovery, every new victory over nature will increase equally the comforts and luxuries at the command of each family.

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

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

8sect; 6. Let us now drop the supposition that labour is so mobile as to ensure equal remuneration for equal efforts, throughout the whole of society, and let us approach much nearer to the actual condition of life by supposing that labour is not all of one industrial grade, but of several. Let us suppose that parents always bring up their children to an occupation in their own grade; that they have a free choice within that grade, but not outside it. Lastly, let us suppose that the increase of numbers in each grade is governed by other than economic causes: as before it may be fixed, or it may be influenced by changes in custom, in moral opinion, etc. In this case also the aggregate national dividend will be governed by the abundance of nature's return to man's work in the existing state of the arts of production; but the distribution of that dividend between the different grades will be unequal. It will be governed by the demand of the people themselves. The share of those in any industrial compartment will be the higher, the more extensive and urgent the needs which they are able to satisfy on the part of those who are themselves drawing large shares of the national income.

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

8sect; 7. We may now leave the imaginary world, in which everyone owns the capital that aids him in his work; and return to our own, where the relations of labour and capital play a great part in the problem of distribution. But let us still confine our attention to the distribution of the national dividend among the various agents of production, in accordance with the quantity of each agent, and the services which it renders; and leave the reflex influence which the remuneration of each agent exerts on the supply of that agent, to be considered in the next chapter.

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

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

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

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

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

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

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

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

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

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

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

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

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

Some things are necessary to them; they must have not only some food, clothing, and house room, but also some circulating capital, such as raw material, and some fixed capital, such as tools and perhaps a little machinery. And though competition prevents anything more than the ordinary trade profit being got by the use of this necessary capital; yet the loss of it would be so injurious that those in the trade would