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PRINCIPLES
OF

ECONOMICS







T H K M A C M IL L A N C O M P A N Y
N M V YORK . CH ICAGO .
DAI.I.AC • ATLAN TA • ( A N n iA N C I W t l

T H E M A C M IL L A N C O M P A N Y
O F C A N A D A . L IM IT E D
TORONTO

PRINCIPLES
OF

ECONOMICS
An introductory volume

BY

ALFRED MARSHALL

EIGHTH EDITION

Satura nonfacit saltum

THE MACMILLAN COMPANY




N e w y ork

Fifth Printmff, 1953

P R IN T E D IN T H E U N IT E D S T A T E S O F A M E R IC A




PREFACE TO THE FIRST EDITION.
conditions are constantly .changing, and each
generation looks at its own problems in its own way. In
England, as well as on the Continent and in America, Eco­
nomic studies are being more vigorously pursued now than
ever before; but all this activity has only shown the more
clearly that Economic science is, and must be, one of slow and
continuous growth. Some of the hest work of the present
generation has indeed appeared at first sight to be antagonistic
to that of earlier writers; but when it has had time to settle
down into it3 proper place, and its rough edges have been
worn away, it has been found to involve no real breach of
continuity in the development of the science. The new doctrines
have supplemented the older, have extended, developed, and
sometimes corrected them, and often have given thema different
tone by a new distribution of emphasis; but very seldom have
subverted them.
The present treatise is an attempt to present a modern
version of old doctrines with the aid of the new work, and with
reference to the new problems, of our own age. Its general
scope and purpose are indicated in Book I.; at the end of which
a short account is given of what are taken to be the chief
subjects of economic inquiry, and the chief practical issues on
which that inquiry has a bearing. In accordance with English
traditions, it is held that the function of the science is to collect,
arrange and analyse economic facts, and to apply the know­
ledge, gained by observation and experience, in determining
what are likely to be the immediate and ultimate effects of
various groups of causes; and it is held that the Laws of

E c o n o m ic




VI

PREPACE TO THE FIRST EDITION

Economics are statements of tendencies expressed in the
indicative mood, and not ethical precepts in the imperative.
Economic laws and reasonings in fact are merely a part of the
material which Conscience and Common-sense have to turn to
account in solving practical problems, and in laying down
rules which may be a guide in life.
But ethical forces are among those of which the economist
has to take account. Attempts have indeed been made to
construct an abstract science with regard to the actions of an
“ economic man,” who is under no ethical influences and who
pursues pecuniary gain warily and energetically, but mechanic­
ally and selfishly. But they have not been successful, nor
even thoroughly carried out. For they have never really
treated the economic man as perfectly selfish: no one could be
relied on better to endure toil and sacrifice with the unselfish
desire to make provision for his family; and his normal motives
have always been tacitly assumed to include the family affec­
tions. But if they include these, why should they not include
all other altruistic motives the action of which is so far uniform
in any class at any time and place, that it can be reduced to
general rule? There seems to be no reason; and in the present
book normal action is taken to be that which may be expected,
under certain conditions, from the members of an industrial
group; and no attempt is made to exclude the influence of any
motives, the action of which is regular, merely because they
are altruistic. If the book has any special character of its own,
that may perhaps be said to lie in the prominence which it gives
to this and other applications of the Principle of Continuity.
This principle is applied not only to the ethical quality
of the motives by which a man may be influenced in choosing
his ends, but also to the sagacity, the energy and the enterprise
with which he pursues those ends. Thus stress is laid on the
fact that there is a continuous gradation from the actions of
“ city men,” which are based on deliberate and far-reaching



PREFACE TO THE FIRST EDITION

vii

calculations, and are executed with vigour and ability, to those
of ordinary people who have neither the power nor the will to
conduct their affairs in a business-like way. The normal
willingness to save, the normal willingness to undergo a certain
exertion for a certain pecuniary reward, or the normal alertness
to seek the best markets in which to buy and sell, or to search
out the most advantageous occupation for oneself or for one’s
children—all these and similar phrases must be relative to the
members of a particular class at a given place and time: but,
when that is once understood, the theory of normal value is
applicable to the actions of the unbusiness-like classes in the
same way, though not with the same precision of detail, as to
those of the merchant or banker.
And as there is no sharp line of division between conduct
which is normal, and that which has to be provisionally
neglected as abnormal, so there is none between normal values
and “ current ” or “ market ” or “ occasional ” values. The latter
are those values in which the accidents of the moment exert
a preponderating influence; while normal values are those
which would be ultimately attained, if the economic conditions
under view had time to work out undisturbed their full effect.
But there is no impassable gulf between these two; they shade
into one another by continuous gradations. The values which
we may regard as normal if we are thinking of the changes from
hour to hour on a Produce Exchange, do but indicate current
variations with regard to the year’s history: and the normal
values with reference to the year’s history are but current values
with reference to the history of the century. For tiie element
of Time, which is the centre of the chief difficulty of almost
every economic problem, is itself absolutely continuous:
Nature knows no absolute partition of time into long periods
and short; but the two shade into one another by imperceptible
gradations, and what is a short period for one problem, is a
long period for another.



v iii

PREFACE TO THE FIRST EDITION

Thus for instance the greater part, though not the whole,
of the distinction between Rent and Interest on capital turns
on the length of the period which we have in view. 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 it is called below—on old invest­
ments 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 practice.
Again, though there is a sharp line of division between man
himself and the appliances which he uses; and though the
supply of, and the demand for, human efforts and sacrifices
have peculiarities of their own, which do not attach to the
supply of, and the demand for, material goods; yet, after all,
these material goods are themselves generally the result of
human efforts and sacrifices. The theories of the values of
labour, and of the things made by it, cannot be separated:
they are parts of one great whole; and what differences there
are between them even in matters of detail, turn out on inquiry
to be, for the most part, differences of degree rather than of
kind. As, in spite of the great differences in form between birds
and quadrupeds, there is one Fundamental Idea running
through all their frames, so the general theory of the equi­
librium of demand and supply is a Fundamental Idea running
through the frames of all the various parts of the central
problem of Distribution and Exchange1
.
1 In the Economist of Industry published by my wife anil myself in 1879 an
endeavour was made to show the nature of this fundamental unity. A short pro­
visional account of the relations of demand and supply was giren before the theory
of Distribution; and then this one scheme of general reasoning was applied in




PREFACE TO THE FIRST EDITION

ix

Another application of tlie Principle of Continuity is to
the use of terms. There has always been a temptation to classify
economic goods in clearly defined groups, about which a number
cf. short and sharp propositions could be made, to gratify at
once the student’s desire for logical precision, and the popular
liking for dogmas that have the air of being profound and are
yet easily handled. But great mischief seems to have been
done by yielding to this temptation, and drawing broad artificial
lines of division where Nature has made none. The more
simple and absolute an economic doctrine is, the greater will
be the confusion which it brings into attempts to apply economic
doctrines to practice, if the dividing lines to which it refers
cannot be found in real life. There is not in real life a clear line
of division between things that are and are not Capital, or
that are and are not Necessaries, or again between labour that
is and is not Productive.
The notion of continuity with regard to development is
common to all modern schools of economic thought, whether
the chief influences acting on them are those of biology, as
represented by the writings of Herbert Spencer; or of history
and philosophy, as represented by Hegel’s Philosophy of
History, and by more recent ethico-historical studies on the
Continent and elsewhere. These two kinds of influences have
affected, more than any other, the substance of the views
expressed in the present book; but their form has been most
affected by mathematical conceptions of continuity, as repre­
sented in Cournot’s Principes Mathematitfues de la Theorie des
Richesses. He taught that it is necessary to face the difficulty
of regarding the various elements of an economic problem,—
not as determining one another in a chain of causation, A
determining B, B determining C, and so on—but as all mutually
succession to the earnings of labour, the interest on capital and the Earnings of
Management. But the drift of this arrangement was not made sufficiently clear;
and on Professor Nicholson’s suggestion, more prominence has been given to it in
the present volume.




x

PREFACE TO THE FIRST EDITION

determining one another. Nature’s action is complex: and
nothing is gained in the long run by pretending that it is simple,
and trying to describe it in a series of elementary propositions.
Under the guidance of Cournot, and in a less degree of
von Thiinen, I was led to attach great importance to the fact
that our observations of nature, in the moral as in the physical
world, relate not so much to aggregate quantities, as to incre­
ments of quantities, and that in particular the demand for a
thing is a continuous function, of which the “ marginal1”
increment is, in stable equilibrium, balanced against the
corresponding increment of its cost of production. It is not
easy to get a clear full view of continuity in this aspect without
the aid either of mathematical symbols or of diagrams. The
use of the latter requires no special knowledge, and they often
express the conditions of economic life more accurately, as
well as more easily, than do mathematical symbols; and there­
fore they have been applied as supplementary illustrations
in the footnotes of the present volume. The argument in the
text is never dependent on them; and they may be omitted;
but experience seems to show that they give a firmer grasp
of many important principles than can be got without their
aid; and that there are many problems of pure theory, which
no one who has once learnt to use diagrams will willingly handle
in any other way.
The chief use of pure mathematics in economic questions
seems to be in helping a person to write down quickly, shortly
and exactly, some of his thoughts for his own use: and to
make sure that he has enough, and only enough, premisses for
his conclusions (i.e. that his equations are neither more nor
less in number than his unknowns). But when a great many
symbols have to be used, they become very laborious to any
1 The term “ marginal” increment I borrowed from von Thunen’a Der uolirU
Stoat, 1826—63, and it is now commonly used by German economists. When
Jevona’ Theory appeared, I adopted his word “ final” ; but I hare been gradually
convinced that “ marginal” is the better.




PREFACE TO THE FIRST EDITION

xi

one but the writer himself. And though Cournot’s genius must
give a new mental activity to everyone who passes through his
hands, and mathematicians of calibre similar to his may use
their favourite weapons in clearing a way for themselves to the
centre of some of those difficult problems of economic theory,
of which only the outer fringe has yet been touched; yet it
seems doubtful whether any one spends his time well in reading
lengthy translations of economic doctrines into mathematics,
that have not been made by himself. A few specimens of those
applications of mathematical language which have proved most
useful for my own purposes have, however, beeir -added in an
Appendix.

September, I860.




PREFACE TO THE EIGHTH EDITION.
This edition is a reprint of the seventh, which was almost a

reprint of the sixth, the only changes being in small matters
of detail: the Preface is almost the same as in the seventh
edition.
It is now thirty years since the first edition of this volume
implied a promise that a second volume, completing the
treatise, would appear within a reasonable time. But I had
laid my plan on too large a scale; and its scope widened, es­
pecially on the realistic side, with every pulse of that Industrial
Revolution of the present generation, which has far outdone
the changes of a century ago, in both rapidity and breadth of
movement. So ere long I was compelled to abandon my hope
of completing the work in two volumes. My subsequent plans
were changed more than once; partly by the course of events,
partly by my other engagements, and the decline of my strength.
Industry and Trade, published in 1919, is in effect a con­
tinuation of the present volume. A third (on Trade, Finance
and the Industrial Future) is far advanced. The three volumes
are designed to deal with all the chief problems of economics,
so far as the writer’s power extends.
The present volume therefore remains as a general intro­
duction to the study of economic science; similar in some
respects, though not in all, to that of volumes on Foundations
{Grundlagen), which Roscher and some other economists have
put in the forefront of groups of semi-independent volumes on
economics. It avoids such special topics as currency and the
organization of markets: and, in regard to such matters as the



PREFACE TO THE EIGHTH EDITION

x iii

structure of industry, employment, and the problem of wages,
it deals mainly with normal conditions.
Economic evolution is gradual. Its progress is sometimes
arrested or reversed by political catastrophes: but its forward
movements are never sudden; for even in the Western world
and in Japan it is based on habit, partly conscious, partly
unconscious. And though an inventor, or an organizer, or a
financier of genius may seem to have modified the economic
structure of a people almost at a stroke; yet that part of his
influence, which has not been merely superficial and transitory,
is found on inquiry to have done little more than bring to a
head a broad constructive movement which had long been in
preparation. Those manifestations of nature which occur most
frequently, and are so orderly that they can be closely watched
and narrowly studied, are the basis of economic as of most
other scientific work; while those which are spasmodic, in­
frequent, and difficult of observation, are commonly reserved
for special examination at a later stage: and the motto Natura
non facit scdtum is specially appropriate to a volume on Eco­
nomic Foundations.
An illustration of this contrast may be taken from the
distribution of the study of large businesses between the present
volume and that on Industry and Trade. When any branch of
industry offers an open field for new firms which rise to the
first rank, and perhaps after a time decay, the normal cost of
production in it can be estimated with reference to “ a repre­
sentative firm,” which enjoys a fair share both of those internal
economies which belong to a well-organized individual business,
and of those general or external economies which arise out of
the collective organization of the district as a whole. A study
of such a firm belongs properly to a volume on Foundations.
So also does a study of the principles on which a firmly estab­
lished monopoly, in the hands of a Government department or
a large railway, regulates its prices with main reference indeed



xiv

PREFACE TO THE EIGHTH EDITION

to its own revenue; but also with more or less consideration
for the wellbeing of its customers.
But normal action falls into the background, when Trusts
are striving for the mastery of a large market; when com­
munities of interest are being made and unmade; and, above
all, when the policy of any particular establishment is likely
to be governed, not with a single eye to its own business success,
but in subordination to some large stock-exchange manoeuvre,
or some campaign for the control of markets. Such matters can­
not be fitly discussed in a volume on Foundations: they belong
to a volume dealing with some part of the Superstructure.
The Mecca of the economist lies in economic biology rather
than in economic dynamics. But biological conceptions are
more complex than those of mechanics; a volume on Founda­
tions must therefore give a relatively large place to mechanical
analogies; and frequent use is made of the term “ equilibrium,”
which suggests something of statical analogy. This fact, com­
bined withthepredominant attentionpaidinthepresentvolume
to the normal conditions of life in the modem age, has sug­
gested the notion that its central idea is “ statical,” rather than
“ dynamical.” But in fact it is concerned throughout with the
forces that cause movement: and its key-note is that of
dynamics, rather than statics.
The forces to be dealt with are however so numerous, that
it is best to take a-few at a time; and to work out a number of
partial solutions as auxiliaries to our main study. Thus we
begin by isolating the primary relations of supply, demand and
price in regard to a particular commodity. We reduce to
inaction all other forces by the phrase “ other things being
equal ” : we do not suppose that they are inert, but for the time
we ignore their activity. This scientific device is a great deal
older than science: it is the method by which, consciously or
unconsciously, sensible men have dealt from time immemorial
with every difficult problem of ordinary life.



PREFACE TO THE EIGHTH EDITION

XV

In the second stage more forces are released from the
hypothetical slumber that had been imposed on them: changes
in the conditions of demand for and supply of particular groups
of commodities come into play; and their complex mutual
interactions begin to be observed. GraduaEy the area of the
dynamical problem becomes larger; the area covered by pro­
visional statical assumptions becomes smaller; and at last is
reached the great central problem of the*Distribution of the
National Dividend among a vast number of different agents
of production. Meanwhile the dynamical principle of “ Sub­
stitution” is seen ever at work, causing the demand for, and
the supply of, any one set of agents of production to be
influenced through indirect channels by the movements of
demand and supply in relation to other agents, even though
situated in far remote fields of industry.
The main concern of economics is thus with human beings
who are impelled, for good and evil, to change and progress.
Fragmentary statical hypotheses are used as temporary
auxiliaries to dynamical—or rather biological—conceptions:
but the central idea of economics, even when its Foundations
alone are under discussion, must be that of living force and
movement.
There have been stages in social history in which the special
features of the income yielded by the ownership of land have
dominated human relations r and perhaps they may again
assert a pre-eminence. But in the present age, the opening
out of new countries, ai4 ed by low transport charges on land
and sea, has almost suspended the tendency to Diminishing
Return, in that sense in which the term was used by Malthus
and Ricardo, when the English labourers* weekly wages were
often less than the price of half a bushel of goodwheat. And yet,
if the growth of population should continue for very long even
at a quarter of its present rate, the aggregate rental values of
land for all its uses (assumed to be as free as now from restraint



xvi

PREFACE TO THE EIGHTH EDITION

by public authority) may again exceed the aggregate of incomes
derived from all other forms of material property; even though
that may then embody twenty times as much labour as now.
Increasing stress has been laid in successive editions up
to the present on these facts; and also on the correlated fact
that in every branch of production and trade there is a margin,
up to which an increased application of any agent will be
profitable under given conditions; but beyond which its further
application will yield a diminishing return \m there be some
less
increase of demand accompanied by an appropriate increase
of other agents of production needed to co-operate with it. And
a similar increasing stress has been laid on the complementary
fact that this notion of a margin is not uniform and absolute:
it varies with the conditions of the problem in hand, and in
particular with the period of time to which reference is being
made. The rules are universal that, (I) marginal costs do not
govern price; (2 ) it is only at the margin that the action of
those forces which do govern price can be made to stand out
in clear light; and (3) the margin, which must be studied in
reference to long periods and enduring results, differs in charac­
ter as well as in extent from that which must be studied in
reference to short periods and to passing fluctuations.
Variations in the nature of marginal costs are indeed
largely responsible for the well-known fact that those effects
of an economic cause, which are not easily traced, are frequently
more important than, and in the opposite direction to, those
which lie on the surface and attract the eye of the casual
observer. This is one of those fundamental difficulties which
have underlain and troubled the economic analysis of past
times; its full significance is perhaps not yet generally recog­
nized, and much more work may need to be done before it is
fully mastered.
The new analysis is endeavouring gradually and tentatively
to bring over into economics, as far as the widely different



PREFACE TO THE EIGHTH EDITION

x v ii

nature of the material will allow, those methods of the science
of small increments (commonly called the differential calculus)
to which man owes directly or indirectly the greater part of
the control that he has obtained in recent times over physical
nature. It is still in its infancy; it has no dogmas, and no
standard of orthodoxy. It has not yet had time to obtain a
perfectly settled terminology; and some differences as to the
best use of terms and other subordinate matters are but a sign
of healthy life. In fact however there is a remarkable harmony
and agreement on essentials among those who are working
constructively by the new method; and especially among such
of them as have served an apprenticeship in the simpler and
more definite, and therefore more advanced, problems of
physics. Ere another generation has passed, its dominion over
that limited but important field of economic inquiry to which
it is appropriate will probably be no longer in dispute.
My wife has aided and advised me at every stage of suc­
cessive editions of this volume. Each one of them owes a great
deal to her suggestions, her care, and her judgment. Dr Keynes
and Mr L. L. Price read through the proofs of the first edition
and helped me greatly; and Mr A. W. Flux also has done much
for me. Among the many who have helped me on special points,
in some cases in regard to more than one edition, I would
specially mention Professors Ashley, Cannan, Edgeworth,
Haverfield, Pigou and Taussig; Dr Berry, Mr C. R. Fay, and
the late Professor Sidgwick.

B a ix io l C r o f t ,
6, Madijjqley R o a d , C a m b r id g e .

October 1920.







CONTENTS.
BOOK I.
PRELIMINARY SURVEY.
Chapter L

s

Introduction,
1* Eoonomics Is both a study of wealth and
a branch of the study of man. The history of the world has been shaped
by religious and economics forces. § 2. The question whether poverty is
neoessary gives its highest interest to eoonomics. § 3. The science is in
the main of recent growth. § 4. Competition may be constructive or
destructive: even when constructive it is less beneficent than co-operation.
But the fundamental characteristics of modem business are freedom of
industry and enterprise, self-reliance, and forethought. § 5. Bough sketches
of the growth of these characteristics and of economic science have been
transferred from this Book to Appendices A and B. .
..
pp., 1— 13

T h e substance Of economics. § 1. Economics is mainly
i concerned with incentives to action and resistances to action, the quantity
of which can be roughly measured by money. The measurement refers
- only to the quantities of forces: the qualities of motives, whether noble or
{ ignoble, are from their very nature incapable of measurement. § 2. Reckon>. ing is made for the greater force measured by a shilling in the case of a
poor man than a rich: but economics seeks generally for broad results that
^ are little affected by individual peculiarities. § 3. Habit itself is largely
based on deliberate choice. §§ 4, 6. JSconomio motives are not exclusively
selfish. The desire for money does not exclude other influences; and may
itself arise from noble motives. The range of economio measurement may
r gradually extend to much altruistic action. § 6. The motives to collective
: action are of great and growing importance to the economist. § 7. Econo*
mists deal mainly with one side of man's life; but it is the life of a real
man, not of a fictitious being. See Appendix C
L
.
.
pp. 14—28

Chapter I I .

•

Economic generalizations or laws.
§ l. Economics
. needs induotion and deduction, but in different proportions for different
purposes. §§ 2, 3. The nature of laws: laws of physical science vary in
precision. Social and economic laws correspond to those of the more
complex and less exact and physical sciences. § 4. The relativity of the
term Normal. § 5. All scientific doctrines implicitly assume conditions:
but* this hypothetical element is specially prominent in economio laws.
See Appendix D ..................................................................pp. 29—37

Chapter I I I .




CONTENTS

XX

Chapter IV. The order and aims of economic studies. § l. Summary
of Chapters II., III. § 2. Scientific inquiries are to be arranged with
reference, not to the practical aims which they subserve, but to the nature
of the subjects with which they are concerned. § 3. The chief subjects
of economic investigation. § 4. Practical issues which stimulate the
inquiries of the English economist at the present time, though they do not
lie wholly within the range of his science. §§ 5, 6. The economist needs
to train his faculties of perception, imagination, reason, sympathy, and
caution....................................................................................... pp. 38—
^48

BOOK II.
SOME FUNDAMENTAL NOTIONS.
Introductory. § 1. Economics regards wealth as satisfying
wants, and as the result of efforts. § 2. The difficulties of classifying
things which are changing their characters and their uses. § 3. Economics
must follow the practice of every-day life. § 4. It is necessary that
notions should be clearly defined, but not that the use of terms should
be rigid....................................................................................... pp. 49—53

Chapter I.

W ealth . § 1. The technical use of the term Goods. Material
goods. Personal goods. External and Internal goods. Transferable and
non-transferable goods. Free goods. Exchangeable goods. § 2. A person’s
wealth consists of those of his external goods which are capable of a money
measure. § 3. But sometimes it is well to use the term Wealth broadly so
as to include all personal wealth. § 4. The individual’s share of collective
goods. § 5. National wealth. Cosmopolitan wealth. The juridical basis
of rights to w e a l t h . .............................................................. pp. 64— 62

Chapter II.

Chapter I I I .

Production. Consumption. Labour.

Necessaries.

§ l.

Man can produce and consumo only utilities,' not matter jtself. § 2. The
word Productive is liable to be misunderstood, and should generally be
avoided or explained. § 3. Necessaries for existence, and for efficiency.
§ 4. There is waste when any one consumes less than is strictly necessary
for efficiency. Conventional necessaries. .
.
.
.
pp. 63— 70
Income. Capital. § 1. Money income and trade capital.
§ 2. Definitions from the ordinary business view of Net Income, Interest,
Profits. Net advantages, Earnings of Management, Quasi-rents. § 3. Classi­
fications of capital from the private point of view. §§ 4— 7. Capital and
income from the social point of view. § 8. Productiveness and prospective­
ness are co-equal attributes of capital in connection with the demand foi it
and the supply of it respectively. See Appendix E. .
.
pp. 71—82

Chapter IV .




BOOKS I— III

xxi

BOOK III.
ON WANTS AND THEIR SATISFACTION.
Introductory. § 1- The relation in which the present Book
stands to the three following. § 2. Insufficient attention has been paid
till recently to demand and consumption.
.
.
pp. 83— 85

Chapter I .

W a n ts in relation to activities. § 1. Desire for variety.
§§ 2, 3. Desire for distinction. § 4. Desire for distinction for its own
sake. The position held in economics by the theory of consumption.
pp. 86— 91

Chapter I I .

Gradations o f consumers’ demand. § l. The law of
satiable wants or diminishing utility. Total utility. Marginal increment.
Marginal utility. § 2. Demand price. § 3. Account must be taken of
variations in the utility of money. § 4. A person’s demand schedule.
Meaning of the term “ an increase of demand.” § 5. Demand of a market.
Law of demand. § 6. Demands for rival commodities. .
pp. 92— 101

Chapter I I I .

The elasticity o f wants. § l. Definition of Elasticity
of demand. §§ 2, 3. A price which is low relatively to the rich may be
high relatively to the poor. § 4. General causes affecting elasticity.
§ 5. Difficulties connected with the element of Time. § 6. Changes in
fashion. § 7. Difficulties in the way of obtaining the requisite statistics.
§ 8. N o t e on statistics of consumption. Traders’ books. Budgets of
c o n s u m e r s ..........................................................................pp. 102— 116

Chapter I V .

Chapter V . Choice between different uses o f the same thing. Im ­
mediate and deferred uses. §§ 1, 2. The distribution of a person’s

means between the gratification of different wants, so that the same price
measures equal utilities at the margin of different purchases. § 3. The
distribution between present and future needs. Discounting future benefits.
§4. Distinction between discounting future pleasures, and discounting
future pleasurable e v e n t s . ..............................................pp. 117— 123
Value and utility. § 1. Price and Utility. Consumers’
surplus. Conjuncture. § 2. Consumers’ surplus in relation to the demand
of an individual; §§ 3, 4 and in relation to a market. Individual differences
of character may be neglected when we consider the average of large
numbers of people; and if these include rich and poor in equal propor­
tions, price becomes a fair measure of utility, § 5 provided allowance is
made for collective wealth. § 6. Bernoulli’s suggestion. Broader aspects
of the utility of wealth...........................................................pp. 124— 137

Chapter V I .




CONTENTS

xxii

BOOK IV.
THE AGENTS OF PRODUCTION.
L A N D , LA B O U R , CAPITAL A N D ORGANIZATIO N.
•

|1. The agents of production. §2. Margins
disutility. Although work is sometimes its own reward; yet, with certain
assumptions, we may regard its supply as governed by the price which is to
^143
be got for it. Supply p r i c e . ............................................. pp. 138—

Chapter I . Introductory.

Chapter II. The fertility of land. 5

The notion that land is a free
gift dl nature while the produoe of land is due to man’s work is not strictly
accurate: but there is a truth underlying it. § 2. Mechanical and chemical
conditions of fertility. § 3. Man’s power of altering the character of the
soil, § 4. In any case the extra return to additional capital and labour
diminishes sooner or later.
.
.
.
.
.
.
pp. 144—149

Chapter I I I . The fertility of land, continued. The tendency to Dimin­
ishing Return. § 1. Land may be under-cultivated and then the return

due to extra capital and labour will increase, until a maximum rate has
been reached; after which it will diminish again. Improved methods may
enable more capital and labour to be profitably applied. The law relates
to the amount of the produce, not its value. £.2. A dose of capital and
labour. Marginal dose, marginal return, margin of cultivation. The
marginal dose is not necessarily the last in time. Surplus produce; its
relation to rent. Ricardo confined his attention to the circumstances of an
old country. § 3. Every measure of fertility must be relative to place and
time. § 4. As 9 rule the poorer soils rise in value relatively to the richer,
as the pressure of population increases. §§ 5, 6. Ricardo said that the
richest lands were cultivated first; and this is true in the sense in which
he meant it. But he underrated the indirect advantages which a dense
population offers to agriculture. § 7. The laws of return from finhwpfn,
mines and building ground. § 8. N o t e t>n the law of Diminishing Return,
and on a Dose of capital and labour.
.
.
.
.
pp. 150— 172
Chapter IV . The growth Of population.

§§ 1, 2. History of the doctrine
of population. § 3. Maithus. §§ 4, 5. Marriage-rate and birth-rate.
§§ 6, 7. History of population in England.
. . .
pp. 173— 192

Chapter V . The health and strength of the population. 5 5 1 , 2. General

conditions of health and’ strength. § 3. The necessaries of life. § 4. Hope,
freedom and change. § 5. Influence of occupation. § 6. Influence of
town life. §§ 7, 8. Nature left to herself tends to weed out the weak. Rat
much well-meant human action checks the increase of the strong, and
enables the weak to survive. Practical conclusion.
.
pp. 193—203




BOOK IV

xxiii

Industrial training. §§1, 2. Unskilled labour a relative
term. Skill with which we are familiar, we often do not recognize as skill.
Mere manual skill is losing importance relatively to general intelligence
and vigour. General ability and specialized skilL §§ 3— 5. liberal and
technical education. Apprenticeships. § 6. Education in art. § 7. Edu­
cation as a national investment. § 8. Mobility is increasing both between
grades and within grades.....................................
pp. 204:— 219

Chapter V I.

Th e growth o f wealth. f§ 1—3. Until recently there was
little use of expensive forms of auxiliary capital; but they are now
increasing fast, as is also the power to accumulate. $ 4. Security as a
condition of saving. § 5. The growth of a money economy gives new
temptations to extravagance; but it has enabled people who have no
faculty for business to reap the fruits of saving. § 6. The chief motive
of saving is family affection. § 7. Sources of accumulation. Public
accumulations. Co-operation. § 8. Choice between present and deferred
gratifications. Some waiting, or postponement of gratification is generally
involved in the accumulation of wealth. Interest is its reward. §§ 9, 10.
The higher the reward, the greater the rate of saving as a rule. But there
are exceptions. $ 11. N o t e on the statistics of the growth of wealth.
pp. 220— 239

Chapter V II.

'

Industrial organization. §§ l , 2. The doctrine that
organization increases efficiency is old, but Adam Smith gave it a new
life. Economists and biologists have worked together in examining
the influence whioh the struggle for survival exerts on organization; its
harshest features Boftened by heredity. § 3. Ancient castes and modem
classes. §§4, 5. Adam Smith was cautious but many of his followers
exaggerated the economy of natural organization. The development of
faculties by use; and their inheritance through early training, and possibly
in other w a y s . ................................................................pp. 240—249

Chapter V I I I .

Chapter I X . Industrial organization, continned. Division o f labour.
The influence Of machinery. § 1. Practice makes perfect. § 2. In the

lower, but not always in the higher grades of work extreme specialization
increases efficiency. § 3. The influences exerted by machinery on the
quality of human life are partly good and partly eviL § 4. Machinemade machinery is introducing the new era of Interchangeable Parts.
1 5. Illustration from the printing trade. § 6. Machinery relieves the
strain on human muscles; and thus preventa monotony of work from
involving monotony of life. § 7. Specialized skill and specialized
machinery compared. External and Internal economies.
pp. 250— 286
Chapter X . Industrial organization, continued. Th e concentration
of specialized industries in particular localities. § i. Localized

industries: their primitive forma. § 2. Their various origins. § 3. Their
advantages; hereditary skill; the growth of subsidiary trades; the use of
highly specialized machinery; a local market for special skilL § 4. The
influence of improved means of communication on the geographical dis­
tribution of industries. Illustration from the recent history of England.
pp. 267— 277
Chapter X I . Industrial organization, continued. Production on a
large scale. § l. The typical industries for our present purpose are those




CONTENTS
of manufacture. The economy of material. §§ 2— 4. The advantages of
a large factory in the use and improvement of specialized machinery; in
buying and selling; in specialized B k i l l ; and in the subdivision of the
work of business management. Advantages of the small manufacturer in
superintendence. Modern developments of knowledge act in a great measure
on hia side. § 5. In trades which offer great economies to production on
a large scale, a firm may grow rapidly; provided it can market easily but
often it cannot do that. § 6. Large and Bmall trading establishments.
§ 7. The carrying trades. Mines and quarries.
.
.
pp. 278—290
Chapter X I I . Industrial organization, continued. Business m anage­
ment. § 1. The primitive handicraftsman dealt directly with the con­

sumer; and so do as a rule the learned professions now. § 2. But in
most businesses the services of a special class of undertakers intervene.
§§ 3, 4. The chief risks of undertaking sometimes separated from the
detailed work of management in the building and some other trades. The
undertaker who is not an employer. § 5. The faculties required in tho
ideal manufacturer. § 6. The son of a business man starts with so many
advantages, that one might expect business men to form something like
a caste; reasons why this result does not follow. §7. Private partner­
ships.
§§ 8, 9. Joint-stock companies. Government undertakings.
§ 10. Co-operative association. Profit-sharing. § 11. The working man’s
opportunities of rising. He is hindered less than at first sight appears, by
his want of capital; for the Loan-fund is increasing rapidly. But the
growing complexity of business is against him. § 12. An able business
man speedily increases the capital at his command; and one who is not
able generally loses his capital the more rapidly, the larger his business is.
These two forces tend to adjust capital to tho ability reqaired to use it
welL Business ability in command of capital has a fairly defined supply
price in Buch a country as England.....................................pp. 291—313
Chapter X I I I . Conclusion. Correlation of the tendencies to increasing
and to diminishing return. § 1. Summary of the later chapters of this

Book. § 2. Cost of production should be taken with reference to a re­
presentative firm, which has normal access to the economies Internal and
External belonging to a given aggregate volume of production. Constant
Return and Increasing Return. § 3. An increase of numbers is generally
accompanied by a more than proportionate increase of collective efficiency.
pp. 314—322

BOOK V.
GENERAL RELATIONS OF DEMAND, SUrPLY, AND VALUE.
§ 1. Biological and mechanical
notions of the balancing of opposed forces. Scope of the Book. § 2. Defi­
nition of a Market. § 3. Limitations of a market with regard to Space.
General conditions which affect the extent of the market for a thing;
suitability for grading and sampling; portability. § 4. Highly organized
markets. § 5. Even a small market is often subjected to indirect influences
from great distances. § 6. Limitations of market with regard to Time.
pp. 323— 330

Chapter I. Introductory. On markets.




BOOKS IV, V

XXV

Chapter I I .

Temporary equilibrium of demand and supply. §1. Equi­
librium between desire and effort. In a casual barter there ia generally no
true equilibrium. § 2. In a local com market a true, though temporary,
equilibrium is generally reached. § 3. As a rule, the intensity of the need
for money does not appreciably change during the dealing in a corn market,
but it does in a labour market. See Appendix F. .
.
pp. 331—336

Chapter I I I .

Equilibrium of normal demand and supply. § l. Nearly
all dealings in commodities that are not very perishable, are affected by
calculations of the future. § 2. Real and money cost of production.
Expenses of production. Factors of production. § 3. The principle of
substitution. § 4. Cost of production by a representative firm. § 5. Supply
schedule. § 6. Equilibrium-amount and equilibrium-price. Looseness of
the connection between the supply-price of a commodity and its real cost
of production. True significance of a position of normal equilibrium.
Meaning of the phrase “ in the long run.” §7. The influence of utility
on value preponderates during short periods, but that of cost of pro­
duction in the long r u n . ............................................. pp. 337— 350

Chapter IV . The investment and distribution o f resources. §1. Motives

determining the investment of capital in the case of a man who makes a
thing for his own use. Balancing of future gratifications against present.
§ 2. Accumulation of past and discounting bf future outlays and receipts.
Difficulty of distinguishing between expenditure on current and on capital
account. § 3. The margin of profitableness, at which the principle of
substitution acts, is not a point on any one route, but a line intersecting
all routes. § 4. Correlation between the distribution of resources in
domestie and in business economy. §§ 5, 6. The division between Prime
and Supplementary Costs varies with the duration of the enterprise in
question: and this variation is the chief source of difficulty in the study of
the relations of marginal costs to value.............................. pp. 351— 362
Chapter V . Equilibrium o f normal demand and supply, continued,
with reference to long and short periods. §'l. Elasticity of the term

Normal in popular as well as in academic use. §§ 2, 3. The complex
problem of normal valve must be broken up. First step the fiction of a
stationary state; modifications of which enable us to treat the problem by
auxiliary statical assumptions. §§ 4, 5. Thus studies of the equilibrium
of normal demand and supply may be divided into those which relate to
long periods and to short. § 6. For short periods the stock of appliances
of production is practically fixed; and their employment varies with the
demand. § 7. But in long periods the flow of appliances for production ia
adjusted to the demand for the products of those appliances; and the
unit of production is a process rather than a parcel of goods. § 8. Bough
classification of problems of value....................................... pp. 363— 380
Chapter V I. Joint and composite demand. Joint and composite supply.

§ 1. Indirect derived demand: joint demand. Illustration taken from a
labour dispute in the building trade. Law of derived demand. § 2. Con­
ditions under which a check to supply may raise much the price of a factor
of production. § 3. Composite demand. § 4. Joint supply. Derived
supply price. §5. Composite supply. § 6. Complex relations between
com m od ities..........................................................................pp. 381— 393




CONTENTS
Chapter V I I . Prime and total cost in relation to joint products.
Cost o f marketing. Insurance against risk. Cost of reproduction.

§§ 1, 2. Difficulties of assigning to each branch of a mixed business its
proper share of the expenses of production, and especially of marketing.
§§ 3, 4. Insurance against business risks. §5. Cost of reproduction.
Some of the remaining chapters of Book V. may be provisionally omitted.
pp. 394— 402
Chapter V I I I . Marginal costs in relation to values. General principles.

§ 1. This and the following three chapters carry further the study of the
relations in which prime and supplementary costs stand to the value o!
products, and of the reflex action which the derived demand for products
exerts on the values of agents employed in their production, with special
reference to the influence of the element of time. § 2. Farther illustra­
tions of the principle of substitution. § 3. Definition of net product.
§4. An inappropriate increase in the use of any one agent yields a
diminishing return: this faot is analogous to bat not identical with the
fact that a well-adjusted increase of capital and labour of various kinds
applied to land yields a Diminishing Return. § 5. Marginal uses indicate,
but do not govern value: they are governed together with value by the
general relations of demand and snpply. § 6. The terms Interrat and
Profits are directly applicable to fluid capital; but only indirectly, and on
certain definite assumptions, to particular embodiments of capital. The
central doctrine of this group of chapters.
.
.
.
pp. 403—412
Chapter I X . Marginal costs in relation to values. General principles,
continued. § 1. Reasons for illustrating the problem of value by refer­

ence to the shifting of tho incidence of taxes. §§ 2— 4. Illustrations of the
relations of rents and quasi-rents to value, discussed in the last chapter.
§ 5. Scarcity rents and differential rents.
.
.
.
pp. 413—424
Chapter X .

Marginal costs in

relation

to

agricultural

values.

§§ 1, 2. The influence of the element of time in this problem is best seen
by reference to agricultural produce in general; and to the emergence
of rent in a new country. § 3. Land is but one form of capital to the
individual producer. §§ 4— 6. Illustrations from the incidence of special
taxes on all agricultural produce and on a single crop. Quasi-rents in
relation to a single c r o p . .............................................pp. 425—439
Marginal costs in relation to urban values. § l . The
influence of situation on agricultural and urban values. Site values.
§ 2. Exceptional cases in which situation value is created by deliberate
individual or associated effort. 8 3. Causes that govern ground rents for
long leases. § 4.
Diminishing return in relation to building land.
§ 5. Competition of different classes of buildings for the same land.
§ 6. Rents of traders in relation to the prices charged by them.
§ 7. Composite rents of urban properties. Set Appendix G.
pp. 440—454

Chapter X I .

Chapter X I I . Equilibrium o f normal demand and supply, continued,
-with reference to the law o f increasing return. §§ 1—3. Modes of

action of the tendency to increasing return. Dangers in the use ot the
term Elasticity of Supply. Contrast between the eoonomies of
whole
industry and those of a single firm. See Appendix IL
pp. 455—461




a

BOOKS V, VI

X X Y li

Chapter X I I I . Theory o f changes o f normal demand and supply, in
relation to the doctrine of maximum satisfaction. § 1* Introduction.

§ 2. Effects of an increase of normal demand. § 3. Effects of an increase
of normal supply. § 4. The oases of constant, diminishing and increasing
return. §§6— 7. Statement and limitations of the abstract doctrine of
Maximum S atisfaction ........................................................pp. 462— 476
T h e theory o f monopolies. § 1. We are now to compare
the monopolist's gains from a high price with the benefits to the publio of
a low price. § 2. The primd facie interest of the monopolist is to get the
maximum Net Revenue. § 3. The Monopoly Revenue Schedule. § 4. A
tax, fixed in total amount, on a monopoly, will not diminish production;
nor will one proportioned to monopoly net revenue; but it will have that
effect if it is proportional to the quantity produced. § 5. A monopolist
can often work economically. § 6. He may lower his price with a view
to the future development of his business, or from a direct interest in
’ the welfare of consumers. § 7. Total benefit. Compromise benefit.
§ 8. The publio importance of the statistical study of the law of demand
and of consumers’ surplus. § 9. The problem of two complementary
monopolies is inoapable of a general solution.
.
.
pp. 477— 495

Chapter X I V .

Chapter X V . Summary of the general theory o f equilibrium o f demand
and Supply. §§ 1— 5. A summary of Book V. See Appendix I.

pp. 496—503

BOOK VI.
T H E D IST R IB U TIO N OF T H E N A T IO N A L INCOME.
Chapter I.

Preliminary survey o f distribution.' § 1. The drift of the
Book as a whole. § 2. The Physiocrats assumed, in accordance with the
peculiar circumstances of their country and time, that wages were at their
lowest possible level, and that much the same was true of the interest
on capital. These rigid assumptions were partially relaxed by Adam
Smith, and by Malthus. §§ 3— 6. A series of hypothetical illustrations
of the influence of demand on distribution drawn from a society, in which
the problem of the relations between capital and labour does not exist.
§ 7. The net product of a particular kind of labour illustrated by a worker
o f normal efficiency, whose employment causes no additional indirect cost,
but whose work comes only just up to the margin at which the employer
would derive no net gain from it. § 8. The demand for capita^ in general.
{9 . Provisional summary. $ 10. Further definition of the national
income, or dividend.
.
............................................. pp. 504— 524
Preliminary survey o f distribution, continued. § 1. The
causes affecting the supply of the agents of production exert a coordinate
influence with those affecting demand over distribution. §§ 2—4 . Re­
capitulation of the causes, discussed in Book IV., which affect the supply
of various forms of labour and capital. The irregular influence which
an increase in remuneration exerts on the exertion put forth by an in­
dividual. The more regular correspondence between normal wages and
the growth of the population in numbers and vigour, especially the latter.
The general influence exerted on the accumulation of capital and other
forms of wealth, by the benefits to be derived from saving. { 5. T-Bn^ may

Chapter I I .




x x v iii

CONTENTS

be regarded as a special form of capital ia relation both to the influence of
demand in distribution, and to the application of the resources of an
individual in production: but it stands on a different footing from capital
relatively to that normal influence of the forces of supply in distribution,
which we are considering in the present chapter. § 6. Provisional con­
clusion of one stage of the argument. § 7. The mutual relations between
the eaminga and efficiencies of different groups of workers. § 8. We
assume throughout no more enterprise, knowledge and freedom of com­
petition than are in fact characteristic of the particular group of workers,
employers, etc. at the place and time under discussion. § 9. On the
relations between labour in gene.-al and capital in general. Capital aids
labour. And it competes with labour for the field of employment: but
this phrase needs to be interpreted carefully. § 10. The limited sense in
which it is true that wages depend on advances made by capital See
Appendices J, K .................................................................... pp. 525— 545
Chapter I I I .

Earnings of labour. § l. Tbe scope of chapters m .— x.
§ 2. Competition tends to make weekly wages in similar employments not
equal, but proportionate to the efficiency of the workers. Time-eamings.
Payment by Piece-work. Efficiency-eamings. Time-eamings do not tend
to equality but efficiency-eamings do. §§ 3, 4. Real wages and Nominal
wages. Allowance must be made for variations in the purchasing power
of money, with special reference to the consumption of the grade of labour
concerned; and for trade expenses and all incidental advantages and
disadvantages. § 5. Wages partly paid in kind. The Truck System.
§ 6. Uncertainty of success and irregularity of employment. § 7. Supple­
mentary earnings. Family earnings. § 8. The attractiveness of a trade
does not depend merely on its money -earnings, but on its net advantages.
Influence of individual and national character. Peculiar conditions of the
lowest grade of workers.......................................................pp. 546—558

Chapter IV .

Earnings of labour, continued. 5 1- The importance of
many peculiarities in the action of demand and supply with regard to
labour depends much on the cumulativenesa of their effects; thus re­
sembling the influence of custom. §§ 2—4. First peculiarity: the worker
sells his work, but he himself has no price. Consequently the investment
of capital in him is limited by the means, the forethought, and the un­
selfishness of his parents. Importance of a start in life. Influence of
moral forces. § 5. Second peculiarity. The worker is inseparable from his
work. § 6. Third and fourth peculiarities. Labour is perishable, and the
sellers of it are often at a disadvantage in bargaining. .
pp. 559—569
Earnings of labour, continued. § 1. The fifth peculiarity
of labour consists in the great length of time required for providing addi­
tional supplies of specialized ability. § 2. Parents in choosing trades for
their children must look forward a whole generation; difficulties of fore­
casting the future. § 3. Movements of adult labour are of increasing
importance in consequence of the growing demand for general ability.
§| 4—6. Resume of the distinction between long and short periods with
reference to normal value. Fluctuations of the special earnings of «Vill
and ability, as distinguished from those which compensate for the exertion
involved in any particular task. § 7. The earnings of rare natural abili­
ties yield a surplus over costs of rearing and t r a i n i n g , which resembles a
rent in some respects.
......................................................pp. 570______ 579

Chapter V .




BOOK VI

xxix

Chapter V I. Interest Of capital.

§§ 1—3. The theory of interest has been
improved recently in many details, but has not undergone any substantial
change. It was misconceived in the Middle Ages, and by Rodbertus and
Marx. §§ 4, 5. The Gross interest paid by the borrower includes some
insurance against risks, both real and personal, and some earnings of
management as well as true or Net interest. It therefore does not tend to
equality as net interest does. § 6. The term Rate of Interest needs to be
applied with caution in regard to old investments. § 7. Relations between
changes in the purchasing power of money and changes in the rate of
interest.................................................................................... pp. 580— 595
Profits of capital and business power. § l. Struggle
for Survival among business men. Services of those who pioneer.
§§ 2— 4. The influence of the principle of Substitution on Earnings of
Management, illustrated by comparing firstly the services of foremen with
those of ordinary workmen, secondly those of heads of businesses with those
of foremen, and lastly those of the heads of large and small businesses.
§ 5. Position of the business man who uses much borrowed capital.
§ 6. Joint-stock companies. § 7. General tendency of modem methods
of business to adjust earnings of management to the difficulty of the work
done.
.
.
.
.
.
.
.
.
.
.
pp. 596— 608

Chapter V I I .

Chapter V I I I .

Profits o f capital and business power, continued.

§ 1. We have next to inquire whether there is any general tendency of
the rate of profits to equality. In a large business some Earnings of
Management are classed as salaries; and in a small one much wages of
labour are classed as profits; and in consequence profits appear higher
in small businesses than they really are. § 2. The normal annual rate
of profits on the capital employed is high where the circulating capital
is large relatively to the fixed. The economies of production on a large
scale, when generally diffused throughout an industry, do not raise the rate
of profits in it. §§ 3, 4. Each branch of trade has its customary or fair
rate of profits on the turnover § 5. Profits are a constituent element of
normal supply-price; but the income derived from capital already invested,
in a material form or in the acquisition of skill, is governed by the demand
for its products. §§ 6— 8. A comparison between profits and other earn­
ings in relation to fluctuations of prices; to inequalities between different
individuals; and to the proportions of the whole which are properly earnings
of effort, and of natural abilities respectively. §§9, 10. The relations
between the interests of different classes of workers in the same trade,
and especially in the same business.
.
.
.
.
pp. 609— 628
Rent Of land. §§ 1# 2. The rent of land is a species of a large
genus. For the present we suppose land to be cultivated by its owners.
R£sum6 of earlier discussions. § 3. A rise in the real value of produce
generally raises the produce value of the surplus, and its real value even
more. Distinction between the labour value, and the general purchasing
power of produce §4 Effects of improvements on rent. §5. The
central doctrine of rent is applicable to nearly all systems of land tenure.
But in the modem English system the broad line of division between the
landlord’s and the farmer’s share is also that which is most important for
science. See Appendix L
. ............................................. pp. 629— 630

Chapter I X .




zzz

CONTENTS

Chapter X . L an d tenuro. § 1. Early forms of Land tenure have generally

been based on partnerships, the terms of which are determined by custom,
rather than by conscious contract; the so-called landlord is generally the
sleeping partner. §§ 2, 3. But custom is much more plastio than at first
appears, as is shown even by recent English history. Caution is needed
when applying Ricardian analysis to modem English land problems; as
well as to earlier systems. The terms of partnership in them were
vague, elastic, and capable of unconscious modification in many ways.
§|4, 0. The advantages and disadvantages of metayage and peasant*
proprietorship. §§ 6, 7. The English system enables the landlord to
supply that part of the capital for which he can be easily and effectively
responsible; and it gives considerable freedom to the forces of selection,
though less than there is in other branches of industry. §§ 8, 0. Large
Mid small holdings. Co-operation. $ 10. Difficulty of deciding what are
normal prices and harvests. The tenant’s freedom to make and reap
the fruits of improvements. § 11. Conflict between publio and private
interests in regard to building, open spaces, and other matters.
pp. 637— 659
General view o f distribution. 511— 3. Summary of the
preceding eight chapters, in which is traced a thread of continuity lying
across that traced in Book V. chapter xrv., and establishing a unity between
the causes that govern the normal values of the various agents and
appliances of production, material and human. { 4 The various agents
of production may be competitors for employment, but they are also the
sole source of employment for one another. How an increase of capital
enriches the field of employment for labour. J 5. An increase either in
the number or in the efficiency of any group of workers generally benefits
other workers; but the former injures, while the latter benefits themselves.
It changes the marginal products of its own labour wad of other kinds of
labour, and thus affects wages. Need for great care in estimating normal
marginal product. .
.
.
.
.
.
.
.
pp. 660— 667

Chapter X I .

.

Chapter X I I .

General Influences of progress on value.

§ 1-

The

richness of the field of employment for capital and labour in a new country
depends partly on the access to markets in which it can sell its goods
and mortgage its future incomes for present supplies of what it wants.
|| 2, 3. England’s foreign trade in last century increased her command over
comforts and luxuries, and only within recent yean has much increased
her command over necessaries. $ 4. Her direct gains from the progress of
manufactures have been less than at first sight appears; but those from the
new means of transport have been greater. { 5. Changes in the labour
values of com, meat, house-room, fuel, clothing, water, light, news, and
travel. |$6—8. Progress has raised the labour-value of English land,
urban and rural, taken together; though it has lowered the value of most
kinds of material appliances; and the increase of capital has lowered its
proportionate, but not its total income. §§ 9, 10. Nature and causes of
changes in the earnings of different industrial classes. §11. The earnings
of exceptional ability. § 12. Progress has done more than is generally
thought to raise the wages of labour, and has probably lessened rather than
increased, the inconstancy of employment of free labour.
pp. 668— 688




BOOK VI

xxxi

Progress in relation to standards o f life. §§ l, 2. Standards of activities and of wants: of life and of comfort. A rise in tbe
standard of comfort could have raised wages considerably in England a
century ago by checking the growth of population: but easy access to
food and raw produce from new countries has left little to be done in that
direction. §§ 3—6. Efforts to regulate activities by reducing the hours
of work. Excessive hours are wasteful. But a reduction of moderate
hours lessens output generally. Therefore though its immediate effect
may be to give an impetus to employment, it must soon lessen the amount
of employment at good wages, unless the leisure is so used as to develop
higher and larger activities. Danger of the emigration of capital. Difficulty
of assigning observed facts to their true causes. Immediate and ultimate
results are often in opposite directions. §§ 7—9. The original aim of
trade unions was to give the workman independence and thus to raise
his standard of life, as much as to raise his wages. The success of this
endeavouT testifies to the importance of their chief weapon—the Common
Rule. But the rigid enforcement o the letter of that rule is apt to cause
false standardization of work and to hamper enterprise; to repel capital;
and in other ways to injure the working classes together with the rest of the
nation. § 10. Difficulties connected with changes in the purchasing power
of money, especially in regard to credit fluctuations. §§ 11— 15. Pro­
visional conclusion as to the possibilities of social progress. An equal
division of the national dividend would lower the incomes of many artisan
households. Exceptional treatment is needed for the Residuum: but the
best means of raising the wages of unskilled work is so thorough an educa­
tion of character and faculty for all classes of the people as will, on the one
hand, greatly reduce the numbers of those who are incapable of any but
unskilled work; and, on the other, will increase the numbers of those
capable of that higher constructive imagination, which is the chief source
of man’s command over nature. But a truly high standard of life cannot
be attained till man has learnt to use leisure well; and this is one of many
indications that violent eoonomic changes work mischief, if they outrun
the slow transformation of that character, which mankind has inherited
from long ages of selfishness and strife.
. . .
pp. 639— 722

Chapter X I I I .

Appendix A. The growth of free industry and enterprise. S 1- Physical

causes aot most powerfully in the early stages of civilization, which have
neoessarily taken place in warm climates. $ 2. Divided ownership
strengthens the force of oustom and resists changes. §3. The Greeks
brought Northern energy to bear on Oriental culture; but they regarded
industry as specially belonging to slaves. § 4. The apparent resemblance
between the economio conditions of the Roman and modem world is
superficial; but the Stoic philosophy and the cosmopolitan experience of
the later Roman lawyers exercised considerable indirect influenoe on
economio thought and action. $ 5. The Teutons were slow to learn from
those whom they had conquered: learning was kept alive by the Saracens.
§§ 6, 7. Self-government by the people could exist only in the free towns.
{ 8. The influenoe of Chivalry and of the Church. The growth of large
armies led to the overthrow of the free cities. But the hopes of progress
were again raised by the invention of printing, the Reformation, and the




CONTENTS

x x x ii

discovery of the New World. § 9. The benefit of the maritime dis
coveries went first to the Spanish peninsula; but it soon moved farther on,
to Holland, to France, and to England. § 10. The character of English­
men early showed signs of their modem faculty for organized action.
The capitalist organization of agriculture pioneered the way for that of
manufacture. §§ 11, 12. Influence of the Reformation. § 13. English
enterprise was promoted by the growth of consumers beyond the seas,
wanting large quantities of goods of simple patterns. The undertakers at
first merely organized supply, without supervising industry; but later
collected their operatives into factories. §§ 14, 15. Henceforth manu­
facturing labour was hired wholesale. The new organization was
accompanied by great evils; many of which were, however, due to other
causes: while the new system had saved England from French armies.
§§ 16, 17. The telegraph and printing-press enable the people now to
decide on their own remedies for their evils; and we are gradually moving
towards forms of collectivism, which will be higher than the old, in so far
as they are based on strong self-disciplined individuality.
pp. 723—753
§ l. Modem economic
science owes much to ancient thought indirectly, but little directly.
The early fetters on trade were a little relaxed by the Mercantilists.
§§ 2, 3. The Physiocrats. Adam Smith developed their doctrine of free
trade, and found in the theory of value a common centre that gave unity to
economic science. |§ 4, 5. The study of facts was not neglected by his
successors, though some of them had a bias towards deductive reasoning.
§§ 6— 8. They did not however allow enough for the dependence of man’s
character on his circumstances. The influence of socialist aspirations and
biological studies in this respcct. John Stuart MilL Characteristics of
modem w o r k . ...............................................................pp. 754— 769

Appendix B. T he growth o f economic science.

The scope and method o f economics. §1 . A unified
social science is desirable, but unattainable. The value of Comte’s
suggestions, the weakness of his negations. § 2. Methods of economics,
physics, and biology. § 3. Explanation and prediction are the same
operation in opposite directions. Only such interpretations of past facts
as are based on thorough analysis can serve as good guides for the future.
§| 4—6. Untrained common sense cam often carry analysis far: but it can
seldom discover obscure causes, and especially not the causes of causes.
Functions of the machinery of science.
. . .
pp. 770—780

Appendix C.

§ l. Economics
affords no scope for long chains of deductive reasoning: nature and
limitations of services rendered by a mathematical training. §f 2, 3. Con­
structive imagination is the dominant force in scientific work: its strength
is shown not in developing abstract hypotheses, but in correlating the
multitudinous influences of real economic forces acting over a wide area.
pp. 781— 784

Appendix D . U ses o f abstract reasoning in economics.

Appendix E . Definitions Of capital. § 1. Trade-capital does not include

all the wealth that gives employment to labour. §§ 2, 3. The sterility of
controversies as to the relative importance of the two essential properties,
prospectiveness and productiveness.
.
.
.
.
pp. 785— 790




APPENDICES A - J

x x x iii

Appendix F. Barter. The uncertainties of market bargaining are greater in
barter than where money is used; partly because a man can generally give
out, or take in, a given quantum (not a given percentage) of value in the
form of money without greatly altering ita marginal utility to him, than he
can in the form of any single commodity.
.
.
.
pp. 791—793

Appendix G. The incidence of local rates, with some suggestions as
to policy. § The ultimate incidence of a rate varies greatly according
as the population is or is not migratory, and as the rate is Onerous or
Bcneficial. Rapid changes in conditions make clear foresight impossible.
§ 2. The “ building value” of a property together with its site value
combine to make its whole value, provided the building is appropriate to
the site: but not otherwise. § 3. Onerous taxes - on site values fall
mainly on owners; or, if unforeseen, on lessees. § 4. But such onerous
taxes on building values, as are uniform all over the country, fall mainly
on the occupier. Exceptionally heavy local onerous rates are however
largely paid by owner (or lessee), even in so far as assessed on building
values. § 5. The distribution of the burden of old rates and taxes is but
little affected by their being collected from the occupier: but a sudden
increase of onerous rates is a grievous burden to the occupier, especially
if a shopkeeper, under the present system of collection. § 6. Assessment
of vacant building sites on the basis of their capital value, and a partial
transference of assessments from building to site values generally, might
be beneficial, provided they were gradual, and accompanied by stringent
bylaws as to the relation between the heights of buildings and the free
spaces in front and back. § 7. Some further observations on rural rates.
§§ 8, 9. Some practical suggestions. The permanent limitations in the
supply of land, and the large share which collective action has in its
present value, require it to be classed in a separate category for the
purposes of taxation.......................................................... pp. 79-4—804

Appendix H. Limitations of the use of statical assumptions in regard
to increasing return. §§ 1—4. The hypothesis of a rigid supply schedule
leads to the possibility of multiple positions of equilibrium, stable and
unstable. But this hypothesis diverges so far from actual conditions,
in regard to increasing return, that it can be applied only tentatively
and within a narrow scope. Caution in regard to the use of the term
Normal Supply-price in this connection.
.
.
.
pp. 805—812

Appendix I. Ricardo’s theory of value.

§§ 1—3. Though obscurely
expressed, it anticipated more of the modem doctrine of the relations
between cost, utility and value, than has been recognized by Jevons and
some other critics.
.
.
.
.
.
.
pp. 813—821

Appendix J. The doctrine of the wagcs-fund. § l. Tho scarcity of
capital a century ago inclined economists to lay excessive stress on the
part played by the supply of capital in governing wages. §§ 2, 3. This
exaggeration ia found in the discussion of wages in Mill’s Second Book
which preceded his study of Value; but not in the later discussion of
Distribution in his Fourth Book. The partial symmetry of the mutual
relations of capital and labour; and of production and consumption.
§ 4. Relation of wages to trade-capital and to other forms of wealth.
pp. 822—829



xxxiv

CONTENTS

Certain kinds o f surplus. The aggregate real cost of any
branch of production is less than in proportion to its marginal costs in
several ways; to each of which there corresponds what may be regarded as a
■orpins from some special point of view. Bat only those kinds of surplus,
which have been discussed in the text, appear to call for careful study.
pp. 830— 832

Appendix K .

Appendix L . Ricardo’s doctrine as to taxes and improvements in
agriculture.
Part of his reasoning proceeds on latent improbable

assumptions: and though logically valid, it is not applicable to actual
c o n d i t i o n s . ........................................................................pp. 833— 837
Mathematical A p p e n d i x .......................................................... pp- 838— 858
Index




pp. 859— 871

BOOK I.
PRELIMINARY SURVEY.

CHAPTER I.
IN TRO DU CTIO N.

§ 1 . P o l it ic a l E c o n o m y or E cono m ics 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 Economics
other, and more important side, a part of the study of man. of w
^dtif
For man’s character has been moulded by his every-day Jn p
f j£ art
work, and the material resources which lie thereby procures, J^jy 01
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 Man’s
business by which a person earns his livelihood generally fillsfonrwlby
his thoughts during by far the greater part of those hours in ^ r Iy
^
which his mind is at its best; during them his character is




2

Poverty
causes de­
gradation.

INTRODUCTION

being formed by the way in which lie 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




THE URGENCY OF THE PROBLEM OF POVERTY

3

spirit may go far towards reconciling them to these evils, 1,1, 2.
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 May we not
poverty are not its necessary consequences; yet, broadly °hebelief
speaking, “ the destruction of the poor is their poverty,” and ^yerty j8
the study of the causes of poverty is the study of the causes necessary?
of the degradation of a large part of mankind.
§ 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



4

INTRODUCTION

i , i, 3.

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 im­
possible 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.
Causes of
§ 3. It might have been expected that a science, which
grow
thof deals with questions so vital for the wellbeing of mankind,
a ie c '.1 would have engaged the attention of many of the ablest
c ne 0
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 over­
looked. Indeed, a science which has wealth for its subjectmatter, is often repugnant at first sight to many students;
for those who do most to advance the boundaries of know­
ledge, seldom care much about the possession of wealth for
its own sake.
ChangefulBut a more important cause is that many of those coneconomic ditions of industrial life, and of those methods of production,
conditions, distribution and consumption, with which modem 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



ECONOMICS IS A MODERN SCIENCE

5

adapted to the conditions of backward races. But unity in I, h 4.
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 modem 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.
§ 4. It is often said that the modern forms of industrial T
hefundaj
life are distinguished from the earlier by being more com- racterfstic
petitive. But this account is not quite satisfactory. ThefndH^S
strict meaning of competition seems to be the racing of one n com
oV person against another, with special reference to bidding for petition,
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 charac­
teristics of modem industrial life.
There is no one term that will express these characteristics but sc
adequately. They are, as we shall presently see, a certain inde- ’
independence and habit of choosing one’s own course for ^liberate
oneself, a self-reliance; a deliberation and yet a promptness ^ ceand
of choice and judgment, and a habit of forecasting the future thought,
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



6

INTRODUCTION
1, 1, 4.

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.
••ComThe term “ competition” has gathered about it evil
Enpiies'too savour, and has come to imply a certain selfishness and
w as* indifference to the wellbeing of others. Now it is true that
ell
too little, there is less deliberate selfishness in early than in modern
Man is not
#
J
more
forms of industry; but there is also less deliberate unselfishhe was.
ness. It is deliberateness, and not selfishness, that is the
characteristic of the modem 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 ob­
servation 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



CHARACTERISTICS OP MODERN BUSINESS

71

others in cases where custom and law have left him free’ to 1, 1,4." /
choose his own course. Among races, whose intellectual^ 7” - »
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 open- Man is
ings for dishonesty in trade. The advance of knowledge has d o est
ish n
discovered new ways of making things appear other than
10
1
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 neigh­
bours. The opportunities for knavery are certainly more
numerous than they were; but there is no reason for think­
ing 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 popu­
lation 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.
Dreams of
In every stage of civilization, in which the power of money qP ^ a
has been prominent, poets in verse and prose have delighted a» beautito depict a past truly “ Golden A ge/' before the pressure of le d g
a in !*”8



8

- INTRODUCT1023

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 some­
times 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. Wp ought therefore not to brand
the forces, which have made modern civilization, by a name
which suggests evil.
Modem
It is perhaps not reasonable that such a suggestion
competi­
should attach to the term “ competition” ; but in fact it does.
tion is of
two kinds.
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 essen­
tial to the maintenance of energy and spontaneity, that their
cessation might probably be injurious on the balance to
construc­ social wellbeing. The traders or producers, who find that
tive and
a rival is offering goods at a lower price than will yield them
destruc­
tive.
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 carecr, 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



COMPETITION MAY BE LESS CRUEL THAN COMBINATION

9

in unselfish work for the public good, then even the best i,i, 4 .
forms of competition are relatively evil; while its harsher E c^nveT
and meaner formrf are hateful. And in a world in which all "0™^!
men were perfectly virtuous, competition would be out j^flcen?
place; but so also would be private property and every form than ideal
of private right. Men would think only of their duties; and co-op ^
era
no one would desire to have a larger share of the comfortst,on
*
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 ia
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



10
i, 1, 5 .
Economic
Freedom.

INTRODUCTION

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
-g no£ 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 volume1.
Rough
§ 5 . This introductory chapter was followed in earlier
ofthe'6
8 editions by two short sketches: the one related to the growth
economic
^ enterprise and generally of economic freedom, and the
ree
freedom
other to the growth of economic science. They have no claim
and of
.
economic to be systematic histories, however compressed; they aim
transferred °nly at indicating some landmarks on the routes by which
Book to Ap- econornic structure and economic thought have travelled to
5Tand b
Present position. They are now transferred to Appen­
dices 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
The relations of many ancient Greeks and Romans with
economic the slaves of their households were genial and humane. But
freedom.
even m Attica the physical and moral wellbeing of the great
‘
1 They occupy a considerable place in the forthcoming volumes on Industry
and Trade.




THE GROWTH OF ECONOMIC FREEDOM

11

body of the inhabitants was not accepted as a chief aim of the i, i, 5.
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 b y 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; The early
but towards the end of the eighteenth century, the changes, 01^ 0
”
which had so far been slow and gradual, suddenly became JI^^n
free'
rapid and violent. Mechanical inventions, the concentration England,
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 dimin­
ished the good caused by the advent of free enterprise.
T
hft
And yet the time at which free enterprise was showing growth of
itself in an unnaturally harsh form, was the very time in s S T .'0



j

12
1, 1, 6.

IHTEODXTCnOH

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 dis­
placed; and partly because the general tendency of English­
men 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 pro­
ductive 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 mediaeval 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 import­
ant 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 com:—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 misunder­
standing and mismanagement of economic freedom.




THE GROWTH OP ECONOMIC SCIENCE

13

Intermediate between these two extremes are the great 1, 1, 6.
body of economists who, working on parallel lines in many
different countries, are bringing to their studies an un­
biassed 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.




CHAPTER II.
‘
I, II, 1.

The chief
motives of
business
life can be
measured
indirectly
in money.

' TH E SUBSTANCE OF ECONOMICS.

§ 1 . E c o n o m i c s is a study of men as they live and move
and think in the ordinary business of life. Bat 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
nature1.
1 Some remarks on the relation of economics to the sum total of social science
will be found in Appendix C, 1, 2.




MEASUREMENT OF THE FORCE OF AN ECONOMIC MOTIVE

15

The advantage which economics has over other branches I, n, 1.
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 Even
measure any affection of the mind in itself, or directly; but
only indirectly through its effect. No one can compare and ^ ^ com measure accurately against one another even his own mental pared only
.
,
through the
states at different times: and no one can measure the mental strength of
states of another at all except indirectly and conjecturally by uveswhich
their effects. Of course various affections belong to man’ s JoY/tionly
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



16
i, n, l.

THE SUBSTANCE OF ECONOMICS

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.
and this
Thus measuring a mental state, as men do in ordinary
comparison life, by its motor-force or the incentive which it affords to
applied to action, no new difficulty is introduced by the fact that some
of desire.9
m°tives 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
Economfca
practice of their manifestations than in themselves; and if he finds they
discourse, afford evenly balanced incentives to action, he treats them
primd 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 tho
mental and spiritual characteristics of individuals. But he



THE QUALITY OF A MOTIVE EVADES MEASUREMENT

does not ignore the mental and spiritual side o! life. On the i,
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-point1
.
§2. There are several other, limitations of the measure­
ment of motive by money to be discussed. The first of
these arises from the necessity of taking account of the
1 Tbs objection* raised by some philosophers to speaking of two pleasures as
equal, under any circumstances, seem to apply only to uses of the phrase other
than those with which the economist is concerned. It has however unfortunately
happened that the customary uses of economic terms have sometimes suggested
the belief that economists are adherents of the philosophical system of Hedonism
or of Utilitarianism. For, while they have generally taken for granted that the
greatest pleasures are those which come with the endeavour to do one’s duty, they
have spoken of “ pleasures” and “ pains” as supplying the motives to all action;
and they have thus brought themselves under the censure of those philosophers,
with whom it is matter of principle to insist that the desire to do one’s duty is
a different thing from desire for the pleasure which, if one happens to think of
the matter at all, one may expect from doing it; though perhaps it may be not
incorrectly described as a desire for “ self-satis!action ” or "the satisfaction
of the permanent self.” (See for instance T. H. Green, Prolegomena to Ethici,
pp. 165-45.)
It is clearly not the part of economics to appear to take a side in ethical
controversy: and since there is general agreement that all incentives to action,
in so far as they ate conscious desires at oil, may without impropriety be spoken
of shortly as desires for “ satisfaction,” it may perhaps be well to use this word
instead of "pleasure,” when occasion arises for referring to the aims of all
desires, whether appertaining to man's higher or lower nature.
The simple
antithesis to satisfaction is “ dissatisfaction” : but perhaps it may be well to use
the shorter and equally colourless word “ detriment” in its place.
It may however be noted that some followers of Bentham (though perhaps not
Bentham himself) made this large use of “ pain and pleasure” serve as a bridge
by which to pass from individualistic Hedonism to a complete ethical creed, without
recognizing the necessity for the introduction of an independent major premiss;
and for such a premiss the necessity would appear to be absolute, although
opinions will perhaps always differ as to its form. Some will regard it as the
Categorical Imperative; while others will regard it as » simple belief that,
whatever be the origin of our moral instincts, their indications are borne out by a
verdict of the experience of mankind to the eSect that true happiness is not to be
' had without self-respect, and that self-respect is to be had only on the condition
of endeavouring so to live aa to promote the progress of the him>ftn race.

a

a




a

THE SUBSTANCE OF ECONOMICS

18

i, n, 2.

variations in the amount of pleasure, or other satisfaction,
represented by the same sum of money to different persons
and under different circumstances.
The same ,
A shilling may measure a greater pleasure (or other
m
easures satisfaction) at one time than at another even for the
imtisfacsame person; because money may be more plentiful with
tions even j j j m
o r because his sensibility may vary1. And persons
to persons
3
. .
,
with equal 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 par­
ticular 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,
but these
Nevertheless, if we take averages sufficiently broad to
differences
»• • •
* • t •i
i
m gene- cause the personal peculiarities of individuals to counteray
neglerted balance one another, the money which people of equal incomes
coiaider
&
*ve to obtain a benefit or avoid an injury is a good
onarge™ measure
26
the benefit or injury. If there are a thousand
numbers
persons living in Sheffield, and another thousand in Leeds,
of people.
w. ^ about £iQQ a-year, and a tax of £1 is levied on
all of them; we may be sure that the loss of pleasure or other



* Compare Edgeworth’s Mathematical Ptychict.

INDIVIDUAL PECULIARITIES PROVISIONALLY NEGLECTED

19

injury which the tax will cause in Sheffield is of about equal I, n,2.
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 there­
fore presumably somewhat similar in sensibility and tempera­
ment, 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 The sigincentive will be required to induce a person to pay a 0f a given
given price for anything if he is poor than if he is rich, greaterfor
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 rich,
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 But this
to consider the actions and the motives of large groups porta n u n
of people. If we know, for instance, that a bank failure t^o groups
has taken £200,000 from the people of Leeds and £100,000 ^hand
from those of Sheffield, we may fairly assume that the p in
.001
suffering caused in Leeds has been about twice as great as portions,
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




20

THE SUBSTANCE OF ECONOMICS

loss of employment caused by it pressed in uneven propor­
tions on the working classes in the two towns.
Increase of
By far the greater number of the events with which
material
economics deals affect in about equal proportions all the
means
sometime*
different classes of society; so that if the money measures
a fair
measure
of the happiness caused by two events are equal, it is reason­
of real
progress. able and in accordance with common usage to regard the
amount® 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
parte of the western world, there is even some primd facie
probability that equal additions to their material resources
will make about equal additions to the fulness of life, and
the true progress of the human race.
Action is
§3. To pass to another point. When we speak of the
SZft, measurement of desire by the action to which it forms the
habit,
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
lower1
.
especially
Now the side of life with which economics is specially
as regards
concerned is that in which man’s conduct is most deliberate,
business
conduct.
and in which he most often reckons up the advantages and
1 This is specially true of that group of gratifications, which is sometimes
named “ the pleasures of the chase." They include not only the light-hearted
emulation of games and pastimes, of hunts and steeplechases, but the more serious
contests of professional and business life: and they will occupy good deal of our
attention in discussions of the causes that govern wages and profits, and forms of
industrial organization.
Some people are of wayward temperament, and could give no good account
even to themselves of the motives of their action. But if a man is steadfast and
thoughtful, even his impulses aze the products of habits which he has adopted
more or less deliberately. And, whether these impulses are an expression of his
higher nature or not; whether they spring from mandates of his conscience, the
pressure of social connection, or the claims of his bodily wants, he yields a certain
relative precedence to them without reflection now, because on previous occasions
he has decided deliberately to yield that relative precedence. The predominant
attractiveness of one course of action over others, even when not the result of
calculation at the time, is the product of more or less deliberate decisions made by
hitp before in somewhat similar cases.




a

ACCOUNT TO BE TAKEN OF HABIT AND CUSTOM

disadvantages of any particular action before he enters on it. I
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 incen­
tive to save for the future. This measurement presents



THE SUBSTANCE OF ECONOMICS

22

however some special difficulties, the study of which must be
postponed.
§ 4. Here, as elsewhere, we must bear in mind that the
The
motives
desire to make money does not itself necessarily procecd
that lead
to the
pursuit of from motives of a low order, even when it is to be spent
m o n e y m a y on oneself. Money is a means towards ends, and if the ends
themselves
*' t
’
be noble, 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
material1.
And there
Thus though it is true that “ money” or “ general pur­
is no truth
chasing power” or “ command over material wealth,” is the
in the
common
centre around which economic science clusters; this is so, not
opinion
that
because money or material wealth is regarded as the main
economics
regards
aim of human effort, nor even as affording the main subjectman as
matter for the study of the economist, but because in this
absorbed
in a selfish
pursuit of world of ours it is the one convenient means of measuring
wealth.
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 selfishness2
.
The desire
Again, when the motive to a man’s action is spoken of as
for money
does not’ supplied by the money which he will earn, it is not meant
exclude
that his mind is closed to all other considerations save those
other in­
I , « » 4-

fluences;

1 See an admirable essay by Cliffe Leslie on The Love of Monty. We do
indeed hear of people who pursue money for its own sake without caring for what
it will purchase, especially at the end of a long life spent in business: but in this
as in other cases the habit of doing a thing is kept up after the purpose for which
it was originally done has ceased to exist. The possession of wealth gives such
people a feeling of power over their tellow-creatures, and insures them a sort of
envious respect in which they find a bitter but strong pleasure.
*
In fact a world can l»e conceived in which there is a science of economics
very much like our own, but in it there is no money of any sort. See Appendices
B, 8 and I), 2.




MAN NOT ASSUMED TO BE ABSORBED IN PURSUIT OF GAIN

23

of gain. For even the most purely business relations of I, n, 5
.
life assume honesty and good faith; while many of themtake 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 su a th
ch s e
people earn their living is pleasurable in itself; and there is afforfedby
truth in the contention of socialists that more of it might be j^Hnd
made so. Indeed even business work, that seems at firstt,° » stin
h n (,t
.
°* power.
sight unattractive, often yields a great pleasure by offering
scope for the exercise of men’s faculties, and for their in­
stincts 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 fortune1
.
§ 5. It has indeed always been the practice of economists Economists b&vo
to take careful account of all the advantages which attract a a s
lw y
people generally towards an occupation, whether they appear j^ad^anin a money form or not. Other things being equal, people
will prefer an occupation in which they do not need to soil oth th n
er a
their hands, in which they enjoy a good social position, and gain
;
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 and they
contempt of those around one is a stimulus to action which allowed for
often works with some sort of uniformity in any class of
persons at a given time and place; though local and tem­
porary 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 wilt 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
1S o re a s on tlio luy scop of econ ics a cou cdinU n u w
oin mrk
ru o
om s otiiv
eu a y ill
b fou dinA p d D 3
e n
p en ix , .



24
I, n, 5.

and family
affections.

THE SUBSTANCE OP ECONOMICS

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 sem­
blance 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.




ECONOMICS CONCERNED W ITH ALTRUISTIC MOTIVES

25

16. Perhaps the earlier English economists confined their I, n, 6,7.
attention too much to the motives of individual action. But T e
h
in fact economists, like all other students of social science, JJJJSJJ0
are concerned with individuals chiefly as members of the ^tion
social organism. As a cathedral is something more than the and growstones of which it is made, as a person is something more “ ? port
c^n
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 afiect 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.
§7. To conclude provisionally: economists study theEconoactions of individuals, but study them in relation to socialSekidudy
rather than individual life; and therefore concern themselves rid ii?“ a
u
member
but little with personal peculiarities of temper and character. oi



26

THE SUBSTANCE OF ECONOMICS

I, n, 7 They watch carefully the conduct of a whole class of people,
.
sometimes the whole of a nation, sometimes only those living
group;
i n 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,
andmcaBut yet the measurement is accurate enough to enable
play of6
experienced persons to forecast fairly well the extent of the
dem d" results that will follow from changes in which motives of
an 1
atfirstin7
kind are chiefly concerned. Thus, for instance, they can
simle
p
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 pro­
posed 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
And, starting from simple considerations of this kind,
ftftorwdrds
in more
economists go on to analyse the causes which govern the
^ £ lex 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 thi3 they deal with man as he is: not with an

industrial




PROVISIONAL CONCLUSIONS

27

abstract or “ economic” man; but a man of flesh and blood. I, n 7
, .
They deal with a man who is largely influenced by egoistic T eyd l
h ea
motives in his business life to a great extent with reference ^^one
to them; but who is also neither above vanity and reckless- side,sf,.r
o
’
.
.
.
.
man lifo,
ness, nor below delight in doing his work well for its own but it is
• alwavs tl)©
sake, or in sacrificing himself for the good of his family, his life of a
neighbours, or his country; a man who is not below the love ”0 of a"
°t
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 pre­
dicted, 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 The
be observed, and quantities which can be measured and econ ics
om
recorded; so that when differences of opinion arise with ^ °c£
regard to them, the differences can be brought to the test®™
it*
of public and well-established records; and thus science a p l to
p ea
obtains a solid basis on which to work. In the second ex a
tern l
place, the problems, which arc grouped as economic, because XStlmai
they relate specially to man’s conduct under the influence of tomo#
geneity.
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
d 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 in­
quiries 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



28
I, n, 7.

THE SUBSTANCE OF ECONOMICS

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 indude 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.




CHAPTER m .
ECONOMIC G EN E RALIZATIO N S O R LAW S.

§1. It is the business of economics, as of almost every 1 , 10 , 1 .
other science, to collect facts, to arrange and interpret them, Economics
and to draw inferences from them. “ Observation and de-j^^ion
scription, definition and classification are the preparatory ^ ju
ction
activities. But what we desire to reach thereby is a know­
ledge of the interdependence of economic phenomena... .In­
duction and deduction are both needed for scientific thought
as the right and left foot are both needed for walking1 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 but in
purposes, it is more urgent to ascertain new facts, than to propo^4
trouble ourselves with the mutual relations and explanations d
ifferen
t
of those which we already have. While in other branches P rP .
u °«e8
1Schmoller in the article on



Volktwirtichaft

in Conrad’a Eandwdrterbuch.

30

ECONOMIC GENERALIZATIONS OR LAWS

i, m, 2. 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.
A nalytical
For this and other reasons, there always has been and
historical
there probably always will be a need for the existence side
are^oth
S^ e
workers with different aptitudes and different
needed and aims some of whom give their chief attention to the ascersupplem ent
m1
®
.
. . . . .
each other, tamment 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 tw o
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,
im agina§ 2. Those physical sciences, which have progressed
on org an "" most beyond the points to which they were brought by the
offacts '7 brilliant genius of the Greeks, are not all of them strictly
speaking “ exact sciences.” But they all aim at exactness,
stateThat is they all aim at precipitating the result of a multiand som
e tude of observations into provisional statements, which are
areseiectodsufficiently definite to be brought under test by other
or^lawa1 observations of nature. These statements, when first p u t
”3
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



LAWS OF PHYSICAL SCIENCE VARY IN PRECISION

31

relies on his own resources and neglects the results obtained I, m, 3.
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 multi­
tudinous 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.
§ 3. Let us then consider more closely the nature of Nearly all
economic laws, and their limitations. Every cause has a sconce are
tendency to produce some definite result if nothing occurs to ® ^ ents
fa
hinder it. Thus gravitation tends to make things fall to the dencie8ground: 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 gravita­
tion 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 mathe- The exart
maticians can calculate a Nautical Almanac, which will show sam
ple
the moments at which each satellite of Jupiter will hide 8clence,‘
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
The science of the tides explains how the tide rises and falls meiact



32
I, nx, 3.
laws of
complex
sciences.

The
science of
man is
complex
and its
laws are
inexact.

ECONOMIC GENERALIZATIONS OR LAWS

twice a day under the action of the sun and the m oon: 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 down­
pour 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. B y 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




LIMITATIONS OP ECONOMIC LAWS

33

thought-out estimates, or provisional laws, of the tendencies i, m , 4.
of human action.
§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 not1.
Thus a law of social science, or a Social Law, is a state- Definition
ment 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 and
those social laws which relate to branches of conduct in eeonomtc'
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
1 The relation of “ natural and economic laws,” is exhaustively discussed
by Neumann (Zeilschrift fur dit goamtt StaaUwitstntcKaft, 1892) who concludes
(p. 464) that there is no other word than Law (Gesetx) to express those statements
of tendency, which play so important a part in natural as well as economic science.
See also Wagner (Grumdltg%ng, §§ 86—81).




84

ECONOMIC GENERALIZATIONS OR LAWS

i,ra,4. 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
Definition substituted for it in scientific discussions. And following
economic our definition of an economic law, we may say that the
action.
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.
The term
This use of the term Normal has been misunderstood; and
implies
it may be well to say something as to the unity in difference
with1007 ^bich underlies various uses of the term. When we talk of a
whatever Good man or a Strong man, we refer to excellence or strength
conditions
• -i
?
• 1
i
1 •
•
i .
happen to of those particular physical mental or moral qualities which
diswssion. 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.
Thus ^
This is the point of view from which it is said that normal
conditions economic action is that which may be expected in the long
K w
ages run UQder certain conditions (provided those conditions are
w
agespersistent) 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 Id. In Johannesburg it may be normal that a brick­
layer should refuse work at much less than £1 a day. The



RELATIVITY OF THE TERM NORMAL

35

normal price of bona fide fresh laid eggs may be taken to be I, m, 4.
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 they may
from the notion that only those economic results are normal, presence*
which are due to the undisturbed action of free competition, “j^ c e
But the term has often to be applied to conditions in which of eager
.
comp©perfectly free competition does not exist, and can hardly even tition.
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 whioh 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 Normal
we should use our utmost efforts to stop. For instance, the not always
normal condition of many of the very poorest inhabitants of ” g n
^
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



36

ECONOMIC GENERALIZATIONS OR LAWS

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 m odify
that nature and thus modify the action of laws of nature.
For instance, economics may suggest practical means o f
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 tempo­
rary 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
postponed1.
All
§ 5. It is sometimes said that the laws of economics are
scientific
doctrines
“ hypothetical.” Of course, like every other science, it under­
tacitly or
implicitly takes to study the effects which will be produced by certain,
assume
causes, not absolutely, but subject to the condition that
certain
conditions other things are equal, and that the causes are able to work ou t
and are in
this sense their effects undisturbed. • Almost every scientific doctrine,
hypotheti­
when carefully and formally stated, will be found to contain
cal.
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 hypo­
thesis 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.
I, in, 5.




* They are discussed in Book V, especially chapters III and V.

THE IMPORTANCE OF CONDITIONING CLAUSES

37

The conditioning clauses implied in a law are not con- I, m, 5.
tinually repeated, but the common sense of the reader Butin”
supplies them for himself. In economics it is necessary to tho^piTea
repeat them oftener than elsewhere, because its doctrines are conditions
.
must be
more apt than those of any other science to be quoted by emphapersons who have had no scientific training, and who perhapss,zed*
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 sim­
plicity 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 gain1.
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 doctrines2.
1 Compare Book II, chapter I.
*
Some parts of economics are relatively abstract or pure, because they are
concerned mainly with broad general propositions: tor, in order that a proposition
may be of broad application it must necessarily contain few details: it cannot
adapt itself to particular cases; and if it points to any prediction, that must be
governed by a strong conditioning clause in which a very large meaning is given
to the phrase “ other things being equal.”
Other parts are relatively applied, because they deal with narrower questions
more in detail; they take more account of local and temporary elements; and they
consider economic conditions in fuller and closer relation to other conditions of
life. Thus there is but a short step from the applied science of banking in its more
general sense, to broad rules or precepts of the general Art of banking: while the
step from a particular local problem of the applied science of banking to the
corresponding rule of practice or precept of Art may be shorter still.




CHAPTER IV.
THE ORDER AND AIMS OF ECONOMIC STUDIES.
i, *▼ i,
Summary
of chapters
II and III.

§ 1. W e 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 o f
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 ten­
dencies of man’s action under certain conditions. They are
hypothetical only in the same sense as are the laws o f
the physical sciences: for those laws also contain or im ply
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 ascertain­
able 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'etre 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




A RETROSPECT

39

therefore lends itself better than any other to systematic I, iv, 2.
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 modem age of free enterprise,
of general education, of true democracy, of steam, of the
cheap press and the telegraph.
§ 2 . Economics has then as its purpose firstly to acquire Scientific
knowledge for its own sake, and secondly to throw light onITre'tobl
practical issues. But though we are bound, before entering
on any study, to consider carefully what are its uses, we ference
i n
1
1
•1 T
f
1
not to the
should not plan out our work with direct reference to them, practical
For by so doing we are tempted to break off each line of they sub?
thought as soon as it ceases to have an immediate bearing ^thebut
on that particular aim which we have in view at the time:
the direct pursuit of practical aims leads us to group subjecte
together bits of all sorts of knowledge, which have no they are
connection with one another except for the immediateconcemed*
purposes o f lthe 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. B y
working thus for a long time at one set of considerations,



40
I, iv, 3.

Questions
investiga­
ted by the
economist.

THE ORDER AND AIMS OF ECONOMIC STUDIES

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 Bingly and in combination.
§ 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 m odem
world, affect the consumption and production, the distribu­
tion 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
primd fa d e 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
token of the time over which they will spread, what is the
relative importance of these two classes of ultimate and




SCIENTIFIC INQUIRIES AND PRACTICAL ISSUES

41

intermediate effects? What will be the incidence of any I, it, 4.
system of taxes? What burdens will it impose on the
community, and what revenue will it afford to the State?
§ 4. The above are the main questions with which Practical
economic science has to deal directly, and with reference to
which its main work of collecting facts, of analysing them ®^lulate
and reasoning about them should be arranged. The practical
issues which, though lying for the greater part outside the English
»
. .
.
,
i • m
.•
• j i economist
range of economic science, yet supply a chief motive m the at the
background to the work of the economist, vary from time j^®nt
to time, and from place to place, even more than do the though^
economic facts and conditions which form the material of not lie
his studies. The following problems seem to be of special ^rithmthe
urgency now in our own country:—
hfefdence.
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 thfe 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 in­
justice, 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 bo 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?



42
I, it ,

THE ORDER AND AIMS OF ECONOMIC STUDIES

4.

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?

The
Economics is thus taken to mean a study of the economic
JmoT
aspects and conditions of man’s political, social and private
i^ihe*** ^ e » kut more especially of his social life. The aims of the
present
study are to gain knowledge for its own sake, and to obtain
w to con- guidance in the practical conduct of life, and especially of
a solution social life. The need for such guidance was never so urgent
problem as now; a later generation may have more abundant leisure
s.
than we for researches that throw light on obscure points in



PRACTICAL ISSUES

43

abstract speculation, or in the history of past times, but do I, iv, 5.
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.”
§ 5. The economist needs the three great intellectual The
faculties, perception, imagination and reason: and most o f 0fpercepall he needs imagination, to put him on the track of those naSonwS
causes of visible events which are remote or lie below the reason \
n
economics.
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. An
The path of least resistance is sometimes the only one open: standard of
it is always alluring; and though it is also always treacherous, SeS'to"
the temptation is great to follow it even when a more 8te«dy



44

THE ORDER AND AIMS OF ECONOMIC STUDIES

I, iv, 5. thorough way can be fought out by resolute work. The
scientific student of history is hampered by his inability to
measure* experiment and even more by the absence of any objective
bytheabl6 stan<*ar(* to wkich his estimates of relative proportion can be
economist, referred. Such estimates are latent in almost every stage of
his argument: he cannot conclude th it 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.
But his
In smaller matters, indeed, simple experience will suggest
rom
ance the unseen. It will, for instance, put people in the way of
looking for the harm to strength of character and to family
imagma- lif e that comes from ill-considered aid to the thriftless; even
uon|
_
_
_
#
4
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 employ­
ment 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

judgment




THE NEED FOR PERCEPTION, IMAGINATION AND REASON

45

make no good cure of the evils we see; and we are likely I, iv,5.
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,
w& 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. W hat 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 b y 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 and he
sometimes even the critical faculties, which are most inactive
demand. But economic studies call for and develop th e 8ym
pathy'
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



46

THE ORDER AND ATMS OF ECONOMIC STUDIES

I, iv, 6. 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 aflections 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 pro­
fessional etiquette and of trade union customs; and of move­
ments by which our growing wealth and opportunities may
best be turned to account for the wellbeing of the present
and coming generations1.
Caution«
§ 6 . The economist needs imagination especially in
by an
order that he may develop his ideals. But most of all he
recognition ueeds caution and reserve in order that his advocacy of
{imitation i^ea^ may no^ outrun his grasp of the future,
s
knowledge
After many more generations have passed, our present
and the
ideals and methods may seem to belong to the infancy,
perman-" rather than to the maturity of man. One definite advance has
pre*snt°U already been made. We have learnt that every one until
r
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 begin­
ning 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
1 This Section is reproduced from a Flea for the creation of a curriculum in
eeonomici and associated branches of political science addressed to the University
of Cambridge in 1902, and conceded in the following year.




THE NEED FOR SYMPATHY

47

progress is being fashioned, and how little we can forecast i , i v , 6 .
the ultimate destiny of the industrial organism.
Some harsh employers and politicians, defending exclusive Popular
class privileges early in last century, found it convenient toX T ofth o
claim the authority of political economy on their side; and a™
e
cter
they often spoke of themselves as “ economists.” And even in fu n ders°f
our own time, that title has been assumed by opponents of economics,
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 say­
ings 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



48

the

ORDER AND AIMS OF ECONOMIC STUDIES

I, it, 6. imaginations were eager, but not steadied by knowledge nor
disciplined by hard thought.
Biology
Their caution was perhaps a little greater than necessary:
new
^hopes for the range of vision even of the great seers of that age
future of was m some respects narrower than is that of most educated
the human men jn the present time; when, partly through the sugges­
tions 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.
But it is
The rights of property, as such, have not been venerated
that short by those master minds who have built up economic science;
dangerous: ^ufc the authority of the science has been wrongly assumed
muftbe
ky some who have pushed the claims of vested rights to
extreme and antisocial uses. It may be well therefore to
cautious
tentative, 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.

C H A P TER I.
INTRODUCTORY.

§ 1 . W e have seen that economics is, on the one side, Ii,i, 1.
a Science of Wealth; and, on the other, that part of the Economics
Social Science of man’s action in society, which deals with ^ 1^
r 8a3
t(
his Efforts to satisfy his Wants, in so far as the efforts and satisfying
. . . . .
. .
,
. ,
Wants and
wants are capable of being measured m terms of wealth, or as the
its general representative, i.e. money. We shall be occupied Efforts,
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 But it
all the things that are the result of man’s efforts, and are Sake a
capable of satisfying man’s wants, are to be counted as narystudy
Wealth; and into what groups or classes these are to be ° ^ ealth
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



50

INTRODUCTORY

ii, i, 2. course of starting with, an analysis of wants, and of wealth ill
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.
Principles
§ 2. As Mill says1:— “ The ends of scientific classification
ofclassifi*
,
1
,
,
, .
,
i .
cation.
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 develop­
ment, are not unlikely to be among the least important in
another, if indeed they apply at all.
The dimIn this matter economists have much to learn from the
classifying recent experiences of biology: and Darwin’s profound discuswhidh are si°n of the question2 throws a strong light on the difficulties
theS8^
kef° re us* He points out that those parts of the structure
characters which determine the habits of life and the general place o f
and their
i i
i
i
>
i
i
uses.
each being m 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 t o
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




1 Logic, Bk. iv. ch. vn. Par. 2.
* Origin of Species, ch. Xiv.

DIFFICULTIES OF ECONOMIC TERMINOLOGY

5
1

employer and employed, between middleman and producer, n, i, 3.
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 classifica­
tion 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
N
throws side lights on the history of the economic develop­
ment 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.
§ 3. Our task is difficult. In physical sciences indeed, in its use
whenever it is seen that a group of things have a certain set economica
of qualities in common, and will often be spoken of together,
as
they are formed into a class with a special name; and as soon p°ss ie 8
s^ a
as a new notion emerges, a new technical term is invented thepractice
to represent it. But economics cannot venture to follow this daylife.
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 every­
day life, and so far as possible must use them as they are
commonly used.
In common use almost every word has many shades of But that ia
meaning, and therefore needs to be interpreted by the con- ISLSent8
text. And, as Bagehot has pointed out, even the most
formal writers on economic science are compelled zo follow



52

INTRODUCTORY

ii, i, 3. this course; lor 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 guilty1,
definite.
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.

'

1 We ought “ to write more as we do in common life, where the context is &
sort of unexpressed ‘ interpretation clause’ ; only as in Political Economy we have
more difficult things to speak of than in ordinary conversation, we must take
more care, give more warning of any change; and at times write out ‘ the interpretation clause' for that page or discussion lest there should be any mistake.
I know that this is difficult and delicate work; and all that I have to say in
defence of it is that in practice it is safer than the competing plan of inSexible
definitions. Any one who tries to express various meanings on complex things
with a scanty vocabulary of fastened senses, will find that his style grows cum­
brous without being accurate, that he has to use long periphrases for common
thoughts, and that after all he does not come out right, for he is half the time
falling back into the senses which lit the case in hand best, and these are some­
times one, sometimes another, and almost always different from his ‘ hard and
fast’ sense. In such discussions we should learn to vary our definitions as we
want, just as we say ‘ let x, y, t, mean’ now this, and now that, in different prob­
lems; and this, though they do not always avow it, is really the practice of the
clearest and most effective writers.” (Bagehot’s Postulate! of English Political
Economy, pp. 78, 9.) Caimes also {Logical Method of Political Economy, Lect. Vi.)
combats “ the assumption that the attribute on which a definition turns ought to
be one which does not admit of degrees” ; and argues that “ to admit of degrees is
the character of all natural facts.”




DIFFICULTIES OF ECONOMIC TERMINOLOGY

53

§ 4. We must then analyze carefully the real character- Ii, i, 4.
istics of the various things with which we have to deal; and it iTneceswe shall thus generally find that there is some use of each
term which has distinctly greater claims than any other
should be
be called its leading use, on the ground that it represents a defined,
distinction that is more important for the purposes of m odem thauhe
science than any other that is in harmony with ordinary
usage. This may be laid down as the meaning to be given ®j^ld be
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 basis1.
1 When it is wanted to narrow the meaning of a term (that is, in logical lan*
guage, to diminish its extension by increasing its intension), a qualifying adjective
will generally suffice, but a change in the opposite direction cannot as a rule be
so simply made. Contests as to definitions are often of this kind:—A and B are
qualities common to a great number of things, many of these things have in
addition the quality C, and again many the quality D, whilst some have both C
and D. It may then be argued that on the whole it will be best to define a term
so as to include all things which have the qualities A and B, or only those
which have the qualities A , B ,C , or only those which have the qualities A, B, D\
or only those which have A, B, C, D. The decision between these various
courses must rest on considerations of practical convenience, and is a matter
of far lass importance than a careful study of the qualities A , B, C, D, and of
their mutual relations. But unfortunately this study has occupied a much smaller
space in English economics than controversies as to definitions; which have
indeed occasionally led indirectly to the discovery of scientific truth, but always
by roundabout routes, and with much waste of time and labour.




CHAPTER II.
WEALTH.
II, ir, !•
Wealth
consists of
desirable
things or
Goods.

Material
goods.

External
and
internal
goods.

§ 1 . A l l 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 affec­
tion 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 imple­
ments; 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 deriviag recreation from reading ox




CLASSES OF DESIRABLE THINGS

55

music. All these lie within himself and are called internal. II, n, 1 .
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 men1.
Again, goods may be transferable or non-transferable. TransferAmong the latter are to be classed a person’s qualities and lon-tZnsfaculties 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 property2.
Those goods are free, which are not appropriated and Free goods.
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. W ood 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
1 F op, in the words in which Hermann begins his masterly analysis of wealth,
“ Some Goods are internal, others external, to the individual. An internal good is
that which ha finds in himself given to him by nature, or which he educates in
himself by his own free action, such as muscular strength, health, mental attain­
ments. Everything that the outer world offers for the satisfaction of his wants is an
external good to him.”
1 The above classification of goods may be expressed thus:—

.
,
Goods are -{ exwmal

f
,
J ma
i

• , f transferable
a 1 non-transferable
. f transferable

[Personal | non transferable

intemal-personal-non-transferable.
Another arrangement is more convenient for some purposes:—
[ material-external -f tran^ era^ e
I
^ non-transferable
Goods are -I
, PxtPmsil / transferable
j personal J
\ non-transferable
I
I intemal-non-transferable.




WEALTH

56

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 b y
labour.
A person’s
§ 2. We may now pass to the question which classes of a
m
aUh
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:—
is his stock
When a man’s wealth is spoken of simply, and without
classes of any interpretation clause in the context, it is to be taken to
goods,
be his stock of two classes of goods.
In the first class are those material goods to which he
material
goods,
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 wealth1,
and such
In the second class are those immaterial goods which
external
belong to him, are external to him, and serve directly as
II, ii, 2.

1 That part of the value of the share in a trading company which is due to the
personal reputation and connection of those who conduct its affairs ought properly
to come under the next head as external personal goods. But thi* point is not of
much practical importance.




THE POINT OF VIEW OF THE INDIVIDUAL

57

the means of enabling him t o acquire material goods. Thus II, n, 3.
it excludes all his own personal qualities and faculties, even goods as
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 The two
usage of ordinary life: and, at the same time, it includes together
those goods, and only those, which come clearly within the
scope of economic science, as defined in Book I . ; and which 9ood*'
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 satisfy1.
§ 3. A broader view of wealth may indeed be taken for A broader
some purposes; but then recourse must be had to a special in- the term
terpretation clause, to prevent confusion. Thus, for instance, sometimes
the carpenter’s skill is as direct a means of enabling him to re(iuiredsatisfy 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 Smith2, and followed by most continental
1 It is not implied that the owner of transferable goods, if he transferred
them, could always realize the whole money value, which they have for him.
A well-fitting coat, for instance, may be worth the price charged for it by an
expensive tailor to its owner, because he wants it and cannot get it made for less:
but he could not sell it for half that sum. The successful financier who his spent
£50,000 on having a house and grounds made to suit his own special fancy, is
from one point of view right in reckoning them in the inventory of his property at
their cost price: but, should he fail, they will not form an asset to his creditors of
anything like that value.
And in the same way from one point of view we may count the business con­
nection of the solicitor or physician, the merchant or the manufacturer, at the full
equivalent of the income he would lose if he were deprived of it; while yet we
must recognize that its exchange value, i.e. the value which he could get for it by
selling it, is much 1ms than that.
• Comp. Wealth of Nations, Bk. ii. ch. n.




WEALTH

58

n. n>4- economists, we may define pewonal wealth so as to include
all those energies, faculties, and habits which directly con­
Personal
wealth.
tribute 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 measurement1.
The question whether ib 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.
A broad
Confusion would certainly be caused by using the term
term to
include all “ wealth” by itself when we desire to include a person’s
forms of
industrial qualities. “ W ealth” simply should always mean
private
wealth.
external wealth only. But little harm, and some good seems
likely to arise from the occasional use of the phrase “ material
and personal wealth.”
But we
§ 4. But we still have to take account of those material
still have
goods which are common to him with his neighbours; and
to take
account
of the in­ which therefore it would be a needless trouble to mention
dividual’s when comparing his wealth with theirs; though they may be
share
of the
important for some purposes, and especially for comparisons
common
wealth.
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
1 “ The bodies, of men are without doubt the most valuable treasure of a
country,” said Davenant in the seventeenth century; and similar phrases have been
common whenever the trend of political development has made men anxious thnt
the population should increase fast.




THE SOCIAL POINT OF VIEW

59

wholesome drainage; and again better newspapers, books, II,n,5.
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 Coliecti™
which are not in private ownership. And this brings us to goods’
consider wealth from the social, as opposed to the individual
point of view.
§ 5. Let us then look at those elements of the wealth of in a broad
a nation which are commonly ignored when estimating the national
wealth of the individuals composing it. The most obvious wealth
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 account
than all its canals, and perhaps even than all its railroads, ^en^oi
And though the Thames is a free gift of nature (except in so
j>
°ods
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 theorganielements of national wealth; and it is right to do this in society or
some problems relating to national wealth, but not in a ll.the State‘
Scientific knowledge indeed, wherever discovered, soon be­
comes 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



WEALTH

60

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
Debts
to one member of a nation from another. For instance, so
m ber*© far as the English national debt and the bonds of an English.
em
?
10 railway are owned within the nation, we can adopt the
may be
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 b y Englishmen1.
II,

n, 5.

1 The value of a business may be to some extent due to its having a monopoly,
either a complete monopoly, secured perhaps by a patent; or a partial monopoly,
owing to its wares being better known than others which are really equally good;
and in so far as this is the case the business does not add to the real wealth of
the nation. If the monopoly were broken down, the diminution of national wealth
due to the disappearance of its value would generally be more than made up,
partly by the increased value of rival businesses, and partly by the increased
purchasing power of the money representing the wealth of other members of the
community. (It should, however, be added that in some exceptional cases, the
price of a commodity may be lowered in consequence of its production being
monopolized: but such cases are very rare, and may be neglected for the
present.)
Again, business connections and trade reputations add to the national wealth,
only in so far as they bring purchasers into relation with those producers who
will meet their real wants most fully for a given price; or in other words, only
in so far as they increase the extent to which the efforts of the community as a
whole meet the wants of the community as a whole. Nevertheless when we are
estimating national wealth, not directly but indirectly as the aggregate of Indi­
vidual wealth, we must allow for these businesses at their full value, even though
this partly consists of a monopoly which is not used for the public benefit. For
the injury they do to rival producers was allowed for in counting up the values
of the businesses of those rivals; and the injury done to consumers by raising the
price of the produce, which they buy was allowed for in reckoning the purchasing
power of their means, so far as this particular commodity is concerned.
A special case of this is the organization of credit. It increases the efficiency
of production in the country, and thus adds to national wealth. And the power
of obtaining credit is a valuable asset to any individual trader. If, however, any
accident should drive him out of business, the injury to national wealth is some­
thing less than the whole value of that asset; because some part at least of the
business, which he would have done, will now be done by others with the aid of
some part at least of the capital which he would have borrowed.
There are similar difficulties as to how far money is to be reckoned as part of
national wealth; but to tTeat them thoroughly would require us to anticipate a
good deal of the theory of money.




THE SOCIAL POINT OP VIEW

61

Cosmopolitan wealth differs from national wealth much as II, n, 6.
that differs from individual wealth. In reckoning it, debts cosmodue from members of one nation to those of another may ^aith.
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 Tbe^ ^
basis of civil and international law, or at least of custom that
of
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.
§ 6. The notion of Value is intimately connected with Value.
•
•
Pric61
8
that of Wealth; and a little may be said about it here, taken pro“ 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 purchasing
other goods which the possession of that object conveys.” power*
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 com 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



62
II, n, 6.

WEALTH

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 power1.
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.
1 As Cournot points out (Principes Matb.bnatiqv.es de la Thiorie des Rtchesses,
ch. H.), we get the same sort of convenience from assuming the existence of a
standard of uniform purchasing power by which to measure value, that astronomers
do by assuming that there is a “ mean sun” which crosses the meridian at
uniform intervals, so that the clock can keep pace with it; whereas the actual
sun crosses the meridian sometimes before and sometimes after noon as shown
by the clock.




CHAPTER III.
PRODUCTION.

CONSUMPTION.

LABOUR.

NECESSARIES.

§ 1 . M a n cannot create material tilings. In the mental n ,m ,i.
and moral world indeed he may produce new ideas; b u t Ma‘
when he is said to produce material things, he really only
produces utilities; or in other words, his efforts and sacrifices matter,
result in changing the form or arrangement of matter toutffltie/
adapt it better for the satisfaction of wants. All that he Setter,
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 life1.
It is sometimes said that traders do not produce: that The trader*
while the cabinet-maker produces furniture, the furniture- StiUtiesf
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 car­
penter 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
1 Bacon, Novum Organon TV., says “ Ad opera nil aliud potest homo quam ut
corpora naturalia admoveat et amoveat, reliqua nptura intus agit” (quoted by
Bonar, Philosophy and Political Economy, p. 249).




64

PRODUCTION. CONSUMPTION.

LABOUR. NECESSARIES

il,m ,i. 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 mediaeval 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 trade1.
Man can
Consumption may be regarded as negative production,
ashman Just as man can produce only utilities, so he can consume
only'106'
nothing more. He can produce services and other immautM
ties. terial 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 disarrange­
ment 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 time2.” 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.
Consum
ers'
Another distinction to which some prominence has been
prodticers’ given, but which is vague and perhaps not of much practical
use, is that between consumers’ goods (called also consumption
9°od*‘
goods, or again goods o f 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 goods3.
1 Production, in the narrow sense, changes the form and nature of products.
Trade and transport change their external relations.
* Political Economy, p. 54. Senior would like to substitute the verb “ to use**
for the verb “ to consume.”
• Thus flour to be made into a cake when already in the house of the consumer,
is treated by some as a consumers’ good; while not only the flour, but the cake
itself is treated as a producers’ good when in the hand of the confectioner.



PRODUCTIVE LABOUR
I

65

§ 2. All labour is directed towards producing some effect, n, m, 2.
For though some exertions are taken merely for their ownNeariyaii
sake, as when a game is played for amusement, they are not ^meLnse
counted as labour. We may define labour as any exertion productive,
of mind or body undergone partly or wholly with a view to
some good other than the pleasure derived directly from the
work1. 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 enjoyment2; and an almost
unbroken tradition compels us to regard the central notion
Carl Menger ( Volkswirthschaftslehre, ch. I. §2) says bread belongs to the first
order, flour to the second, a flour mill to the third order and so on. It appears
that if a railway train carries people on a pleasure excursion, also some tins of
biscuits, and milling machinery and some machinery that is used for making
milling machinery; then the train is at one and the same time a good of the first,
second, third and fourth orders.
*
This is Jevons’ definition (Theory of Political Economy, ch. w.), except
that he includes only painful exertions. But he himself points out how painful
idleness often is. Most people work more than they would if they considered
only the direct pleasure resulting from the work; but in a healthy state, pleasure
predominates over pain in a great part even of the work that is done for hire.
Of course the definition is elastic; an agricultural labourer working in his
garden in the evening thinks chiefly of the fruit of his labours; a mechanic
returning home after a day of sedentary toil finds positive pleasure in bis garden
work, but he too cares a good deal about the fruit of his labour; while a rich
man working in like manner, though he may take a pride in doing it well, will
probably care little for any pecuniary saving that he effects by it.
1 Thus the Mercantilists who regarded the precious metals, partly because
they were imperishable, as wealth in a fuller sense than anything else, regarded
as unproductive or “ sterile” all labour that was not directed to producing goods
for exportation in exchange for gold and silver. The Physiocrats thouyht
all labour sterile which consumed an equal value to that which it produced;
and regarded the agriculturist as the only productive worker, because his labour
alone (as they thought) left behind it a net surplus of stored-up wealth.' Adam
Smith softened down the Physiocratic definition; but still he considered that
agricultural labour was more productive than any other. His followers discarded
this distinction; but they have generally adhered, though with many differences
in points of detail, to the notion that productive labour is that which tends to
increase accumulated wealth; a notion which is implied rather than stated in the
celebrated chapter of The Wealth of Nations which bears the title, “ On the
Accumulation of Capital, or on Productive and Unproductive Labour.” (Comp.
Travers Twiss, Progress of Political Economy, Sect. VI., and the discussions on
the word Productive in J. S. Mill’s Essays, and in his Principles of Political
Economy.)




v

66

PRODUCTION. CONSUMPTION.

LABOUR. NECESSARIES

ii, ni, 2. of the word as relating to the provision for the wants of the
that future rather than those of the present. Jt is true that all
generally wholesome enjoyments, whether luxurious or not, are legitisaid to be mate ends of action both public and private; and it is true
productive that the enjoyment of luxuries affords an incentive to
provides
exertion, and promotes progress in many ways. But if the
wantsof
efficiency and energy of industry are the same, the true
tbefuture interest of a country is generally advanced by the subordina­
tion the tion of the desire for transient luxuries to the attainment of
present.
^ ose 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.
The work
For instance, many writers even of recent times have
servantTis0 adhered to Adam Smith’s plan of classing domestic servants
eari^urf-' as unPr°ductive. There is doubtless in many large houses
productive, 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 econo­
mist 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.
Provisional
Whenever we use the word Productive by itself, it is t o
of produc- be understood to mean productive o f the means o f production,
U
ve’
and o f durable sources o f enjoyment. But it is a slippery
term, and should not be used where precision is needed1.
1 Among the means of production are included the necessaries of labour but
not ephemeral luxuries; and the maker of ices is thus classed as unproductive
whether he is working for a pastry-cook, or as a private servant in a country house.
But a bricklayer engaged in building a theatre is classed as productive. No doubt
the division between permanent and ephemeral sources of enjoyment is vague



PRODUCTIVE LABOUR AND PRODUCTIVE CONSUMPTION

67

If ever we want to use it in a different sense, we must n , m , 3.
say so: for instance we may speak of labour as 'productive o f
necessaries, etc.
Productive consumption, when employed as a technical Productive
term, is commonly defined as the use of wealth in the e i ^ mp~
t
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 per­
haps 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 pro­
ductive of benefits, many of the most worthy of which do
not directly contribute to the production of material wealth1.
§ 3. This brings us to consider the term Necessaries. NecesIt is common to distinguish necessaries, comforts, and things*1 6
1
luxuries; the first class including all things required to jJjjjj jJJJ*
meet wants which must be satisfied, while the latter consist m be
ust
satisfied*
of things that meet wants of a less urgent character. But But this
here again there is a troublesome ambiguity. When we say Am
biguous,
that a want must be satisfied, what are the consequences
which we have in view if it is not satisfied? D o they
and unsubstantial. But this difficulty exists in the nature of things and cannot be
completely evaded by any device of words. We can speak of an increase of tall
men relatively to short, without deciding whether all those above five feet nine
inches are to be classed as tall, or only those above five feet ten. And we can
speak of the increase of productive labour at the expense of unproductive without
fixing on any rigid, and therefore arbitrary line of division between them. If such
an artificial line is required for any particular purpose, it must be drawn explicitly
for the occasion. But in fact such occasions seldom or never occur.
1 All the distinctions in which the word Productive is used are very thin and
have a certain air of unreality. It would hardly be worth while to introduce them
now. but they have a long history; and it is probably better that they should
dwindle gradually out of use, rather than be suddenly discarded.
The attempt to draw a hard and fast line of distinction where there is no
real discontinuity in nature has often done more mischief, but has perhaps
never led to more quaint results, than in the rigid definitions which have been
sometimes given of this term Productive. Some of them for instance lead to
the conclusion that a singer in an opera is unproductive, that the printer of the
tickets of admission to the opera is productive; while the usher who shows
people to their places is unproductive, unless he happens to sell programmes, and
then he is productive. Senior points out that “ a cook is not said to make roast
meat but to dress it; but he is said to make a pudding. . . . A tailor is said to make
cloth into a coat, a dyer is not said to make undved cloth into dyed cloth. The
change produced by the dyer is perhaps greater than that produced by the tailor,
but the cloth in passing through the tailor’s hands changes its name; in passing
through the dyer’s it does not: the dyer has not produced a new name, nor
consequently a new thing.” Pol. Econ. pp. 51,2.




PRODUCTION. CONSUMPTION. LABOUR. NECESSARIES
II, m, 3.

The term
Neces­
saries is
elliptical.

Necestariu for
existence
and for
efficiency.

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 o l 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 others1. 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 efficiency2.
* Compare Carver, Principles of Political Economy, p. 474; which called m y
attention to Adam Smith’s observation that customary decencics are in efleet
necessaries.
* Thus in the South of England population has increased during the last hundred
years at a fair rate, allowance being made for migration. But the efficiency of
labour, which in earlier times was aa high as that in the North of England, has
sunk relatively to the North; so that the low-waged labour of the South is often
dearer than the more highly-paid labour of the North. We cannot thus say
whether the labourers in the South have been supplied with necessaries, lining
we know in which of these two senses the word is used. They have had the bare
necessaries for existence and the increase of numbers, but apparently they have
not had the necessaries tor efficiency. It must however be remembered *^at the
strongest labourers in the South have constantly migrated to the North; ana
the energies of those in the North have been raised by their larger share of




NECESSARIES FOR EFFICIENCY

69

It may be true that the wages of any industrial class n,m,4.
might have sufficed to maintain a higher efficiency, if they Account
had been spent with perfect wisdom. But every estimate of UJSi56
necessaries must be relative to a given place and time; and of
.
.
.
conditions
unless there be a special interpretation clause to the contrary, of glace
it may be assumed that the wages will be spent with just and oTthe
that amount of wisdom, forethought, and unselfishness, which
of
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, Neeeswhen any increase in their income would in the course o f ,artes'
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 wasteful1.
§ 4. Some detailed study of the necessaries for efficiency niustraof different classes o f workers will have to be made, when we cessaries of
come to inquire into the causes that determine the supply of {ins ed
ab^
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 under­
clothing, 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
economic freedom and of the hope of rising to a higher position. See Mackay
in Charity Organization Journal, Feb. 1891.
1 If we considered an individual of exreptional abilities we should have to take
account of the fact that there is not likely to be the same close correspondence
between the real value of his work for the community and the income which he
earns by it, that there is in the case of an ordinary member of any industrial class.
And we should have to say that all his consumption is strictly productive and
necessary, so long as by cutting off any part of it he would diminish his efficiency
by an amount that is of more real value to him or the rest of the world than he
saved from his consum ption. If a Newton or a Watt could have added a hundredth
part to his efficiency by doubling his personal expenditure, the increase in his
consumption would have been truly productive. As we shall see later on, such a
case is analogous to additional cultivation of rich land that bears a high rent: it
may be profitable though the return to it is less than in proportion to the previous
, outlay.




70

PRODUCTION. CONSUMPTION.

LABOUR. NECESSARIES

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
There is
waste
an inadequate supply of coals. All consumption up to this
when
any one
limit is strictly productive consumption: any stinting of this
consumes
less than is consumption is not economical, but wasteful.
In addition, perhaps, some consumption of alcohol and
necessaries, 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 pro­
vide not only for what is strictly necessary consumption, bu t
include also a certain amount of conventional necessaries1.
The consumption of conventional necessaries b y produc­
tive 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 producers2.
II, iii , 4.

1 Compare the distinction between “ Physical and Political Necessaries” In
James Steuart’a Inquiry, a.d. 1767, II. xxi.
*
Thus a dish of green peas in March, costing perhaps ten shillings, is a
superfluous luxury: but yet it is wholesome food, and does the work perhaps of
three pennyworth of cabbage; or even, since variety undoubtedly conduces to
health, a little more than that. So it may be entered perhaps at the value of
fourpence under Che head of necessaries, and at that of nine shillings and
eigbtpence under that of superfluities; and its consumption may be regarded as
strictly productive to the extent of one-fortieth. In exceptional cases, as for
instance when the peas are given to an invalid, the whole ten shillings may be
well spent, and reproduce their own value.
For the sake of giving definiteness to the ideas it may be well to venture on
estimates of necessaries, rough and random as they must be. Perhaps at present
prices the strict necessaries for an average agricultural family are covered by
fifteen or eighteen shillings a week, the conventional necessaries by about five
shillings more. For the unskilled labourer in the town a few shillings must be
added to the strict necessaries. For the family of the skilled workman living
in a town we may take twenty-five or thirty shillings for strict necessaries, and
ten shillings for conventional necessaries. For a man whose brain has to undergo
great continuous strain the strict necessaries are perhaps two hundred or two
hundred and fifty pounds a year if he is a bachelor: but more than twice as
much if he has an expensive family to educate. His conventional necessaries
depend on the nature of his calling.




CHAPTER IV.
INCOME.

CAPITAL.

a primitive community each family is nearly self-, n, rv, 1.
sufficing, and provides most of its own food and clothing and Income in
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 belong1.
But with the growth of a money economy there has been Correa strong tendency to confine the notion of income to those tomwwyincomings which are in the form of m oney; including tncomf>
“ 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 we have
of the market-place commonly regards a man’s capital C
apital.
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;
§ 1. In

1 This and similar facte hare led some people to suppose not only that some
parts of the modem analysis of distribution and exchange are inapplicable to a
primitive community; which is true: but also that thore are no important parts
of it that are applicable; which is not true. This is a striking instance of the
dangers that arise from allowing ourselves to become the servants of words,
avoiding the hard work that is required for discovering unity of substance under­
lying variety of form.




72

INCOME. 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
Its
most con­
such things as the factory and the business plant of a manu­
spicuous
elements. facturer; 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 modem “ 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.
Net
§ 2 . If a person is engaged in business, he is sure to
income.
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 production1.**
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
II, tv, 2.

1 See a report of a Committee of the British Association, 1878, on the Income Tax.




THE POINT OF VIEW OF ORDINARY BUSINESS

73

income; just as would the dressmaker, gardener or carpenter ir, iv, 2 .
who might be hired to do the work.
In this connection we may introduce a term of which we Proshall have to make frequent use hereafter. The need for it 5Sttn
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 occupa­
tion 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 in
terest of
for, say, a year is expressed as the ratio which that paymentca ita
p L
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 com­
monly 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 P
rofits.
current rate. These gains are called profits.
The command over goods to a given money value, which Fret or
can be applied to any purpose, is often described as “ free” or Spftaf
“ floating” capital1
.
1 Professor Clark has made the suggestion to distinguish between Purt Capital
and Capital Oiods: the former is to correspond to a waterfall which remains
stationary; while Capital Goods are the particular things which enter and leave
the business, as particular drops pass through the wateifalL He would of course
connect Interest with pure capital, not with capital good*.




74
II, rv, 2.

Earnings
of manage­
ment.

Rents and
Quasi­
rents.

INCOME. CAPITAL

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 incon­
venience 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




DEFINITIONS OF TECHNICAL TERMS

75

is yielding five per cent, on its present value. This however II, iv, 3,
raises some difficult questions of principle, which will be
discussed in Book V.
§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 c<m
wants directly; that is, goods which afford a direct sus-T
ayfta™
tenance to the workers, such as food, clothes, house-room, etc.
Auxiliary, or instrumental, capital is so called because it A xiliary
u
consists of all the goods that aid labour in production, m ta
en l
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 docs from
the shelter of his house1
.
We may follow Mill in distinguishing circulating capital C ircu
“ which fulfils the whole of its office in the production inj££d?and
which it is engaged, by a single use,” from fixed capital ca L
?lta
“ which exists in a durable shape and the return to which is
spread over a period of corresponding duration2
.”
§4. The customary point of view of the business man Transition
is that which is most convenient for the economist to adopt S ck
S i
when discussing the production of goods for a market, and
the causes which govern their exchange value. But there is in e,
com
a broader point of view which the business man, no less than
1 See above II. m. 1.
*
Adam Smith’s distinction between fixed and circulating capital turned o n "
the question wliother the goods “ yield a profit without changing masters” or not.
Ricardo made it turn on whether they are “ of slow consumption or require to be
frequently reproduced” ; but he truly remarks that this is “ a division not essential,
and in which the line of demarcation cannot be accurately drawn.” Mill’s modifi­
cation is generally accepted by modern economists.




76

INCOME. CAPITAL

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 b y
a clear indication of the meaning attached to each term in
every doubtful case1.
Let us then during the remainder of this chapter de­
liberately 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,
caim
atte'rs
From this point of view income is regarded as including
theoretical all the benefits which mankind derive at any time from their
nSP
may efforts, in the present and in the past, to turn nature’s resources to their best account. The pleasure derived from the
too great beauties of the rainbow, or the sweet taste of the fresh mornft cost*
f
t
ing 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 B e minimis
II, i t , 4.




1 Compare above II. L 3.

CAPITAL FROM THE SOCIAL POINT OF VIEW

non curat lex. A driver who, not noticing a pool in his way, ii,
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 b y 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 form 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 o f this term is occasion­
ally 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



78

INCOME.

CAPITAL

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.
Thecorre§ 5 . This brings us to consider the use of the term
income and capital from the point of view of inquiries into the material
capital.
wellbeing of society as a whole. Adam Smith said that
a person’s capital is that part o f 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 Incom e:
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
Meaning
treatise of Par^
capital from the social point of view all things other
Ca
than land, which yield income that is generally reckoned as
Hmtfocf suck
common discourse; together with similar things in
social point public ownership, such as government factories: the term
of view.
Lan(j being taken to include all free gifts of nature, such as .
mines, fisheries, etc., which yield income.
Thus it will include all thing8 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
II,

it

,

5.




CAPITAL AND INCOME FROM THE SOCIAL POINT OF VIEW

79

outline to start with, and reserving minor details for later II, iv, 6.
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 o f 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
Income1.
§ 6. Social income may be estimated by adding together Elements
the incomes of the individuals in the society in question, SScon?
whether it be a nation or any other group of persons. [J
We must however not count the same thing twice. I f of being
counted
we have counted a carpet at its full value, we have already twice or
counted the values of the yarn and the labour that were used SmittX
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 clean­
ing 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
1 Just as for practical purposes it is better not to encumber ourselves with
specifying the “ income” of benefit which a man derives from tbe labour of
brushing bis hat in the morninp, so it is better to ignore the element of capital
vested in his brush. But no such consideration arises in a merely abstract
discussion: and therefore the logical simplicity of Jevons’ dictum that com­
modities in the hands of consumers are capital has some advantages and no
disadvantages for mathematical versions of economic doctrines.




80

INCOME. CAPITAL

ii, iv, 7. 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.
National
§ 7 . The money income, or. inflow, 01 wealth gives a
TStter3 measure of a nation’s prosperity, which, untrustworthy as it
oTgenerai
ia 3 ^
some respects better than that afforded by the
prosperity money value of its stock of wealth.
thtfonal
F °r income consists chiefly of commodities in a form to
wealth.
give pleasure directly; while the greater part of national
wealth consists of the means of production, which are o f
service to the nation only in so far as they contribute to pro­
ducing commodities ready for consumption. And further,
though this is a minor point, consumable commodities, being



PROSPECTIVENESS AND PRODUCTIVENESS

81

more portable, have more nearly uniform prices all the world n, it , 8.
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 rich­
ness 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.
§ 8. In purely abstract, and especially in mathematical, Prospectreasoning the terms Capital and Wealth are used as
68
8
synonymous almost perforce, except that "la n d ” proper £™fuctlve*
may for some purposes be omitted from Capital. But there controUiie
is a clear tradition that we should speak of Capital when for capital
considering things as agents of production; and that w e^ppiye
should speak of Wealth when considering them as resultso!lt*
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.
A t 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



INCOME. CAPITAL

82

ii,

it

, 8.

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 com­
mitting 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 it1
.
1 A short- forecast of some of this work may be given here. It will be seen
how Capital needs to be considered in regard loih to the embodied aggregate of the
benefits derivable from its ir e, and to the embodied aggregate of the costs of the
efforts and of the saving needed for its production: and it will be shown how these
two aggregates tend to balance. Thus in V. iv., which may be taken as in some
sense a continuation of the present chapter, they will be seen balancing directly
in the forecasts of an individual Robinson Crusoe; and—for the greater part at
least—in terms of money in the forecasts of a modem business man. In either
case both sides of the account must be referred to the same date of time; those
that come after that date being “ discounted” back to it; and those that come
before being “ accumulated” up to it.
A similar balancing in regard to the benefits and the costs of capital at large
will be found to be a chief corner stone of social economy: although it is true
that in consequence of the unequal distribution of wealth, accounts cannot be
made up from the social point of view with that clearness of outline that is attain­
able in the case of an individual whether a Robinson Crusoe, or a modem business
man.
In every part of our discussion of the causes that govern the accumulation and
the application of productive resources, it will appear that there is no universal rule
that the use of roundabout methods of production is more efficient than direct
methods; that there are some conditions under which the investment of effort
in obtaining machinery and in making costly provision against future wants is
economical in the long run, and others in which it is not: and that capital is
accumulated in proportion to the prospectiveness of man on the one hand, and
on the other to the absorption of capital by those roundabout methods, which
are sufficiently productive to remunerate their adoption. See especially IV. vn. 8*
V. iv.; VI. I. 8; and VI. n . 1.
The broader forces, that govern the production of capital in general and its con­
tribution to the national income, are discussed in IV. vn. i x . - x i . : the imperfect
adjustments of the money measures of benefits and costs to their real volume are
discussed chiefly in III. m .-v.; IV. vn.; and VI. ra.-vm.; the resulting share in
the total product of labour and capital, aided by natural resources, which goes
to capital, is discussed chiefly in VI. J. n. vi.-vm. xi. in .
Some of the chief incidents in the history of the definitions of Capital ate
given in Appendix E.




BOOK III.
ON WANTS AND THEIR SATISFACTION.

CHAPTER I.
IN TR O D U C TO R Y.

§1. T h e older definitions of economics described it as iii,i, l.
the science which is concerned with the production, the T e
h
distribution, the exchange, and the consumption of wealth, ^hichthe
Later experience has shown that the problems of distribution | ^ n
t
and exchange are so closely connected, that it is doubtful
whether anything is to be gained by the attempt to keep remainder
them separate. There is however a good deal of general volume,
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.



84

INTRODUCTORY

in, i, a. 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.
Several
§ 2. Until recently the subject of demand or consumpb g g tion has been somewhat neglected. For important as is the
rin in
p in inquiry how to turn our resources to the best account, it
rom study of
* n(yk one wkicl1 leads itself, so far as the expenditure of
s
consump- 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 dis­
cussions.
The first
The first of these is the growing belief that harm was
cause.
dorie 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.
T esecon
h
d
Secondly, the growth of exact habits of thought in
ca 8 *
ue
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 mathe­
matical language and mathematical habits of thought. It
is indeed doubtful whether much has been gained by the
use of complex mathematical formulae. 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.



THE POSITION OP THE STUDY OP WANTS IN ECONOMICS

85

This has in its turn compelled a more careful analysis of in, i, 2
.
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 he 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 con­
sumption 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 The third
to the question whether our increasing wealth may not be ca s #
ue
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 We will
of human wants, considered in their relation to human efforts iT d of
stu y1
Mid activities. For the progressive nature of man is one reia to
tforT
whole. It is only temporarily and provisionally that we can efforts,
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.




CHAPTER II.
WANTS IN RELATION TO ACTIVITIES.

in, n, 1.

§1. H uman wants and desires are countless in number

and very various in kind: but they are generally limited and
th sa a capable of being satisfied. The uncivilized man indeed has
T v go
are few;
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
but civilibrings
preferences for choice morsels, neither of them cares much
for variety for its own sake. As, however, man rises in

The

variety

its own
sake.

for

civilization, as his mind becomes developed, and even his
.

1

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.




THE DESIRE FOR DISTINCTION

87

As a man’s riches increase, his food and drink become m,n,2.
more various and costly; but his appetite is limited by Man’s
nature, and when his expenditure on food is extravagant it SSSkT
is more often to gratify the desires of hospitality and display “ U ited
m >
than to indulge his own senses.
This brings us to remark with Senior that “ Strong as is but not his
the desire for variety, it is weak compared with the desire d ctf°r
istin
for distinction: a feeling which if we consider its universality,tion;
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.
§2. That need for dress which is the result of n a t u r a l which is
•
&chicf
causes varies with the climate and the season of year, and a source of
little with the nature of a person’s occupations. But in dress fora»U
y
conventional wants overshadow those which are natural.d
ress*
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 ex­
tending 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



WANTS IN RELATION TO ACTIVITIES

as
III, n, 3, 4.

House
room.

Wants

resulting
from
activities.

as compared with what it was in Europe not long agor 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 fashion1
.
§ 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 urgent2
.
. And therefore relatively large and well-appointed house
room is, even in the lowest social ranks, at once a “ necessary
for efficiency3 and the most convenient and obvious way ol
,”
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.
§ 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
1 A woman may display wealth, but she may not display only her wealth, by
her dress; or else she defeats her ends. She must also suggest some distinction
of character as well as of wealth; for though her dress may owe more to her dress­
maker than to herself, yet there is a traditional assumption that, being loss busy
than man with external affairs, she can give more time to taking thought as to her
dress. Even under the sway of modem fashions, to be “ well dressed” —not
“ expensively dressed”—is a reasonable minor aim for those who desire to be
distinguished for their faculties and abilities; and this will be still more the
if the evil dominion of the wanton vagaries of fashion should pass away. For
to arrange costumes beautiful in themselves, various and well-adapted to their
purposes, is an object worthy of high endeavour; it belongs to the same flaw
though not to the same rank in that class, as the painting of a good picture.
* It is true that many active-minded working men prefer cramped lodgings In
a town to a roomy cottage in the country; but that is because they have a strong
taste for those activities for which a country life offers little scope.
• See Bbok II. ch. m. |3.




NEW ACTIVITIES GIVE RISE TO NEW WANTS

89

art for their own sake, but to the rapidly increasing m,n,4.
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
craving1.
For indeed the desire for excellence for its own sake, is Gradations
almost as wide in its range as the lower desire for distinction.
for
Just as the desire for distinction graduates down from the exceU
ence*
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 a
in the earliest stages of his development that give rise tOgtatenew
his activities, yet afterwards each new step upwards is to be
regarded as the development of new activities giving rise to ^®^ay
new wants, rather than of new wants giving rise to new wants,
activities.
We see this clearly if we look away from healthy con­
ditions of life, where new activities are constantly being
1 As a minor point it may be noticed that those drinks which stimulate the
mental activities are largely displacing those which merely gratify the senses.
The consumption of tea is increasing very fast, while that of alcohol is stationary;
and there is in all ranks of society a diminishing demand for the grosser and more
immediately stupefying forms of alcohoL




WANTS IN RELATION TO ACTIVITIES

90
hi , n,4.

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 Test; 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.
The
It is not true therefore that “ the Theory of Consumption
wantJcan is the scientific basis of economics1,” For much that is of
supremacy °kie* interest in the science of wants, is borrowed from the
theory of science
efforts and activities. These two supplement
efforts.
one another; either is incomplete without the other. But
if either, more than the other, may claim to be the inter­
preter 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 man2,” 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

/

1 This doctrine is laid down by Banfield, and adopted by Jevons as the key of
his position. It is unfortunate that here as elsewhere Jevons’ delight in stating
bis case strongly has led him to a conclusion, which not only is inaccurate,
but does mischief by implying that the older economists were more at fault
than they really were. Banfield says “ the first proposition of the theory of consumption is that the satisfaction of every lower want in the scale creates a desire
of a higher character.” And if this were true, the above doctrine, which he bases
on it, would be truQ also. But, as Jevons points out (Theory, 2nd Ed. p. 59), it is
not true: and he substitutes for it the statement that the satisfaction of a lower
want permits a higher want to manifest itself. That is a true and indeed an
identical proposition: but it affords no support to the claims of the Theory of
Consumption to supremacy.

* Political Economy, ch. n




PROGRESSIVE ACTIVITIES

economics, it cannot find its conclusion there, but must hi ,
extend far beyond1.
~
1 The formal classification of Wants is a task not without interest; but it is
not needed for our purposes. The basis of most modem work in this direction
is to be found in Hermann’s Staatswirthschaftliche Uniersuchungen, Ch. n., where
wants are classified as “ absolute and relative, higher and lower, urgent and capable
of postponement, positive and negative, direct and indirect, eeneral and particular,
constant and interrupted, permanent and temporary, ordinary and extraordinary,
present and future, individual and collective, private and public.”
Some analysis of wants and desires is to be found in the great majority of
French and other Continental treatises on economics even of the last generation;
but the rigid boundary which English writers have ascribed to their science
has excluded such discussions. And it is a characteristic fact that there is no
allusion to them in Bentham’s Manual of Political Economy, although his profound
analysis of them in the Principles o f Morals and legislation and in the Table o f
the Springs of Hwman Action has exercised a wide-spread influence. Hermann
had studied Bentham; and on the other hand Banfield, whose lectures were
perhaps the first ever given in an English University that owed much directly to
German economic thought, acknowledges special obligations to Hermann. In
England the way was prepared for Jevons’ excellent work on the theory
of wants, by Bentham himself; by Senior, whose short remarks on the subject
are pregnant with far-reaching hints; by Banfield, and by the Australian Hearn.
Heam’s Plutology or Theory o f the Efforts to satisfy Human Wants is at once
simple and profound: it affords an admirable example of tbe way in which
detailed analysis may be applied to afford a training of a very high order for the
young, and to give them an intelligent acquaintance with the economic conditions
of life, without forcing upon them any particular solution of those more difficult
problems on which they are not yet able to form an independent judgment. At
about the same time as Jevons’ Theory appeared, Carl Menger gave a great impetus
to the subtle and interesting studies of wants and utilities by the Austrian school of
economists: they had already been initiated by von Thiinen, as is indicated in the
Preface to this Volume.




CHAPTER III.
GRADATIONS OF CONSUMERS’ DEMAND.

in, m, l.
§ 1. W h e n a trader or a manufacturer buys anything to
The
be used in production, or be sold again, his demand is based
demand™’ on
anticipations of the profits which he can derive from it.
traders* These profits depend at any time on speculative risks and on
demand,
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 and
Utility is taken to be correlative to Desire or W ant,
used as”
It has been already argued that desires cannot be measured
term
s^tive directly, but only indirectly by the outward phenomena to
ethical or
they give rise: and that in those cases with which
prudential economics is chiefly concerned the measure is found in the
tfons.
price which a person is willing to pay for the fulfilment or
satisfaction of his desire. He may have desires and aspira­
tions 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 antici­
pated when the purchase was made1.
1 It cannot be too much insisted that to measure directly, or per aet either
desires or the satisfaction which results from their fulfilment is impossible, if
not inconceivable. If we could, we should hare two accounts to make up, one of
desires, and the other of realized satisfactions. And the two might differ con­
siderably. For, to say nothing of higher aspirations, some of those desires with
which economics is chiefly concerned, and especially those connected with ftmnlq.
tioo, are impulsive; many result from the force of habit; some are morbid and




MEASUREMENT OF GRADATIONS OF DEMAND

93

There is an endless variety of wants, but there is a hi, m, i.
limit to each separate want. This familiar and fundamental The fow
tendency of human nature may be stated in the law o f^ J ^ fth
satiable wards or o f diminishing •utility thus:— The total
utility of a thing to anyone (that is, the total pleasure Total
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 Marginal
on the margin of doubt whether it is worth his while t o purchase'
incur the outlay required to obtain it. And the utility of
his marginal purchase may be called the marginal utility of Marginal
the thing to him. Or, if instead of buying it, he makes the utllity'
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 has1.
lead only to hurt; and many are baaed on expectations that are never fulfilled.

(See above I. n. 3, 4.) Of course many satisfactions are not common pleasures,
but belong to the development of a man’s higher nature, or to use a good old
word, to his beatification', and some may even partly result from self-abnegation.
(See I. u. 1.) The two direct measurements then might differ. But as neither
of them is possible, we fall back on the measurement which economics supplies,
of the motive or moving force to action: and we make it serve, with all its
faults, both for the desires which prompt activities and for the satisfactions
that result from them. (Compare “ Some remarks on Utility” by Prof. Pigou
in the Economic Journal for March, 1903.)
1 See Note I. in the Mathematical Appendix at the end of the Volume. This
law holds a priority ot position to the law o f diminishing return from land;
which however has the priority in time; since it was the first to be subjected to a
rigid analysis of a semi-mathematical character. And if by anticipation we borrow
some of its terms, we may say that the return of pleasure which a person gets
from each additional dose of a commodity diminishes till at last a margin is
reached at which it is no longer worth his while to acquire any more of it.
The term marginal utility (Grenz-nutz) was first used in this connection by the
Austrian Wieser. It has been adopted by Prof. Wicksteed. It corresponds to the
term Final used by Jevons, to whom Wieser makes his acknowledgments in the
Preface (p. xxiii. of the English edition). His list of anticipators of his doctrine is
headed by Gossen, 1854.




GRADATIONS OF CONSUMERS’ DEMAND

94

in, in, 2.
There is however an implicit condition in this law which
it is
should be made clear. It is that we do not suppose time to
thauhe he allowed for any alteration in the character or tastes of the
consumer’s man himself. It is therefore no exception to the law that
iaunthe more good music a man hears, the stronger is his taste
changed.
£o r
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 tim e;
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 it1.
Transia-^
§ 2 . Now let us translate this law of diminishing
law into
utility into terms of price. Let us take an illustration from
jfrice? °f 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 25. per lb. A person might be willing to give 10s. for
a single pound once a year rather than go without it alto­
gether; 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
1 It may be noticed here, though the fact is of but little practical importance,
that a small quantity of a commodity may be insufficient to meet a certain special
want; and then there will be a more than proportionate increase of pleasure when
the consumer gets enough of it to enable him to attain the desired end. Thus,
for instance, anyone would derive less pleasure in proportion from ten pieces of
wall paper than from twelve, if the latter would, and the former would not, cover
the whole of the walls of his room. Or again a very short concert or a holiday
may fail of its purpose of soothing and recreating: and one of double length
might be of more than double total utility. This case corresponds to the fact,
which we shall have to study in connection with the tendency to diminishing
return, that the capital and labour already applied to any piece of land may be 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; and in the fact that an improvement in the arts of agriculture may resist
that tendency, we shall find an analogy to the condition just mentioned in the text
as implied in the law of diminishing utility.




DEMAND OF AN INDIVIDUAL

95

be worth an extra 2s. to him. That ia, 2s. a pound measures ill, ui, 3.
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 ^ a ^ al
rg
for any pound be called his demand price, then 2s. is his price,
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. A t 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.
§ 3. A greater utility will be required to induce him to The
buy a thing if he is poor than if he is rich. We have seen utility of
how the clerk with £100 a year will walk to business in a ^tcrfor
heavier rain than the clerk with £300 a year1. But although
P°?r
,
i
/*
i
•
- . . 1
than the
the utility, or the benefit, that is measured in the poorer rich,
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.




1 See L ix. 2.

GRADATIONS OF CONSUMERS’ DEMAND

96

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 benefit1.
A more
§ 4 . To obtain complete knowledge of demand for
definite
expression anything, we should have to ascertain how much of it he
for the
would be willing to purchase at each of the prices at which
demand
of an
it is likely to be offered; and the circumstance of his demand
individual.
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

III, in, 4.

6 lbs. at
7
„
8
„
9
„

50d. per lb.
40
„
33
„
28
„

10 lbs. at
11
„
12
„
13
„

24d.
21
19
17

per lb.
„
„
„

If corresponding prices were filled in for all interme­
diate amounts we should have an exact statement of his
demand2. We cannot express a person’s demand for a thing
1 See Note II. in the Mathematical Appendix.
*
Such a demand schedule may be translated, on a plan now coining into
familiar use, into a curve that may be called bis demand curve. Let Ox and O y
be drawn the one horizontally, the other vertically. Let an Inch measured
Ox represent 10 lbs. of tea, and an inch measured along Oy represent 40&

fortieths of
tenths of
an inch.
an inch.
take 0«»l«=6, and draw mlpl=50
Om,=7 >
„
40
»
Omt=8 J
„ mtj>,«*33
*
Omt—9 9
„ *»«?«=28
9
Omt= 10 n
„ msp,=24
0 m, =11
„
i«=21
„ m,p7=19
% i7=12
13 >
„
»

°

seisllsI

*

m x being on Ox and m,p, being drawn vertically from «*,; and so lor the others.




DEMAND OF AN INDIVIDUAL

97

by the “ amount he is willing to buy,’ * or by the “ intensity h i , m , 4.
ol his eagerness to buy a certain amount,” without reference The meanto the prices at which he would buy that amount and other “ m *the
amounts. We can represent it exactly only by lists of the
°f
prices at which he is willing to buy different amounts1.
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 prices2.
Then p,p t . . . . p H are points on his demand curve for tea; or as we may say
demand points. If we could find demand points in the same manner for every
possible quantity of tea, we should get the whole continuous curve D D " as shown
in the figure. This account of the demand schedule and curve is provisional;
several difficulties connected with it are deferred to chapter v.
1
Thus Mill says that we must “ mean by the word demand, the quantity
demanded, and remember that this is not a fixed quantity, but in general varies
according to the value.” ( Principles, III. n. 4.) This account is scientific in
substance; but it is not clearly expressed and it has been much misunderstood.
Caimes prefers to represent “ demand as the desire for commodities and services,
seeking its end by an offer of general purchasing power, and supply as the
desire for general purchasing power, seeking its end by an offer of specific com­
modities or services.” He does this in order that he may be able to speak of a
ratio, or equality, of demand and supply. But the quantities of two desires on
the part of two different persons cannot be compared directly; their measures may
be compared, but not they themselves. And in fact Caimes is himself driven to
speak of supply as “ limited by the quantity of specific commodities offered for
sale, and demand by the quantity of purchasing power offered for their purchase.”
But sellers have not a fixed quantity of commodities which they offer for sale
unconditionally at whatever price they can get: buyers have not a fixed quantity
of purchasing power which they are ready to'spend on the specific commodities,
however much they pay for them. Account must then be taken in either case
of the relation between quantity and price, in order to complete Caimes* account,
and when this is done it L brought back to the lines followed by Mill. He
s
says, indeed, that “ Demand, as defined by Mill, is to be understood as measured,
not, as my definition would require, by the quantity of purchasing power offered
in support of the desire for commodities, but by the quantity of commodities for
which such purchasing power is offered.” It is true that there is a great difference
between the statements, “ I will buy twelve eggs,” and “ I will buy a shilling’s
worth of eggs.” But there is no substantive difference between the statement,
“ I will buy twelve eggs at a penny each, but only six at three halfpence each,”
an.l the statement, “ I will spend a shilling on eggs at a penny each, but if they
cost three halfpence each I will spend ninepence on them.” But while Caimes*
account when completed becomes substantially the same as Mill’s, its present form
is even more misleading. (See an article by the present writer on ilUTs Theory
of Value in the Fortnightly Review for April, 1876.)
* We may sometimes find it convenient to speak of this as a raising o f hi»




98

GRADATIONS OF CONSUMERS’ DEMAND

ill, nr, 5.

§ 5 . So far we have looked at the demand of a single
individual. And in the particular case of such a thing as tea,
of the demand of a single person is fairly representative of the
a group of general demand of a whole market: for the demand for tea
m
arket* is a constant one; and, since it can be purchased in small
The dequantities, every variation in its price is likely to affect the
ihTp&rt amount which he will buy. But even among those things
individual which are in constant use, there are many for which the
things”0 demand on the part of any single individual cannot vary
is discon- continuously with every small change in price, but can move
tmuous.
onjy by great leaps. For instance, a small fall in the price of

Transition

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 inci­
dents in the lives of individuals. He studies rather “ the
course of action that may be expected under certain condi­
tions 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.
But the
In large markets, then— where rich and poor, old and
d K n d of young, men and women, persons of all varieties of tastes,
£«sons
temperaments and occupations are mingled together,— the
shows a fail peculiarities in the wants of individuals will compensate
price for
one another in a comparatively regular gradation of total
clSshi demand. Every fall, however slight in the price of a comquantity. modity 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
demand schedule. Geometrically it is represented by raising his demau«I
or, what comes to the same thing, moving it to the right, with perhaps
modification of its shape.




TRANSITION TO MARKET DEMAND

99

uninjured by it. And therefore if we had the requisite know- ill, m, 5
.
ledge, 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 pur­
chasers 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 pound1.
There is then one general law o f demand:— The greater the The
amount to be sold, the smaller must be the price at which dmlid.
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 b y a
twentieth or by a quarter, or it may double them. But as the
numbers in the left-hand column of the demand schedule in­
crease, those in the right-hand column will always diminish4.
1 The demand is represented by the same curve as before, only an inch
measured along Ox now represents ten million pounds instead of ten pounds. And
* formal definition of the demand curve for a
market may be given thus:—The demand curve for
any commodity in a market during any given unit of
time is the locus of demand points for it. That is to
say, it is a curve such that if from any point P on it,
a straight line PM be drawn perpendicular to Ox,
PM represents the price at which purchasers will be
forthcoming for an amount of the commodity repre­
sented by OM.
2 That is, if a point moves along the curve away
from Oy it will constantly approach Ox. Therefore
if a straight line PT be drawn touching the curve at P and meeting Ox in T, the
angle PTx is an obtuse angle. It will be found convenient to have a short way of
expressing this fact; which may be done by saying that PT is inclined negatively.
Thus the one universal rule to which the demand curve conforms is that it is
indined negatively throughout the whole of its length.
It will of course be understood that “ the law of demand” does not apply to the
demand in a campaign between groups of speculators. A group, which desires to un­
load a great quantity of a thing on to the market, often begins by buying some of it
openly. When it has thus raised the price of the thing, it arranges to sell a great deal
quietly, and through unaccustomed channels. See an article by Professor Taussig in
the Quarterly Journal of Economics (May, 1921, p. 402).




GRADATIONS OF CONSUMERS’ DEMAND

100
in, m, c.

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.
The in§ 6. The demand prices in our list are those at which
dem an d of various quantities of a thing can be sold in a market during
ofVnyai*1 a given time and under given conditions. If the conditions
modity
vai7 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 b y
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
variety1.
Relation
Our next step will be to consider the general character of
following demand in the cases of some important commodities ready
preceding f° r immediate consumption. We shall thus be c o n t in u in g
the inquiry made in the preceding chapter as to the
chapter,
1 It is even conceivable, though not probable, that a simultaneous and pro­
portionate fall in the price of all teas may diminish the demand for some particular
kind of it; if it happens that those whom the increased cheapness of tea leads to
substitute a superior kind for it are more numerous than those who an led to
it in the place of an inferior kind. The question where the lines of division
between different commodities should be drawn must be settled by convenience
of the particular discussion. For some purposes it may be best to regard Chinese
and Indian teas, or even Souchong and Pekoe teas, as different commodities; and
to have a separate demand schedule for each of them. While for other purposes
it may be best to group together commodities as distinct as beef and mutton, or
. even as tea and cofTee, and to have a single list to represent the demand for
the two combined; but in such a case of course some convention must be made
as to the number of ounces of tea which are taken as equivalent to a pound of
coffee.
Again, a commodity may be simultaneously demanded for several uses (for
instance there may be a “ composite demand” for leather for making shoes
portmanteaus); the demand for a thing may be conditional on there being a supply
of some other thing without which it would not be of much service (thus there
may be a “ joint demand” fd> raw cotton and cotton-spinners’ labour). Ap»tn
the demand for a commodity on the part of dealers who buy it only with the
purpose of selling it again, though governed by the demand of the ultimate con­
sumers in the background, has some peculiarities of its own. But all such points
may best be discussed at a later staga.
*




MARKET DEMAND

101

variety and satiability of wants; but we shall be treating hi , m, 6.
it from a rather different point of view, viz. that of pricestatistics1.
1 A groat change in the manner of economic thought has been brought about
during the present generation by the general adoption of semi-mathematical
language for expressing the relation between small increments of a commodity on
the one hand, and on the other hand small increments in the aggregate price that
will be paid for it: and by formally describing these small increments of price
as measuring corresponding small increments of pleasure. The former, and by
far the more important, step was taken by Cournot (Recherche* sur Its Principes
MathSmatigues de la Thiorie des Richesses, 1838); the latter by Dupuit (D« la
Mesure d’utxliti des travaux publics in the Annales des Ponts et Chaussfes, 1844),
and by Gossen (Entwickelung der Gesetze des mmschlichcn Verlcehrs, 1854). But
their work was forgotten; part of it was done over again, developed and published
almost simultaneously by Jevons and by Carl Menger in 1871, and by Walras
a little later. Jevons almost at once arrested public attention by his brilliant
luddity and interesting style. He applied the new name final utility so in­
geniously as to, enable people who knew nothing of mathematical science to get
clear ideas of the general relations between the small increments of two things
that are gradually changing in causal conncclion with one another. His success
was aided even by Lis faults. For under the honest belief that Ricardo and his
followers had rendered their account of the causes that determine value hopelessly
wrong by omitting to lay stress on the law of satiable wants, he led many to think
he was correcting great errors; whereas he was really only adding very important
explanations. He did excellent work in insisting on a fact which is none the less
important, because liis predecessors, and even Cournot, thought it too obvious to
be explicitly mentioned, viz. that the diminution in the amount of a thing de­
manded in a market indicates a diminution in the intensity of the desire for it on
the part of individual consumers, whose wants are becoming satiated. But he has
led many of his readers into a confusion between the provinces of Hedonics and
Economics, by exaggerating the applications of his favourite phrases, and speaking
(Theory, 2nd Edn. p. 105) without qualification of the price of a thing as measuring
its final utility not only to an individual, which it can do, but also to “ a trading
body,” which it cannot do. These points are developed later on in Appendix I.
on Ricardo’s Theory of value. It should be added that Prof. Seligman has shown
(Economic Journal, 1903, pp. 356-363) that a long-forgotten Lecture, delivered
by Prof. W. F. Lloyd at Oxford in 1833, anticipated many of the central ideas of
the present doctrine of utility.
An excellent bibliography of Mathematical Economics is given by Prof. Fisher
as mi appendix to Bacon’s translation of Cournot’s Researches, to which the reader
may be referred for a more detailed account of the earlier mathematical writings
•n economics, as well as of those by Edgeworth, Pareto, Wicksteed, Auspitz,
Lieben and others. Pantaleoni’s Pure Economics, amid much excellent matter,
makes generally accessible for the first time the profoundly original and vigorous,
if somewhat aLotract, reasonings of Gossen.




CHAPTER IV.
THE ELASTICITY OF WANTS.
[I I , IV, 1.

Definition
of tknHcity of
demand.

§ 1 . W e 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. I f
it is Blow 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 com ­
paratively 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 m ay
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 16i. to 15<Z. per lb. of tea would muck
increase his purchases, then a rise in price from 15<Z. to 16<2.
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) o f 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 price1.
1
We may say that the elasticity of demand is one, if a small fall in price will
cause an equal proportionate increase in the amount
demanded: or as we may say roughly, if a fall of
one per cent, in price will increase the sales by one
per cent.; that it is two or a half, if a fall of one per
cent, in price makes an increase of two or one half
per cent, respectively in the amount demanded;
and so on. (This statement is rough; because 98
does not bear exactly the same proportion to 100
that 100 does to 102.) The elasticity of demand can
be best traced in the demand curve with the aid of
the following rule. Let a straight line touching the




ELASTICITY OR RESPONSIVENESS OF MARKET DEMAND

103

§ 2 . The price which is so high relatively to the poor ill, i t , 2.
man as to be almost prohibitive, may be scarcely felt by theThegenerich; the poor man, for instance, never tastes wine, but'the Nation
very rich man may drink as much of it as he has a fancy
for, without giving himself a thought of its cost. W e sh a ll of demand,
therefore get the clearest notion of the law of the elasticity consequent
of demand by considering one class of society at a time.
Of course there are many degrees of richness among th eJ^ J^
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 com­
modities 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
curve at any point P meet Ox in T and Oy in t, then the measure of the elasticity
at the point P is the ratio of PT to Pt.
If PT were twice Pt, a fall of 1 per cent, in price would cause an increase of
2 per cent., in the amount demanded; the elasticity of demand would be two.
If PT were one-third of Pt, a fall of 1 per cent, in price would cause an inrrftft.se
erf | per cent, in the amount demanded; the elasticity of demand would be onethird; and so on. Another way of looking at the same result is this:—the elasticity
at the point P is measured by the ratio of PT to Pt, that is of MT to MO [PM being
drawn perpendicular to Om); and therefore the elasticity is equal to one when the
angle TPM is equal to the angle OPM; and it always increases when the angle TPM
increases relatively to the angle OPM, and vice versd. See Note III. in the Mathe­
matical Appendix.




104

THE ELASTICITY OF WANTS

iii, it, 2. 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 reached1
.
1 Let ua illustrate by the case of the demand for, say, green peas in a town in
which all vegetables are
Fig. (4).
bought and sold in one
market. Early in the sea­
Oml= >02 in. M jp ^ l '2 in.
son perhaps 100 lb. a day
Omx— *1
*6
will be brought to market
0m**= *2
*4
and sold at 1$. per lb., later
Owj= l '
Af4
pt= -2
on 500 lb. will be brought
Om,« 2-15
and sold at 6 d., later on
1.000 lb. at 4d., later still
5.000 at 2 d., and later still
10.000 at l\d. Thus de­
Pa
mand is represented in fig.
P
$
(4), an inch along Ox repre­
___
senting 5,000 lbs. and an o u '— ----------------------1 _______________ ____ 9
—
inch along Oy representEs E
m»
ing lOd. Then a curve through ptf+.-Pt, found as shown above, will be the total
demand curve. But this total demand will be made up of the demands of the rich,
the middle class and the poor. The amounts that they will severally demand may
perhaps be represented by the following schedules:—
At price in
pence per lb.
12
6
i
. 2
1*
Fig. (*).

rich
100
300
500
800
1,000

Number of lbs. bought by
middle class
0
200
400
2,500
4,000

rig. (6).

poor
0
0
100
1,700
5,000

Total
100
500
1,000
5,000
10,000

Fig* (7).

O H

These schedules are translated into curves figs. (5), (ft), (7), showing the demands
of the rich, the middle class and the poor represented on the same scale aa fig. (4).
Thus for instance AE, BK and CL each represents a price of 2d. and is *2 inches
in length; 0£f=-16 in. representing 800 lb., OK**-5 in. representing 2,900 lb.
and OL**-34 in. representing 1,700 lb., while OH+OK+OL*ml inch, i.e.»Owi4
in
(4) as they should do. This may serve as an example of the way in which




ILLUSTRATIONS

105

§ 3. There are some things the current prices of which III, tv, 3
.
in this country ar& very low relatively even to the poorer iiiustraclasses; such are for instance salt, and many kinds of savours
and flavours, and also cheap medicines. It is doubtful *f°mto
®
demand
whether any fall in price would induce a considerable in- tot^&
rcrease in the consumption of these.
oommo*
The current prices of meat, milk and butter, wool,d a
itie *
tobacco, imported fruits, and of ordinary medical attend­
ance, 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 elastic1
.
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
several partial demand curves, drawn to the same scale, can be superimposed
horizontally on one another to make the total demand curve representing the
aggregate of the partial demand.
1 We must however remember that the character of the demand schedule for
any commodity depends in a great measure on whether the prices of its rivals are
taken to be fixed or to alter with it. If we separated the demand for beef from
that for mutton, and supposed the price of mutton to be held fixed while that for
beef was raised, then the demand for beef would become extremely elastic. For
any slight fall in the price of beef would cause it to be used largely in the place of
mutton and thus lead to a very great increase of its consumption: while on the
other hand even a small rise in price would cause many people to eat mutton
to the almost entire exclusion of beef. But the demand schedule for all Unrig of
fresh meat taken together, their prices being supposed to retain always about tbs
snme relation to one another, and to be not very different from thoso now prevail­
ing in England, shows only a moderate elasticity. And mmiVr remarks apply to
beet-root and cane-sugar. Compare the note on p. 100.




THE ELASTICITY OF WANTS

106
III,

it

,

4.

The de­
mand for
neces­
saries.

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 insatiable1
.
§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 con­
sumed 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 cer­
tainty, 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
respectively2 Much greater variations in prices indeed than
.
this have not been uncommon. Thus wheat sold in London
1 See above ch. n. § 1. In April 1894, for instance, six plovers’ eggs, the first
of the season, were sold in London at 10*. 6d each. The following day there were
L
more, and the price fell to 5a.; the next day to 3*. each; and a week later to id.
*
This estimate is commonly attributed to Gregory King. Its bearing on the
law of demand is admirably discussed by Lord Lauderdale (Inquiry, pp. 51-3).
It is represented in fig. (8) by the curve DD’ ,
the point A corresponding to the ordinary
price. If we take account of the fact that
where the price of wheat is very low, it may
be used, as it was for instance in 1834, for
feeding cattle and sheep and pigs and for
brewing and distilling, the lower part of the
curve would take a shape somewhat like that
of the dotted line in the figure. And if we
assume that when the price is very high,
cheaper substitutes can be got for it, the
upper part of the curve would take a shape
similar to that of the upper dotted line.
o
e




CAUSES OF VARYING ELASTICITY

107

for ten shillings a bushel in 1335, but in the following year it h i , iv, 4.
sold for ten pence1.
There may be even more violent changes than this in Commothe price of a thing which is not necessary, if it is perishable part of the
and the demand for it is inelastic: thus fish may be very tfoI
nafip"
dear one day, and sold for manure two or three days later. necessary.
whlch “
»7
J
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. A t 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 influence
on sensibility: some people care little for a refined flavour biiity and
in their wine provided they can get plenty of it: othersHesand
crave a high quality, but are easily satiated. In the ordinary distastesworking 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
1 Chronicon Predosum ( a . d . 1745) says that the price of wheat in London was
as low as 2 s. a quarter in 1336: and that at Leicester it sold at 40j. on a Saturday,
and at 14*. on the following Friday.
*




THE ELASTICITY OF WANTS

108

acquired distastes as well m 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.
Influence
Generally speaking those things have the most elastic
of variety
demand, which are capable of being applied to many different
of uses.
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 limit1.

III, it , 4.

1 Thus the general demand of any one person for such a thing as water
is the aggregate (or compound, see V. t l 3) of his demand for it for each use;
in the same way as the demand of a group of peoj.% of different orders of
wealth for a commodity, which is serviceable in only one use, is the aggregate of
the demands of each member of the group. Again, just as the demand of the rich
for peas is considerable even at a very high price, but loses all elasticity at a price
that is still high relatively to the consumption of the poor; so the demand of the
individual for water to drink is considerable even at a very high price, but loses
all elasticity at a price that is still high relatively to his demand for it for the
purpose of cleaning up the house. And as the aggregate of a number of demands
on the part of different classes of people for peas retains elasticity over a larger
range of price than will that of any one individual, so the demand of an individual
for water for many uses retains elasticity over a larger range of prices than his
demand for it for any one use. Compare an article by J. B. Clark on A Universal
Law of Economic Variation in the Harvard Journal of Economics, VoL Tin.




DIFFICULTIES OF THE STATISTICAL STUDY

109

On the other hand, demand is, generally speaking, very hi, iv, 5.
inelastic, firstly, for absolute necessaries (as distinguished inelastic
from conventional necessaries and necessaries for efficiency); dem
andand secondly, for some of those luxuries of the rich which do
not absorb much of their income.
§ 5. So far we have taken no account of the difficulties Difficulties
of getting exact lists of demand prices, and interpreting statistical
them correctly. The first which we have to consider arisesJiementoF
from the element of time, the source of many of the greatestTimedifficulties 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 con- Changes in
tinually changing, and rendering necessary a correction~of chasing
the results obtained on our assumption that money retains m
oney,°f
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 whether
the total purchasing power at the disposal of the community or tem-6" 1,
at large. The influence of these changes is important, b u tporary*
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 <jf the total consumption of such com­
modities as tea, sugar, butter, wool, etc. prove that the total



110
III, rr, 6.

Gradual
changes in
habits and
in the
familiarity
with new
things and
new ways
of using
them.

THE ELASTICITY OF WANTS

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 cor­
rection can be made when the facts are known1.
§ 6. Next, allowance must be made for changes in fashion,
and taste and habit2, 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 habit®
of familiarity with the new commodities and the discovery of
methods of economizing them.
1 When a statistical table shows the gradual growth of the consumption of
a commodity over a long series of years, we may want to compare the percentage
by which it increases in different years. This can be
Fig. (9).
done pretty easily with a little practice. But when the
figures are expressed in the form of a statistical diagram, V
it cannot easily be done, without translating the diagram
back into figures; and this is a cause of the disfavour in
which many statisticians hold the graphic method. But
p
by the knowledge of one simple rule the balance can be
turned, so far as this point goes, in favour of the graphic
s .
method. The rule is as follows:—Let the quantity of a
commodity consumed (or of trade carried, or of tax levied
etc.) be measured by horizontal lines parallel to Ox, fig.
(9), while the corresponding years are in the usual manner ticked off in descending
order at equal distances along Oy. To measure the rate of growth at any point P,
put a ruler to touch the curve at P. Let it meet Oy in t, and let N be the point
on Oy at the same vertical height as P : then the number of years marked 08
along Oy by the distance Ni is the inverse of the fraction by which the amount is
increasing annually. That is, if A’<is 20 years, the amount is increasing at the rate
of Tir, » «• of 5 per cent, annually; if Nt is 25 years, the increase is jV or 4 per
’•
cent, annually; and so on. See a paper by the present writer in the Jubile«
num ber of the Journal of the London Statistical Society, June 1885; also Note
IV. in the Mathematical Appendix.
•
For illustrations of the influence of fashion see articles by Miss Foley in the
Economic Journal, VoL m., and Miss Heather Bigg in the Nineteenth Century,
Vol. xxm.




DIFFICULTIES OF THE STATISTICAL STUDY

111

For instance when wood and charcoal became dear in in, it , 6.
England, familiarity with coal as a fuel grew slowly, fireplaces niual
were but slowly adapted to its use, and an organized traffic tratlons*
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 Some
that there are many purchases which can easily be put off can be
for a short time, but not for a long time. This is often the postponed7
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



THE ELASTICITY OF WANTS

m
h i, iv, 7.

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,
imperfec§ 7 . The above difficulties are fundamental: but there
statistics, 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 weH
acquainted with one another’s affairs that the price of a com­
modity 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 onjthe 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.
Increase of
Again, there is generally some ambiguity even in such
stocks*
statistics as are to be had. They commonly show goods
fo r * increase as entered for consumption as soon as they pass into the
sumption ^ant^8
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 stocks1.
1 In examining the effects of taxation, it is customary to compare the amounts
entered for consumption just before and just after the imposition of the tax. But
this is untrustworthy. For dealers anticipating the tax lay in large stocks just
before it is imposed, and need to buy very little for some time afterwards. And
vice versa when a ta* is lowered. Again, high taxes lead to false returns. For




STATISTICAL DIFFICULTIES

113

Next it is difficult to insure that the commodities referred in, i t , 8 .
to are always of the same quality. After a dry summer what changes of
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.

N ote

on

St a t is t ic s

of

Co n s u m p t io n .

§ 8 . Greneral Statistics of consumption are published b y many Inductive
Governments with regard to certain classes of commodities. But
partly for the reasons just indicated they are of very little service in demand la
helping us to trace either a causal connection between variations in but'traiers
prices and variations in the amounts which people will buy, or in the could
distribution of different kinds of consumption among the different [^ cjfb y
classes of the community.
analysing
As regards the first of these objects, viz. the discovery of the laws fo u n ts ?
connecting variations in consumption consequent on variations in price,
there seems much to be gained b y working out a hint given b y Jevonfl
{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
go. 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 com m odity is
brought about by a fall in its price, the cause acting quickly, and
acting alone without any admixture of disturbing causes. Even where
instance, the nominal importation of molasses into Boston increased fiftyfold in
consequence of the tax being lowered by the Rockingham Ministry in 1766, from
6 to Id. per gallon. But this was chiefly due to the fact that with the tax
d.
at Id., it was cheaper to pay the duty than to smuggle.




114

NOTE ON STATISTICS OF CONSUMPTION

III, rv, 8. 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 o f 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 o f his books
for the two winters will afford a very accurate indication of the influence
o f changes in price on consumption. Shopkeepers who supply other
classes o f society must occasionally be in a position to furnish similar
facts relating to the consumption o f their customers.
ConsumpI f a sufficient number of tables o f demand by different sections of
the'poor
BC
O ie^y could be obtained, they would afford the means of estimating
of cheap
indirectly the variations in total demand that would result from extreme
sugsreetthe variationa in price, and thus attaining an end which is inaccessible by
probable any other route. For, as a general rule, the price o f a com m odity
Tnite^on- fluctuatea within but narrow limits; and therefore statistics afford t »
sumption no direct means o f guessing what the consumption o f it would be, if '
iHtbecame *ta P™56 were either fivefold or a fifth part of what it actually is. B u t
very dear, 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 o f its consumption.would in most cases be among the w ork­
ing 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 m ode­
rate 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 w idely
different prices. (That is to say, the general demand curve for a com ­
modity cannot be drawn with confidence except in the immediate
neighbourhood of the current price, until we are able to piece it to ­
gether out of the fragmentary demand curves o f different classes o f
society. Compare the Second Section of this Chapter.)
When some progress has been made in reducing to definite law the
demand for commodities that axe 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 o f artisans and others w ho take




115

NOTE ON STATISTICS OF CONSUMPTION
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, o f domestic servants
a-nri of all those whose services are rendered direct to the consumer is
alnnilftr 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 England1.

h i,

Proportions of the Expenditure of the Family of—

Food only .................
Clothing.....................
Lodging....................
Light and fuel ..........
Education .................
Legal protection ......
Care of health ..........
8. Comfort and recreation

1.
2.
3.
4.
5.
6.
7.

Totals

....................

2.
1.
3.
Workman with an Workman with an Middle-Class person
Income of ibl, to Income of 90i, to
with an Income of
120J.
tfO a Year.
i.
1502. to 200i.

62 0 per cent.
ICO
„
12 0
„
50
„
20
„
10
10
„
10
„

55 0 per cent.
180
„

100 0 per ccnt.

1U per cent.
0-0

^

k0
"

20
25

”
”>
>
„
„

50 0 per ccnt.
180
„
12-0
„
50
„
5t
o
f'O
30
3-5

”
„
„
„

100*0 per cent.

Working-men’s budgets have often been collected and compared. But like all
other figures of the kind they suffer from the facts that those who will take the
trouble to make such returns voluntarily are not average men, that those who keep
careful accounts are not average men; and that when accounts have to be supple­
mented by the memory, the memory is apt to bo biassed by notions as to how the
money ought to have been spent, especially when the accounts are put together
specially for another’s eye. This border-ground between the provinces of domestic
and public economy is one in which excellent work may be done by many who are
disinclined for more general and abstract speculations.
Information bearing on the subject was collected long ago by Harrison, Petty,
Cantillon (whose lost Supplement seems to have contained some workmen’s
budgets), Arthur Young, Malthus and others. Working-men’s budgets were
collected by Eden at the end of the last century; and there is much miscellaneous
information on the expenditure of the working classes in subsequent Reports of




, 8.

Another
^ collect
budgets of
d ifferen t
classes,

1 A single table made out by the great statistician Engel for the consumption
of the lower, middle and working classes in Saxony in 1857, may be quoted here;
because it bas acted as a guide and a standard of comparison to later inquiries.
It is as follows:—

Items of Expenditure.

iv

116

NOTE ON STATISTICS OF CONSUMPTION

III, IV, 8- Commissions on Poor-relief, Factories, etc. Indeed almost every year sees some
-----important addition from public or private sources to our information on these
subjects.
It may be noted that the method of le Play’s monumental Lts Ouvriert
Eurvpiens is the intensive study of all the details of the domestic life of a few
carefully chosen families. To work it well requires a rare combination of judgment
in selecting cases, and of insight and sympathy in interpreting them. At its best,
it is the best of all: but in ordinary hands it is likely to suggest more
untrustworthy general conclusions, than those obtained by the extensive method
of collecting more rapidly very numerous observations, reducing them as far as
possible to statistical form, and obtaining broad averages in which inaccuracies
and idiosyncrasies may,be trusted to counteract one another to some extent.




i,

C H A P TER Y .
CHOICE B E T W E E N D IF F E R E N T USES O F T H E SAM E
TH IN G .

IM M ED IATE A N D D E F E R R E D USES.

primitive housewife finding that she has a hi, v, 1
limited number of hanks of yarn from the year’s shearing, Thedktriconsiders all the domestic wants for clothing and tries to
distribute the yarn between them in such a way as to con- ™t^een
e 8
e
tribute as much as possible to the family wellbeing. She the gratiwill think she has failed if, when it is done, she has reason different
to regret that she did not apply more to making, say, socks, wants*
and less to vests. That would mean that she had mis­
calculated 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 yam 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 yam 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
§ 1.

The




118

CHOICE BETWEEN DIFFERENT USES

h i , v, 2.

gain by taking away some of it from the second use and
applying it to the first1.
But a
One great disadvantage of a primitive economy, in which
liave too**7 there is but little free exchange, is that a person may easily
one°thing have so much of one thing, say wool, that when he has
todtoo868’ aPP^e^ ^
every possible use, its marginal utility in each
little of
use is low: and at the same time he may have so little of
another.
gome 0tljer 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.
Barter ia
The difficulty of barter is indeed not so very great
remedy/ 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.
Money
§ 2. But when commodities have become very numerous
distributed and highly specialized, there is an urgent need for the free
have equal u se
m o n e 7 » or general purchasing power; for that alone
marginal can be applied easily in an unlimited variety of purchases.
utilities m
.
J
_
i
t
each use. And m 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 any­
thing 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,
niustraThus, for instance, the clerk who is in doubt whether to
tions.
r}de to town, or to walk and have some little extra indulgence
*
Our illustration belongs indeed properly to domestic production rather than
to domestic consumption. But that was almost Inevitable; for there are very
few things ready for immediate consumption which are available for many
different uses. And the doctrino of the distribution of means between different
uses has less important and less interesting applications in the science of
demand than in that of'supply. See e.g. V. m. 3.




PRESENT AND FUTURE BENEFITS

119

at his lunch, is weighing against one another the (marginal) in, v, 3.
utilities of two different modes of spending his money. And a chief
when an experienced housekeeper urges on a young couple domestic
the importance of keeping accounts carefully; a chief motive accounts,
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 propor­
tion 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
maximum1.
§ 3. The different uses between which a commodity is The
distributed need not all be present uses; some may be of future
present and some future. A prudent person will endeavour ^"j^t
to distribute his means between all their several uses, present Presentand future, in such a way that they will have in each the
same marginal utility. But in estimating the present mar­
ginal 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 w ay); 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
1 The working-class budgets which were mentioned in Ch. iv. § 8 may render
most important services in helping people to distribute their resources wisely
between different uses, so that the marginal utility for each purpose shall be the
same. But the vital problems of domestic economy relate as much to wise action
as to wise spending. The English and the American housewife make limited
means go a less way towards satisfying wants than the French housewife does,
not because they do not know how to buy, but because they cannot produce as
good finished commodities out of the raw material of inexpensive joints, vegetables
etc., as she can. Domestic economy is often spoken of as belonging to the science
of consumption: but that is only half true. The greatest faults in domestic
economy, among the sober portion of the Anglo-Saxon working-classes at all events,
are faults of production rather than of consumption.




120

CHOICE BETWEEN DIFFERENT USES

in, v, 3. estimate in different ways according to their individual
characters, and their circumstances at the time).
Future
If people regarded future benefits as equally desirable
are‘SU
s- with similar benefits at the present time, they would proa^&fferent bably endeavour to distribute their pleasures and other
rates.
satisfactions avenly 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 rind 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
x 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.
Desire for
The rates at which different people discount the future
sources of affect not only their tendency to save, as the term is ordianiif£ent narily understood, but also their tendency to buy things
ownership, 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



PRESENT AND FUTURE BENEFITS

121

the mere feeling of ownership a stronger satisfaction than h i , v, 4.
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.
§ 4. As has already been urged, we cannot compare the But we
quantities of two benefits, which are enjoyed at different really
times even by the same person. When a person postpones a “ tuuate
e
pleasure-giving event he does not postpone the pleasure; but
he gives up a present pleasure and takes in its place another, benefit,
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 whiqji he discounts future
pleasurable events, such as spending £1 on immediate grati­
fications, we yet do not know the rate at which he discounts
future pleasures1.
1 In classifying some pleasures as more urgent than others,, it is often for­
gotten that the postponement of a pleasarable event may alter the circumstances
under which it occurs, and therefore alter the character of the pleasure itself. For
instance it may be said that a young man discounts at a very high rate the
pleasure of the Alpine tomp which he hopes to be able to afford himself when he
has made his fortune. He would much rather have them now, partly because
they would give him much greater pleasure now.
Again, it may happen that the postponement of a pleasurable event involves
an unequal distribution in Time of a certain good, and that the Law of Diminu­
tion of Marginal Utility acts strongly in the case of this particular good. For
instance, it is sometimes said that the pleasures of eating are specially urgent;
and it is undoubtedly true that if a man goes dinnerless for six days in the week
and eats seven dinners on the seventh, he loses very much; because when post*
poning six dinners, he does not postpone the pleasures of eating six separate
dinners, but substitutes for them the pleasure of one day’s excessive eating.
Again, when a person puts- away eggs for the winter he does not expect that they
will be. better flavoured then than now; he expects that they will be scarce, and
that therefore their utility will be higher than now. This shows the importance
of drawing a clear distinction between discounting a future pleasure, and dis­
counting the pleasure derived from the future enjoyment of a certain amount of
a commodity. For in the latter case we must make separate allowance for




1

CHOICE BETWEEN DIFFERENT USES

122
III, v, 4.
An
artificial
measure
of the
rate of
discount
of future
benefits.

W e can however get an artificial measure of the rate at
which he discounts future benefits by making two assump­
tions. These are, firstly, that he expects to be about as rich
at the future date as he is now; and secondly, that his capa­
city 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 hi 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 con­
ditions 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 market1.
differences between the marginal utilities of the commodity at the two times:
but in the former this has been allowed for once ia estimating the amount of the
pleasure; and it must not be allowed for again.
1 It is important to remember that, except on these assumptions there is no
direct connection between the rate of discount on the lean of money, and the rate
at which future pleasures are discounted. A man may be so impatient of delay
that a certain promise of a pleasure ten years hence will not induce him to give
up one close at hand which he regards as a quarter as great. And yet if he
should fear that ten years hence money may be so scarce with him (and its
marginal utility therefore so high) that half-a-crown then may give him more
pleasure or save him more pain than a pound now, he will save something for the
future even though he have to hoard it, on the same principle that be might store
eggs for the winter. But we are here straying into questions that are more
closely connected with Supply than with Demand. We shall have to consider
them again from different points of view in connection with the Accumulation of
Wealth, and later again in connection with the causes that determine the Rate of
Interest.
We may however consider here how to measure numerically the present value
of a future pleasure, on the supposition that we know, (i) its amount, (ii) the date
at which it will come, if it comes at all, (iii) the chance that it will como, and
(iv) the rate at which the person in question discounts future pleasures.
If the probability that a pleasure will be enjoyed is three to one, so that
three chances out of four are in its favour, the value of its expectation is threefourths of what it would be if it were certain: if the probability that it will be
enjoyed were only seven to five, so that only seven chances out of twelve are in its
favour, the value of its expectation is only seven-twelfths of what it would be if
the event were certain, and so on. [This is its actuarial value: but further
allowance may havo to be made for the fact that the true value to anyone of an
uncertain gain is generally less than its actuarial value (see the note on p. 200).]
If the anticipated pleasure is both uncertain and distant, we have a twofold
deduction to make from its full value. We will suppose, for instance, that a
person would give 10s. for a gratification if it were present and certain, but that




PRESENT AND FUTURE BENEFITS

123

So far we have considered each pleasure singly; but a ill, v,4.
great many of the things which people buy are durable, i.e. Future"
are not consumed in a single use; a durable good, such asjkjjjjjj
& piano, is the probable source of many pleasures, more or
less remote; and its value to a purchaser is the aggregate of durable
of the usance, or worth to him of all these pleasures, allowance ties,
being made for their uncertainty and for their distance1.
it is due a year hence, and the probability of its happening then is three to one.
Suppose also that he discounts the future at the rate of twenty per cent, per
annum. Then the value to him of the anticipation of it is | X yoV X 10s. i.e. 6s.
Compare the Introductory chapter of Jevons’ Theory of Political Economy.
1 Of course this estimate is formed by a rough instinct; and in any attempt to
reduce it to numerical accuracy (see Note V. in the Appendix), we must recollect
what has been said, in this and the preceding Section, as to the impossibility of
comparing accurately pleasures or other satisfactions that do not occur at the
B
oma time; and also as to the assumption of uniformity involved in supposing the
discount of future pleasures to obey the exponential law.




CHAPTER VI.
VALUE AND UTILITY.

Ill, vi, l.

§ 1 . W e may now turn to consider how far the price
which ia actually paid for a thing represents the benefit that
utility.
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 purchased 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.
Consumer's
It is obvious that the consumer’s surpluses derived from
turfius
gome commodities are much greater than from others. There
Price and

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.
is part of
This benefit, which he gets from purchasing at a low price
amannefit things for which he would rather pay a high price than go
derive*
without them, may be called the benefit which he derives



CONSUMER’S SURPLUS

125

from his opportunities, or from his environment; or, to recur m, vi, 2.
to a word that was in common use a few generations ago, from from his
Ms conjuncture. Our aim in the present chapter is to apply mentor
the notion of consumer’s surplus as an aid in estimating %*£u
tem
roughly some of the benefits which a person derives from his
environment or his conjuncture1.
§ 2. In order to give definiteness to our notions, let us Con,
,
eumers
consider the case of tea purchased ior domestic consumption, surplus in
Let us take the case of a man, who, if the price of tea ^demtuad
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;y three pounds if the price were 10s., four
pounds if the price were 6s., five pounds if the price were
is ., six pounds if the price were 3s., and who, the price
being actually 2 s., does purchase seven pounds. We have to
investigate the consumer’s surplus which he derives from his
power of purchasing tea at 2 s. 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 20 s .; 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
1 This term is a familiar one in German economics, and meets a need which is
much felt in English economics. For “ opportunity” and “ environment,” the only
available substitutes for it, are sometimes rather misleading. By Conjunctur, says
Wagner (Grundegung, Ed. in. p. 387), “ we understand the sum total of the
technical, economic, social and legal conditions; which, in a mode of national
life (VoUcswirthachafl) resting upon division of labour and private property,—
especially private property in land and other material means of production—
determine the demand for and supply of goods, and therefore their exchange
value: this determination being as a rule, or at least in the main, independent of
the will of the owner, of bis activity and his remissness.'*




126

VALUE AND UTILITY

ill, vi, 2. total utility of the two pounds is worth at least 34$., his
consumer’s surplus is at least 65.1 The fact that each
additional purchase reacts upon the utility of the purchases
which he had previously decided to make has already been
allowed fo r 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 205. what
1 Some further explanations may be given of tliis statement; though in fact
they do little more than repeat in other words what has already been said.
The significance of the condition in the text that he buys the second pound of
his own free choice is shown by the consideration that if the price of 14s. had been
offered to him on the condition that he took two pounds, he would then have to
elect between taking one pound fpr 205. or two pounds for 28s.: and then his
taking two pounds would not have proved that he thought the second pound worth
more than 8s. to him. But as it is, he takes a second pound paying 14s. uncon­
ditionally for it; and that proves that it is worth at least 14s. to him. (If he can
get buns at a penny each, but seven for sixpence; and he elects to buy seven, we
know that he is willing to give up his sixth penny for the sake of the sixth and the
seventh buns: but we cannot tell how much he would pay rather than go without
the seventh bun only.)
It is sometimes objected that as he increases his purchases, the urgency of his
need for his earlier purchases is diminished, and their utility falls; therefore we
ought to continually redraw the earlier parts of our list of demand prices at a lower
level, as we pass along it towards lower prices (i.e. to redraw at a lower level our
demand curve as we pass along it to the right). But this misconceives the plan on
which the list of prices is made out. The objection would have been valid, if
the demand price set against each number of pounds of tea represented the average
utility of that number. For it is true that, if ho would pay just 20s. for one
pound, and just 14s. for a second, then he would pay just 34s. for the two; t.e. 17s.
each on the average. And if our list had had reference to the average prices he
would pay, and had set 17*. against the second pound; then no doubt we should
have had to redraw the list as we passed on. For when he has bought a third
pound the average utility to him of each of the three will be less than that of 17*.;
being in fact 14a. 8i. if, as we go on to assume, he would pay just 10s. for a third
pound. But this difficulty is entirely avoided on the plan of making out demand
prices which is here adopted; according to which his second pound is credited, not
with the 17s. which represents the average value per pound of the two pounds;
but with the 14s., which represents the additional utility'which a second pound
has for him. For that Temains unchanged when he has bought a third pound, erf
which the additional utility is measured by 10s.
The first pound was probably worth to him moro than 20s. All that we know
is that it was not worth less to him. He probably got some small surplus even on
that. Again, the second pound was probably worth more than 14s. to him, AH
that we know is that it was worth at le'ast 14s. and not worth 20s. to him. He
would get therefore at this stage a surplus satisfaction of at least 6s., probably a
little more. A ragged edge of this kind, as mathematicians are aware, always
exists when we watch the ellects of considerable changes, as that from 20s. to 14*.
a pound. If we had begun with a very high price, had descended by practically
infinitesimal changes of a farthing per pound, and watched infinitesimal variations
in his consumption of a small fraction of a pound at a time, this ragged edge w ld
ou
have disappeared.




INDIVIDUAL CONSUMER’S SURPLUS

127

was worth to him at least 34s., and derive a surplus satis* III, vi, 2.
faction worth at least 145. 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, C, 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
them1. >
1 Prof. Nicholson (Printij&ti of Political Economy, VoL I and Economic
Journal, Vol. iv.) has raised objections to the notion of consumers* surplus,
which have been answered by Frof. Edgeworth in tho same Journal. Trot.
Nicholson says:—“ Of what avail is it to say that the utility of an income
of (say) £100 a year is worth (say) £1000 a year?” There would be no avail
in saying that. But there might be use, when comparing life in Central Africa
with life in England, in saying that, though the things which money will buy
in Central Africa may on the average be as cheap there as here, yet there are so
many things which cannot be bought there at all, that a person with a thousand
a year there is not so well off as a person with three or four hundred a year here.
If a man pays Id. toll on a bridge, which saves him an additional drive that would
cost a shilling, we do not say that the penny is worth a shilling, but that the penny
together with the advantage offered him by the bridge (the part it plays in
his conjuncture) is worth a shilling for that day. Were the bridge swept away on
a day on which he needed it, he would be in at least as bad a position as if he had
been deprived of eleven pence.




VALUE AND UTILITY

128

§ 3. In the same way if we were to neglect for the
moment the fact that the same sum of money represents
Demand of
a market. different amounts of pleasure to different people, we might
measure the surplus satisfaction which the sale o f tea affords,
say, in the London market, hy the aggregate of the sums by
which the prices shown in a complete list of demand prices
for tea exceeds its selling price1.
III, vi, 3.

1 Let ua then consider the demand curve DD' for tea in any large market.
Let OH be the amount which is sold there at the
price HA annually, a year being taken as our unit
of time. Taking any point M in OH let us draw
MP vertically upwards to meet the curve in P and
cut a horizontal line through A in 2t. We will
suppose the several lbs. numbered in the order
of the eagerness of the several purchasers: the
eagerness of the purchaser of any lb. being mea­
sured by the price he is just willing to pay for
that lb. The figure informs us that OM can be
sold at the price PM ; but that at any higher price
not quite so many lbs. can be sold. There must be then some individual who will
buy more at the price PM, than he will at any higher price; and we are to regard
the OMth lb. as sold to this individual. Suppose for instance that PM represents
is., and that OM represents a million lbs. The purchaser described in the text is
just willing to buy his fifth lb of tea at the price 4j., and the OMth or millionth
lb. may be said to be sold to him. If AH and therefore SM represent 2s., the
consumers’ surplus derived from the OMth lb. is the excess of PM or 4s. which the
purchaser of that lb. would have been willing to pay for it over JSM the 2«. which
he actually does pay for it. Let us suppose that a very thin vertical parallelogram
is drawn of which the height is PM and of which the base is the distance along Ox
that measures the single unit or lb. of tea. It will be convenient henceforward to
regard price as measured not by a mathematical straight line without thitvknwa^
as PM\ but by a very thin parallelogram, or as it may be called a thick Straight
line, of which the breadth is in every case equal to the distance along Ox which
measures a unit or lb. of tea. Thus we should say that the total satisfaction
derived from the OAfth lb. of tea is represented (or, on the assumption made in
the last paragraph of the text is measured) by the thick straight line MP;
that the price paid for this lb. is represented by the thick straight line MR
and the consumers’ surplus derived from this lb. by the thick straight line RP.
Now let us suppose that such thin parallelograms, or thick straight lines, are
drawn from all positions of M between O and H, one for each lb. of tea. The
thick straight lines thus drawn, as MP is, from Ox up to the demand curve
will each represent the aggregate of the satisfaction derived from a lb. of tea;
and taken together thus occupy and exactly fill up the whole area DOHA.
Therefore we may say that the area DOHA represents the aggregate of the satis­
faction derived from tho consumption of tea. Again, each of the straight lm
«»a
drawn, as MR is, from Ox upwards as far as AC represents the price that actually
is paid for a lb. of tea. These straight lines together make up the area COHA;
and therefore this area represents the total price paid for tea. Finally
of the straight lines drawn as RP is from AC upwards as far as the demand curv®,
represents the consumers’ surplus derived from the corresponding lb. of tea.
These straight lines together make up the area DCA ; and therefore this area
represents the total consumers’ surplus that is derived from tea when the price fa




I

THIS ANALYSIS GIVES FORM TO FAMILIAR NOTIONS

129

This analysis, with its newnames and elaborate machinery, in, vi, 3
.
appears at first sight laboured and unreal. On closer T is
h
study it will be found to introduce no new difficulties and aS/oniy
to make no new assumptions; but only to bring to.light
difficulties and assumptions that are latent in the common expression
language of the market-place. For in this, as in other cases, notions,
the apparent simplicity of popular phrases veils a real com*
plexity, 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
AH. But it must be repeated that this geometrical measurement is only an
aggregate of the measures, of benefits which are not all measured on the same
gcale except on the assumption just made in the text. Unless that assumption
is made the area only represents an aggregate of satisfactions, the several amounts
of which are not exactly measured. On that assumption only, its area measures
the volume of the total net satisfaction derived from the tea by its various pur­
chasers.




130

VALUE AND UTILITY

hi,vi,3. 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 study1
,
in regard
Or the real worth of a thing might be discussed with
todifierent ref eren ce n o t t o a 8in g ie person but to people in general;
miT a e an * thus it would naturally be assumed that a shilling’s
a hv
<
w
he«m d wor^ of gratification to one Englishman might be taken as
ae
necessary equivalent with a shilling’s worth to another, “ to start with,'*
encesof
and “ until cause to the contrary were shown.” But everyaenaibiiity one wotli^ 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 temperament2
,
and for
This involves the consideration that a pound’s worth of
of^eaith: 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
1 Harris On Coins 1757, «ays “ Things in general are valued, not according to
their real uses in supplying the necessities of men; but rather in proportion to the
land, labour and skill that are requisite to produce them. It is according to th«i
proportion nearly, that things or commodities are exchanged one for another; and
it is by the said scale, that the intrinsic values of most things are chiefly estimated.
Water is of great use, and yet ordinarily of little or no value; because in most
places, water flows spontaneously in such great plenty, as not to be withheld
within the limits of private property; but all may have enough, without other
expense than that of bringing or conducting it, when the cam so requires. On the
other hand, diamonds being very scarce, have upon that account a great value,
(hough they are but little use/'
1 There might conceivably be persons of high sensibility who would suffer
specially from the want of either salt or tea: or who were generally sensitive, and
would suffer more from the loss of a certain part of their income than others in
the same station of life. But it would be assumed that such differences between
individuals might be neglected, since we were considering in either case the
average of large numbers of people; though of course it might be necessary to
consider whether there were some special reason for believing, say, that those who
laid most store by tea were a specially sensitive class of people. If it could,
a separate allowance for this would have to be made before applying the results of
economical analysis to practical problems of ethics or politics.




THIS ANALYSIS GIVES FORM TO FAMILIAR NOTIONS

131

both used largely by all classes, we compared either of them ill, yi, 3.
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 but it is
about equal proportions all the different classes of society; so needed in
that if the money measures of the happiness caused by two
events are equal, there is not in general any very great gr°u^ of
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 separately1.
1 Some ambiguous phrases in earlier editions appear to have suggested to
some readers the opposite opinion. But the task of adding together the total
utilities of all commodities, so as to obtain the aggregate of the total utility of all
wealth, is beyond the range of any but the most elaborate mathematical formulae.
An attempt to treat it by them some years ago convinced the present writer that
even if the task be theoretically feasible, the result would be encumbered by so
many hypotheses as to be practically useless.
Attention has already (pp. 100, 105) been called to the fact that for some
purposes such things as tea and coffee must be grouped together as one com­
modity: and it is obvious that, if tea were inaccessible, people would
their consumption of coffee, and vice versd. The loss that people would suffer
from being deprived both of tea find coffee would be greater than the sura oI
their losses from being deprived of either alone: and therefore the total utility of
tea and coffee is greater than the sum of the total utility of tea
on the




132
III, vi, 4.
It is
seldom
necessary
to take
account of
changes in
the pur­
chaser’s
command
of money.

VALUE AND UTILITY

§ 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 expendi­
ture 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
importance1.
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.
supposition that people can have recourse to coffee, and that of coffee calculated
on a like supposition as to tea. This difficulty can be theoretically evaded by
grouping the two “ rival” commodities together under a common demand schedule.
On the other hand, if we have calculated the total utility of fuel with reference
to the fact that without it we could not obtain hot water to obtain the beverage tea
from tea leaves, we should count something twice over if we added to that utility
the total utility of tea leaves, reckoned on a similar plan. Again the total utility
of agricultural produce incjudes that of ploughs; and the two may not be added
together; though the total utility of ploughs may be discussed in connection with
one problem, and that of wheat in connection with another. Other aspects of
these two difficulties are examined in V. vi.
Prof. Patten has insisted on the latter of them in some able and suggestive
writings. But his attempt to express the aggregate utility of all forms of wealth
seems to overlook many difficulties.
1 In mathematical language the neglected elements would generally belong to
the second order of small quantities; and tho legitimacy of tho familiar scientific
method by which they are neglected would have seemed beyond question, had not
Prof. Nicholson challenged it. A short reply to him has been given by Prof. Edgeworth in the Economic Journal for March 1894; and a fuller reply by Prof. Barone
in the Giomale degli Economisti for Sept. 1894; of which some account is given
by Mr Sanger in the Economic Journal for March 1895.
As is indicated in Note VI. in the Mathematical Appendix, formal account could
be taken of changes in the marginal utility of^money, if it were desired to do so.
If we attempted to add together the total utilities of all commodities, we should
bound to do so: that task is however impracticable.




LIMITATIONS OF THE DOCTRINE

133

It has already been remarked that we cannot guess at in, v i,5.
all accurately how much of anything people would buy at \ye C
aii
prices very different from those which they are accustomed obuina
to pay for it: or in other words, what the demand prices ^ r j^ ^ flete
o
it would be for amounts very different from those which are demand
commonly sold. Our list; of demand prices is therefore nor do we
highly conjectural except in the neighbourhood of the
need
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
necessaries1.
§ 5. There remains another class of considerations which Elem
ents
are apt to be overlooked in estimating the dependence of ive wealth
wellbeing upon material wealth. Not only does a person’ s beaver-1
0
looked.
1 The notion of consumers* surplus may help us a little now; and, when our
statistical knowledge is further advanced, it may help us a great deed to decide
how much injury would be done to the public by an additional tax of 6d. a pound
on tea, or by an addition of ten per cent, to the freight charges of a railway: and
the value of the notion is but little diminished by the fact that it would not help
us much to estimate the loss that would be caused by a tax of 20s. a pound on tea,
or a tenfold rise in freight charges.
Beverting to our last diagram, we may express this by saying that, if A is the
point on the curve corresponding to the amount that is wont to be sold in the
market, data can be obtained sufficient for drawing the curve'with tolerable
correctness for some distance on either side of A\ though the curve can seldom
be drawn with any approach to accuracy right up to D. But this is practically
unimportant, because in the chief practical applications of the theory of value we
should seldom make any use of a knowledge of the whole shape of the demand
curve if we had it. We need just what we can get, that is, a fairly correct know­
ledge of its shape in the neighbourhood of A. We seldom require to ascertain the
total area DCA; it is sufficient for most of our purposes to know the changes in
this area that would be occasioned by moving A through small distances along the
curve in either direction. Nevertheless it will save trouble to assume provision­
ally, as in pure theory we are at liberty to do, that the curve is completely drawn.
There is however a special difficulty in estimating the whole of the utility of
commodities some supply of which is necessary for life. If any attempt is made
to do it, the best plan is perhaps to take that necessary supply for granted, and
estimate the total utility only of that part of the commodity which is in excess of
this amount. But we must recollect that the desire for anything is much
dependent on the difficulty of getting substitutes for it.
(See Note VI. in
the Mathematical Appendix.)




134

VALUE AND UTILITY

ill, vi, 6. 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 modem civilized world,
and even more important when we compare our own age
with earlier times.
So-called
Collective action for the purposes of securing common
wellbeing, as for instance in lighting and watering the streets,
belong to
0CCUPy us much towards the end of our inquiries,
thesubpct Co-operative associations for the purchase of things for
duction.
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.
We are
§ 6 . When we speak of the dependence of wellbeing on
t»medn* material wealth, we refer to the flow or stream of wellbeing
with large as measured by the flow or stream of incoming wealth and
incomes
J
e
rather
the consequent power of using and consuming it. A person’s
possesstock of wealth yields by its usance and in other ways an
eions.
income of happiness, among which of course are to be counted
the pleasures of possession: but there is little direct con­
nection 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 possessions1.




1 See Note VII. in the Appendix.

BROADER ASPECTS OF THE UTILITY OP WEALTH

135

In accordance with a suggestion made by Daniel Ber- IN.vi, 6
.
noulli, we may regard the satisfaction which a person derives B
erfrom his income as commencing when he has enough to
*
support life, and afterwards as increasing by equal amounts tion
with every equal successive percentage that is added to his
income; and vice versa, for loss of income1
.
But after a time new riches often lose a great part of The edge
their charms. Partly this is the result of familiarity; which mentis'
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.
1 That is to say, if £30 represent necessaries, a person’s satisfaction from his
income will begin at that point; and when it has reached £40, an additional £1
will add a tenth to the £10 which represents its happiness-yielding power. But if
his income were £100, that is £70 above the level ofnecessaries, an additional £7
would be required to add as much to his happiness as £1 if his income were £40:
while if his incomo were £10,000, an additional £1000 would be needed to produce
an equal effect (compare Note VIII. in the Appendix). Of course such estimates
are very much at random, and unable to adapt themselves to the varying circum­
stances of individual life. As we shall see later, the systems of taxation which are
now most widely prevalent follow generally on the lines of Bernoulli’s suggestion.
Earlier systems took from the poor very much more than would be in accordance
with that plan; while the systems of graduated taxation, which are being fore­
shadowed in several countries, are in some measure based on the assumption that
the addition of one per cent, to a very large income adds less to the wellbeing of
its owner than an addition of one per cent, to smaller incomes would, even after
Bernoulli’s correction for necessaries has been made.

It may be mentioned in passing that from the general law that the utility to
anyone of an additional £1 diminishes with the number of pounds he already has,
there follow two important practical principles. The first is that gambling
involves an economic loss, even when conducted on perfectly fair and even terms.
For instance, a man who having £600 makes a fair even bet of £100, has now an
expectation of happiness equal to half that derived from £700, and half that
derived from £500; and this is less than the certain expectation of the happiness
derived from £600, because by hypothesis the difference between the happiness
got from £600 and £500 is greater than the difference between the happiness got
from £700 and £600. (Compare Note IX. in the Appendix and Jevons, I. c.
Ch. iv.) The second principle, the direct converse of the first, is that a
theoretically fair insurance against risks is always an economic gain. But of
course every insurance office, after calculating what is a theoretically fair
premium, has to share in addition to it enough to pay profits on its own capital,
and to cover its own expenses of working, among which are often to be reckoned
very heavy items for advertising and for losses by fraud. The question whether
it is advisable to pay the premium which insurance offices practically do charge,
is one that must be decided for each case on its own merits.




136

VALUE AND UTILITY

in, vi, 6.

In every civilized country there have been some followers
The value of the Buddhist doctrine that a placid serenity is the highest
of leisure ^ eai G jife- that it is the part of the wise man to root out
f
and rest.
*
1
.
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 life1
.
The excelThe truth seems to be that as human nature is constim era tuted, man rapidly degenerates unless he has some hard work
od te
obtained by^°
some difficulties to overcome; and that some strenuous
m era exertion is necessary for physical and moral health. The
od te
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 improve­
ment 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 am­
bitions, 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.
ExpendiThere is some misuse of wealth in all ranks of society.
the6sake
And though, speaking generally, we may say that every
of display. j n c r e a s e j n 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



1 See his lecture on The Gospel of Relaxation.

BROADER ASPECTS OF THE UTILITY OF WEALTH

137

all sorts of display of individual wealth. There are indeed in,vx,6.
true and worthy pleasures to be got from wisely ordered The
magnificence: but they are at their best when free from any no^hty
taint of personal vanity on the one side and envy on the ^ug“tive
other; as they are when they centre round public buildings, over th
e
public parks, public collections of the fine arts, and public oP eaH ?
w h
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 The^ ^
should seek to increase the beauty of things in his possession purchaser
rather than their number or their magnificence. An im- the pro68
provement in the artistic character of furniture and clothing ^thus
trains the higher faculties of those who make them, and is a p ch
p roa
a source of growing happiness to those who use them. But of broatP
if instead of seeking for a higher standard of beauty, we^H 18
6’
spend our growing resources on increasing the complexity
and intricacy of our domestic goods, we gaiq 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.
LAN D , LABO UR, CAPITAL A N D

O RG A N IZATIO N .

CHAPTER I.
INTRODUCTORY.

iv, i,i.
§ 1. The agents of production are commonly classed as
The
Land, Labour and Capital. B y Land is meant the material
JSductkm an<* ^ e f° rces which Nature gives freely for man’s aid, in land
h?
and water, in air and light and heat. Bv Labour is meant
classed
#
^
*
<11
"
under three 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 pro­
duction rather than as a direct source of gratification.
Capital consists in a great part of knowledge and organi­
zation: and of this some part is private property and other
part is not. Knowledge is our most powerful engine of pro­
duction; it enables us to subdue Nature and force her to
satisfy our wants. Organization aids knowledge; it haa
1 Labour is classed as economic when it is “ undergone partly or wholly with
a view to some good other than the pleasure directly derived from it.’* See p. 65
and footnote. Such labour with the head as does not tend directly or indirectly
to promote material production, as for instance the work of the schoolboy at his
tasks, is left out of account, so long as we are confining our attention to production
in the ordinary sense of the term. From some points of view, but not from all,
tho phrase Land, Labour, Capital would be more symmetrical if labour were
interpreted to mean the labourers, i e. mankind. See Walras, Economie Politiqut
Piirf, Lejon 17, and Prof. Fisher, Economic Journal, vx. p. 529.




RELATIONS BETWEEN AGENTS OF PRODUCTION

139

many forms, e.g. that of a single business, that of various iv, t, l.
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 but for
and man. Capital and organization are the result of the purposes
work of man aided by nature, and directed by his power of u ertw
n
0‘
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 fromI 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 J^n^ th
e
strength, in knowledge, ability, and in richness of character and an
is the end of all our studies: but it is an aim to which^foduction.
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. Mean­
while 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.



140
IV, i, 2.

INTRODUCTORY

§2.

It is not possible at this stage to do more than
very slightly the general relations between demand
^demand an^ supply, between consumption and production. But it
and supply, 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 haa
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.
ordinary
While demand is based on the desire to obtain com ­
labour
modities, supply depends mainly on the overcoming of
being
selected
the unwillingness to undergo “ discommodities.” These
for illus­
tration.
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 in­
volved (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
The
discommodities of mental fatigue, or from its being carried on in unhealthy
various*” 8urr°undings, 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.
Man its
Of course much exertion is undergone for its own sake,
motives.
ftg £o r jn s^a n ce j n mountaineering, in playing games and in
Provisional indicate

the pursuit of literature, of art, and of science; and much
hard work is done under the influence of a desire to benefit
others1. But the chief motive to most labour, in our use of
1 We have seen (p. 124) that, if a person makes the whole of his purchases at
the price which he would be just willing to pay for his last purchases, he gains
a surplus of satisfaction on his earlier purchases; since he gets them for less than




141

UTILITY AND DISUTILITY OR COST
•

•

•

^

the term, is the desire to obtam some material advantage; IV, i, 2.
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 manu­
facturer 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 t*h
e
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 Though
increase his exertions depends, under ordinary circumstances, k B u
iew r?
on fundamental principles of human nature which economists »
have to accept as ultimate facts. As Jevons remarks1 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
lie would have paid rather Ilian go without them. So, if the price paid to him for
doing any work is an adequate reward for that part which he docs most unwillingly;
and if, as generally happens, the same payment is given for that part of the work
which he does less unwillingly and at less real cost to himself; then from that
part he obtains a producer’s surplus. Some difficulties connected with this notion
are considered in Appendix K.
The labourer’s unwillingness to sell his labour for less than its normal price
resembles the unwillingness of manufacturers to spoil their market by pushing
goods for sale at a low price; even though, so far as the particular transaction is
concerned, they would rather take the low price than let their works stand idle.
1 Theory of Political Economy, Ch. v. This doctrine has been emphasized and
developed in much detail by Austrian and American economists.




142

INTRODUCTORY

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 increas­
ing 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 in­
creases.
certain
Subject to these and some other qualifications, it is
supposibroadly true that the exertions which any set of workers
w infnesa will make, rise or fall with a rise or fall in the remuneration
iU
governed which is offered to them. As the price required to attract
pncetobe Purc^asers f° r an7 given amount of a commodity, was called
got for it. 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
S
ttjppfy
commodity, may be called the supply price for that amount
price.
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 corre­
sponding 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 exertion1.
But this simple method of treating the supply of work
of any kind, and consequently the supply of goods made b y
1 See above IIL m. 4
IV, t, 2.




SOME DIFFICULTIES AHEAD

143

that work, assumes that the number of those who are iv, i, 2.
qualified for it is fixed; and that assumption can be made Forecast
only for short periods of time. The total numbers of thejjjg£®lty
people change under the action of many causes. Of these of fch
is
,
,
i
i
problem in
causes only some are economic; but among them the average real life,
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.




CHAPTER II.
THE FERTILITY OF LAND.
IV> *
♦
§ 1. T he requisites of production are commonly spoken
The notion 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
W
roduceof ^
an^* Tlie distinction is obviously a loose one: for bricks
Fandisdue are but pieces of earth slightly worked up; and the soil of
wort is a old settled countries has for the greater part been worked
but there'* over many times by man, and owes to him its present form,
underlying ^ e r e 18 however a scientific principle underlying the dis­
it.
tinction. While man has no power of creating matter, he
creates utilities by putting things into a useful form1; 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 ha 3
no control; they are given as a fixed quantity b y nature and
have therefore no supply price. The term “ land” has been
extended by economists so as to include the permanent
sources of these utilities2; whether they are found in land,
as the term is commonly used, or in seas and rivers, in sun­
shine 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

is a free
nature

1 See Book II. Chapter m .
*
In Ricardo’s famous phrase “ the original and indestructible powers of the
soil.” Von Tinmen, in a noteworthy discussion of the basis of the theory of rent,
and of the positions which Adam Smith and Ricardo took with regard to it,
speaks of “ Der Boden an sich” ; a phrase which unfortunately cannot be trans­
lated, but which means the soil as it, would be by itself, if not altered by the
action of man (Der Isolirte Slaat, L u 5).




MECHANICAL AND CHEMICAL CONDITIONS OF FERTILITY

145

o! the land, we shall find that the fundamental attribute of iv, n, 2.
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 geometrio
relations in which any particular part of it stands to
other parts are fixed. Man has no control over them; they
are wholly unaffected b y 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 d o; 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 econo­
mics 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.
§ 2. To the agriculturist an area of land is the means of Conditions
supporting a certain amount of vegetable, and perhaps u lti-of fertlhty#
mately 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 pas­
sage : 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



146

THE FERTILITY OF LAND

iv, n, 3. 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.
Chemical
Chemically the soil must have the inorganic elements
T i t S ; . 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.
Man’s
§ 3. By all these means the fertility of the soil can be
power of
brought under man’s control. He can by sufficient labour
altering
the cha­
make almost any land bear large crops. He can prepare
racter of
the soil.
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 deficien­
cies. Hitherto this has been done only on a small scale;



MECHANICAL AND CHEMICAL CONDITIONS OF FERTILITY

147

chalk and lime, clay and marl have been but thinly spread iv, n, 3
over the fields; a completely new soil has seldom been made
except in gardens and other favoured spots. But it is pos­
sible, 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 ex■
tensively 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 th e“ inherent ” and “ indestructible”
properties of the soil, have been largely modified; partly
impoverished and partly enriched by the work of many
generations 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 Ordinal
between the original or inherent properties, which the land £}iaf rtl’
derives from nature, and the artificial properties which
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 in­
herent properties of the soil. It is chiefly from them that the
ownership of agricultural land derives its peculiar signifi­
cance, and the Theory of Rent its special character.



148

t h e f e r t il it y of la n d

§ 4. But the question how far the fertility of any soil is
due to the original properties given to it by nature, and how
quaUtiea
*ar to
changes in it made by man, cannot be fully dis­
count for cussed without taking account of the kind of produce raised
theartifrom it. Human agency can do much more to promote the
fesain”
growth of some crops than of others. At one end of the
thaifiif8 BCa^ are f° rest trees; an oak well planted and with plenty
68
e
others.
0f 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 som e’
/ 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. F or
while nature left to herself would select those that are best
able to take care of themselves and their offspring, man
Belects 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.
inan^
Thus various then are the parts which man plays in
extra *
aiding nature to raise the different kinds of agricultural
i v , it ,

4.

Th^




ORIGINAL AND ARTIFICIAL PROPERTIES OF LAND

149

produce. In each case he works on till the extra return got iv, n , 4.
by extra capital and labour has so far diminished that it will return to
no longer remunerate him for applying them. Where this capital™1
limit is soon reached he leaves nature to do nearly all the and labour
.
.
J
diminishes
work; where his share m the production has been great, it sooner or
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 The return
labour now under discussion is measured by the amount of measured
the produce raised independently of any changes that may qu^Mty
meanwhile take place in the exchange value or price of °^ ® ce
produce; such, for instance, as might occur if a new r a i l w a y not b y its
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 amount1.
1 But see the latter part o f IV. m. 8;




a ls o

IV.

x iii.

2.

CHAPTER III.
THE FERTILITY OF LAND, CONTINUED.

THE

TENDENCY TO DIMINISHING RETURN.

i v ^ 1.

§ 1. T im law o f or statement o f tendency to Diminishing
Return may be provisionally worded thus:
An increase in the capital and labour applied in the cul
tivation of land causes in general a less than proportionat
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.
beunder7
When land that requires no clearing is to be had for
c u l t i v a t e d , nothing, everyone uses just that quantity which he thinks
exu-a cn will give his capital and labour the largest return. His
labou r w cultivation is “ extensive,” not “ intensive.” He does not aim
^ in
Increasing
ge^ ng many bushels of corn from any one acre, for then
return
he would cultivate only a few acres. His purpose is to get as
m
axim
um large a total crop as possible with a given expenditure of seed
bwnUa and labour; and therefore he sows as many acres as he can
a
Star which manage to bring under a light cultivation. Of course he may
d minish
&° *°° ^ar:
spread his work over so large an area that
again.
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;

Provisional
statement
of the
tendency
to dimin­
ishing
return.




LAW OF DIMINISHING RETURN BASED ON EXPERIENCE

151

that is, an extra return larger in proportion than it gives to IV, in, l.
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 applica­
tions 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 culti­
vate more land. But perhaps by this time all the neigh­
bouring 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 nothing1.
This tendency to a diminishing return was the cause of Were it
Abraham’s parting from L ot2, and of most of the migrations every
of which history tells. And wherever the right to cultivate ^™idr8ave
land is much in request, we may be sure that the tendency
h
ia
to a diminishing return is in full operation. Were it not applying
for this tendency every farmer could save nearly the whole of capital and
his rent by giving up all but a small piece of his land, and 8
maUpart
bestowing all his capital and labour on that. If all the °*bia*
andcapital 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
1 Increasing return in the earlier stages arises partly from economy of organ­
ization, similar to that which gives an advantage to manufacture on a large scale.
But it is also partly due to the fact that where land is very slightly cultivated
the farmer’s crops are apt to be smothered by nature’s crops of weeds. The relation
between Diminishing and Increasing Return is discussed further in the last chapter
of this Book.
*
“ The land was not able to bear them, that they might dwell together: for
tlieir substance was great, so that they could not dwell together.” Genesis xiii. 6.




152

THE FERTILITY OF LAND

iv, m, l. 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 mis­
take. 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 con­
centrating 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,
improved
Again, it may be granted that much land, even in a
m
ayhenabie country as advanced as England, is so unskilfully cultivated
capital and that it could be made to give more than doubly its present
profitably6 § ross P r ° d u c e if twice the present capital and labour were
applied,
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 seveA
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, b y
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



LAW OF DIMINISHING RETURN

153

implied under the words “ in general” in our provisional iv, m ,2.
wording of the law. The law is a statement of a tendency
~
which may indeed be held in check for a time by improve­
ments 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 pro­
duce 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 Final
raise the rate of return which land generally affords to any ome*6 1
14
given amount of capital and labour; and although the dindnish-1
0
capital and labour already applied to any piece of lan dj^ s^
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 propor­
tionate 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.
§ 2. Making use of a term suggested by James Mill, we Adoseot
may regard the capital and labour applied to land as con- labour!^
sisting of equal successive doses1. 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 ex­
ceptional 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
1 As to this term see the Note at the end of the chapter.




THE FERTILITY OF LAND

154

iv, in, 2. 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.
Marginal
The dose which only just remunerates the cultivator may
marginal
be said to be the marginal dose, and the return to it the
T ar^nof ma1'9^na^ return. If there happens to be in the neighbourm
cvtiivation. hood 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 o f 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 land1.
Tho ^
When we speak of the marginal, or the “ last” dose apdoseianot plied to the land, we do not mean the last in time, we mean
K T * that dose which is on the margin of profitable expenditure;
in tim
e.
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
*
Ricardo was well aware of this: though he did not emphasue it enough.
Those opponents of his doctrine who have supposed that it has no application to
places where all the land pays a rent, have mistaken the nature of his argument.




THE CULTIVATOR S SURPLUS PRODUCE

155

would not have been produced if the farmer had decided iv, m, 2.
against the extra hoeing1.
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 surplus
produce of the land. This surplus is retained by the cu lti-p
vator if he owns the land himself2.
1 An illustration from recorded experiments may help to make clearer the
notion of the return to a marginal dose of capital and labour. The Arkansas
experimental station (see The Times, 18 Nov. 1889) reported that four plots
of an acre each were treated exactly alike except in tho matter of ploughing and
harrowing, with the following result:—
l ’lot.

Cultivation.

1
2
3
4

Ploughed once ..........................................
Ploughed once and harrowed once .............
Ploughed twice and harrowed once.............
Ploughed twice and harrowed twice ..........

Crop field*

bushel* per
•ere.

16
m
21!
23|

This would show that the dose of capital and labour applied in harrowing
a second time an acre which had already been ploughed twice gave a return
of 1 /j bushels. And if the value of these bushels, after allowing for expenses
of harvesting, etc. just replaced that dose with profits, then that dose was a
marginal one; even though it was not tho last in point of time, since those spent
on harvesting must needs come later.
*
Let us seek a graphical illustration. It is to be remembered that graphical
illustrations are not proofs. They are merely pictures corresponding very roughly
to the main conditions of certain real problems. They obtain clearness of outline,
by leaving out of account many considerations which vary from one practical
problem to another, and of which the farmer must take frill account in his
own Bpecial case. If on any given field there were expended a capital of £50, a
certain amount of produce would be raised from it: a certain amount larger than,
the former would be raised if there were expended on it a capital of £51. The
difference between these two amounts may be regarded as the produce due to the
fifty-first pound; and if we suppose the capital to be applied in successive doses
of £1 each we may speak of this difference as the produce due to the fifty-first
dose. Let the doses be represented in order by successive equal divisions of the
line OD. Let there now be drawn from the division of
K g. (U ).
thjg line representing the fifty-first dose M, a line MP
at right angles to OD, in thickness equal to the length
of one of the divisions, and such that its length repre­
sents the amount of the produce due to the fifty-first
dose. Suppose this done for each separate division up
to that corresponding to the last dose which it is found
profitable to put on the land. Let this last dose be the
110th at D, and DC the corresponding return that only just remunerates the farmer.
The extremities of such lines will lie on a curve APC. The gross produce will




THE FERTILITY OF LAND

156

iv, hi, 2.

It is important to note that this description of the nature
°* surplus produce is not a theory of rent: we shall not
be ready for that till a much later stage. All that can be
produce is said here, is that this surplus produce may, under certain
theory of conditions, become the rent which the owner of the land can
reQ
t”
exact from the tenant for its use. But, as we shall see here­
after, 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 impor­
tant of all, to the growth of a dense and rich population, and
to facilities of communication by public roads, railroads, etc.
Ricardo
It is to be noted also that in an old country it is impossible
hisatten- to discover what was the original state of the land before it
cixmn-he was
cultivated. The results of some of man’s work are
stances of f o r g 00d and evil fixed in the land, and cannot be distinan Ola
#~
country,
guished 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 case1.

This

be represented by the sum of these lines: i.e., since the thickness of each
is equal to the length of the division on ■which it stands, by the area ODCA.
Let CGIl be drawn parallel to DO, cutting PM in G; then MG is equal to CD;
and since DC just remunerates the farmer for one dose, MG will just remunerate
him for another: and so for all the portions of the thick vertical lines cut off
between OD and UC. Therefore the sum of these, that is, the area QDCU,
represents the share of the produce that is required to remunerate him; white
the remainder, AHGCPA, is the surplus produce, which under certain conditions
becomes the rent.
1 That is, we may substitute (fig. 11) the dotted line B A 'ioi BA and regard
A'BPC as the typical curve for the return to capital and labour applied in
English agriculture. No doubt crops of wheat and some other anmmla cannot be
raised at all without some considerable labour. But natural grasses which sow
themselves will yield a good return of rough cattle to scarcely any labour.
It has already been noticed (Book m. ch. in. $ 1), the law of diminishing
return bears a close analogy to the law of demand. The return which land gives
to a dose of capital and labour may be regarded as the price which land offers for
that dose. Land’s return to capital and labour is, so to speak, her effective




ORDER OF FERTILITY CHANGES WITH CIRCUMSTANCES

157

§ 3 . Let us next inquire on what depends the rate of iv, m, 3.
diminution or of increase of the returns to successive doses of The
capital and labour. We have seen that there are great varia- ^nature's
tions in the share of the produce which man may claim as
the additional result of his own work over what unaided labour
nature would have produced; and that man’s share is much J^Vand1
larger with some crops and soils and methods of cultivationctops’
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 The
of land. Even if there be no change in the arts of production, fertility of
a mere increase in the demand for produce may invert the ^ a
°yfields
order in which two adjacent pieces of land rank as regards
fertility. The one which gives the smaller produce, whencircum•
stances
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 tho­
roughness. 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,
for them: her return to any do9e is her demand price for that dose, and the list
of returns that she will give to successive doses may thus be regarded as her
demand schedule: but to avoid confusion we shall call it her “ Return Schedule.”
Corresponding to the case of the land in the text is that of a man who may be
willing to pay a larger proportionate price for a paper that would cover the whole
of the walls of his room than for one that would go only half way; and then his
demand schedule would at one stage show an increase and not a diminution of
demand price for an increased quantity. But in the aggregate demand of many
individuals these unevennesses destroy one another; so that the aggregate
demand schedule of a group of people always shows the demand price as falling
steadily with every increase in the amount offered. In the same way, by grouping
together many pieces of land we might obtain a return schedule that would show
a constant diminution for every increase pf capital and labour applied. But it is
more easy to ascertain, and in some ways more important to take note of, the
variations of individual demand in the case of plots of land than in the case of
people. And therefore our typical return schedule is not drawn out so as to show
as even and uniform a diminution of return as our typical demand schedule does
of demand price.




158

THE FERTILITY OF LAND

IV,h i , 3. 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 culti­
vation 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 off1.
1 This case may be represented by diagrams. If the produce rises in real value
in the ratio of OH' to OH (so that the amount required to remunerate the farmer
for a dose of capital and labour has fallen from OH to 07/’), the surplus produce
rises only to AH’C\ which is not very much greater than its old amount ABC%
fig. 12, representing the first case. The second case is represented in fig. 13,
where a similar change in the price of produce makes the new surplus produce
AH'C about three times as large as the old surplus, AHC\ and the third in
fig. 14. The earliest doses of capital and labour applied to the land give so poor &
return, that it would not be worth while to apply them unless it were intended to
Fig. (12).

Fig. (13).

Fig. (14).

carry the cultivation further. But later doses give an increasing return which
culminates at P, and afterwards diminishes. If the price to be got for produce is
so low that an amount OH" is required to remunerate the cultivator for a dose of
capital and labour, it will then be only just profitable to cultivate the land. For
then cultivation will be carried as far as D "; there will be a deficit on the earlier
doses represented by the area H"AE” t and a surplus on the later doses repre­
sented by the area E " P C and as these two are about equal, the cultivation of
the land b o far will only just pay its way. But if the price of produce rises till




FAVOURITE SOILS OF EARLY SETTLERS

159

But when improvements of this kind have once been iv.ra, 3.
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 return1.
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 b o . 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
c o m m a n d , may sometimes obtain an increasing return even
at a late stage in his cultivation2.
OH is sufficient to remunerate the cultivator for a dose of capital and labour, the
deficit on the earlier doses will sink to HAE, and the surplus on the later doses
will rise to EPC: the net surplus (the true rent in case the land is hired out) will
be the excess of EPC over HAE. Should the price rise further till OH' is
sufficient to remunerate the cultivator for a dose of capital and labour, this net
surplus will rise to the very large amount represented by the excess of E'PC'
over II'AE't
1 In such a case as this the earlier doses are pretty sure to be sunk in the
land; and the actual rent paid, if the land is hired out, will then include profits
on them in addition to the surplus produce or true rent thus shown. Pro­
vision can easily be made in the diagrams for the returns due to the landlord’s
capital.
*
Of course his return may diminish and then increase
and then diminish again; and yet again increase when he a
is in a position to carry out some further extensive change, H
as was represented by fig. 11. But more extreme instances,
oi the kind represented by fig. 15, are not very rare.
o




160

THE FERTILITY OF LAND

iv, m, s.

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.
Early
The first settlers in a new country generally avoid land
often
which does not lend itself to immediate cultivation. They
rfokHhe are often repelled by the very luxuriance of natural vegetaan English ^ on> ^ ^ happens to be of a kind that they do not want,
farm
er
They do not care to plough land that is at all heavy, howwo ul d b e
. . .
. - . t
-it
,
apt to
ever rich it might become if thoroughly worked. They will
8elect*
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 b y
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.
Fertility
We cannot then call one piece of land more fertile than
18 n o t
m
i •
absolute
another until we know something about the skill and enterto place
prise of its cultivators, and the amount of capital and labour
and tim
e. ^
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




VARIATIONS IN RELATIVE VALUE OF DIFFERENT SOILS

161

with reference to the special circumstances of a particular iv, m, 4
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
context1.
§ 4. But further, the order of fertility of different soils Other
is liable to be changed by changes in the methods of culti- change in
vation and in the relative values of different crops. Thus tatoeso f V
*
when at the end of last century Mr Coke showed how to
grow wheat well on light soils by preparing the way with land*
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
1 If the price of produce is such that an amount of it OH (figs. 12, 13, 14)
is required to pay the cultivator for one dose of capital and labour, the cultivation
will be carried as far aa 1); and the produce raised, AODC, will be greatest in
fig. 12, next greatest in fig. 13, and least in fig. 14. But if the demand for
agricultural produce so rises that OH' is enough to repay the cultivator for a
dose, the cultivation will be carried as far as D\ and the produce raised will
be AOD'C', which is greatest in fig. 14, next in fig. 13, and least in fig. 12.
The contrast would have been even stronger if we had considered the surplus
produce which remains after deducting what is sufficient to repay the cultivator,
and which becomes under some conditions the rent of the land. For this is A1IC
in figs. 12 and 13 in the first case and A H 'C in the second; while in fig. 14 it
is in the first case the excess of AODCPA over ODCH, i.e. the excess of PEC
over AI1E\ and in the second case the excess of P E ’C' over A H ’E ’.




162

THE FERTILITY OF LAND

iv, n i, 4. 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
Com 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 re­
covered part of that great fall in value relatively to arable
land, which had resulted from the growth of population1.
Poorer^
Independently of any change in the suitability of the
in relative prevailing crops and methods of cultivation for special soils,
Is the
there is a constant tendency towards equality in the value
of different soils. In the absence of any special cause to
increases, 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 b y 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 labour2.
1 Rogers (Six Centuries of Work and Wages, p. 73) calculates that rich
meadow had about the same value, estimated in grain, five or six centuries ago as it
has now; but that the value of arable land, similarly estimated, has increased about
fivefold in the same time. This is partly due to the great importance of hay at a
time when roots and other modem kinds of winter food for cattle were unknown.
*
Thus we may compare two pieces of land represented in figs. 16 and 17, with
regard to which the law of
Fig. (18).
diminishing return acts in a
similar way, bo that their pro­
1
K fr (W ).
duce curves have similar shapes,
s . c
but the former has a higher fer­
tility than the other for all de­
grees of intensity of cultivation.
D'
The value of the land may gene*
rally be represented by its surplus produce or rent, which is in each
represented by ABC when OB is required to repay a dose of capital and labour*
and by AH'C' when the growth of numbers and wealth have made OH' sufficient.
It is clear that AH'C' in fig. 17 bears a more favourable comparison with AH'C'
in fig. 16 than does AHC in fig. 17 with ARC in fig. 16. In the same way, though
not to the same extent, the total produce AOD'C in fig. 17 bears a more favour­
able comparison with AOD'C' in fig. 16, than, does AODC in fig. 17 with AO DC
in fig. 16.
(It is ingeniously argued in Wicksteed’s Coordinates of Lavss cf
Distribution, pp. 51, 2 that rent may be negative. Of course taxes may absorb
rent: but land which will not reward the plough will grow trees or rough gtasg.
See above, pp. 157, 8.)
Leroy Beaulieu (Repartition dtt Richtssei, chap. e l) has collected several




GOOD CULTIVATION A RELATIVE TERM

163

As there is no absolute standard for fertility, so there is iv, m, 5.
none of good cultivation. The best cultivation in the richest There is no
parts of the Channel Islands, for instance, involves a lavish Ijjadajd
expenditure of capital and labour on each acre: for they are °uHivation
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 exception­
ally 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.
§ 5. Ricardo’s wording of the law of diminishing return Ricarfo’s
was inexact. It is however probable that the inaccuracy was of°theiaw
due not to careless thinking but only to careless writing, accurate.
In any case he would have been justified in thinking that
these conditions were not of great importance in the pe­
culiar 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 change1.
illustrating this tendency of poor lands to rise in value relatively to rich. He
quotes the following figures, showing the rental in francs per hectare (2| acres) of
8ve classes of land in several communes of the D6partements de l’Eure et de
l’Oise in 1829 and 1852 respectively:—
Class I.
Class II.
Class III.
Class IV.
Class V.
A.D. 1829
58
48
34
20
8
A.D. 1862
80
78
60
50
40
1 As Roscher says (Political Economy, Sect. c l v .), “ In judging Ricardo, it
must not be forgotten that it was not his intention to write a text-book on the
science of Political Economy, but only to communicate to those versed in it the
result of his researches in as brief a manner as possible. Hence he writes so
frequently making certain assumptions, and his words are to be extended to other
cases only after due consideration, or rather re-written to suit the changed case.”




THE FERTILITY OF LAND

164

iv, ra, 5.
He stated that the first settlers in a new country invariRieardo ably chose the richest lands, and that as population increased,
therichnt Poorer an^ P00rer soils were gradually brought under cultilwidswere vation, speaking carelessly as though there were an absolute
ftrat; this standard of fertility. But as we have already seen, where
thewnse land is free, everyone chooses that which is best adapted for
meantuf0 his own purpose, and that which will give him, all things
considered, the best return for his capital and labour. H e
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 aU
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 posi­
tion, have yet some solid substance in them.
aU to be
t
The fact that, in new countries, soils which an English
m
isunder- farmer would regard as poor, are sometimes cultivated before
was bj^8 neighbouring soils which he would regard as rich, is not
Carey.
inconsistent, as some foreign writers have supposed, with
the general tenor of Ricardo’s doctrines. Its practical im­
portance 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 it1.
1 Carey claims to have proved that “ in every quarter of the world cultivation
has commenced on the sides of the hills where the soil was poorest, and where the
natural advantages of situation were the least. With the growth of wealth and
population, men have been seen descending from the high lands bounding the
valley on either side, and coming together at its feet.” (Principles of Social
Science, chap. iv. J4.) He has even argued that whenever a thickly peopled
country is laid waste, “ whenever population, wealth, and the power of association
decline, it is the rich soil that is abandoned by men who fly again to the poor




CAREY’S CRITICISM OF RICARDO’S DOCTRINE

165

§ 6. Ricardo, and the economists of his time generally iv, in, 6.
were too hasty in deducing this inference from the law of But Carey
diminishing return; and they did not allow enough for the *^fshown
c
increase of strength that comes from organization. But ^ Serrated
fact every farmer is aided by the presence of neighbours the indirect
whether agriculturists or townspeople1. Even if most of which a8*8
*”
them are engaged like himself in agriculture, they gradually portion
supply him with good roads, and other means of communi1
0
cation: they give him a market in which he can buy at culture,
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 know­
ledge: 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 popu­
lation 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
ones” (lb. ch. v. § 3); the rich soils being rendered difficult and dangerous by the
rapid growth of jungles which harbour wild beasts and banditti, and perhaps by
malaria. The experience of more recent settlers in South Africa and elsewhere
does not however generally support his conclusions, which are indeed based largely
on facts relating to warm countries. But much of the apparent attractiveness of
tropical countries is delusive: they would give a very rich return to hard work:
but hard work in them is impossible at present, though some change in this
respect may be made by the progress of medical and especially bacteriological
science. A cool refreshing breeze is as much a necessary of vigorous life as
food itself. Land that offers plenty of food but whose climate destroys energy, is
not niore productive of the raw material of human wellbeing, than land that
supplies less food but has an invigorating climate.
The late Duke of Argyll described the influence of insecurity and poverty in
compelling the cultivation of the hills beforo that of the valleys of the Highlands
was feasible, Scotland as it is and was, II. 74, 5.
1 In a new country an important form of this assistance is to enable him
to venture on rich lai>d that he would Lave otherwise shunned, through fear of
enemies or of malaria.




166

T H E F E R T IL IT Y OF LAN D

iv, in, 7 as sharply as to that on a single farm. Even when culti.
vation 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 diffi­
culty 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.
The value
Against this must be set the growing difficulty of getting
airjdght, fresh air and light, and in some cases fresh water, in densely
b«autifuid 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,
fertility of
§ 7 . As has already been said the land in economic
fisheries,
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.
Amine
The produce of mines again, among which may be
giveadi- reckoned quarries and brickfields, is said to conform to the
retu irf law of dim inishing return; but this statement is misleading.
rn



FISH ERIE S AN D MINES

167

It is true that we find continually increasing difficulty in iv,m, 7
.
obtaining a further supply of minerals, except in so far as we the same
obtain increased power over nature’s stores through improvedoes,
ments 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 1
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 storehouse1.
*
As Ricardo says (Principles, chap. n.) “ The compensation given (by the
lessee) for the mine or quarry is paid for the value of the coal or stone which can
be removed from them, and has no connection with the original or indestructible
powers of the land.” But both he and others seem sometimes to lose sight of
these distinctions in discussing the law of diminishing return in its application to
mines. Especially is this the case in Ricardo’s criticism of Adam Smith’s theory
of rent (Principles, chap. xxiv.).




168

t h e f e r t il it y o f la n d

iv , m 7
, .
On the other hand, services which land renders to man,
Bt
u
in giving him space and light and air in which to live
landdoes a < work, do conform strictly to the law of diminishing
n^
iim ish re^
in
urn* ^ 1 advantageous to apply a constantly increasing
3
ing return capital to land that has any special advantages of situation,
°enience as natural or acquired. Buildings tower up towards the sky;
S T H natural light and ventilation are supplemented by artificial
ip ta s
spent on it. 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 reachcd 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 land1 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.
The
And what is true of building land is true of many other
oU
helty things. If a manufacturer has, say, three planing machines
d in -* there is a certain amount of work which he can get out of
im ish
ing return them easily. If he wants to get more work from them he
and rent
*
°
fo r e ^
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

1 Of course the return to capital spent in building increases for the earlier
doses. Even where land can be had for almost nothing, it is cheaper to build
houses two stories high than one; and hitherto it has been thought cheapest to
build factories about four stories high. But a belief is growing up in America,
that where land is not very dear factories should be only two stories high, partly
in order to avoid the evil effects of vibration, and of the expensive foundations
and walls required to prevent it in a high building: that is, it is found that the
return of accommodation diminishes perceptibly after the capital and labour
required to raise two stories have been spent on the land.




N O TE ON T H E L A W OF D IM IN ISH IN G R E T U R N

169

machines: just as a farmer who has already cultivated his iv, m 8
, .
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.

N o t e o n t h e L a w o p D im in is h in g R e t u r n .

§ 8. The elasticity of the notion of diminishing return cannot be The
fully considered here; for it is but an important detail of that large
general problem of the economic distribution of resources in the notion of
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 further
few words about it seem now to be called for in this place, because C0ns^ 6re^‘
much stress has recently been laid on it under the able and suggestive
leadership of Professor Carver1.
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
p H capital applied to land is regarded as a special instance of the
.n
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 jtcres 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
r e g a r d to tho 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.
1 See also the writings of Professors Bullock and Landry.




X70

t h e f e r t il it y o f l a n d

IV, in, 8.
la every phase of any branch of production there is some distribu1—
tion of resources between various expenditures which yields a better
TTiini'ghing result than any other. The abler the man in control of any business,
return
the nearer he will approach to the ideally perfect distribution; just
generally
from an

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

priate™

between the different needs of the fam ily1.

apportionif tig business extends he will extend his uses of each requisite of
appliances production in due proportion; but not, as has sometimes been said,
for pro*
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 the
But when the older economists spoke of the Law of Diminishing
national
Return they were looking at the problems of agriculture not only from
culture of the point of view of the individual cultivator but also from that of the
peopled* nation as a whole. Now if the nation as a whole finds ita stock of
country
planing machines or ploughs inappropriately large or inappropriately
natedby sma^» ^ 0811 redistribute its resources. It can obtain more of that in
the fixity which it is deficient, while gradually lessening its stock of such things
ofone as are superabundant: but it cannot do that in regard to land', it can
of the chief cultivate its land more intensively, but it cannot get any more. At»|
appliances. 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,

st ock

*
In this he will make large use of what is called below the “ Substitution” of
more for less appropriate means. Discussions bearing directly on this paragraph
will be found in III. v. 1—3: IV. vn. 8; and xm. 2: V. m. 3; iv. 1—4; ▼ 6—S;
.
Yin. 1—5; x. 3: VI. i. 7; and n. 5.
The tendencies of diminishing utility and of diminishing return have thojT
roots, the one in qualities of human nature, the other in the technical conditions
of industry. But the distributions of resources, to which they point, are governed
by exactly similar laws. In Mathematical phrase, the problems in maxima and
minima to which they give rise are expressed by the same general equations;
as may be seen by reference to Mathematical Note XIV.




N OTE ON T H E L A W OF D IM IN ISH IN G R E T U R N

171

or rent, of land as varying with the land’s distance from good markets, IV, m, 8.
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
likft 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 dispropor­
tionately large number of ploughs or planing machines.
It is true that when the tendency to diminishing return is general- Difficulty •
ized, the return is apt to be expressed in terms of value, and not
r*
of quantity. It must however be conceded that the older method dose of
of measuring return in terms of quantity often jostled against the capital^
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 problem1.
A similar difficulty is found in comparing the returns obtained by and of
labour and capital applied under different circumstances. So long as
the crops are of the same kind, the quantity of one return can be produce to
measured off against that of another: but, when they are of different ^ c®
mmon
Vmda, 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 under­
stood to hold only on the basis of the prices at the time. In such a
*
The labour-part of the dose is of course current agricultural labour; the
eapital-part is itself also the product of labour in past times rendered by workers
of many kinds and degrees, accompanied by “ waiting.”




172

T H E F E R T IL IT Y OF LAN D

IV, in, 8. 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
Different
methods
and capital is not here taken to include the value of the capital itself.
of book­
For instance, if part of the capital on a farm consists of two-year-old
keeping
may class oxen, then the returns to a year’s labour and capital will include not
the same
thing*as
the full weight of these oxen at the end of the year, but only the
capital or
addition that has been made to it during the year. Again, when a
produce;
farmer is said to work with a capital of £10 to the acre, this includes
but each
must be
consistent the value of everything that he has on the farm; but the total volume
with itself. 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 circu­
lating 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 Bame 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 ua 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 ia every densely peopled country. It was first stated clearly by
Turgot (CEuvres, ed. Daire I. pp. 420, 1), as Prof. Cannan has shown;
and its chief applications were developed by Ricardo.




CHAPTER IV.
T H E G R O W T H O F POPULATION?

§1.

T h e p ro d u c tio n o f w e a lth is b u t a m e a n s t o th e

iv .iv , 1.

su stenance o f m a n ; to th e sa tisfa c tio n o f h is w a n t s ; a n d t o poz ^ ion
th e

d e v e lo p m e n t

m o ra l.

o f h is

a ctiv itie s,

p h y sica l,

m e n ta l,

a n d “ “tF £ '

B u t m a n h im self is th e ch ief m ea n s o f th e p ro ­

d u ction o f t h a t w e a lth o f w h ich h e is th e u ltim a te a im 1 :
a n d th is a n d th e tw o fo llo w in g c h a p te rs w ill b e g iv e n t o
so m e s tu d y o f th e su p p ly o f la b o u r ;

i.e. o f

th e g ro w th of

p o p u la tio n in n u m b e rs, in stre n g th , in k n o w led g e, a n d in
ch aracter.

In the animal and vegetable world the growth of numbers The
is governed by the tendency of individuals to propagate their lumbers
species on the one hand, and on the other hand by the
ig
struggle for life which thins out the young before they
arrive at maturity. In the human race alone the conflict of conditions;
these two opposing forces is complicated by other influences, menitis
On the one hand regard for the future induces many indi- tu itions7
viduals to control their natural impulses; sometimes with o
fJ£®nd
the purpose of worthily discharging their duties as parents; Recasts
sometimes,' as for instance at Home under the Empire, for future,
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 The pro­
as though it were a modern one. But in a more or less potation
^vague form it has occupied the attention of thoughtful men S n d w i i in all ages of the world. To its influence, often unavowed, 2ation


1 See IV. 1. 1.

G RO W TH OF POPULATION

174

IV, it , 1. 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. Am ong
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.
Fluetuai n ancient Greece and Rome, with the safety-valve of the
tions of
J
opinion
power of planting colomes, and in the presence of constant
encourage- war, an increase in the number of citizens was regarded as
a source of public strength; and marriage was encouraged b y
fam
ilies, public opinion, and in iiiany cases even by legislation: though
thoughtful men were even then aware that action in the
*
contrary sense might be necessary if the responsibilities o f
parentage should ever cease to be burdensome1. In later
times there may be observed, as Roscher says2, 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 percept­
ible 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 b y the monastic establishments.
Later on the growth of population was checked b y that rise
1 Thus Aristotle (Polities, n. 6) objects to Plato’s scheme for equalizing pro,
perty and abolishing poverty on the ground that it would be unworkable
the State exercised a firm control over the growth of numbers. And as Jowet&
points out, Plato himself was aware of this (see Laws, v. 740: also Aristotle,
Politics, vix. 16). The opinion, formerly held that the population of Greece fWnnrifl
from the seventh century B.C., and that of Rome from the third, has recently been
called in question, see “ Die Bev&lkerung des Altertums” by Edouard Meyer in the
Samdworterbuch der Staatswissenschaften.
*

P
olitical E
conom $ 254.
y,




H IS T O R Y OF T H E DO CTRIN E OF PO PU LATION

175

in the standard of comfort which took effect in the general iv, i t ,
adoption of wheat as the staple food of Englishmen during
the first half of the eighteenth century. A t that time there
were even fears, which later inquiries showed to be un­
founded, that the population was actually diminishing. Petty1
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 i t ” ; 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 land2.” 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 Helena3.
1 He argues that Holland is richer than it appears to be relatively to France,
because its people hare access to many advantages that cannot be had by those
who live on poorer land, and are therefore more scattered. “ Rich land is better
than coarse land of the same Rent.” Political Arithmetick, ch. I.
* Discourses on Trade, ch. X. Harris, Essay on Coins, pp. 32, 3, argues to a
gjmilar effect, and proposes to “ encourage matrimony among the lower classes by
giving some privileges to those who have children,” etc.
* “ Let us,” said Pitt, “ make relief, in cases where there are a large number o!
children, a matter of right and an honour, instead of a ground for opprobrium and
contempt. This will make a large family a blessing and not a curse, and this will
draw a proper line of distinction between those who are able to provide for
themselves by labour, and those who after having enriched their country with a
number of children have a claim on its assistance for their support.” Of course he
desired “ to discourage relief where it was not wanted.” Napoleon the First had
offered to take under his own charge one member of any family which contained
seven male children; and Louis XIV., his predec'wsor in the slaughter of men, had
exempted from public taxes all those who married before the age of 20 or had
more than ten legitimate children. A comparison of the rapid increase in the
population of Germany with that of France was a chief motive of the order of the
French Chamber in 1885 that education and board should be provided at the public
expense for every seventh child in necessitous families: and in 1913 a law was




i

.

176
IV, it , 2The
doctrines
of recent
econo­
mists.
The Phy­
siocrats.

G RO W TH OP POPULATION

§ .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
i t ' 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 b y 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 subsistence1.”
passed giving bounties under certain conditions to parents of large families. The
British Budget Bill of 1909 allowed a small abatement of income tax for fathers
of families.
1 The Physiocratic doctrine with regard to the tendency of population to
increase up to the margin of subsistence may be given in Turgot’s words:—the
employer “ since he always has his choice of a great number of working men, will
chooae that one who will work most cheaply. Thus then the workers are com­
pelled by mutual competition to lower their price; and with regard to every kind
of labour the result is bound to be reached—and it is reached as a matter of fact__
that the wages of the worker are limited to that which is necessary to procure his
subsistence.” (Sur la formation et la distribution des riehesses, $ vi.)
Similarly Sir James Steuart says (Inquiry, Bk. I. ch. in.), “ The generative
faculty resembles a spring loaded with a weight, which always exerts itself in
proportion to the diminution of resistance: when food has remained some time
without augmentation or diminution, generation will carry numbers as high as
possible; if then food comes to be diminished the spring is overpowered; the fore®
of it becomes less than nothing, inhabitants will diminish at least in proportion to
the overcharge. If, on the other hand, food be increased, the spring which stood
at 0, will begin to exert itself in proportion as the resistance diminishes; people
will begin to be better fed; they will multiply; and in proportion as they
in numbers the food will become scarce again.” Sir James Steuart was much
under the influence of the Physiocrats, and was indeed in some respects imbued




H ISTO RY OF T H E D O CTRIN E OF PO PU LATIO N

177

Adam Smith said but little on the question of population, IV, i t , 2 .
for indeed he wrote at one of the culminating points of the Adam
prosperity of the English working classes; but what he does Sm
ith*
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; ai^d may vary more1. 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 The
century began; year by year the condition of the working crahfry *
classes in England became more gloomy. An astonishing andthe
series of bad harvests2, a most exhausting war3, and a change
in the methods of industry that dislocated old ties, co m - gloom,
bined 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 history4. 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 children6.
with Continental rather than English notions of government: and his artificial
schemes for regulating population seem very far off from us now. See his Inquiry,
Bk. I. ch. xn., "O f the great advantage of combining a well-digested Theory and
a perfect Knowledge of Facts with the Practical Part of Government in order to
make a People multiply.”
1 See Wealth of Nations, Bk. I. ch. Tin. and Bk. v. ch. i l See also supra,
Bk. u cL iv.
* The average price of wheat in the decade 1771-1780 in which Adam Smith
wrote was 34s. 7d. \in 1781-1790 it was 37s. Id.; in 1791-1800 it was 63s. 6d.; in
1801-1810 it was 83s. lid .; and in 1811-1820 it was 87s. 6i.
* Early in the last century the Imperial taxes—for the greater part war
taxes—amounted to one-fifth of the whole income of the country; whereas now
they are not much more than a twentieth, and even of this a great part is spent
on education and other benefits which Government did not then afford.
* See below § 7 and above Bk. i. ch. ni. §§ 5, 6.
1 Especially Godwin in his Inquiry concerning Political Justice (1792). It is
interesting to compare Malthus* criticism of this Essay (Bk. m. ch. n.) with
Aristotle’s comments on Plato’s Republic (see especially Politics, n. 6).




G RO W TH OF POPULATION

178

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
Malthus.
Principle o f Population is the starting-point of all modem
speculations on the subject.
His
§ 3. Malthus’ reasoning consists of three parts, which
argument
has three must be kept distinct. The first relates to the supply of
stages.
The first. labour. B y 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 volun­
tary restraint.
The
His second position relates to the demand for labour.
second.
Like the first it is supported by facts, but b y 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 demand1.
The third.
Thirdly, he draws the conclusion that what had been in
the past, was likely to be in the future; and, that the growth
IV, iv, 3.

1 But many of his critics suppose him to have stated his position much less
unreservedly than he did; they have forgotten such passages as this:—“ From a
review of the state of society in former periods compared with the present I should
certainly say that the evils resulting from the principle of population have rather
diminished than increased, even under the disadvantage of an almost total igno­
rance of their real cause. And if we can indulge the hope that this ignorance
will be gradually dissipated, it does not seem unreasonable to hope that they will
be still further diminished. The increase of absolute population, which will of
course take place, will evidently tend but little to weaken this expectation, as
everything depends on the relative proportions between population and food, and
not on the absolute number of the people. In the former part of this work it
appeared that the countries which possessed the fewest people often suffered the
most from the effects of the principle of population.” Euay, Bk. iv. ch. xn.




MALTHUS

179

of population would be checked by poverty or some other iv, iv, 3.
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 marriages1.
His position with regard to the supply of population, Later
with which alone we are directly concerned in this chapter, attecuhe
remains substantially valid. The changes which the course ^second
of events has introduced into the doctrine of population
relate chiefly to the second and third steps of his reasoning, not o f’his
We have already noticed that the English economists of the
earlier half of last century overrated the tendency of an
1 In the first edition of his essay, 1798, Malthus gave liis argument without any
detailed statement of facts, though from the first he regarded it as needing to be
treated in direct connection with a study of facts; as is shown by his having told
Fryme (who afterwards became the first Professor of Political Economy at
Cambridge) “ that his theory was first suggested to his mind in an argumentative
conversation which he had with his father on the state of some other countries”
(Pryme’s Recollections, p. 6G). American experience showed that population if
unchecked would double at least once in twenty-five years. He argued that a
doubled population might, even in a country as thickly peopled as England was
with its seven million inhabitants, conceivably though not probably double the
subsistence raised from the English soil: but that labour doubled again would not
suffice to double the produce again. “ Let us then take this for our rule, though
-certainly far beyond the truth; and allow that the whole produce of the island
might be increased every twenty-five years [that is with every doubling of the
population] by a quantity of subsistence equal to that which it at present
produces” ; or in other words, in an arithmetical progression. His desire to make
himself clearly understood mad« him, as Wagner says in his excellent introduc­
tion to the study of Population {Grundlegung, Ed. 3, p. 453), “ put too sharp a
point on his doctrine, and formulate it too absolutely.” Thus he got into the
habit of speaking of production as capable of increasing in an arithmetical ratio:
and many writers think that ho attached importance to the phrase itself: whereas
it was really only a short way of stating the utmost that he thought any reason­
able person could ask him to concedo. What he meant, stated in modem
language, was that the tendency to diminishing return, which is assumed through­
out his argument, would begin to operato sharply after the produce of the island
had been doubled. Doubled labour might give doubled produce: but quadrupled
labour would hardly treble it: octupled labour would not quadruple it.
In the second edition, 1803, he based himself on so wide and carcful a statement
of facts as to claim a place among the founders of historical economics; ho softened
and explained away many of tho "sharp points” of his old doctrine, though he did
not abandon (as was implied in earlier editions of this work) the use of the phrase
“ arithmetical ratio.” In particular he took a less despondent view of the future
of the human race; and dwelt on the hope that moral restraint might hold
population in check, and that “ vice and misery,” the old checks, might thus be
kept in abeyance. Francis Place, who was not blind to his many faults, wrote in
1822 an apology for him, excellent in tone and judgment. Good accounts of
his work are given in Bonar’s Malthus and his Work, Cannan’s Production and
Distribution, 177G-1848, and Nicholson’s Political Economy, Dk. i. ch. h i.




G R O W T H OF POPULATION

180
IV, iv, 4.

Natural
Increase.

Marriage
affected
by the
climate,

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 b y 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 makea
the second and third Bteps 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 hereafter1.
§ 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 later2; but in every
1 Taking the present population of the world at one and a half thousand
millions; and assuming that its present rate of increase (about 8 per 1000
annually, see Ravenstein’s paper before the British Association in 1890) will
continue, we find that in less than two hundred years it will amount to six
thousand millions; or at the rate of about 200 to the square mile of fairly fertile
land (Ravenstein reckons 28 million square miles of fairly fertile land, and 14
millions of poor grass lands. The first estimate is thought by many to be too
high: but, allowing for this, if the less fertile land be reckoned in for what it is
worth, the mult will be about thirty million square miles aa assumed above).
Meanwhile there will probably be great improvements in the arts of agriculture;
and, if so, the pressure of population on the means of subsistence may be held ia
check for about two hundred years, but not longer.
*
Of course the length of a generation has itself some influence on the growth
of population. If it is 25 years in one place and 20 in another; and if in each
place population doubles once in two generations during a thousand years, the in­
crease will be a million-fold in the first place, but thirty million-fold in the second.




M A R R IA G E -R A T E

181

case the longer marriages are postponed beyond the age that IV, i t , 4.
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 husband1. Given the climate, and the
the average age of marriage depends chiefly on the ease with JSJStuJf
which young people can establish themselves, and supporta
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 Middle
maximum till he is forty or fifty years old; and the expense marry
of bringing up his children is heavy and lasts for many years. JJJJSkI
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 un­
skilled labourers2.
1 Dr Ogle (Statistical Journal, Vol. 53) calculates that if the average age of
marriage of women in England were postponed five years, the number of children
to a marriage, which is now 4-2 would fall to 3-1. Kordsi, basing himself on
the facts of the relatively warm climate of, Buda Pest, finds 18—20 the most
prolific age for women, 24—26 that for men. But he concludes that a slight
postponement of weddings beyond these ages is advisable mainly on the ground
that the vitality of the children of women under 20 is generally Bmalh See
Proceedings of Congress of Hygiene and Demography, London 1892, and Statistical
Journal, Vol. 57.
*
The term marriage in the text must be taken in a wide sense so as to include
not only legal marriages, but all those informal unions which are sufficiently
permanent in character to involve for several years at least the practical responsi­
bilities of married life. They are often contracted at an early age, and not unfrequently lead up to legal marriages after the lapse of some years. For this reason
the average age at marriage in the broad sense of the term, with which alone we
are here concerned, is below the average age at legal marriage. The allowance
to be made on this head for the whole of the working classes is probably con­
siderable; but it is very much greater in the case of unskilled labourers than of
any other class. The following statistics must be interpreted in the light of
this remark, and of the fact that all English industrial statistics are vitiated
by the want of sufficient care in the classification of the working classes in our
official returns. The Registrar-General’s forty-ninth Annual Beport states that




GRO W TH OF POPULATION

182

iv, iv, 4.

Unskilled labourers, when not so poor r,s 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 in­
ference is confirmed by the teaching of all history. Through­
out Europe during the Middle Ages, and in some parts o f
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 them ­
selves: when a village has as many hands as it can well
employ, the number of houses i3 not increased, and young
people have to wait as best they can.
toefrfyCS
e
There are many parts of Europe even now in which custom
marriage in exercising the force of law prevents more than one son in
each family from marrying; he is generally the eldest, b u t
rural
dwtncta. jn gome 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 hardships*.
It is true that the severity of this custom may be tempered
in certain selected districts the returns of marriages for 1884-5 were examined
with the following results; the number after each occupation being the average
age of bachelors in it at marriage, and the following number, in brackets, being
the average age of spinsters who married men of that occupation:—Miners 24-06
(22-46); Textile hands 24-38 (23-43); Shoemakers, Tailors 21-92 (24-31); Artisans
25-35 (23-70); Labourers 25-56 (23-f>G); Commercial Clerks 2f>-25 (24-43); Shop­
keepers, Shopmen 20-67 (21-22); Farmers and sons 20-23 (2G-91); Professional and
Independent Class 31-22 (26-40).
Dr Ogle, in the paper already referred to, shows that tho marriage-rate is
greatest generally in those parts of England in which the percentage of those women
between 15 and 25 years of age who are industrially occupied is the greatest. This
is no doubt due, as he suggests, partly to the willingness of men to have their money
incomes supplemented by those of their wives; but it may be partly due also to an
excess of women of a marriageable age in those districts.
1 Thus a visit to the valley Jachenau in the Bararian Alps about 1880 found
this custom still in full force. Aided by a great recent rise in the value of their woods,
with regard to which they had pursued a farseeing policy, the inhabitants lived
prosperously in large houses, the younger brothers and sisters acting as servants
in their old homes or elsewhere. They were of a different race from the work­
people in the neighbouring valleys, who lived poor and hard lives, but seemed to
think that the Jachenau purchased its material prosperity at too great a cost.




M A R R IA G E -R A T E

183

by the power of migration; but in the Middle Ages the free iv, tv,5.
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 them­
selves1.
§ 5. In this respect the position of the hired agricultural The
labourer has changed very much. The towns are now always is often
open to him and his children; and if he betakes himself to pe t°ng
^s£m
the New World he is likely to succeed better than any other P^Prie‘
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 i3 presumably not of a fertile stock, and some­
times 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 but not
favourable to the rapid growth of numbers than those of American
the agricultural districts of new countries. Land is to b e farrn
ers>
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-ofdoor lives; there is nothing to check but everything to
1 See e.g. Rogers, Six Centuries, pp. 106, 7.




G RO W T H OF POPULATION

184
IV, iv, 5.

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 years1.
1 The extreme prudence of peasant proprietors under stationary conditions
was noticed by Malthus; see bis account of Switzerland (Essay, Bk. n. ch. ▼
.).
Adam Smith remarked that poor Highland women frequently had twenty children
of whom not more than two reached maturity (Wealth of Nations, Bk. I. ch. vm.);
and the notion that want stimulated fertility was insisted on by Doubleday,
True Law of Population. See also Sadler, Law of Population. Herbert Spencer
seemed to think it probable that the progress of civilization will of itself hold the
growth of population completely in check. But Malthus’ remark, that the repro­
ductive power is less in barbarous than in civilized races, has been extended by
Darwin to the animal and vegetable kingdom generally.
Mr Charles Booth (Statistical Journal, 1893) has divided London into 27 districts
(chiefly Registration districts); and arranged them in order of poverty, of over­
crowding, of high birth-rate and of high death-rate. He finds that the four orders
are generally the same. The excess of birth-rate over death-rate is lowest in the
very rich and the very poor districts.
The birth-rate in England and Wales is nominally diminishing at about an
equal rate in both town and country. But the continuous migration of young
persons from rural to industrial areas has considerably depleted the ranks of
young married women in the rural districts; and, when allowance is made for this
fact, we find that the percentage of births to women of childbearing ages is much
higher in them than in the towns: as is shown in the following table published by
the Registrar-General in 1907.

Mean Annual Birth-rates in Urban and Rural Areas.

Urban.
20 Urge towns, with an aggregate population o f 9,742,404 persons
at the date of the Census o f 1901.
Calculated on the total
population.

Calculated on the female
population, aged 15—45 years.

1

Period.
Rate per
1000

1870-72
1880-82
1800-92
1900-02

Compared with
rate in 1870—72
taken as 100

Bate per
1000

Compared with
rate In 1870—72
taken as 100

36-7
35-7
320
29-8

100-0
97-3
87-2
81-2

1431
140-6
1246
111-4

100-0
98-3
87-1
77-8

Rural.
112 entli ely rural registra ion
c>f 1,330,319 peraont at
1870-72
1880-82
1890-02
1900-02




31-0
30-3
27-8
260

districts, wit i an aggregate po potation
the date of t he Census o f 19bl

100-0
95-9
88-0
82-3

158-9
153-5
135-6
120-7

100-0
96-6
85-3
76-0

B IR T H -R A T E

185

On the whole it seems proved that the birth-rate is iv, iv, 6.
generally lower among the well-to-do than among those who General
make little expensive provision for the future of themselves conclU
8,on*
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.
§ 6. The growth of population in England has a more Popuia*
clearly defined history than that in the United Kingdom, England,
and we shall find some interest in noticing its chief move­
ments.
The restraints on the increase of numbers during the The
Middle Ages were the same in England as elsewhere. In Ages.
England as elsewhere the religious orders were a refuge
to those for whom no establishment in marriage could be
The movements of the population of France bare been studied with exceptiona
care; and the great work on the subject by Levasseur, La Population Franqaise,
is a mine of valuable information as regards other nations besides France.
Montesquieu, reasoning perhaps rather a priori, accused the law of primogeniture
which ruled in his time in France of reducing the number of children in a family:
and le Play brought the same charge against the law of compulsory division.
Levasseur (I.e. Vol. in. pp. 171-7) calls attention to the contrast; and remarks
that Malthus’ expectations of the effect of the Civil Code on population were in
harmony with Montesquieu’s rather than le Play’s diagnosis. But in fact the birth­
rate varies much from one part of France to another. It is generally lower where
a large part of the population owns land than where it does not. If however the
Departments of France be arranged in groups in ascending order of the property
left at death (valeurs luccessorales par tlte d’habitanf), the corresponding birth-rate
descends almost uniformly, being 23 per hundred married women between 15 and
50 years for the ten Departments in which the property left is 48—57 fr.; and 13-2
for the Seine, where it is 412 fr. And in Paris itself the arrondissements inhabited
by the well-to-do show a smaller percentage of families with more than two children
than the poorer arrondissements show. There is much interest in the careful
analysis which Levasseur gives of the connection between economic conditions and
birth-rate; his general conclusion being that it is not direct but indirect, through
the mutual influence of the two on manners and the habit of life (maeurs). He
appears to hold that, however much the decline in the numbers of the French
relatively to surrounding nations may be regretted from the political and military
points of view, there is much good mixed with the evil in its
on
comfort and even social progress.




GRO W TH OF POPULATION

186

iv, iv, 6. 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 *n 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 families1.
There was however some movement even of agricultural
labourers towards districts which had been struck more
heavily than their neighbours by pestilence, b y 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
1 Thus we are (old that after the Black Death of 1340 most marriages were
very fertile (Rogers, History of Agriculture and Prices. VoL I. p. 301).




EN GLAND IN T H E M ID D LE AGES

187

homes. In these various ways some elasticity was intro- iv, iv, 6.
duced into the rigid system of mediaeval 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 trade1.
In the latter half of the seventeenth and the first half of Settlement
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 Settle­
ment 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 period2. Land- Slow
lords and farmers were so eager to prevent people from population
getting a “ settlement” in their parish that they put great fnthe8
6
difficulties in the way of building cottages, and sometimes
even razed them to the ground. In consequence the agri- the first
cultural population of England was stationary during the eighteenth
century;
1 There is no certain knowledge to bo had as to the density of population in
England before the eighteenth century; but the following estimates, reproduced
from Steffen (Geschichte der englischen Lohn-arbeiter, I. pp. 463 S.), are probably
the best as yet available.. Domesday Booh suggests that in 1086 the population of
England was between two, and two-and-a-half millions. Just before the Black
Death (1348) it may have been between three-and-a-half, and four-and-a-half
millions; and just afterwards two-and-a-half millions. It began to recover quickly;
but made slow progress between 1400 and 1550: it increased rather fast in the
next hundred years, and reached five-and-a-balf millions in 1700.
If we are to trust Harrison (Description of England, Bk. n. ch. xvi.), the
muster of men able for service in 1574 amounted to 1,172,674.
Tho Black Death was England’s only very great calamity. She was not, liko
the rest of Europe, liablo to devastating wnrs, such as the Thirty Years’ War,
which destroyed more than half the population of Germany, a loss which it
required a full century to recover. (See Rumelin’s instructive article on Bcvdlkerungslehre in SchSnberg’s Ilandbuch.)
*
Adam Smith is justly indignant at this. (See Wealth of Nations, Bk. I.
ch. x . Part i i . and Book i v . ch. i i .) The Act recites (14 Charles II. c. 12,
A.n. 1062) that “ by reason of some defoets in the law, poor people are nob
restrained from going from one parish to another, and thereby do endeavour to
settle themselves in those parishes where there is the best stock, the largest
wastes or commons to build cottages, anil the most woods for them to burn and
destroy: etc.” and it is therefore ordered “ that upon complaint made...within
forty days after any such person or persons coming, so as to settle as aforesaid,
in any tenement under the yearly value of ten pounds...it shall bo lawful for
any two justices of the Peace...to remove and convey such person or persons to
such parish where ho or they Mere last legally settled.” Several Acts purporting
to soften its harshness had been passed before Adam Smith’s time; but they had
been ineffective. In 1795 however it was ordered that no one should be removed
until he became actually chargeable.




G RO W TH OF POPULATION

188

IV, iv, 6. 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
people1.
changes in
From 1 7 6 0 onwards those who could not establish themthesecond gei veg a-j.
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. T o
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. A t 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 b y 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 allow­
ances 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
reformof
but its quality improved little, if at all, till the passing
bwthe1

^ ew •>00r ^ aw 1 1 18^4. Since that time the rapid
^
1
growth of the town population has, as we shall see in the
O S S * next chapter, tended to increase mortality, but this has
Sealy.
been counteracted b y the growth of temperance, of medical

growth of

1 Soma interesting remarks on this subject an made by Eden, History of tht
Foot% pp. 560-4.
I.




189

ENGLAND IN T H E E IG H T E E N T H CEN TU RY

knowledge, of sanitation and of general cleanliness. Emigra- IV, iv, 7
tion 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 risen1; with the result that population has
been growing very nearly steadily2. Let us examine the
course of recent changes a little more closely.
§ 7 . Early in this century, when wages were low and in the
wheat was dear, the working classes generally spent moreofthePart
than half their income on bread: and consequently a rise in JJjJjJJi!1
*
the price of wheat diminished marriages very much among
aS*4
them: that is, it diminished very much the number of goodness
marriages by banns. But it raised the income of many harvest,
members of the well-to-do classes, and therefore often in­
creased the number of marriages by licence3. Since however
1 But this increase in the figures shown is partly due to improved registration
of births. (Farr, Vital Statistics, p. 97.)
*
The following tables show the growth of the population of England and
Wales from the beginning of the eighteenth century. The figures before 1801 are
computed from the registers of births and deaths, and the poll and hearth tax
returns: those since 1801 from Census returns. It will be noticed that the numbers
increased nearly as much in the twenty years following 1760 as in the preceding
sixty years. The pressure of the great war and the high price of com is shown
in the slow growth between 1790 and 1801; and the effects of indiscriminate poor
law allowances, in spite of greater pressure, is 6hown by the rapid increase in the
next ten years, and the still greater increase when that pressure was removed in
the decade ending 1821. The third column shows the percentage which the increase
during the preceding decade was of the population at the beginning of that
decade.
Tear
1700
10
20
SO
40
50
60
70
80
90

Population

000s omitted
5,475
5,240
5,565
5,796
6,064
6,467
6,738
7,428
7,953
8,675

Increase
per cent.

Year

Population
000s omitted

Increase
percent.

1801
2-5
8,892
11
10,164
14-3
21
12,000
181
15-8
81
13,897
41
14-5
15,909
51
17,928
12-7
61
20,066
11-9
22,712
13-2
71
14 4
81
25,974
91
29,002
11-7
1901
32,527
11-7
* Decrease; but these early figures are untrustworthy.
- 4-9*
6-2
41
4-6
6-6
41
10-3
71
91

The great growth of emigration during recent years makes it important to
correct the figures for the last three decades so as to show the “ natural increase,”
viz. that due to the excess of births over deaths. The net emigration from the
United Kingdom during the decades 1871*81 and 1881-91 was 1,480,000, and
1,747,000 respectively.
•
See Farr's 17th Annual Report for 1854 as Registrar-General, or the abstract
of it in Vital Statistics (pp. 72—5).




G RO W TH OF POPULATION

190

iv, iv, 7. these were but a small part of the whole, the net effect
was to lower the marriage-rate1. But as time went on, the
influence of Price
wheat fell and wages rose, till now the working
commercial ciasses spend on the average less than a quarter of their
tionspre- incomes on bread; and in consequence the variations of
dominated. c o m m e r c }a;i prosperity have got to exercise a preponderating

Later

influence on the marriage-rate2.
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 pur­
chasing 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
* For instance, representing the price of wheat in shillings and the number of
marriages in England and Wales in thousands, we have for 1801 wheat at 119 and
marriages at 67, for 1803 wheat at 59 and marriages at 94; for 1805 the numbers
are 90 and 80, for 1807 they are 75 and 84, for 1812 they are 126 and 82, for
1815 they are 66 and 100, for 1817 they aro 97 and 88, for 1822 they are 45
and 99.
* Since 1820 the average price of wheat has seldom exceeded 60*. and never
75s. : and the successive inflations of commerce which culminated and broke in 1826,
1836-9, 1848, 1856, 1866 and 1873 exercised an influence on the marriage-rate
about equal with changes in the price of corn. When the two causes act together
the eflects are very striking: thus between 1829 and 1831, there was a recovery of
prosperity accompanied by a steady fall in the price of wheat and marriages rose
from a hundred and four to a hundred and twenty-one thousand. The marriagerate rose again rapidly between 1842 and 1845 when tho price of wheat was a
little lower than in the preceding years, and tho business of the country was
reviving; and again under similar circumstanccs between 1817 and 1853 and
between 1862 and 1865.
A comparison of the marriage-rate with the harvests in Sweden for the years
1749 to 1883 is given by Sir Rawson Rawson in the Statistical Journal for
December 1885. The harvest does not declare itself till part of the year’s tale
of marriages is made up; and further the inequalities of harvests are to some
extent compensated for by the storage of grain; and therefore the individual
harvest figures do not correspond closely with the marriage-rate. But when
several good or bad harvests come together, the effect in increasing or diminish­
ing the marriage-rate is very clearly marked.




ENGLAND IN T H E N IN E T E E N TH CE N T U R Y

1
91

fast. Meanwhile the price of wheat has also fallen very iv, i t , 7.
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 14-91.
There is much to be learnt from the history of population Scotland,
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 neigh­
bours have combined to afford a great increase of average
income to a rapidly increasing population. On the o t h e r Ireland,
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 nations2 we find that interin the Teutonic countries of Central and Northern Europe, vital
the age of marriage is kept late, partly in consequence of th e 8tatistlca*
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 regime, 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
1 Statistics of exports are among the most convenient indications of the
fluctuations of comiaeraial credit and industrial activity: and in the article
already quoted, Ogle has shown a correspondence between the marriage-rate
and the exports per head. Compare diagrams in VoL n. p. 12 of Levasseur’s
La Population Fran^aise; and with regard to Massachusetts by Willcox in the
Political Science Quarterly, Vol. vm. pp. 76—82. Ogle’s inquiries have been
extended and corrected in a paper read by R. H. Hooker before the Manchester
Statistical Society, in January 1898; who points out that if the marriage-rate
fluctuates, the birth-rate during an ascending phase of the marriage-rate is apt
to correspond to the marriage-rate not for that phase, but for the preceding phase
when the marriage-rate was declining: and vice vend. “ Hence the ratio of
births to marriages declines when the marriage-rate is rising and rises when the
marriage-rate falls. A curve representing the ratio of births to marriages will
move inversely to the marriage-rate.*’ He points out that the decline in the
ratio of births to marriages is not great, and is accounted for by the rapid decline
of illegitimate births. The ratio of legitimate births to marriages is not declining
perceptibly.
•
The following statements are based chiefly on statistics arranged by the late
Signor Bodio, by M. Levasseur, La Population Frangaise, and by the English
Registrar-General in his Report for 1907.




G R O W T H OF POPULATION

192

iv, iv, 7. 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
1881-19011.
1 Much instructive and suggestive matter connected with the subject of this
chapter is contained in the Statistical Memoranda and Charts relating to Public
Health and Social Conditions published by the Local Government Board in 1909
[Cd. 4671J.




CHAPTER V.
THE HEALTH AND STRENGTH OF THE POPULATION.
§ 1 . W e have next to consider the conditions on which iv,v, 1 .
depend health and strength, physical, mental and moral. Th‘
They are the basis of industrial efficiency, on which theJj“ “ ® a
^I
production of material wealth depends; while conversely the efficiency,
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 Physical
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 does1.
1 This measure can be applied directly to most kinds of navvies’ and porters*
work, and indirectly to many kinds of agricultural work. In a controversy
that was waged after the great agricultural lock-out as to the relative efficiency
of unskilled labour in the South and North of England, the most trustworthy
measure was found in the number of tons of material that a man would load into
a cart in a day. Other measures have been found in the number of acres reaped
or mown, or the number of bushels of com reaped, etc.: but these are unsatisfac­
tory, particularly for comparing different conditions of agriculture: since the
implements used, the nature of the crop and the mode of doing the work all vary




H EALTH AN D STREN G TH

194

Although the power of sustaining great muscular exertion
seems to rest on constitutional strength and other physical
requires
nervous
conditions, yet even it depends also on force of will, and
as well as
muscular strength of character. Energy of this kind, which may
strength.
perhaps be taken to be the strength of the man, as distin­
guished 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 feeling1.
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
IV, v, 1.

widely. Thus nearly all comparisons between mediaeval and modem work and
wages based on the wages of reaping, mowing, etc. are valueless until we have
found means to allow for the effects of changes in the methods of agriculture. It
costs for instance less labour than it did to reap by hand a crop that yields a
hundred bushels of com; because the implements used are better than they were:
but it may not cost less labour to rfeap an acre of com; because the crops are
heavier than they were.
In backward countries, particularly where there is not much use of horses or
other draught animals, a great part of men’s and women’s work may be measured
fairly well by the muscular exertion involved in it. But In England less than
one-sixth of the industrial classes are now engaged on work of this kind; while
the force exerted by steam-engines alone is more than twenty times as much as
could be exerted by the muscles of all Englishmen.
1 This must be distinguished from nervousness, which, as a rule, indicates a
general deficiency of nervous strength; though sometimes it proceeds from
nervous irritability or want of balance. A man who has great nervous strength
in some directions may have but little in others; the artistic temperament in par­
ticular often develops one set of nerves at the expense of others: but it is the
weakness of some of the nerves, not the strength of ^he others, that leads to
nervousness. The most perfect artistic natures seem not to have been nervous:
Leonardo da Vinci and Shakespeare for example. The term “ nervous strength”
corresponds in some measure to Heart in Engel’s great division of the elements
of efficiency into (a) Body, (b) Reason, and (c) Heart [Leib, Verstand und Uert).
He classifies activities according to the permutations a, ab, ac, abc, acb\ ft, ba,
le, lea, lac; c, ca, cl, cab, cla: the order in each case being that of relative im­
portance, and a letter being omitted where the corresponding element plays only
a very small part.
In the war of 1870 Berlin University students, who seemed to be weaker i h ^
the average soldier, wore found to be able to bear fatigue better.




195

FOOD AN D O TH E R M A T E R IA L NECESSARIES

becomes known if less strength is required to get a “ first iv, v, 2,3.
class” in one study than another.
'
§2. In discussing the growth of numbers a little has The
been said incidentally of the causes which determine length ouhmate
of life: but they are in the main the same as those which and race*
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 consc- ■
quence a low respect for human life: this has probably been
the cause of a great part of the high mortality that is gener­
ally attributed to the insalubrity of the climate1.
Vigour depends partly on race qualities: but these, so
far as they can be explained at all, seem to be chiefly due to
climate2.
§ 3. Climate has also a large share in determining the The
necessaries of life; the first of which is food. Much depends ofc^ 8anes
1
on the proper preparation of food; and a skilled housewife Food*
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
1 A warm climate impairs vigour.
It is not altogether hostile to high
intellectual and artistic work: but it prevents people from being able to endure
very hard exertion of any kind for a long time. More sustained hard work can be
done in the cooler half of the temperate zone than anywhere else; and most of all
in places such as England and her counterpart New Zealand, where sea-breezes
keep the temperature nearly uniform. The summer heats and winter colds of
many parts of Europe and America, where the mean temperature is moderate,
have the effect of shortening the year for working purposes by about two months.
Extreme and sustained cold is found to dull the energies, partly perhaps because
it causes people to spend much of their time in close and confined quarters: in­
habitants of the Arctic regions are generally incapable of long-continued severe
exertion. In England popular opinion has insisted that a “ warm Yule-tide makes
a fat churchyard” ; but statistics prove beyond question that it has the opposite
effect: the average mortality is highest in the coldest quarter of the year, and
higher in cold winters than in warm.
*
Race history is a fascinating but disappointing study for the economist: for
conquering races generally incorporated the women of the conquered; they often
carried with them many slaves of both sexes during their migrations, and slaves
were less likely than freemen to be killed in battle or to adopt a monastic life. In
consequence nearly every race had much servile, that is mixed blood in it: and as
the share of servile blood was largest in the industrial classes, a race history of
industrial habits seems impossible.




1

H E A LT H AN D STREN G TH

196

iv, v, 3. to this want of motherly care often grow up with enfeebled
constitutions.
Scarcity
In all ages of the world except the present, want of food
increases has caused wholesale destruction of the people. Even in
m ortality; ;L0n(i 0I1
the seventeenth and eighteenth centuries the
mortality was eight per cent, greater in years of dear com
than in years of cheap corn1. 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
and
connection between the supply of food that a man has,
that lowers and his available strength. If the work is intermittent, as
vigour.
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.
Clothing,
After food, the next necessaries of life and labour are
and firing, clothing, house-room and firing. When they are deficient,
the mind becomes torpid, and ultimately the physical con­
stitution 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
1 This was proved by Farr, who eliminated disturbing causes by an instructive
statistical derice (Vital Utalislics, p. 139).




H O PE, FRE ED OM AN D CHANGE

197

which, is injurious to health and vigour; and not the least IV, v ,4.
of the benefits which English people derive from the cheapness of coal, is the habit, peculiar to them, of having wellventilated 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 over­
crowding 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 popula- Rest,
tion 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.
§ 4. Next come three closely allied conditions of vigour, Hopenamely, hopefulness, freedom, and change. All history is freedom
full of the record of inefficiency caused in varying degrees j j j n
ge<
by slavery, serfdom, and other forms of civil and political
oppression and repression1.
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 neces­
saries 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
lives2.
1 Freedom and hope Increase not only man’s willingness but also his power
for work; physiologists tell us that a given exertion consumes less of the store of
nervous energy if done under the stimulus of pleasure than of pain: and without
hope there is no enterprise. Security of person and property are two conditions
of this hopefulness and freedom; but security always involves restraints on
freedom, and it is one of the most difficult problems of civilization to discover
how to obtain the security which is a condition of freedom without too great a
sacrifice of freedom itself. Changes of work, of scene, and of personal associations
bring new thoughts, call attention to the imperfections of old methods, stimulate
a “ divine discontent,” and in every way develop creative energy.
*
By converse with others who come from different places, and have different
customs, travellers learn to put on its trial many a habit of thought or action
which otherwise they would have always acquiesced in as though it were a law of
nature. Moreover, a shifting of places enables the more powerful and original
minds to find full scope for their energies and to rise to important positions:




H E A LT H AND STRENGTH

198

Freedom so far ha3 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.
Influence
§ 5 . Bodily and mental health and strength are much
of occupa­
influenced by occupation1. At the beginning of this century
tion.
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.
IV, v, 5.

whereas those who stay at horns are often over much kept in their places. Few
men are prophets in their own land; neighbours and relations are generally the
last to pardon the faults and to recognize the merits o! those who are less docile
and more enterprising than those around them. It is doubtless chiefly for this
reason that in almost every part of England a disproportionately large share ol the
best energy and enterprise is to be found among those who were bom elsewhere.
But change may be carried to excess; and when population shifts so rapidly,
that a man is always shaking himself loose from his reputation, he loses some of
the best external aids to the formation of a high moral character. The extreme
hopefulness and restlessness of those who wander to new countries lead to much
waste of effort in half acquiring technical skill, and half finishing tasks which are
speedily abandoned in favour of some new occupation.
1 The rate of mortality is low among ministers of religion and schoolmaster;
among the agricultural classes, and in some other industries such as those of
wheelwrights, shipwrights and coal-miners. It is high in lead and tin mining, in
file-making and earthenware manufacture. But neither these nor any other
regular trade show as high a rate of mortality as is found among London general
labourers and costermongers; while the highest of all is that of servants in inns.
Such occupations are not directly injurious to health, but they attract those who
are weak in physique and in character and they encourage irregular habits.
A good account of the influence of occupation on death-rates is given in the
, supplement to the forty-fifth (1885) Annual Report of the Registrar-General,
pp. xxv—Isiii. See also Farr’s Vital Statistics, pp. 392—411, Humphreys’ paper
on Class Mortality Statistics in the Statistical Journal for June 1887, and the
literature of the Factory Acts generally.




T H E INFLUENCE OF TO W N L IF E

199

§ 6 . In almost all countries there is a constant migration iv, v, 6.
towards the towns1. The large towns and especially London influence
absorb the very best blood from all the rest of England; the {$e n
t°w
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 oppor­
tunities 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
1 Davenant (Balance of Trade, a .d . 1699, p. 20), following Gregory King, proves
that according to official figures-London has an excess of deaths over births of
2000 a year, but an immigration of 5000; which is more than half of what he
calculates, by a rather risky method, to be the true net increase of the population
of the country. He reckons that 530,000 people live in London, 870,000 in the
other cities and market towns, and 4,100,000 in villages and hamlets. Compare
these figures with the census of 1901 for England and Wales; where we find
London with a population of over 4,500,000; five more towns with an average of
over 500,000; and sixty-nine more exceeding 50,000 with an average of over
100.000. Nor is this all: for many suburbs whose population is not counted in,
am often really parts of the big towns; and in some cases the suburbs of several
adjacent towns run into one another, making them all into one gigantic, though
rather scattered town. A suburb of Manchester is counted as a large town with
220,000 inhabitants; and the same is true of West Ham, a suburb of London with
275.000. The boundaries of some large towns are extended at irregular intervals
to include such suburbs: and consequently the true population of a large town
may be growing fast, while its nomin&l population grows slowly or even recedes,
and then suddenly leaps forwards. Thus the nominal population of Liverpool
was 552,000 in 1881; 518,000 in 1891; and 685,000 in 1901.
Similar changes are taking place elsewhere. Thus the population of Paris has
grown twelve times as fasti during the nineteenth century as that of France. The
towns of Germany are increasing at the expense of the country by one half per
cent, of the population yearly. In the United States there was in 1800 no town
with more than 75,000 inhabitants; in 1905 there were three which together
contained more than 7,000,000 and eleven more with above 300,000 each. More
f.han a third of the population of Victoria are collected in Melbourne.
It must be recollected that the characteristics of town life increase in intensity
for good and for evil with every increase in the size of a town, and its suburbs.
Fresh country air has to pass over many more sources of noisome vapour before
it reaches the average Londoner than before it reaches the average inhabitant of a
small town. The Londoner has generally to go far before he can reach the freedom
and the restful sounds and sights of the country. London therefore with 4,500,000
inhabitants adds to the urban character of England’s life far more than a hundred
times os much as a town of 45,000 inhabitants.




H EALTH AN D STRENGTH

iv, ▼6. 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 in^
dustries 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 seri­
ously ill1.
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 them2.
1 For reasons of this kind Welton (Statistical Journal, 1897) makes the ex­
treme proposal to omit all persons between 15 and 35 years of age in comparing
the rates of mortality in different towns. The mortality of females in London
between the ages of fifteen and thirty-five is, chiefly for this reason, abnormally
low. If however a town has a stationary population its vital statistics are more
easily interpreted; and felecting Coventry as a typical town, Galton has calculated
that the adult children of artisan townsfolk are little more than half as numerous
as those of labouring people who live in healthy country districts. When a place
is decaying, the young and strong and hearty drift away from it; leaving the old
and the infirm behind them, and consequently the birth-rate is generally low.
On the other hand, a centre of industry that is attracting population is likely to
have a very high birth-rate, because it has more than its share of people in the
full vigour of life. This is especially the case in the coal and iron towns, partly
because they do not suffer, as the textile towns do, from a deficiency of males;
and partly because miners as a class marry early. In some of them, though the
death-rate is high, the excess of the birth-rate over it exceeds 20 per thousand of
the population. The death-rate is generally highest in towns of the second order,
chiefly because their sanitary arrangements are not yet as good os those of the
very largest towns.
Prof. Haycraft (Darwinism and Race Progress) argues in the opposite direction.
He lays just stress on the dangers to the human race which would result from a
diminution of those diseases, such as phthisis and scrofula, which attack chiefly
people of weak constitution, and thus exercise a selective influence on the race,
unless it were accompanied by corresponding improvements in other directions.
But phthisis does not kill all its victims; there is some net gain in a diminution
of, its power of weakening them.
' * See an article entitled "Where to House the London Poor” by the present
writer in the Contemporary Review, Feb. 1884.




N A T U R A L AN D A R T IF IC IA L SELECTION

201

§ 7 . And there are yet other causes for anxiety. For iv, v, 7.
there is some partial arrest of that selective influence of Nature left
struggle and competition which in the earlier stages oftendsto*
civilization caused those who were strongest and most™5edou*
1 - 1 * 1
-I ® ® w e a * i
vigorous to leave the largest progeny behind them; and but m
an
to which, more than any other single cause, the progress of fered.
the human race is due. In the later stages of civilization
the rule has indeed long been that the upper classes maTry
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 dis­
inclination to have large families; and this is a source of
danger1.
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
1 In tho Southern States of America, manual work became disgraceful
to the white man; so that, if unable to have slaves himself, he led a paltry
degenerate life, and seldom married. Again, on tho Pacific Slope, there were
at one time just grounds for fearing that all but highly skilled work would be left
to the Chinese; and that the white men would live in an artificial way in which
a family became a great expense. In this case Chinese lives would have been >
substituted for American, and the average quality of the human race would have
been lowered.




H EALTH AN D STRENGTH

202

iv, v, 8. 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.
The state
It must be remembered that the members of a large
from large family educate one another, they are usually more genial
oTheaithy &nd bright, often more vigorous in every way than the
children,
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.
The evils
But on the other hand there is no doubt that the parents
mortality. can ° ^ en 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 infan­
tile 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 family1.
Practical
§ 8 . There are other considerations of which account
conclusion. 0 Ug j1^ £0
taken; but so far as the points discussed in this
chapter are concerned, it seems primd fa d e 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
1 The extent of the infant mortality that arises from preventable causes may
bo inferred from the facts that the percentage of deaths under one year of age to
births is generally about a third as much again in urban as in rural districts;
yet in many urban districts which have a well-to-do population it is lower than the
average for the whole country (Registrar-General?! Report for 1905, pp. xlii-xlv).
A few years ago it was found that, while the annual death-rate of children under
five years of age was only about two per cent, in the families of peers and was less
than three per cent, for the whole of the upper classes, it was between six and seven
per cent, for the whole of England. On the other hand Prof. Leroy Beaulieu says
that in France the parents of but one or two children are apt to indulge them, an^j
be over-careful about them to the detriment of their boldness, enterprise
endurance. (See Statistical Journal, Vol. 54, pp. 378, 9.)




PRA CTICAL CONCLUSION

203

these principles of action, combined with an adequate provi- iv, v, 8.
sion 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 The
of medical science, the ever-growing activity and wisdom of to-and-fro
Government in all matters relating to health, and the increase
of
of material wealth, all tend to lessen mortality and to increase |°?jd and
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 un­
checked, he would speedily degenerate.
As it is, the two sets hold one another very nearly in The former
balance, the former slightly preponderating. While the pre^7
population of England is growing nearly as fast as ever,ponderate'
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.




CHAPTER YL
IN D U ST R IA L T R A IN IN G .

§ 1 . H a v i n g 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 form
The natural vigour that enables a man to attain great
natural
success in any one pursuit would generally have served him
in good stead in almost any other. But there are exceptions,
depend^ Some people, for instance, seem to be fitted from birth for an
tn!ning!n artistic career, and for no other; and occasionally a man o !
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 mediaeval 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 defects
The growth of this taste in our own age has prevented
ageareapt us from taking full advantage of the opportunities our largely
Started! 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
IV, vi, l.




U N SK ILLED LABOU R A R E L A T IV E TER M

205

it really is, in consequence of the growth of scientific pursuits, iv, vi, 2.
For in art and literature success is often achieved while genius
still wears the fascinating aspect of youth; but in modem
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 is1. In the same way
the solid qualities of the modem machine-tending artisan
are rated more cheaply than the lighter virtues of the
mediaeval 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.
§ 2. Very backward races are unable to keep on at any SkiUedand
kind of work for a long time; and even the simplest form of labour,
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 manufac- Skill with
tures have long been domiciled, a habit of responsibility, of weare
carefulness and promptitude in handling expensive machinery
and materials becomes the common property of all; and then recognize
do not.
*
J
much of the work of tending machinery is said to be entirely as skill,
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
1 In this connection it is worth while to notice that the lull importance of
an epoch-making idea is often not perceived in the generation in which it is
made: it starts the thoughts of the world on a new track, but the change of
direction is not obvious until the turning-point has been left some way behind.
In the same way the mechanical inventions of every age are apt to be underrated
relatively to those of earlier times. For a new discovery is seldom fully effectivo
for practical purposes till many minor improvements and subsidiary discoveries
have gathered themselves around it: an invention that makes an epoch is very
often a generation older than the epoch which it makes. Thus it is that each
generation seems to be chiefly occupied in working out the thoughts of the
preceding one; while the full importance of its own thoughts is as yet not clearly
seen*




206

IN D U STRIAL TR A IN IN G

iv, vi, 2. mental and moral faculties, the intelligence, and the selfcontrol 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.
Me” ai
Some kinds of manual work require long-continued
skiUis
practice in one set of operations, but these cases are not
portance" very common, and they are becoming rarer: for machinery is
togenerai constantly taking over work that requires manual skill of this
m igence kind. It is indeed true that a general command over the
teU
vigour of use of one’s fingers is a very important element of industrial
character. efftcjency .
this is the result chiefly of nervous strength,
and self-mastery. It is of course developed b y 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 in­
capable of being transferred from one occupation td another
is becoming steadily a less and less important factor in
production. Putting aside for the present the faculties o f
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 on©
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 bo



G E N E R A L A N D SPECIALIZED A B IL IT Y

207

steady and trustworthy, to have always a reserve of force iv .v i, 3.
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 supple­
mented by some knowledge of materials and familiarity with
special processes.
We may then use the term general ability to denote General
those faculties and that general knowledge and intelligence specialized
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 pro­
cesses which are required for the special purposes of
individual trades may be classed as specialized ability.
§ 3. General ability depends largely on the surroundings Tbe cause*
of childhood and youth. In this the first and far the most determine
powerful influence is that of the mother1. Next comes theofgeneraf
influence of the father, of other children, and in some cases »bili*y«
of servants2. As years pass on the child of the working man The home,
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,
* According to Galton the statement that all great men have had great
mothers goes too far: but that shows only that the mother’s influence does not
outweigh all others; not that it is not greater than any one of them. He says
that the mother’s influence is most easily traceable among theologians and men
of science, because an earnest mother leads her child to feel deeply about great
things; and a thoughtful mother does not repress, but encourages that childish
curiosity which is the raw material of scientific habits of thought.
* There are many fine natures among domestic servants. But those whQ
live in very rich houses are apt to get self-indulgent habits, to overestimate the
importance of wealth, and generally to put the lower aims of life above the higher,
in a way that is not common with independent working people. The company in
which the children of some of our best houses spend much of their time, is less
ennobling than that of the average cottage. Yet in these very houses, no servant
who is not specially qualified, is allowed to take charge of a young retriever or
a young horse.




'

IN D U STRIAL T R A IN IN G

20 8

Little need be said of general education; though the
influence even of that on industrial efficiency is greater than
School
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 draw­
ing; 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 n ot
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 increas­
ing culture; though it does not concern itself with the
details of particular trades: that is left for technical educa­
tion1.
Technical
§ 4 . Technical education has in like manner raised its
education.
aims in recent years. It used to mean little more than im­
parting 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. B ut
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 b y
so doing; and he is likely to make better progress in the
IV, vi, 4.

1 The absence of a careful general education for the children of the working
classes, has been hardly less detrimental to industrial progress than the narrow
range of the old grammar-school education of the middle classes. Till recently
indeed it was the only one by which the average schoolmaster could induce his
pupils to use their minds in anything higher than the absorption of knowledge.
It was therefore rightly called liberal, because it was the best that was to be had.
But it failed in its aim of familiarizing the citizen with the great thoughts of
antiquity; it was generally forgotten as soon as school-time was over; and it
raised an injurious antagonism between business and culture. Now however the
advance of knowledge is enabling us to use science and art to supplement the
curriculum of the grammar-school, and to give to those who can afford it an
education that develops their best faculties, and starts them on the track of
thoughts which will most stimulate the higher activities of their minds in
after-life. The time spent on learning to spell is almost wasted: if spelling
pronunciation are brought into harmony in the English language as in most others,
about a year will be added to the effective school education without any additional
cost.




G E N E R A L A N D TECHNICAL ED UCATION

209

future than one who has been taught in a school of this old- iv, n, 4.
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 b y general
education, to which it properly belongs); and secondly at
imparting artistic skill and knowledge, and methods of in­
vestigation, 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 importance1.
According to the best English opinions, technical educa- The aims
tion for the higher ranks of industry should keep the aim of education
developing the faculties almost as constantly before it a s reform
*
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 trades2. 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 b y 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 instruments3.
• As Nasmyth says; if a lad, having dropped two peas at random on a table,
can readily put a third pea midway in a line between them, he is on the way to
a good mechanic. Command over eye and hand is gained in the ordinary
EngUsh games, no less than in the playful work of the Kinder-garten. Drawing
hag always been on the border line between work and play.
• One of the weakest points of technical education is that it does not educate
the sense of proportion and the desire for simplicity of detail. The English, and
to an even greater extent, the Americans, have acquired in actual business the
faculty of rejecting intricacies in machinery and processes, which are not worth
what they cost, and practical instinct of this kind often enables them to succeed
in competition with Continental rivals who are much better educated.
• A good plan is that of spending the six winter months of several years alter




210

IN DU STRIAL TR A IN IN G

The old apprenticeship system is not exactly suited to
modern conditions and it has fallen into disuse; but a subticeship.
gtitute 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 modem 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 form1.
inventions
The great epoch-making inventions in industry came
till recently almost exclusively from England. But now
IV,

vi, 4.

Appren-

leaving school in learning science in College, and the six summer months as
articled pupils in large workshops. The present writer introduced this plan about
forty years ago at University College, Bristol (now the University of Bristol). But
it has practical difficulties which can be overcome only by the cordial and generous
co-operation of the heads of large firms with the College authorities. Another
excellent plan is that adopted in the school attached to the works of Messrs Mat.h»r
and Platt at Manchester. “ The drawings made in the school ar& of work actually
in progress in the shops. One day the teacher gives the necessary explanations
and calculations, and the next day the scholars see, as it were on the anvil, the
very tiling which has been the subject of his lecture.”
1 The employer binds himself to see that the apprentice ,is thoroughly taught
In the workshop all the subdivisions of one great division of his trade, inst e p
letting him leam only one of these subdivisions, as too often happens now. The
apprentice’s training would then often be as broad as if he had been taught the •
whole of the trade as it existed a few generations ago; and it might be «nppfo
mented by a theoretical knowledge of all branches of the trade, acquired in a
technical school. Something resembling the old apprenticeship system has recently
come into vogue for young Englishmen who desire to leam the business of farming
under the peculiar conditions of a new country: and there are some signs that the
plan may be extended to the business of farming in this country, for which it is in
many respects admirably adapted. But there remains a great deal of education
suitable to the farmer and to the farm-labourer which can best be given in agrfru|.
tural colleges and dairy schools.
Meanwhile many great agencies for the technical education of adults are
rapidly developed, such as public exhibitions, trade associations and
and trade journals. Each of them has its own work to do. In agriculture and
some other trades the greatest aid to progress is perhaps found in public shows.
But those industries, which are more advanced and in the hands of persons of
studious habits, owe more to the diffusion of practical and scientific knowledge by
trade journals; which, aided by changes in the methods of industry and also in its
social conditions, are breaking up trade secrets and helping men of smalt
in competition with their richer rivals.




G E N E R A L AN D TECH NICAL EDUCATION

211

other nations are joining in the race. The excellence of i v ,t i , 5.
the common schools of the Americans, the variety of their andother
lives, the interchange of ideas between different races among countricsthem, and the peculiar conditions of their agriculture have
developed a restless spirit of inquiry; while technical educa­
tion 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
business1.
§ 5. It is true that there are many kinds of work A high
which can be done as efficiently by an uneducated as will inby an educated workman: and that the higher branches effk^ncy6
of education are of little direct use except to employers®^®
and foremen and a comparatively -small number of artisans, grades of
But a good education confers great indirect benefits even indim^y
on the ordinary workman. It stimulates his mental activity; directly^”
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
1 The heads of almost every progressive firm on the Continent have carefully
studied processes and machinery in foreign lands. The English are great
travellers; but partly perhaps on account of their ignorance of other languages
they seem hardly to set enough store on the technical education that can be
gained by the vwe use of travel.




212

IN D U STRIAL TR A IN IN G

iv, vi, 5. 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.
Much of
The laws which govern the birth of genius are innaturtd
scrutable. It is probable that the percentage of children
thenation
the working classes who are endowed with natuial
among the
the highest order is not so great as that of the
working^ children of people who have attained or have inherited
too often a higher position in society. But since the manual labour
waatenow. 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 negli­
gence which allows genius that happens to be b om 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 m ay
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
tha 3ountry 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 o f
a spirit of caste has held back the working men and the sons
of working men from rising to posts of command; and th e
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 o f



LATEN T GENIUS AMONG T H E W O R K IN G CLASSES

213

caste, and this deficiency of new blood among the leaders of iv, vi, 6.
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.
§ 6 . Education in art stands on a somewhat different Education
footing from education in hard thinking: for while the latter1 ar ’
0
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
fulness 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 origin- industrial
ality than he has really possessed. Eastern carpets, for gwlrUs
instance, are full of grand conceptions: but if we examine a ^ f ^ d y
great many examples of the art of any one place, selected instincts,
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 b y fashion and
some by the beneficial movements of industrial and Bocial
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 him1.
1 In fact every designer in a primitive age is governed by precedent: only
very daring people depart from it; even they do not depart far, and their innova­
tions are subjected to the test of experience, which, in the long run, is infallible.
For though the crudest and most ridiculous fashions in art and in literature will
be accepted by the people for a time at the bidding of their social superiors,
nothing but true artistic excellence has enabled a ballad or a melody, a style of
dress or a pattern of furniture to retain its popularity among a whole nation for
many generations together. These innovations, then, which were inconsistent
with the true spirit of art were suppressed, and those that were on the right
track were retained, and became the starting-point for further progress; and
thus traditional instincts played a great part in preserving the purity of the
industrial arts in Oriental countries, and to a less extent in mediseval Europe.




21 4

INDUSTRIAL TRAINING

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 modem 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 mediaeval pre­
decessor, 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.
Butin
It must however be admitted that he would have groat
modern
difficulties in doing this. The shortness of the time which
timea
design is
we allow ourselves for changes in the arts of decoration is
abnoat
limited to scarcely a greater evil than the width of the area of the
a narrow
profession 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 m ove­
ments of tho 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.

IV, vr, 0.
and
attracts
a Urge
share of
ability.




ARTISTIC DESIGN

215

Increasing wealth is enabling people to buy things of all iv, n,6.
kinds to suit the fancy, with but a secondary regard to their whichia
powers of wearing; so that in all kinds of clothing and furni- pa J£jt
^
ture it is every day more true that it is the pattern which 40 fashion,
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
elsewhere1.
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
scale2.
1 French designers find it best to live in Paris: if they stay for long out of
contact with the central movements of fashion they seem to fall behindhand.
Most of them have been educated as artists, but have failed of their highest
ambition. It is only in exceptional cases, as for instance for the S&vres china,
that those who have succeeded as artists find it worth their while to design.
Englishmen can, however, hold their own in designing for Oriental markets, and
there is evidence that the English are at least equal to the French in originality,
though they are inferior in quickness in seeing how to group forms and colours so
as to obtain an effective result. (See the Report on Technical Education, Vol. I.
pp. 256, 261, 324, 325 and Vol. hi. pp. 151, 152, 202, 203, 211 and passim.) It is
probable that the profession of the modern designer has not yet risen to the best
position which it is capable of holding. For it has been to a disproportionate
extent under the influence of one nation; and that nation is one whose works in
the highest branches of art have seldom borne to be transplanted. They have
\
indeed often been applaudod and imitated at the time by other nations, but they
have as yet seldom struck a key-note for the best work of later generations.
*
The painters themselves have put on record in the portrait-galleries the
(act that in mediaeval times, and even later, their art attracted a larger share of




INDUSTRIAL TRAINING

216

iv, vi, 7.

§ 7 . We may then conclude that the wisdom of expending public and private funds on education is not to be
invest-™1 measured by its direct fruits alone. It will be profitable as
ment,
a mere investment, to give the masses of the people much
greater opportunities than they can generally avail them­
selves 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 pro­
ductive 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 princi­
ples 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 Bhare of the expense,
whatever it may be.
andaduty
Most parents are willing enough to do for their children
o parents.
^ ejr own parents did for them; and perhaps even
Education

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
the best intellect than it does now; when the ambition of youth is tempted by the
excitement of modem business, when its zeal for imperishable achievements finds
a field in the discoveries of modem science, and, lastly, when a great deal of
excellent talent is insensibly diverted from high aims by the ready pay to be got
by hastily writing half-thoughts for periodical literature.




MOBILITY BETWEEN GRADES AND WITHIN GRADES

217

are perhaps not rare, a certain habit of mind which is as iv, vr, 8.
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.
§ 8 . Parents generally bring up their children to occu- Mobility
pations in their own grade, and therefore the total supply of grades and
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.
W e must defer to a later stage a fuller discussion of the Provisional
obstacles which the conditions of any place and time opposeconc 18
11
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



V

218

INDUSTRIAL TRAINING

iv, n , 8. 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
predict1.
1 Mill was so much impressed by the difficulties that beset a parent in the
attempt to bring up his son to an occupation widely different in character from his
own, that he said (Principles, II. Iiv. 2):—“ So complete, indeed, has hitherto been
the separation, so strongly marked the line of demarcation, between tlie different
grades of labourers, as to be almost equivalent to an hereditary distinction of caste;
each employment being chiefly recruited from the children of those already employed
in it, or in employments or the same rank with it in social estimation, or from the
children of persons who, if originally of a lower rank, have succeeded in raising
themselves by their exertions. The liberal professions are mostly supplied by the
sons of either the professional or the idle classes: the more highly skilled manual
employments are filled up from the sons of skilled artisans or the class of
tradesmen who rank with them: the lower classes of skilled employments are
in a similar case; and unskilled labourers, with occasional exceptions, remain
from father to son in their pristine condition. Consequently the wages of each
class have hitherto been regulated by the increase of its own population, rather
than that of the general population of the country.” But he goes on, “ Tho
changes, however, now so rapidly taking place in usages and ideas are under­
mining all these distinctions.”
His prescience has been vindicated by the progress of change since he wrote.
The broad lines of division which he pointed out have been almost obliterated by
the rapid action of those causes which, as we saw earlier in the chapter, are
reducing the amount of skill and ability required in some occupations and
increasing it in others. We cannot any longer regard different occupations as
distributed among four great planes; but we may perhaps think of them as
resembling a long flight of steps of unequal breadth, some of them being so broad
as to act as landing stages. Or even better still we might picture to ourselves two
flights of stairs, one representing the "hard-handed Industries” and the other
“ the soft-handed industries” ; because the vertical division between these two is
in fact as broad and as clearly marked as the horizontal division betweon any two
grades.
Mill’s classification had lost a great part of its value when Caimes adopted i%
(Leading PrincipUs, p. 72). A classification more suited to our existing conditions
is offered by Giddings (Political Science Quarterly, Vol. II. pp. 60—71). It is
open to the objection that it draws broad lines of division where nature has made
no broad lines; but it is perhaps as good as any division of industry into four
grades can be. His divisions are (i) automaiie manual labour, including common
labourers and machine tenders; (ii) responsible manual labour, including those who
can be entrusted with some responsibility and labour of self-direction; (iii) ~*
,to
malic brain workers, such as book-keepers, and (iv) responsible brain workers
including the superintendents and directors.
*
The conditions and methods of the large and incessant movement of the




MOBILITY BETWEEN GRADES AND WITHIN GRADES

21 9

population upwards and downwards from grade to grade are studied more fully IV, vi, 8.
-----be’ow, VI. iv. v. and vn.
The growing demand for boys to run errands, and to do other work that has
no educational value, has increased the danger that parents may send their sons
into avenues that have no outlook for good employment in later years: and
something is being done by public agency, and more by the devotion and energy
of men and women in unofficial association, in giving out notes of warning
against such “ blind alley” occupations, and assisting lads to prepare themselves
for skilled work. These efforts may be of great national value. But care must
be taken that this guidance and help is as accessible to the higher strains of the
working class population when in need of it as to the lower; lest the race should
degenerate.




CHAPTER VII.
THE GROWTH OF WEALTH.
IV, vn, 1.

§ 1 . I n 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.
Forma of
The earliest forms of wealth were probably implements
wealth
for hunting and fishing, and personal ornaments; and, in
among
barbarous
cold countries, clothing and huts1. During this stage the
peoples.
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 pos­
session rather than as a provision against future needs*.
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.
1 A short but suggestive study of the growth of wealth in its early fonrs, an4
of the arts of life, is given in Tyler’s Anthropology.
*
Bagebot (Economic Studies, pp. 163—5), after quoting the evidence which
Galton has collected on the keeping of pet animals by savage tribes, points out
that we find here a good illustration of the fact that however careless a savage
race may be for the future, it cannot avoid making some provision for it. A bow
a fishing-net, which will do its work well in getting food for to-day must be of
service for many days to come: a horse or a canoe that will carry one well to-day
must be a stored-up source of many future enjoyments. The least provident of
barbaric despots may raise a massive pile of buildings, because it is the
palpable proof of his present wealth and power.




EARLY FORMS OF WEALTH

221

As numbers thickened and the people settled down to iv, vn, 1 .
agriculture, cultivated land took the first place in the inven- Forms of
tory 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 thetion.
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 Until
forms of accumulated wealth. In towns indeed houses and thenfwaa
household furniture took the first place, and stocks of th eJ i^ J J .
more expensive of raw materials counted for a good deal; but
though the inhabitants of the towns had often more wealth capital,
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 But in
slowly in value for a long time; but the progress was quick- toms they
ened in the eighteenth century. After a while the use first increased
• v® A
_ _
of water power and then of steam power caused the rapid very fast,
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



222

GROWTH OF WEALTH

iv, vn, l. 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 tw o 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
R yot even of to-day with the equipment of a progressive
Lowland farmer1; and consider the brick-making, mortarmaking, 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
1 The farm Implements for a first class Ryot family, including six or seven
adult males, are a few light ploughs and hoes chiefly of wood, of the total value o f
about 13 rupees (Sir G. Phear, Aryan Village, p. 233) or the equivalent of fV ir
work for about a month; while the value of the machinery alone on a well
equipped large modem arable farm amounts to £3 an acre {Equipment of the
Farm, edited by J. C. Morton) or say a year’s work for each person employed.
They include steam-engines, trench, subsoil and ordinary ploughs, some to be
worked by steam and some by horse power; various grubbers, harrows, rollers,
clod-crusheri, seed and manure drills, horse hoes, rakes, hay-making, mowing and
reaping machines, steam or horse threshing, chaff cutting, turnip cutting, haypressing machines and a multitude of others. Meanwhile there is an
use of silos and covered yards, and constant improvements in the fittings of the
dairy and other larm buildings, all of which give great economy of effort in the
long run, but require a larger share of it to be spent in preparing the way for the
direct work of the farmer in raising agricultural produce.




MODERN FORMS OF WEALTH

22 3

operative in early times content with implements the cost of iv, vn, 2.
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.
S 2. As civilization has progressed, man has always been And they
•
are likely
developing new wants, and new and more expensive ways to continue
of gratifying them. The rate of progress has sometimes beent0 increase*
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 them­
selves, 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 knowledge1.
1 For instance, improvements which have recently been made in some American
cities indicate that by a sufficient outlay of capital cach house could be supplied
with what it does Require, and relieved of what it does not, much more effectively
than now, so as to enable a large part of the population to live in towns and yet
be free from many of the present evils of town life. The first step is to make
under all the streets large tunnels, in which many pipes and wires can be laid
side by side, and repaired when they get out of order, without any interruption
of the general traffic and without great expense. Motive power, and possibly
even heat, might then be generated at great distances from the towns (in some
cases in coal-mines), and laid on wherever wanted. Soft water and spring water,
and perhaps even sea water and ozonized air, mi^ht lie laid on in separate pipes
to nearly every house; while steam-pipes might be used for giving warmth in




224

GROWTH OP WEALTH

iv, vir, 3.

And with the growth of openings for the investment of
capital there is a constant increase in that surplus of prothere has* Auction over the necessaries of life, which gives the power
been and to save. When the arts of production were rude, there was
will be
very little surplus, except where a strong ruling race kept
fncreasehi the subject masses hard at work on the bare necessaries of
toaccumu- ^ e>anc^ where the climate was so mild that those necessaries
late.
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 rested1.
Thus from step to step wealth and knowledge have grown,
and with every step the power of saving wealth and extend­
ing knowledge has increased.
The slow
§ 3. The habit of distinctly realizing the future and
developproviding for it has developed itself slowly and fitfully in.
habit of the the course of man’s history. Travellers tell us of tribes
for the" 8 W^ ° migkt double their resources and enjoyments without
future.
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

2^2

winter, and compressed air for lowering the heat of summer; or the heat might
be supplied by gas of great heating power laid on in special pipes, while light
was derived from gas specially suited for the purpose or from electricity; Mid
every house might be in electric communication with the rest of the town. All
unwholesome vapours, including those given o3 by any domestic fires which were
still used, might be carried away by strong draughts through long conduits, to
be purified by passing through large furnaces and thence away through huge
chimneys into the higher air. To carry out such a scheme in the towns of
England would require the outlay of a much larger capital than has been
absorbed by our railways. This conjecture as to the ultimate course of town
improvement may be wide of the truth; but it serves to indicate one of rm y
many ways in which the experience of the past foreshadows broad openings
for investing present effort in providing the means of satisfying our wants in
the future.
1 Comp. Appendix A.




/

SLOW AND FITFUL GROWTH OF HABITS OF SAVING

22 5

wastefulness that is found now among some classes in our iv, vn,3.
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 need1. A t 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 b y 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.
1 They “ discount” future benefits (comp. Book III. ch. t. § 3) at the rate of
many thousands per cent, per annum.




226

GROWTH OF WEALTH

§ 4 . The thriftlessness of early times was in a great
measure due to the want of security that those who made
Security as
a condition provision for the future would enjoy it: only those who were
of saving.
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 b y 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 taxgatherer 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 b y 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 them­
selves 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.
IV, vn, 4.




'

MOTIVES OF SAVING

227

§ 5 . The growth of a money-economy and of modern iv,vn,5
habits of business does indeed hinder the accumulation of The
wealth by putting new temptations in the way of those who £ ^oney-*
are inclined to live extravagantly. In old times if a man economy
.
.
gives new
wanted a good house to live in he must build it himself; temptanow he finds plenty of good houses to be hired at a rent, extravaFormerly, if he wanted good beer he must have a good brew -ganca’
house, 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 modem 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 but also
variety of the uses between which a person can distribute certainty
his future expenditure. A person who in a primitive state
of society stores up some things against a future need, may JjjJJS?*
find that after all he does not need those things as much what is
as others which he has not stored up: and there are many the future,
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 arise1.
Again, modern methods of business have brought with And it has
them opportunities for the safe investment of capital in such Jeopiewho
ways as to yield a revenue to persons who have no good j ^ e
lty°for
opportunity of engaging in any business,— not even in that ^ in t0
^
of agriculture, where the land will under some conditions act foil fruits
as a trustworthy savings-bank. These new opportunities018avine‘
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.




1 Comp. III. v. 2.

GROWTH OF WEALTH

228
IV, rn, 8.
A few
people
save for
their own
sakea:

but the
chief
motive of
saving is
family
affection.

§ 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 »thers. 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, b y
a sort of refiez 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 com fort­
able annuity for their own lives; either b y 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 o f
their hoped-for old age, from which they had been cut off b y
death. That men labour and save chiefly for the sake o f
their families and not for themselves, is shown by the fa ct
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
enterprise than the hope of rising in life, and leaving M s
family to start from a higher round of the social ladder than
that on which he began. It may even give him an over­
mastering 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 aspira­
tions. But, as is shown by the marvellous growth of wealth
in America during the present generation, it makes hi*n 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 h i ^




SOURCES OF SAVING

229

into as great extravagance as could have been induced by an iv, vn, 7.
improvident and self-indulgent temperament.
The greatest savings are made by those who have been
brought up on narrow means to stem 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.
8 7. Next, as to the sources of accumulation. The power The source
°
,
. .
of accumuto save depends on an excess of income over necessary jation is
expenditure; and this is greatest among the wealthy. In jjjjjjj.
this country most of the larger incomes, but only a few of ^®ther
the smaller, are chiefly derived from capital. And, early in dem-ed
the present century, the commercial classes in England had capital,
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 or rent, the
professional men and hired workers are an important source ofpro-8*
of accumulation: and they have been the chief source of it
and
in all the earlier stages of civilization1. 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
1 Comp. Principles of Political Economy, by Richard Jones.




GROWTH OF WEALTH

230

iv, vn, 8. 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 d o
more in the long-run to promote the growth of even material
wealth than great additions to our stock of factories and
steam-engines.
ammmia-

^ PeoP^e among whom wealth is well distributed, and
who have high ambitions, are likely to accumulate a great
ciea.
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
Cofrom its predecessors. The growth of the co-operative m oveoperation.
.
. . .
ment m all its many forms, of building societies, friendly
societies, trades-unions, of working men’s savings-banks etc.,
shows that, even so fa r 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 wages1.

tions of

§
Having looked at the development of the methods
of saving and the accumulation of wealth, we may now return
commodity to that analysis of the relations between present and deferred
preserftand gratifications, which we began from another point of view in
“^ red our study of Demand2.
We there saw that anyone, who has a stock of a com ­
modity which is applicable to several uses, endeavours to
revertto

the diatri-

1 It must however be admitted that what passes by the name of public
property is often only private wealth borrowed on. a mortgage of future public
revenue. Municipal gas-works for Instance are not generally the results of
public accumulations. They were built with wealth saved by private persons,
and borrowed on public account.
• Above, IIL ▼
.




CHOICE BETWEEN PRESENT AND DEFERRED BENEFITS

231

distribute it between them all in such a way as to give iv, v«, 8.
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 distri­
bution 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 con­
siderations enter, of which the chief are, firstly, that the
deferring of a gratification necessarily introduces some un­
certainty 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 A person
equal gratifications from equal means at all stages of his life, though he
would perhaps endeavour to distribute his means equally over Resent
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 does not
a future date. He would do this not only if he thought Msmeans
that his savings would increase in his hands, but even by waiting*
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 b y keeping.
I f 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



232

GROWTH OF WEALTH

iv, vn, 8. 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.
Some
We can therefore imagine a state of things in which
Jri£ht
stored-up wealth could be put to but little good use; in
conceiv” which many persons wanted to make provision for their
madeeven own ^ ure> while but few of those who wanted to borrow
if intarest goods, were able to offer good security for returning them,
negative; 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: b y 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 negative1.
equaU
y
Such a state of things is conceivable. But it is also
true that conceivable, and almost equally probable, that people may be
would be so anxious to work that they will undergo some penalty as
ff0
thereC a condition of obtaining leave to work. For, as deferring the
n
"enaity
consumption of some of his means is a thing which a prudent
tor it.
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
We may
as the reward of the sacrifice involved in the waiting for the
caUinte- enjoyment of material resources, because few people would
nwudof save muck without reward; just as we speak of wages as
waiting,
the reward of labour, because few people would work hard
without reward.
not of
The sacrifice of present pleasure for the sake of future,
a m nee. kaa ^een ca]|e(j 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
1 The suggestion that the rate of Interest may conceivably become a negative
quantity was discussed by Fozwell in a paper on Some Social Arpectt o f Banking,
read before the Bankers’ Institute in January, 18&6.




THE REWARD OF WAfTlNG

233

certainly do not practise abstinence in that sense of the iv, vn, 8.
term in which it is convertible with abstemiousness. W hat
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 o f 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 it1.
Or, in other words again, it is dependent on man’s prospec­
tiveness; 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 b y him from others,
i Karl Marx and bis followers have found much amusement in contemplating
tbs accumulations of wealth which result from the abstinence of Baron Rothschild,
which they contrast with the extravagance of a labourer who feeds a family of
seven on seven shillings a week; and who, living up.to his full income, practises
no economic abstinence at alL The argument that it is Waiting rather than
Abstinence, which is rewarded by Interest and is a factor of production, was given
by M ac vane in the Harvard Jowmai of Economics for July, 1887.




23 4

GROWTH OF WEALTH

iv, vn, 9. by exchange or by inheritance, by legitimate trade or by unscrupulous forms of speculation, by spoliation or b y 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.
greater the
§
let us look more closely at the statement that,
rate of
as human nature is constituted, an increase in the future
present"1 pleasure which can be secured by a present given sacrifice
thegreater will in general increase the amount of present sacrifice that
b<ftbeten Pe0Pk
make. Suppose, for instance, that villagers have
saving,
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
but not
they spend in getting timber. But this rule is not without
exception. For, if custom has made them familiar with cot­
tages 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.
So the
And similarly if a person expects, not to use his wealth
^
the himself, but to let it out on interest, the higher the rate of
XegTetter interest the higher his reward for saving. If the rate of
Mamie8 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.



THE REWARD OF WAITING

235

Sir Josiah Child remarked more than two centuries iv, vn, 9.
ago, that in countries in which the rate of interest is high, but there
merchants “ when they have gotten great wealth, leave ^ 3 0p
^
trading” and lend out their money at interest, “ the gain therule'
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 them­
selves 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 But in
interest may be accompanied by a continued increase in the exceptions
yearly additions to the world’s capital. But none the less is the wteof
it true that a fall in the distant benefits to be got by a interest
°
J
tends to
given amount of working and waiting for the future does mate
tend on the whole to diminish the provision which people than?te 8
S
make for the future; or in more m odem phrase, that a fall
E
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 done1.
1 See also VI. vi. It may however be observed here that the dependence of
the growth of capital on the high estimation of “ future goods** appears to have
been over-estimated by earlier writers; not under-estimated, as is argued by Prof.
BiShm-Bawerk.




236
iv, vn, 10.

G RO W TH OF W EA LTH

§ 10. The causes which, govern the accumulation of
Provisional wealth and its relation to the rate of interest have so many
conclusion. p0inf,8 G contact with various parts of economic science, that
f
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 invest­
ment of wealth is a small part of the already existing stock,
and that therefore the stock would not be increased per­
ceptibly in any one year by even a considerable increase in
the annual rate of saving.




STATISTICAL N O TE

N ote

on

the

St a t is t ic s

op the

G row th

237

of

W

ealth.

§ 11. The statistical history of the growth of wealth is singularly IV, vn, 11.
poor and misleading. This is partly due to difficulties inherent in any Es)7 ^ es
attempt to give a numerical measure of wealth which shall be appli- of national
cable to different places and times, partly to the absence of systematic
attempts to collect the necessary facts. The Government of the United direct:
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 they are
exclusively on estimates of income, which are capitalized at various
numbers of years’ purchase; this number being chosen with reference estimates
(i) to the general rate of interest current at the time, (ii) to the extent °* in >
c< meto 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 (6) 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 pro­
vision under the head of ii. b).
Land, houses, and live stock are the three forms of wealth which The money
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 increased
often chiefly due to an increase in its scarcity; and is therefore a by i4?
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
fond 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



238

STATISTICAL NOTE ON T H E G RO W T H OF W E A L T H

I? vn 11. fanning 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 erf
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. Gifien’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

Country and
Author of
Estimate.

Houses.
FarmOther
Total
Wealth,
Land.
&c.
£ million. £ million. £capitaL £wealth £wealth. per cap.
million. million. million.
£

England.
1679 (Petty) ..........
1690 (Gregory King)
1812 (Colquhoun) ...
1885 (Gifien) ..........

144
180
750
1,333

30
45
300
1,700

36
25
143
382

40
70
653
3,012

250
320
1,846
6,427

42
58
180
315.

United Kingdom.
1812 (Colquhoun) ...
1855 (E dleston).......
1865 (Gifien) ..........
1875
—
...........
1885
—
...........
1905 (Money)..........

1,200
1,700
1,864
2,007
1,691
966

400
550
1,031
1,420
1,927
2,827

228
472
620
668
522
285

908
1,048
2,598
4,453
5,897
7,326

2,736
3,760
6,113
8,548
10,037
11,413

160
130
200
260
270
265

2,040

2,000

480

4,208

8,728
13,200
18,860

175
208
247

1892 (de Foville) ..

3,000

2,000

400

4,000

9,400

247

ITA1T.
1884 (Pantaleoni) ...

1,160

360

1,920

65

United S tates.
1880 (Census)..........
1890
—
.....
1900
—
..........

Fbanck.




STATISTICAL N O TE

23 9

of all such estimates. Mr Money’s estimate of the value of land, i.e. iv, vn, 11.
agricultural land with farm buildings, is probably too low. Sir R.
----Giffen estimates the value of public property at £m. 600: and he
omits publio loans held at home, on the ground that the entries for
them would cancel one another, as much being debited under the head
of publio property as is credited under that of private property. But
Mr Money reckons the gross value of public roads, parks, build­
ings, 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.
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
In d ia ....................................
„ 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 ficonomique de la Propri&i <fcc. 1200—1800 con­
tains a rich store of materials as to France; and comparative studies
of the growth of wealth in Prance 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,
n.nri the national income to be £m. 3,600. He reckoned the net value
of the countiy'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.




CHAPTER VIII.
INDUSTRIAL ORGANIZATION.

iv , v m , l.

§ l.

W r ite r s

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
m
creasea1 other cases, Adam Smith gave a new and larger significance
1
efficiency ^ aQ 0\£ doctrine by the philosophic thoroughness with

doctrine
that or-

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.
Biologist*
Before Adam Smith’ s book had yet found many readers,
mists have biologists were already beginning to make great advances
influence* towards understanding the real nature of the differences
strafe* in organization which separate the higher from the lower
for survival animals; and before two more generations had elapsed,
organiza- Malthus’ historical account of man’s struggle for existence
t,on*
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




M UTU AL D EBTS O F B IO LO G Y A N D ECONOMICS

241

organization on the one side and the physical organization of iv,vm,i.
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 them1. 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 integrain such forms as the division of labour, and the developmentU
on*
of specialized skill, knowledge and machinery: while “ inte­
gration,” 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 b y sea and road, b y railway and telegraph,
b y 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 develop­
ment. 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 bept fitted to derive benefit from their environ­
ment.
i See a brilliant paper by H&ckd on AfbekstKeihmg in Mtntcht» - md
Thierlebm and Scbiffia’a Bau m i Lebm it* todalm KOrpm*.




IN D U ST R IA L O RG AN IZATION

242

iv,vra,2.

The law requires to be interpreted carefully: for the
fact that a thing is beneficial to its environment will not
forwriyal ky ^self secure its survival either in the physical or in the
requires
moral world. The law of “ survival of the fittest” states
$0 06 CftfB*
fully inter- that those organisms tend to survive which are best fitted
preted.
£0 ^-fciliz© 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 it1. 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,
harshest
seems a hard truth: but some of its harshest features
features are softened down by the fact that those races, whose
by^heJd members render services to one another without exacting
lieredrty. °* 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.

The law of

IfSareC
tal
care on

ofthe8
1
species.

§
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
1 Like all other doctrines of the same class, this requires to be interpreted in
the light of the fact that the effective demand of a purchaser depends on his
means, as well as on his wants: a small want on the part of a rich man often has
more effective force in controlling the business arrangements of the world than,
a great want on the part of a poor man.




STRU G GLE F O R SU R V IV A L

243

return, must yet be willing as individuals to exert themselves iv, vm,2
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 Bocial 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 in man
reason and speech, the influence of a tribal sense of duty in aacrifice
strengthening the tribe takes a more varied form. It is true dlSberate
that in the ruder stages of human life many of the services
rendered by the individual to others are nearly as much due strength of
to hereditary habit and unreasoning impulse, as are those of
the bees and ants. But deliberate, and therefore moral, selfsacrifice soon makes its appearance; it is fostered by the
far-seeing guidance of prophets and priests and legislators,
and is inculcated b y parable and legend. Gradually the un­
reasoning 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 environ­
ment.
Unfortunately however not all the qualities which enable But evil
•
one race to prevail over another benefit mankind as a with the
whole. It would no doubt be wrong to lay very much stress 800d’
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



244

IN D U STRIAL O RGANIZATION

iv, v iii , S. 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
especially return. The fact that there is an economic demand for the
ca»M>f a
services of Jewish and Armenian money-dealers in Eastern
JJ»*ikic 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.
The caste
§ 3. This influence of heredity shows itself nowhere more
S , r markedly than in social organization. For that must neeesSutnot* sarily be a slow growth, the product of many generations: it
drawbacks.mus^
based °n 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 b y itself proved
that the distinction of castes' was well suited to its environ­
ment, 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 b y
it had not been in the main beneficial. Their pre-eminence



PR IN C IPLE OF H E R E D IT Y

245

proved not that it was free from defects, but that its ex- iv, vrn, 3.
cellences, 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 b y 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 same
the modern organization of the Western world, we find itoftbe
offering a striking contrast, and a no less striking resemblance, ^fween
to the system of caste. On the one hand, rigidity has b e e n ^ ® ^ ^
succeeded by plasticity: the methods of industry which w e re cesses i.n
then stereotyped, now change with bewildering quickness;Western
the social relations of classes, and the position of the indi-world'
vidual 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 condi­
tions which prevailed in the far-away times of the rule of



246

IN D U STRIAL ORGANIZATION

iv, Tin, 4. 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.
Adam
§ 4. Adam Smith, while insisting on the general advanmoderatages of that minute division of labour and of that subtle
theexindustrial organization which were being developed with
ofsome"06 unexampled rapidity in his time, was yet careful to indicate
followers many P0^ 8 in which the system failed, and many incidental
evils which it involved1. 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 modem industry might not be transi­
tional, having indeed good work to do in their time, as the
1 See above I. xv. 8; and below Appendix B, 3 and &



T H E IN D IV ID U A L IN R E L A T IO N TO SOCIETY

247

caste system had in its time; but being, like it, serviceable iv,vm,5.
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.
§ 5 . Moreover the doctrine took no account of the They paid
manner in which organs are strengthened by being used, attention
Herbert Spencer has insisted with much force on the rule
that, if any physical or mental exercise gives pleasure and is under
therefore frequent, those physical or mental organs which faculties
are used in it are likely to grow rapidly. Among the lower developed!
animals indeed the action of this rule is so intimately inter­
woven 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 free­
dom. 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 them­
selves 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
wealth1.
No doubt it is true that physical peculiarities acquired
by the parents during their life-time are seldom if ever trans­
mitted. to their offspring. But no conclusive case seems to
1 Man with his many motives, as he may set himself deliberately to encourage
the growth of one peculiarity, may equally set himself to check the growth of
another: the slowness of progress during the Middle Ages was partly due to
a deliberate detestation of learning.




IN D U ST R IA L ORGANIZATION

248

iv, vm, 5. 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 case1.
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 b y 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,
i^ustriai”

^hus progress may bo hastened by thought and work;
by the application of the principles of Eugenics to the rer t t r b plenishment of the race from its higher rather than its lower
mentof*
strains, and by the appropriate education of the faculties
man; and of either sex: but however hastened it must be gradual Mid
therefore
1 .. i
i
'r
1 1
1 . i
»
must be
relatively slow. It must be slow relatively to man s growing
gradual or command over technique and the forces of nature; a command
unstable. w]1
jc]1 js 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

structure

1 See Note XI. in the Mathematical Appendix. Considerations of this
bare little application to the development of mere animals, such as mice; and nose
at all to that of peas and other vegetables. And therefore the marvellous arithmetical
results which have been established, provisionally at all events, in regard to heredity
in such cases, have very little bearing on the full problems of inheritance with which
students of social science are concerned: and some negative utterances on this
subject by eminent Mendelians seem to lack due reserve. Excellent remarks on
the subject will be found in Prof. Pigou’s Wealth and Welfare, Pari I, ch. rv.




LIM ITS O F MAN’ S P O W E R TO H ASTEN PROGRESS

249

reorganization of society on a new basis. In fact our new iv,vra,5
command over nature, while opening the door to much
larger schemes for industrial organization than were physi­
cally possible even a short time ago, places greater responsi­
bilities 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 n on fa d t saltum1.
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 pro­
duction 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.




1 Compare Appendix A, 16.

CHAPTER IX.
INDUSTRIAL ORGANIZATION, CONTINUED. DIVISION OP
LABOUR. THE INFLUENCE OF MACHINERY.

iv, ix, i.

§ 1 . T he first condition of an efficient organization of
industry is that it should keep everyone employed at such
inthisand work as his abilities and training fit him to do well, and
following should equip him with the best machinery and other applichapters. ances for his work. W e 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 pro­
duction on a large scale; and lastly, we shall examine the
growing specialization of the work of business management.
Practice
Everyone is familiar with the fact that “ practice makes
perfect,
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
Physioin some measure explains this fact. For it gives reasons for
pllnation" believing that the change is due to the gradual growth of
new habits of more or less “ reflex” or automatic action.

The course




SPE CIALIZATIO N IN M EN TAL W O R K

251

Perfectly reflex actions, such as that of breathing during iv, ix, 1 .
sleep, are performed by the responsibility of the local nerve
centres without any reference to the supreme central autho­
rity 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 infor­
mation 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
results1.
The physiological basis of purely mental work is not yet Knowledge
well understood; but what little we do know of the growth Actual
of brain structure seems to indicate that practice in any kind abiMy*
1 For instance, the first time a man attempts to skate he must give his whole
attention to keeping his balance, his cerebrum has to exercise a direct control over
every movement, an'*, he has not much mental energy left for other things. But
after a good deal of practice the action becomes semi-automatic, the local nerve
centres undertake nearly all the work of regulating the muscles, the cerebrum is
set free, and the man can carry on an independent train of thought; he can even
alter his course to avoid an obstacle in his path, or to recover his balance after it has
been disturbed by a Blight unevenness, without in any way interrupting the course
of his thoughts. It seems that the exercise of nerve force under the immediate
direction of the thinking power residing in the cerebrum has gradually built up a
set of connections, involving probably distinct physical change, between the nerves
and nerve centres concerned; and these new connections may be regarded as a
sort of capital of nerve force. There is probably something like an organized
bureaucracy of the local nerve centres: the medulla, the spinal axis, and the
larger ganglia generally acting the part of provincial authorities, and being able
after a time to regulate the district and village authorities without troubling the
supreme government. Very likely they send up messages as to what is going on:
but if nothing much out of the way has happened, these are very little attended to.
When however a new feat has to be accomplished, as for instance learning to
skate backwards, the whole thinking force will be called into requisition for the
time; and will now be able by aid of the special skating-organization of the nerves
and nerve centres, which has been built up in ordinary skating, to do what would
have been altogether impossible without such aid.
To take a higher instance: when an artist is painting at his best, his cerebrum
is fully occupied with his work: his whole mental force is thrown into it, and the
strain is too great to be kept up for a long time together. In a few hours of happy
inspiration he may give utterance to thoughts that exert a perceptible influence on
the character of coming generations. But his power of expression had been earned
by numberless hours of plodding work in which he had gradually built up an
intimate connection between eye and hand, sufficient to enable him to make good
rough sketches of things with which he is tolerably familiar, even while he is
engaged in an engrossing conversation and is scarcely conscious that he has a
pencil in his hand.




D IVISION OF LAB OU R

252

iv, ix, l. 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 consider­
able exertion, questions which he could have dealt with but
very imperfectly a little while before, even b y 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 b y the continual applica­
tion 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.
Change of
Some social reformers have indeed maintained that those
activity
often a
who do the most important brain work might do a fair
relaxation, share of manual work also, without diminishing their power
of acquiring knowledge or thinking out hard questions. B ut
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 n ot
economical from the point of view of the community unless
its value is sufficient to outweigh a considerable injury to hia
main work1.
1 J. S. Mill vent so far as to maintain that his occupations at the Tn<tl«
Office did not interfere with his pursuit of philosophical inquiries. But it
probable that this diversion of his freshest powers lowered the quality of his
thought more than be was aware; and though it may have diminished but little
his remarkable usefulness in his own generation, it probably affected very much
his power of doing that kind of work which influences the course of thought in
future generations. It was by husbanding every atom of his small physical
strength that Darwin was enabled to do so much work of just that kind: and a
social reformer who had succeeded in exploiting Darwin’s leisure hours in useful
work on behalf of the community, would have done a very bad piece of business
for it.




SP E C IA LIZATIO N IN M AN U AL W O R K

253

§ 2 . It is a difficult and unsettled question how far IV, n , 2.
specialisation should be carried in the highest branches of in the
work. In science it seems to be a sound rule that the
of
area of study should be broad during youth, and should
gradually be narrowed as years go on. A medical man speciaiizawho has always given his attention exclusively to one class not always
of diseases, may perhaps give less wise advice even in his JJEency.
special subject than another who, having learnt b y 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 stofe o f 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 it is
but nails all his life could make them twice as quickly as acquire
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 sh a p e , ran^e of
gradually learns to move his fingers exactly as they are *°r *
wanted, b y 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 b y hand or machinery, just the same seam on a
piece of leather or cloth o f 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 boot1.
* The brat and most expensive clothes are made by highly
and highly
paid tailors, each of whom works right through first one garment and then
another: while the cheapest and worst clothes are made for starvation wages by
unskilled women who take the cloth to their own homes and do every part of the
sewing themselves. But clothes of intermediate qualities are made in workshops
or factories, in which the division and subdivision of labour are carried as far as
the size of the staff will permit; and this method is rapidly gaining ground at both
ends at the expense of the rival method. Lord Lauderdale (Inquiry, p. 282) quotes




D IVISIO N OF LAB O U R

254

iv, a , 2.
Again, in the wood and the metal industries, if a man
Thg
has to perform exactly the same operations over and over
uniformity a g ain 0n the same piece of material, he gets into the habit
of many
processes of holding it exactly in the way in which it is wanted, and
m the
wood and of arranging the tools and other things which he has to
metal
handle in such positions that he is able to bring them to
trades.
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 ex­
penditure of nervous force diminishes even more rapidly than
his expenditure of muscular force.
The
But when the action has thus been reduced to routine it
provinces
oi manual^ has nearly arrived at the stage at which it can be taken over
machinery, 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 con­
trived when it is worth while to spend some labpur 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
Xenophon’s argument that the best work is done when each confines himself to
one simple department, as when one man makes shoes for men, and another for
women; or better when one man only sews shoes or garments, another cuts them
out: the king’s cooking is much better than anybody else’s, because he has one
cook who only boils, another who only roasts meat; one who only boils
another who only fries it: there is not one man to make all sorts of bread but a
special man for special qualities.




IN M OD ERN M ANUFACTURE

255

which has been reduced to mere routine by the improvement iv, ix, 3.
of machinery and the ever-increasing minuteness of the subdivision of labour.
§ 3 . We are thus led to a general rule, the action of The
which is more prominent in some branches of manufacture onabour
than others, but which applies to all. It is, that any manu- 1 r®^tion
t"
facturing operation that can be reduced to uniformity, so growth of
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 b y it is on a sufficient scale,
money and inventive power will be spent without stint on
the task till it is achieved1.
Thus the two movements of the improvement of ma­
chinery 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 M
achinery
the works at Soho, Boulton and W att found it necessary to purely63
carry division of labour to the furthest practicable point.
1 One great inventor is rumoured to have spent £300,000 on experiments relating
to textile machinery, and his outlay is said to have' been abundantly returned to
him. Some of his inventions were of such a kind as can be made only by a man
of genius; and however great the need, they must have waited till the right
man was found for them. lie charged not unreasonably £1000 as royalty for each
of his combing machines; and a worsted manufacturer, being full of work, found
it worth his while to buy an additional machine, and pay this extra charge for it,
only six months before the expiry of the patent. But such cases are exceptional:
as a rule, patented machines are not very dear. In some cases the economy of
having them all produced at one place by special machinery has been so great that
the patentee has found it to his advantage to sell them at a price lower than the
old prioe of the inferior machines which they displaced: for that old price gave
him so high a profit, that it was worth his white to lower the price still further
in order to induce the use of the machines for new purposes and in new markets.
In almost every trade many things are done by hand, though it is well known that
they could easily be done by some adaptations of machines that are already in use
in that or some other trade, and which are not made only because there would
not as yet be enough employment for them to remunerate the trouble and expense
of making them.




256

D IVISION OF LAB O U R

IV, ix, 4.

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 me­
chanics generally were much less skilled then than they
are now. The way in which Boulton and W att 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. B y continued practice in
handling the same tools and fabricating the same articles,
they thus acquired great individual proficiency1.” Thus
some of
machinery constantly supplants and renders unnecessary
S K S T that purely manual skill, the attainment of which was, even
kbwr?but UP
Adam Smith’s time, the chief advantage of division
of labour. But this influence is more than countervailed
tu0 0COp6
for it.
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.
M
achine§ 4 . The powers of machinery to do work that requires
machinery too much accuracy to be done by hand are perhaps best
ducingthe seen in some branches of the metal industries in which the
XintOT- system of Interchangeable Parts is being rapidly developed.
ckajgeaMe It is only after long training and with much caw 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 b y hand,
their first cost would be very high; and when any part o f
them was broken, it could be replaced only at great cost
b y sending the machine back to the manufacturer or b y
bringing a highly skilled mechanic to the machine. B ut as
it is, the manufacturer keeps in store many facsimiles of the
broken part, which were made b y the same machinery, and
are therefore interchangeable with it. A farmer in the NorthWest of America, perhaps a hundred miles away from any
good mechanic’s shop, can yet us6 complicated machinery



1 Smiles* Boulton and Watt, pp. 170,1.

ILLU STR ATIO N FROM T H E W ATCH -M AK IN G T R A D E

257

with confidence; since he knows that by telegraphing the iv,n ,4.
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 import­
ance 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 machinemade machinery to every branch of production, including
even domestic and agricultural work1.
The influences which machinery exerts over the character iiiustraof modern industry are well illustrated in the manufacture the history
of watches. Some years ago the chief seat of this business ^a^hwas 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 Com
plex
more delicate the machine’s power, the greater is the increases7
judgment and carefulness which is called for from those
who see after it. Take for instance a beautiful machine inent8p
.d
« i • i
•
,
general in*
which feeds itself with steel wire at one end, and delivers teiiigence;
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
1 The system owes its origin in great measure to Sir Joseph Whitworth’s
standard gauges; but it has been worked out with most enterprise and thorough­
ness in America. Standardization is most helpful in regard to things which are
to be built up with others into complex machines, buildings, bridges, etc.




DIVISION OF LABOUR

258

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
thin 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 trust­
worthy 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 work1,
a din
n
Those who finish and put together the different parts
gomo C8868
*
w a en
e k s of a watch must always have highly specialized skill: but
barriers
most of the machines which are in use in a watch factory
d
ifferen are not different in general character from those which are
t'*8
tra es*
d
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, m illin g
machines and a few others, which are familiar to all engineer­
ing 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

IV, rx, 4.

1 The perfection which the machinery has already attained is shown by the
fact that at the Inventions Exhibition held in London in 1885, the representative
of an American watch factory took to pieces fifty watches before some
representatives of the older system of manufacture, and after throwing the
different parts into different heaps, asked them to select for him one piece from
each heap in succession; he then set these pieces up in one of the watch-cases
and handed them back a watch in perfect order.




ILLUSTRATIONS FROM WATCH-MAKING AND PRINTING

259

strayed into a gun-making factory or sewing-machine factory, iv, ix, 5.
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.
§ 5 . The printing trade affords another instance of the iiiustra»
v•i
•
i #
i*
j
*
tion from
way m which an improvement of machinery and an increase thepnntin the volume of production causes an elaborate subdivision m
gtrade*
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 print­
ing was new, the printer had to do all this for himself, and
in addition to make all his own appliances1. These are
now provided for him by separate “ subsidiary” trades, from
whom even the printer in the backwoods can obtain every­
thing that he wants to use. But in spite of the assistance
which it thus gets from outside, a large printing establish­
ment 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 Instance of
divided into many smaller groups, especially in the large JJfcSfifin
1 “ The type-founder was probably the first to secede from the concern; then
printers delegated to others the making of presses; afterwards the ink and the
rollers found separate and distinct manufacturers; and there arose a class of
persons who, though belonging to other trades, made printing appliances a
speciality, such as printers’ smiths, printers’ joiners and printers’ engineers” (Mr
Southward in the Article on Typography in the Encyclopaedia Britannica).




DIVISION OP LABOUR

260

centres of the printing trade. In London, for instance, a
minder who was accustomed to one class of machine, or
modem
industry
a compositor who was accustomed to one class of work, if
of thin
lines of
thrown out of employment would not willingly abandon the
division,
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 work1. These barriers be­
tween 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,
which can because though many of them are so slight that a man
be passed
thrown out of work in one subdivision could pass into one of
without
gnat
difficulty. 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 mediaeval handicraftsmen from
another, and which caused the lifelong suffering of the
handloom-weavers when their trade had left them2.
IV, ix, 5.

1 For instance, Mr Southward tells us “ a minder may understand only book
machines or only news machines; he may know all about” machines that print
from flat surfaces or those that print from cylinders; “ or of cylinders ho may
know only one kind. Entirely novel machines create a new class of artisans.
There are men perfectly competent to manage a Walter press who are ignorant
how to work two-colour or fine book-work machines. In the compositor’s depart­
ment division of labour is carried out to a still minuter degree. An old-fashioned
printer would set up indifferently a placard, a title-page, or a book. At the
present day we have jobbing hands, book hands, and news hands, the word
'band* suggesting the factory-like nature of the business. There are jobbing
hands who confine themselves to posters. Book hands comprise those who set
up the titles and those who set up the body of the work. Of these latter again,
while one man composes, another, the 'maker-up,’ arranges the pages.”
1 Let us follow still further the progress of machinery in supplanting Tntmi.)
labour in some directions and opening out new fields for its employment in other*.
Let us watch the process by which large editions of a great newspaper an set
up and printed off in a few hours. To begin with, a good part of the type-setting
is itself often done by a machine; but in any case the types are in the first In tm ^
on a plane surface, from which it is impossible to print very rapidly. The next
step therefore is to make a papier-mach4 cast of than, which is bent on to %
cylinder, and is then used as the mould from which a new metal plate is cast *Hti
fits the cylinders of the printing machine. Fixed on these it rotates alternately
against the inking cylinders and the paper. The paper is arranged in a huge roll
at the bottom of the machine and unrolls itself automatically, first aga{"«t the
damping cylinders and then against the printing cylinders, the first of u . . ._




THE INFLUENCES OF MACHINERY ON THE ARTISAN

261

In the printing trades, as in the watch trade, we see i v ,i x ,6
mechanical and scientific appliances attaining results that instance
would be impossible without them; at the same time thatCreased
they persistently take over work that used to require manual ^ j ^ for
skill and dexterity, but not much judgment; while they leave of ah
igh
for man’s hand all those parts which do require the use of caused by
judgment, and open up all sorts of new occupations in which m in
ach ery
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.
S 6 . We may now pass to consider the effects which Machinery
•
rftljftvp.s
machinery has in relieving that excessive muscular strain the strain
which a few generations ago was the common lot of m ore^^^3n
a
than half the working men even in such a country as England.
The most marvellous instances of the power of machinery are
prints it on one side, and the second on the other: thence to the cutting cylinders,
which cut it into equal lengths, and thence to the folding apparatus, which folds
it ready for sale.
More recently the casting of the type has been brought under the new methods.
The compositor plays on a keyboard like that of the type-writer, and the matrix
of a corresponding letter goes into line: then after spacing out, molten lead is
poured on the line of matrices, and a solid line of type is ready. And in a further
development each letter is cast separately from its matrix; the machine reckons
up the space taken by the letters, stops when there are enough for a line, divides
out the free space equally into the requisite number of small spaces between the
words; and finally casts the line. It is claimed that one compositor can work
severed such machines simultaneously in distant towns by electric currents.




262

DIVISION OF LABOUR

iv, rr, 6, 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 move­
ment, 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 fore­
fathers, 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 old1.
M in
ach ery
New machinery, when just invented, generally requires
sooner or a great deal of care and attention. But the work of its
m
onoto- attendant is always being sifted; that which is uniform and
jninanu-k monotonous is gradually taken over by the machine, which
facture.
thus becomes steadily more and more automatic and selfacting; 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 responsi­
bility 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.
1 The jack-plane, used for making smooth large boards for floors and other
purposes, used to cause heart disease, making carpenters as a rule old men by the
time they were forty. Adam Smith tells us that “ workmen, when they are
liberally paid, are very apt to overwork themselves and to ruin their health and
constitution in a few years. A carpenter in London, and in some other places, is
not supposed to last in his utmost vigour above eight years....Almost every class
of artificers is subject to some particular infirmity occasioned by excessive
application to their peculiar species of work.” Wealth of Nations, Book l
chapter vn.




MONOTONY OF W O R K AN D M ONOTONY OF L IF E

263

Nothing could be more narrow or monotonous than the iv, it, 6.
occupation of a weaver of plain stuffs in the old time. But iiiustranow one woman will manage four or more looms, each of
which does many times as much work in the course of the *»dustr
i''9day 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 was1.
Facts of this kind are to be found in the recent history it thu
s
of many trades: and they are of great importance when we monotony
are considering the way in which the modern organization *f0 ork
*
of industry is tending to narrow the scope of each person’ s
work, and thereby to render it monotonous. For those trades of life,
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 employ­
ment 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
resource2.
* The efficiency of labour in weaving has been increased twelve-fold and that
in spinning six-fold during the last seventy years. In the preceding seventy
years the improvements in spinning had already increased the efficiency of labour
two-hundred-fold (see Ellison’s Cotton Trade of Great Britain, ch. iv. and ▼
.).
* Perhaps the textile industries afford the best instance of work that used to
be done by hand and is now done by machinery. They are especially prominent
in England, where they give employment to nearly half a million males and more
than half a million females, or more than on® in ten of those persons who are
earning independent incomes. The strain that is taken off human muscles in




264

D IVISION OF LABOU R

iv, ix, 7.

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 disadvan­
tages 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 edu­
cated 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.
The
§ 7 . We must now proceed to consider what are the
economic con(j^{on8 under which the economies in production arising
B 1 n ed from division of labour can best be secured. It is obvious
^ma d
requires17 ^ a t the efficiency of specialized machinery or specialized
shouidbe
fully
occupied.

*s
one condition of its economic use; the other
is that sufficient work should be found to keep it well
e m p l0y e(j t As Babbage pointed out, in a large factory

dealing even with those soft materials is shown by the fact that for every one of
these million operatives there is used about one horse-power of steam, that is,
about ten times as much as they would themselves exert if they were all strong
, men; and the history of these industries will serve to remind us that many of
\ those who perform the more monotonous parts of manufacturing work are as a
rule not skilled workers who have come down to it from a higher class of work,
but unskilled workers who have risen to it. A great number of those who work
in the Lancashire cotton-mills have come there from poverty-stricken districts of
Ireland, while others are the descendants of paupers and people of weak physique,
who were sent there in large numbers early in the last century from the most miser­
able conditions of life in the poorest agricultural districts, where the labourers
were fed and housed almost worse than the animals whom they tended. Again,
when regret is expressed that the cotton factory hands of New England have not
the high standard of culture which prevailed among them a century ago, we must
remember that the descendants of those factory workers have moved up to higher
and more responsible posts, and include many of the ablest and wealthiest of the
citizens of America. Those who have taken their places are in the process of
being raised; they are chiefly French Canadians and Irish, who though they may
learn in their new homes tome of the vices of civilization, are yet much better off
and have on the whole better opportunities of developing the higher faculties of
themselves and their children than they had in their old homes




M ACH INERY A MEANS, MAN ALSO AN EN D OF W O R K

265

“ the master manufacturer by dividing the work to be iv , ix,7.
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 turninglathe 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 But tue
and machines stand on much the same footing: but while economic
machinery is a mere implement of production,man’ s welfare is manasan
also its ultimate aim. W e have already been occupied with ^^uction
the question whether the human race as a whole gains b y is
carrying to an extreme that specialization of function which him
self
causes all the most difficult work to be done b y a few people: byV
ftloped
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;



DIVISIO N OF LAB O U R

266
IV, IX, 7.

External

and
internal
economies.

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.




CHAPTER X.
INDUSTRIAL

ORGANIZATION,

CONTINUED.

TH E

CON-

CENTRATION OF SPECIALIZED INDUSTRIES IN PAR­
TICULAR LOCALITIES.
§ 1 . I n an early stage of civilization every place had to IV>*»1depend on its own resources for most of the heavy wares Even
which it consumed; unless indeed it happened to have special stages of
facilities for water carriage. But wants and customs changed Jj^the
slowly: and this made it easy for producers to meet the P ^ ^ ion
wants even of consumers with whom they had little communication; and it enabled comparatively poor people to w
ares
buy a few expensive goods from a distance, in the security
that they would add to the pleasure o f festivals and holidays
during a life-time, or perhaps even during two or three life­
times. 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 fairs1 and
professional pedlers, and partly b y 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
1 Thus in the records of the Stourbridge Fair held near Cambridge we find an
endless variety of light and precious goods from the older seats of civilization in
the East and on the Mediterranean; some having been brought in Italian ships,
and others having travelled by land as far as the shores of the North Sea.




268

LO CALIZED INDUSTRIES

, IV, x, 2. 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 industry1.
This elementary localization of industry gradually pre­
pared the way for many of the modem 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 produc­
tion, or even only a part of one*.
Tb«
§ 2. Many various causes have led to the localization of
origins of industries; but the chief causes have been physical condiindustnes; tidns; such as the character of the climate and the soil, the
conditions •existence of mines and quarries in the neighbourhood, or
within easy access by land or water. Thus metallic indus­
tries 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
1 Not very long ago travellers in western Tyrol could find a Strange and
characteristic relic of this habit in a village called Imst. The villagers had
somehow acquired a special art in breeding canaries: and their young mm
started for a tour to distant parts of Europe each with about fifty snail cages
hung from a pole over his shoulder, and walked on till they had sold all.
*
There are for instance over 500 villages devoted to various branches of
woodwork; one village makes nothing but spokes for the wheels of vehicles,
another nothing but the bodies and so on; and indications of a like state of things
are found in the histories of oriental civilizations and in the chronicles of mediaeval
Europe. Thus for instance we read (Rogers’ Six Cmturiei of Work and Wages,
ch. iv.) of a lawyer’s handy book written about 1250, which makes note of scarlet
at Lincoln; blanket at Bligh; burnct at Beverley; russet at Colchester; linen
fabrics at Shaftesbury, Lewes, and AyLsham; cord at Warwick and Bridport;
knives at Marstead; needles at Wilton; mors at Leicester; soap at Coventry;
horse girths at Doncaster; skins and furs at Chester and Shrewsbury and so on.
The localization of trades in England at the beginning of the eighteenth
century is well described by Defoe, Plan of English Commerce, 85-7; English
Tradesman, n. 282-3.




(

T H E IR V A R IO U S O RIG IN S

269

afterwards they went to the neighbourhood of collieries1, iv, x, 2.
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 “ Beggars”
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 W ycombe 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
The rich fold there assembled make a demand for goods of of courts;
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 pre­
sence of the court. But very often the rulers deliberately * berate
h®
invited artisans from a distance and settled them in a group invitation
together. Thus the mechanical faculty of Lancashire is said oI ruler8,
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 manu­
facturing 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 wants2.
1 The later wanderings of the iron industry from Wales, Staffordshire and
Shropshire to Scotland and the North of England are well shown in the tables
subm itted by Sir Lowthian Bell to the recent Commission on the Depression of
Trade and Industry. See their Second Report, Part 1. p. 320.
*
Fuller says that Flemings started manufactures of cloths and fustians in
Norwich, of baizes in Sudbury, of serges in Colchester and Taunton, of cloths in




270
iv, x, 2.
Tbo
industrial
developmentof
waitsupoa

ti^and1"
1
character,

LO CALIZED IN D U STRIES

But how did these immigrants learn their skill? Their
ancestors had no doubt profited by the traditional arts of
ear]jer civilizations on the shores of the Mediterranean and
#
fa 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 b y the richness of
her soil and her mines, and her facilities for commerce. Such
natural advantages may themselves have stimulated free in­
dustry 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.
W e 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 b y 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 there­
fore lie outside of our present view. But for the present we
Kent, Gloucestershire, Worcestershire, Westmorland, Yorkshire, Hants, Berks
and Sussex, of kerseys in Devonshire and of Levant cottons in Lancashire.
Smiles’ Huguenots tn England and Ireland, p. 109. See also Lecky’s History
o f England in the eighteenth cmivry, ch. U.




T H E IR ADVAN TAG ES

271

must turn aside from these broader movements of the locali- iv, x, 3. ,
zation 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.
§ 3 . When an industry has thus chosen a locality for The
itself, it is likely to stay there long: so great are the ad- onoeaUzed8
vantages which people following the same skilled trade get j^ ^ ^ ry
from near neighbourhood to one another. The mysteries of skill;
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 the ^ ^
grow up in the neighbourhood, supplying it with implements subsidiary
and materials, organizing its traffic, and in many w aystrade8;
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 specialized
which there is a large aggregate production of the same madunery»
kind, even though no individual capital employed in the
trade be very large. For subsidiary industries devoting them­
selves 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 depre­
ciation very rapid.
Again, in all but the earliest stages of economic develop- a local
ment a localized industry gains a great advantage from the^tdaifor
fact that it offers a constant market for skill. Em ployers8 ^
are apt to resort to any place where they are likely to find
a good choice of workers with the special skill \frhich 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



272

LO CALIZED INDUSTRIES

iv, x, 3. 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
oft old associations should they become irksome. These diffi­
culties are still a great obstacle to the success of any business
in which special skill is needed, but which is not in the neigh­
bourhood of others like it: they are however being diminished
by the railway, the printing-press and the telegraph.
Sometimes
On the other hand a localized industry has some disadhow ever si
localized
vantages as a market for labour if the work done in it is
makestoo chiefly of one kind, such for instance as can be done only b y
dem
ands strong men. In those iron districts in which there are no
kindof
textile or other factories to give employment to women and
labour.
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 pre­
viously 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 manufactur­
ing 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 com ­
mand much higher ground-rents than the situations are
worth for factories, even when account is taken of this com ­
bination of advantages: and there is a similar competition
for dwelling space between the employees of the trading



CHANGES IN VOLUM E OF B R IT IS H IN D U STRIES

273

houses and the factory workers. The result is that factories iv, x, 4.
now congregate in the outskirts of large towns and in manufacturing districts in their neighbourhood rather than in the
towns themselves1.
A district which is dependent chiefly on one industry is Different
liable to extreme depression, in case of a falling-off in the jn^same
demand for its produce, or of a failure in the supply of the
mitf-'
raw material which it uses. This evil again is in a great gate each^
measure avoided by those large towns or large industrial pressions.
districts in which several distinct industries are strongly
developed. I f one of them fails for a time, the others are
likely to support it indirectly; and they enable local shop­
keepers to continue their assistance to workpeople in it.
So far we have discussed localization from the point Locaiizaof view of the economy of production. But there is also the sh<^s.f
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 not2.
§ 4. Every cheapening of the means of. communication, ^®n ‘of
^e
every new facility for the free interchange of ideas between improved
distant places alters the action of the forces which tend tOcommunilocalize industries. Speaking generally we must say that a
lowering of tariffs, or of freights for the transport of goods, ^ P ^ c a i
tends to make each locality buy more largely from a dis- tion of
tance what it requires; and thus tends to concentrate parti-in us n
cular 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
* The movement has been specially conspicuous in the case of the textile
manufacturers. Manchester, Leeds and Lyons are still chief centres of the trade
in cotton, woollen and silk stuffs, but they do not now themselves produce any
great part of the goods to which they owe their chief fame. On the other hand
London and Paris retain their positions as the two largest manufacturing towns
of the world, Philadelphia coming third. The mutual influences of the localization '
of industry, the growth of towns and habits of town life, and tbe development of
machinery are well discussed in Hobson’s Evolution of Capitalism.
* Comp. Hobson, I. e. p. 114.




274
IV, x, 4.

LOCALIZED INDUSTRIES

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.
Illustration
On the one hand the steady cheapening of freights, the
recant*”
opening of railways from the agricultural districts of America
England! an(^ India to the sea-board, and the adoption by England of
a free-trade policy, have led to a great increase in her impor­
tation 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 di­
minished the foreign demand for many of England’s products.
One of the most striking movements towards the speciali­
zation 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 advan­
tage pause here to consider it a little.
The
In the first place, the real diminution of England’s agriofheragri- cultural industries is not so great as at first sight appears.
Mpukiion ^ 18 true ^ a t *n
Middle Ages three-fourths of the people
were reckoned as agriculturists; that only one in nine was
first sight returned to the last census as engaged in agriculture, and
appear*.
perhapg 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 them­
selves a great part of the work that is now done by brewers
and bakers, b y spinners and weavers, by bricklayers and car­
penters, 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




275

CHANGES IN VOLUM E OF ENG LISH IN D U STRIES

it is probable that the labour spent on the land at this time iv, x, 4.
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 agri­
cultural. 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.
A t te n tio n h as a lre a d y b e e n called t o th e in fluence w h ich Changes in
th e im p o rta tio n o f agricu ltu ral pro d u ce e x e r ts in a lte rin g th e button of
rela tiv e v a lu e s o f d ifferen t so ils : th ose fa llin g m o s t in v a lu e cuituSV
w h ich d e p en d ed ch iefly on th eir w h e a t c ro p s, a n d w h ich w ere P
n o t n a tu r a lly fertile, th o u g h t h e y w ere c a p a b le o f b e in g m a d e country,
t o y ie ld fa irly g o o d crops b y ex p e n siv e m e th o d s o f c u ltiv a tio n .
D is tr ic ts in w h ich su ch soils p r e d o m in a te , h a v e c o n tr ib u te d
m ore th a n th eir sh are t o th e crow ds o f a g ricu ltu ra l la b o u rers
who

have

m ig r a te d

to

th e

la rg e

to w n s;

and

th u s

th e

geog rap h ica l d istrib u tio n o f in d u stries w ith in t h e c o u n tr y h a s




270

LOCALIZED INDUSTRIES

IV, i, 4. been still further altered. A striking instance of the influence of the new means df transport is seen in those
pastoral districts in the remoter parts of the United King­
dom, 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.
Those get
But next, the changes of recent years have not, as would
a^odture at first sight appear probable, increased the proportion of the
not to°n° English people who are occupied in manufactures. The outfaauxea Pu^
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,
butchiefly
The chief explanation of this result lies in the wonderful
.triesin
increase in recent years of the power of machinery. This
therehas ^as enabled us to produce ever increasing supplies of manubeem
no
factures of almost every kind both for our own use and for
increase
exportation without requiring any considerable increase in
efficiency the number of people who tend the machines. And there­
of labour. fore 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. Dom estic




OLD IN D U ST R IA L W O R K IN N E W FORMS

277

servants increased rapidly for some years; and the total iv, x,4.
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 Transition
forces on the geographical distribution of industries, we will subject of
resume our inquiry as to how far the full economies of divi- chapter!
sion of labour can be obtained b y the concentration of large
numbers of small businesses of a similar kind in the same
locality; and how far they are attainable only b y the aggre­
gation 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
external1.
1 The percentage of the population occupied in the textile industries in the
United Kingdom fell from 3-13 in 1881 to 2 43 in 1901; partly because much of
the work done by them has been rendered so simple by semi-automatic machinery
that it can be done fairly well by peoples that are in a relatively backward
industrial condition; and partly because the chief textile goods retain nearly the
pama simple character as they had thirty or even three thousand years ago. On
the other hand manufactures of iron and steel (including shipbuilding) have
increased so greatly in complexity as well as in volume of output, that the per*
centage of the population occupied in them rose from 2-39 in 1881 to 3-01 in 1901;
although much greater advance has been meanwhile made in the machinery and
methods employed in them than in the textile group. The remaining manu­
facturing industries employed about the same percentage of the people in 1901 as
in 1881. In the same time the tonnage of British shipping cleared from British ports
increased by one half; and the number of dock labourers doubled, but that
of seamen has slightly diminished. These facts are to be explained partly by vast
improvements in the construction of ships and all appliances connected with them,
and partly by the transference to dock labourers of nearly all tasks connected with
handling the cargo some of which were even recently performed by the crew.
Another marked change is the increased aggregate occupation of women in
manufactures, though that of married women appears to have diminished, and
that of children has certainly diminished greatly.
The Summary Tablet of the Census of 1911, published in 1915, show so many »
changes in classification since 1901 that no general view of recent developments can
be safely made. But Table 64 of that Report and Prof. D. Caradog Jones’ paper read
before the Koyal Statistical Society in December 1914 show that the developments
of 1901-1911 differ from their predecessors in detail rather than in general character.




CHAPTER XL
IN D U STR IAL

O RGANIZATIO N,

CO NTIN U ED.

PRO D UCTIO N

ON A L A R G E SCALE.

IV^xx.1.

§1.

T h e a d v a n ta g e s o f p ro d u ctio n o n a large sca le a re

The typical b e s t sh ow n in m a n u fa c tu r e ; u n d er w h ich h ea d w e m a y
for our

in clu de a ll bu sin esses en g ag ed in w o rk in g u p m a te r ia l in to

purpose

fo rm s in w h ich it w ill b e a d a p te d fo r sale in d is ta n t m a r k e ts .

enraged6

* ^ 6 ch aracteristic o f m a n u fa c tu rin g in d u stries w h ic h m a k e s

in manu­
facture.

th e m offer g en erally th e b e s t illu stra tio n s o f th e a d v a n ta g e s
o f p ro d u ctio n o n a la rg e scale, is th e ir p o w e r o f c h o o sin g
fre ely th e lo c a lity in w h ich t h e y w ill d o th e ir w o rk . T h e y
are th u s c o n tra sted o n th e one h a n d w ith agricu ltu re a n d
oth er e x tra c tiv e in du stries (m in in g , q u a r ry in g , fish in g, e t c .) ,
th e g eograp h ical d istrib u tio n

o f w h ich

is d e te rm in e d b y

n a tu r e ; a n d o n th e o th er h a n d w ith in d u stries t h a t m a k e o r
repair th in g s t o su it th e special n eed s o f in d iv id u a l c o n ­
su m ers, fr o m w h o m t h e y c a n n o t b e fa r r e m o v e d ,

a a ll e v e n t s
t

w ith o u t g re a t lo ss1.

The

The chief advantages of production on a large scale are
of niauriaL 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 work­
man often throws away a number of small things which would
have been collected and turned to good account in a factory2;

'A P A n nm r'

1 “ Manufacture” is a term which has long lost any connection with its
original use: and is now applied to those branches of production where macliine
and not hand work is most prominent. Roscher made the attempt to bring it
back nearer to its old use by applying it to domestic aa opposed to factory
industries: but it is too late to do this now.
*
See Babbage’s instance of the manufacture of bom. Economy of Manu­
factures, ch. xxu.




T H E ECONOMY OF M A T E R IA L

279

but waste of this kind can scarcely occur in a localized manu- iv, xi, 2.
facture even if it is in the hands of small m en; 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 it1.
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 suf&ce for many tasks, and
therefore can be done well and carefully. W e may pass then
to the economy of machinery.
§ 2. In spite of the aid which subsidiary industries can Tbe
give to small manufactures, where many in the same branch of a large"
of trade are collected in one neighbourhood2, they are still ^x^ards
placed under a great disadvantage by the growing variety
and expensiveness of machinery. For in a large establish-machinery,
ment 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 inde­
pendently of interest and the expense of keeping it in repair,
a heavy allowance must be made for depreciation in conse­
quence of its being probably improved upon before long8.
1 Instances are the utilization of the waste from cotton, wool, silk and other
textile materials; and of the by-products in the metallurgical industries, in the
manufacture of soda and gas, and in the American mineral oil and meat packing
industries.
* See the preceding chapter, § 3.
* The average time which a machine will last before being superseded is in
many trades not more than fifteen years, while in some it is ten years or even
less. There is often a loss on tbe use of a machine unless it earns every year
twenty per cent, on its cost; and when the operation performed by such a machine
costing £500 adds only a hundredth part to the value of tht> material that passes
through it—and this is not an extreme case—there will be a loss on its use unless
it can be applied in producing at least £10,000 worth of goods annually.




28 0

PRODUCTION ON A LA R G E SCALE

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.
Advan­
But next, a small manufacturer may not always be
tages with
regard to acquainted with the best machinery for his purpose. It is
the inven­
true that if the industry in which he is engaged has been
tion of
improved
machinery 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 o f the jute and silk manufac­
tures; and in a host of trades that are constantly springing
up to supply some new want or to work up some new
material.
The small
In all such trades new machinery and new processes are
manufac­
turer
for the greater part devised by manufacturers for their own.
cannot
use. Each new departure is an experiment which may fail;
often
afford to
those which succeed must pay for themselves and for the
experi­
ment.
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 Koscher calls a characteristic task ol 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
IV, xr, 2.




ADVANTAGES IN T H E U SE OF M ACH IN ERY

281

email manufacturer cannot afford even to make experiments iv, xi, 2.
■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 improve­
ment 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 others1. '
There are however some trades in which the advantages Butin
which a large factory derives from the economy of machinery trades a
almost vanish as soon as a moderate size has been reached, moderate
For instance in cotton spinning, and calico weaving, a comthe
paratively small factory will hold its own and give constant best
1 1 1
i*
.
machinery.
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 en­
larging their works, think it best to add a weaving depart­
ment. 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
1 In many businesses only a small percentage of improvements are patented.
They consist of many small steps, which it would not be worth while to patent
one at a time. Or their chief point lies in noticing that a certain thing ought to
be done; and to patent one way of doing it, is only to set other people to work to
find out other ways of doing it against which the patent cannot guard. If one
patent is taken out, it is often necessary to "block” it, by patenting other methods
of arriving at the same result; the patentee does not expect to use them himself,
but he wants to prevent others from using them. All this involves worry and
loss of time and money: and the large manufacturer prefers to keep his improve*
ment to himself and get what benefit be can by using it. While if the small
manufacturer takes out a patent, he is likely to be harassed by infringements:
and even though he may win “ with costs” the actions in which he tries to defend
himself, he is sure to be ruined by them if they are numerous. It is generally in
the public interest that an improvement should be published, even though it is at
tbe same time patented. But if it is patented in England and not in other
countries, as is often the case, English manufacturers may not use it, even though
they were just on the point of finding it out for themselves before it was patented;
while foreign manufacturers learn all about it and can use it freely.




PRODUCTION ON A LA R G E SCALE

282

iv, xi, 2. 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 preyent delays from accidents to the
plant1.
A d ra n Akin to these last, there are a great many advantages
£*fa
^e
which a large factory, or indeed a large business of almost
business, any
nearly always has over a small one. A large
groups of* business buys in great quantities and therefore cheaply;
businesses, it pays low freights and saves on carriage in many ways,
and selling, 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 advertis­
ing 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 largft
capitalists who put out the work to be done by smaller
men2.
1 It is a remarkable fact that cotton and some other textile factories form an
exception to the general rule that the capital required per head of the workers is
generally greater in a large factory than in a small one. The reason is that in
most other businesses the large factory has many things done by expensive
machines which are done by hand in a small factory; so that while tho wages
bill is less in proportion to the output in a large factory than in a small one, the
value of the machinery and the factory space occupied by the machinery is much
greater. But in the simpler branches of the textile trades, small works have the
same machinery as large works have; and since small steam-engines, etc. aro
proportionately more expensive than large ones, they require a greater fixed
capital in proportion to their output than larger factories do; and they are likely
to require a floating capital also rather greater in proportion.
* Soo below IV. x il 3.




ADVANTAGES OF A LARGE FIRM IN ORGANIZATION

28 3

§ 3. Next, with regard to the economy of skill. Every- iv, xi, 3.
thing that has been said with regard to the advantages Ad^anT
which a large establishment has in being able to afford *afarg°f
es
highly specialized machinery applies equally with r e g a r d ^tory as
to highly specialized skill. It can contrive to keep each of specialized
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 the
#
•
«
selection
a small one has, of getting hold of men with exceptional 0f leading
natural abilities, to do the most difficult part of his work— men, efcc*
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 mechanism1. 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. W e are thus brought
to the central problem of the modern organization of in­
dustry, viz. that which relates to the advantages and
disadvantages of the subdivision of the work of business
management.
1 Thus Boulton writing in 1770 when ho had 700 or 800 persons employed
as metallic artists and workers in tortoiseshell, stones, glass, and enamel, says:—
“ I have trained up many, and am training up more, plain country lads into good
workmen; and wherever I find indications of skill and ability, I encourage thom.
I have likewise established correspondence with almost every mercantile town in
Europe, and am thus regularly supplied with orders for tho grosser articles in
common demand, by which I am enabled to employ such a number of hands as to
provide me with an ample choice of artists for the finer branches of work: and I
am thus encouraged to erect and employ a more extensive apparatus than it would
be prudent to employ for the production of tbe finer articles only.’* Smiles’ Lift
of Boulton, p. 128.




28 4

iv, xi, 4.

PRODUCTION ON A LARGE SCALE

§ 4 . The head of a large business can reserve all his
Thesubstrength for the broadest and most fundamental problems of
fflvusion kis trade: he must indeed assure himself that his managers,
work of
clerks and foremen are the right men for their work, and are
managedoing their work well; but beyond this he need not trouble
advantages himself much about details. He can keep his mind fresh
m
anu-larg6 and clear for thinking out the most difficult and vital profactuier; b l em s 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,
thesmaii
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 o f
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 disadvan­
tage 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 o f Trade-knowledge:
newspapers, and trade and technical publications of all kinds
are perpetually scouting for him and bringing him m uch
of the knowledge he wants— knowledge which a little while
ago would have been beyond the reach of anyone who



LIMITS TO THE RAPID INCREASE OP A BUSINESS

285

could not afford to have well-paid agents in many distant iv,xt,5.
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 haa
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 neg­
lecting the minor but necessary details of the business.
§ 5 . In agriculture and other trades in which a man Rapid
gains no very great new economies by increasing the scale of ^Farm
s
his production, it often happens that a business remains of
about the same size for many years, if not for many generations, whichoffer
But it is otherwise in trades in which a large business can economies
command very important advantages, which are beyond the tSmw'a"
reach of a small business. A new man, working his w a y larg8 8C
ale”
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
s p e c i a l i z a t i o n 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



PRODUCTION ON A LARGE SCALE

286

iv, xi, 5. 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 con­
sideration 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 pro­
longed if he can hand down his business to a successor almost
as energetic as himself1. 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.
Whew
For in most of those trades in which the economies of
marketing
_
.
.
is easy, the production on a large scale are of first-rate importance,
of produc- marketing is difficult. There are, no doubt, important exi&
rge°scaie ceptions. A producer may, for instance, obtain access to the
open
W
^°^e
a large market in the case of goods which are so
firms of
simple and uniform that they can be sold wholesale in vast
moderate
. .
.
.
quantities. But, most goods of this kind are raw produce;
size.
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 sub­
sidiary industries; and in short there remains no very great
difference between the economies available by a large and b y
a very large firm; and the tendency of large firms to drive
out small ones has already gone so far as to exhaust most
*
Means to this end and their practical limitations are discussed in the latter
half of the following chapter.




LARGE AND SMALL TRADING ESTABLISHMENTS

287

of the strength of those forces by which it was originally iv, xi,6.
promoted.
But many commodities with regard to whicli the tendency But in
to increasing return acts strongly are, more or less, specialities: m
arketing
some of them aim at creating a new want, or at meeting is difficult,
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 Causes
new firm to attain quickly command over new economies of enable
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 hasten
,
..
,
theirfalL
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.
§ 6 . The advantages which a large business has overAdvana small one are conspicuous in manufacture, because, as we large
have noticed, it has special facilities for concentrating a great of^ther6
3
deal of work in a small area. But there is a strong tendency kindsfor 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 in retail
or store has in competing with its smaller neighbours. To are^the
begin with, it can obviously buy on better terms, it can g e tincrease
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



288

PRODUCTION ON A LARGE SCALE

IV, xi, 6.

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.
thegTowth
within recent years there have been many changes
of cash
all telling on the side of large establishments. The habit of
payments
on cre(jit js 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,
and the
But in many trades the ever-growing variety of commovwSyof dities, and those rapid changes of fashion which now extend
Scommon their baneful influence through almost every rank of society,
demand,
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



THE CARRYING TRADES. MINES

289

things from a large store instead of having them made to IV, xi, 7.
order by some small maker and dealer in their neighbourhood. Again, the large shopkeeper, not content with re­
ceiving 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.
§ 7. We may next consider those industries whose geo- The
graphical position is determined by the nature of their work, trades?8
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 com­
merce 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 responsi­
bility, in many different ports; and as regards the vessels



290

PRODUCTION ON A LARGE SCALE

iv, xr, 7. themselves time is on the side of large ships, especially in the
passenger trade1. 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.8
Mines and
The contest between large and small mines and quarries
quames.
^ ag nQt gQ c i earj y 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 b y
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.
The
In agriculture there is not much division of labour, and
agriculture there is no production on a very large scale; for a so-called
is deferred. “ j a rg e f a r m »> d o e s 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 post­
pone discussion of all of them till we come to study demand
and supply in relation to land in the sixth Book.
1 A ship’s carrying power varies as the cube of her dimensions, while tba
resistance offered by the water increases only a little faster than the square of
her dimensions; so that a large ship requires less coal in proportion to its
tonnage than a small one. It also requires less labour, especially that of navi­
gation : while to passengers it offers greater safety and comfort, more choice
of company and better professional attendance. In short, the small ship has no
chance of competing with the large ship between ports which large ships
easily enter, and between which the traffic is sufficient to enable them to fill
up quickly.
*
It is characteristic of the great economic change of the last hundred years that
when the first railway bills were passed, provision was made for allowing private
individuals to run their own conveyances on them, just as they do on a highway
or a canal; and now we find it difficult to imagine how people could hav* expected,
as they certainly did, that this plan would prove a practicable one




CHAPTER XII.
INDUSTRIAL ORGANIZATION, CONTINUED. BUSINESS
MANAGEMENT.

§ 1 . H i t h e r t o we have been considering the work of iv, *n, 1 .
management chiefly in regard to the operations of a manu- Problem
s
facturing or other business employing a good deal of manual ^lved.
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 p rim d
fam e we might therefore expect to Me 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 b y friendship and family affection.
The primitive handicraftsman managed his whole business The
for himself; but since his customers were with few exceptions ESdi^v#
his immediate neighbours, since he required very little capital,
since the plan of production was arranged for him b y custom,
.
and since he had no labour to superintend outside of his own consumer
household, these tasks did not involve any very great mental
strain. He was far from enjoying unbroken prosperity; war



BUSINESS MANAGEMENT

29 2

iv, in , i. 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,
and so do
Even in modern England we find now and then a village
& &m
s l©
^
the learned artisan who adheres to primitive methods, and makes things
^
lona 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 oldfashioned 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 ser­
vice 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,
there are
English solicitors however act, if not as employers or
exceptions undertakers, yet as agents for hiring that branch of the legal
«yen ere. profess^ which ranks highest, and whose work involves the
on
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 sup­
plies to the teacher a market for his labour; and is supposed
to give to the purchaser, who may not be a good judge him­
self, 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



THE BUSINESS UNDERTAKER OR ADVENTURER

293

them with customers; while those of less established repute iv, xn,
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.
§ 2 . But in the greater part of the business of the modern in most
world the task of so directing production that a given effort y^m
e88es
may be most effective in supplying human wants has to be
broken up and given into the hands of a specialized body of
of
employers, or to use a more general term, of business men. takers
They “ adventure” or “ undertake” its risks; they bring Intervene‘
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.
§ 3. The building trade will serve our purpose well, niustrapartly because it adheres in some respects to primitive house-°m
methods of business. Late in the Middle Ages it was quitebuadin8'
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 hia
own building must hire separately all his workmen, he must



BUSINESS MANAGEMENT

294

iv,xn,4. 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 Bpends 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 chief
The division of labour is often carried still further when
risks of
underhouses are built not at the expense of those who are to live
sometimes in them, but as a building speculation. When this is done
separated 0Q &}arge Bcaie> aa for instance in opening out a new suburb,
detailed
manage-

meat

building
trades;

in the
textile
trades;

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 rela­
tions 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.
§ 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 masters1. 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.
1 Compare Appendix A, 13.




THE UNDERTAKER WHO IS NOT AN EMPLOYER

295

Manchester warehousemen give themselves to studying the iv, in , 4.
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 assistants1. In remote villages in almost
every county of England agents of large undertakers come
round to give out to the cottagers partially prepared mate­
rials 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 cloth­
ing 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
1 German economists call this “ factory like" (fabrikmasslg) house industry,
as distinguished from the “ national” house industry, which uses the intervals
of other work (especially the winter interruptions of agriculture) for subsidiary
work in making textile and other goods. (See SchQnberg on Gewerba in his
Handbuch.) Domestic workers of this last class were common all over Europe
in the Middle Ages but are now becoming ran except in the mountains and
in eastern Europe. They are not always well advised in their choice of work;
and much of what they make could be made better with far less labour in
factories, so that it cannot be sold profitably in the open market: but for the most
part they make for their own or their neighbours' use, and thus save the profits
of A series of middlemen. Compare Survival of domestic industries by Gonner in
the Economic Journal, VoL n.




296

BUSINESS MANAGEMENT

iv, xn, 4. instance just at present the growing use of sewing machines
woiked 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 distri­
buting power by gas and petroleum and electric engines
may exercise a like influence on many other industries,
in Sheffield
Or there may be a movement towards intermediate plans,
trades;
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.
in the
Again, the foreign merchant very often has no ships of his
shipping
trade;
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.
production -^-8 a*n » ^ e broader risks of publishing a book are borne by
of books
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.
hMa^van-

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
butia
the whole not unsatisfactory. But unfortunately it is often
liable t o . ,
.
_
.
.
.
•1 1 * 1
abuA
e.
the weakest class of workers, those with the least resource
and the least self-control who drift into work of this kind.

tages;




TH E U N D E R T A K E R W H O IS AN E M P LO Y E R

297

The elasticity of the system which recommends it to the iv, xn, 5.
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 employ­
ment 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.
§ 5. When the profits of business are under discussion Several
they are generally connected in people’s minds with the functions
employer of labour: “ the employer” is often taken as a £^ed in
term practically coextensive with the receiver of business £ye
th^deai
profits. But the instances which we have just considered manuf& C tttN ti
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 the
(IV. xi. 4 and 5), the manufacturer who makes goods not required
to meet special orders but for the general market, must, in m ‘)irahis first r61e 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 pro­
duction and consumption, of seeing where there is an oppor­
tunity 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 role 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



298

BUSINESS MANAGEMENT

iv, in ,6. 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.
^business
Such then being the general nature of the work of
ability may business management, we have next to inquire what opcussed in portunities different classes of people have of developing
S S T business ability; and, when they have obtained that, what
business opportunities they have of getting command over the capital
m
anage- required to give it scope. W e 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 con­
veniently be combined with some examination of the different
forms of business management. Hitherto we have considered
almost exclusively that form in which the whole responsi­
bility 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 cor­
porations 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.
The son of
§ 6 . It is obvious that the son o f a man already estamanhas* blished in business starts with very great advantages over
good start. 0^ e r s . He has from his youth up special facilities for



H E R E D IT A R Y BUSINESSES

299

obtaining the knowledge and developing the faculties that are iv, xu, 6.
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 t& which it sells; he gets to know the relative import­
ance 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 trade1. 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 enter­
prise 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 But
men should constitute a sort of caste; dividing out am ong men do
their sons the chief posts of command, and founding
hereditary dynasties, which should rule certain branches of ^ ? use
trade for many generations together. But the actual state abilities
._
_
_
and tastes
of things is very different. For when a man has got together are not
a great business, his descendants often fail, in spite of their Scented;
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 patents 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
1 We bare already noticed how almost tbe only perfect apprenticeships of
modem times are those of the sons of manufacturers, who practise almost every
important operation that is carried on in the works sufficiently to be able in after
yearn to enter into the difficulties of all their employees and form a fair judgment
- on their work.




BUSINESS MANAGEMENT

300

iv, xn, 7. born alter lie 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 distinction1.
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,
aiid after a
But in most cases his descendants arrive at this result by
time new
.
blood must a shorter route. They prefer an abundant income coming to
in by some them without effort on their part, to one which though twice
method.
as jarge C
ould 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.
method of

private
S f

§
The oldest and simplest plan for renovating the
energies of a business is that of taking into partnership some
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
1 Until lately there has ever been in England a kind of antagonism between
academic studies and business. This is now being diminished by the broadening
of the spirit of our great universities, and by the growth of colleges in our chief
business centres. The sons of business men when sent to the universities do
not leam to despise their fathers’ trades as often as they used to do even a
generation ago. Many of them indeed are drawn away from business by the
desire to extend the boundaries of knowledge. But the higher forms of mental
activity, those which are constructive and not merely critical, tend to promote a
just appreciation of the nobility of business work rightly done.




P R IV A T E PA R TN E R SH IPS

301

to his chief subordinates; partly because the work to be iv.xu.8.
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 thei* 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 affection1.
But there are now, and there always have been, private
partnerships on more equal terms, tw o 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 respon­
sible 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.
§ 8. But from the end of the Middle Ages to the present The
time there has been in some classes of trades a movement joint-stock
towards the substitution of public joint-stock companies,com
panie8the 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
» Much of the happiest romance of life, much that is most pleasant to dwell
upon in the social history of England from the Middle Ages up to our own day is
connected with the story of private partnerships of this class. Many a youth has
been stimulated to a brave career by the influence of ballads and tales which
narrate the difficulties and the ultimate triumph of the faithful apprentice, who
has at length been taken into partnership, perhaps on marrying his employer’s
daughter. There are no influences on national character more fax-reaching than
those which thus give shape to the aims of aspiring youth.




302

BUSINESS MANAGEMENT

[V, xn, 9. 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 parte of the work of
business management.
TheshareThe ultimate undertakers of the risks incurred by a jointundertake stock company are the shareholders; but as a rule they do
the nsks; n o ^
.
m iic j1 a c ^ v e p art in engineering the business and
controlling its general policy; and they take no part in
8uPerintending its details. After the business has once got
control the out of the hands of its original promoters, the control of it is
Managers,
jn
kan(l3 0f Directors; who, if the company is

Directors

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; M id
at the same time to make sure that the “ Managers” of the
intendthe" comPany are doing their work thoroughly1. To the Managers
details.
and their assistants is left a great part of the work of engi­
neering the business, and the whole of the work of superin­
tending 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,
undertake
the risks

§
Joint-stock companies have great elasticity and can
expand themselves without limit when the work to which
1 Bagehot delighted to argue (see (or instance English Constitution, ch. v n .)'
that a Cabinet Minister often derives some advantage from his want of
knowledge of the business of his Department. For 1m can get information on
matters ol detail from the Permanent Secretary and other officials who are under
his authority; and, while he is not likely to set his judgment against theirs on
matters where their knowledge gives them the advantage, his unprejudiced
common sense may well overrule the traditions of officialism in broad questions
of public policy: and in like manner the interests of a company may possibly
sometimes be most advanced by those Directors who have the least technical
knowledge of the details of its business.




JOINT-STOCK COMPANIES

303

they have set themselves offers a wide scope; and they are iv, xn, 9.
gaining ground in nearly all directions. But they have one cannot
great source of weakness in the absence of any adequate
knowledge of the biuaness on the part of the shareholders ^ ether
who undertake its chief risks. It is true that the head of a business
is y ftlj
large private firm undertakes the chief risks o f the business, managed,
while he entrusts many of its details to others; but his posi­
tion is secured b y 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 incompe­
tent 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 s h a r e - The
. . .
. . .
,
.
,
system is
holders of a joint-stock company are, save m a few excep- rendered
tional instances, almost powerless; though a few of the larger ©niybytiie
shareholders often exert themselves to find out what is going
on; and arei thus able to exercise an effective and wise con- morality.
’
, business
trol 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 civili­
zation, 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, b y a diminu­
tion 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



30 4

BUSINESS MANAGEMENT

xn, 9. many directions in which they have hitherto failed, and
may far exceed the gTeat services they already render in
opening a large career to those who have no advantages of
birth.
GoremThe same may be said of the undertakings of Govemdertakiji'gs. ments 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.
ThesocM
The problems of large joint-stock company administration,
bureauas well as of Governmental business, involve however many
m
ethod*. 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 develop­
ment 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 narrow­
ing of the field of industry which is open to the vigorous
initiative of smaller businesses.
carteiLand
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 indepen­
dent businesses; and a first step towards this combination
was generally an association, or “ cartel” to use a German
term, of a rather loose kind.
IV,




CO -O PERATIVE SOCIETIES

§10.

305

The system of co-operation aims at avoiding the lv,xn,io.
evils of these two methods of business management. Incothat ideal form of co-operative society, for which many still 2Sation
fondly hope, but which as yet has been scantily realized in “
ideal
practice, a part or the whole of those shareholders who under­
take the risks of the business are themselves employed b y 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 might
are thus the employers and masters of their own managers the chief
and foremen; they have fairly good means of judging whether ^t-stock
the higher work of engineering the business is conducted companies,
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 it has
of its own. For human nature being what it is, the employees ^ the task
themselves are not always the best possible masters of their m
anage^3
8
own foremen and managers; jealousies and frettings a t ment»
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 inventive­
ness 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 responsi­
bility of private business. Partly for these reasons the



306

BUSINESS MANAGEMENT

iv, xn, 10. 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 bond fide productive associations,
01 “ co-partnerships.”
but ft may
Those working men indeed whose tempers are strongly
gomeoT individualistic, and whose minds are concentrated almost
these.
wholly on their own affairs, will perhaps always find their
quickest and most congenial path to material success b y
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.
Sharing
Meanwhile many partial applications of the co-operative
principle are being tried under various conditions, each o f
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 b y Tim©



CO -O PERATIVE SOCIETIES

307

or Piece-work, and agrees in addition to divide among them iv, xn, 11
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 in­
dustry1.
Another partially co-operative scheme is that of some Partial CoOldham cotton-mills: they are really joint-stock companies; °1>erat,on*
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 establish­
ments, 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.
A t 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 Hope* for
show that the world is only just beginning to be ready f o r thefuture'
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.
§ 1 1 . In speaking of the difficulty that a working m a n The rise
has in rising to a post in which he can turn his business working
> Compare Schloss, Methods of Industrial Remuneration; and Gilman, A
dividend to labour.




308

BUSINESS MANAGEM ENT

iv, hi, 11. ability to full account, the chief stress is commonly laid upon
man is not his want of capital: but this is not always his chief difficulty,
umuch • 'or i ^ a a c e the co-operative distributive societies have
®
as at first accumulated a vast capital, on which they find it difficult to
appears,
get a good rate of interest; and which they would be rejoiced
want of
to lend to any set of working men who could show that they
capital;
^ad 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 con­
vince 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.
for th«
It is true that in almost every business there is a constant
loan-fund .
.
,
. ,
,
. is
increase in the amount of capital required to make a fair
invoiume start; but there is a much more rapid increase in the amount
eagerness °* caP^a^ which is owned by people who do not want to use
^employ- 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 n o
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.
Be is
But perhaps a greater though less conspicuous hindrance
hindered
to the rise of the working man is the growing complexity
much
by the
of business. The head of a business has now to think of
growing
c o m i t y many things about which he never used to trouble himself
nesa.
in earlier days; and these are just the kind of difficulties
for which the training of the workshop affords the least



TH E W O R K IN G MAN’ S O PPORTU N ITIES O F RISIN G

309

preparation. Against this must be set the rapid improvement iv, xn, n.
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 But he
belong to the wage-earning classes; and at all events when ^ercome
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 busi­
ness 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 begin­
ning 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 dies1. 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
1 The Germans say that success in business requires “ Geld, Geduld, Genie
und Gluck.” The chances that a working man has of rising vary somewhat with
the nature of the work, being greatest in those trades in which a careful attention
to details counts for most, and a wide knowledge, whether of science or of the
world movements of speculation, counts for least. Thus for instance “ thrift and
the knowledge of practical details” are the most important elements of success in
the ordinary work of the pottery trade; and in consequence most of those who
have done well in it “ have risen from the bench like Josiah Wedgwood” (see
G. Wedgwood’s evidence before the Commission on Technical Education); and a
similar statement might be made about many of the Sheffield trades. But some
of the working classes develop a great faculty for taking speculative risks; and if
the knowledge of facts by which successful speculation must be guided, comes
within their reach, they will often push their way through competitors who have
started above them. Some of the most successful wholesale dealers in perishable
commodities such as fish and fruit have begun life as market porters.




BUSINESS MANAGEMENT

310

iv, xn, 11 . 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 ef
the office is better adapted for preparing a man to manage a
commercial than a manufacturing business.
Tbe me^
There is then on the whole a broad movement from below
twogene- upwards. Perhaps not so many as formerly rise at once
S5B
from the position of working men to that of employers: bu t
of one.
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 tw o; 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
But that
should be distributed over two generations. The workmen
Mnot an
.
unmixed who at the beginning of the last century rose in such large
8 ’
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 superin­
tendent who has still to obey as well as to command, b u t
who is rising and sees his children likely to rise further, is
in some ways more to be envied than the small master. Ilis
success is less conspicuous, but his work is often higher and
more important for the world, while his character is m ore
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.
danger
of m
ere
can be
avoided,

^ must however be admitted that the rapid extension o f
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 t o
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 com m on­
place members of the lower middle classes. But, if they can




ADJUSTMENT OP C A PITAL T O BUSINESS A B IL IT Y

311

keep their force unimpaired, they are likely to become leaders IV, xn, 12.
in the world, though not generally in their father’ s industry;
and therefore without the benefit of specially appropriate
traditions and aptitude.
§ 12. When a man of great ability is once at the head of An able
an independent business, whatever be the route by which he m
an
has got there, he will with moderate good fortune soon b e * J ^ ^ 3
able to show such evidence of his power of turning capital to ‘ te* pital
hjg
good account as to enable him to borrow in one way or another command,
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 own1: 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 not great
perhaps be one who could and would have managed a small abfutj8
8
1 The danger of not being able to renew his borrowings just at the time when
he wants them most, puts him at a disadvantage relatively to those who use only
their own capital, much greater than is represented by the mere interest on his
borrowings: and, when we come to that part of the doctrine of distribution which
deals with earnings of management, we shall find that, for this among other
reasons, profits are something more than interest in addition to net earnings of
management, i.e. those earnings which are properly to be ascribed to the abilities
of business men.




BUSINESS MANAGEMENT

312

iv,xn,i2. business with credit, and left it stronger than he had found
loseshls
it: but if he has not the genius for dealing with great pro­
capital
blems, the larger it is the more speedily will he break it up.
the more
’
®
l
t
rapidly the For as a rule a large business can be kept going only by
lEessis. 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 m en:
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
abler 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^
These two sets of forces, the one increasing the capital
to adjust at the command of able men, and the other destroying the
thecapitai cap^ al that is in the hands of weaker men, bring about the
required to
use it well,

resu^ 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 steadfast­
ness of purpose— faculties which are not specialized to any
one trade, but which are more or less useful in all— so it is




ADJUSTMENT OF C APITAL TO BUSINESS A B IL IT Y

313

with regard to business ability. In fact business ability iv,xn,i 2.
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 o f capital moves Business
with great ease horizontally from a trade which is over-command
crowded to one which offers good openings for it: and since hisafaWy
it moves with great ease vertically, the abler men rising defined
to the higher posts in their own trade, we see, even at this price in
early stage of our inquiry, some good reasons for believing country as
that in modern England the supply of business ability in Englandcommand 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 oftfrfand
these three elements interest; we may call the price of the swings
second taken by itself net earnings o f management, and that ment™9*
of the second and third, taken together, gross earnings o f
management.




CHAPTER XIII.
CONCLUSION. CORRELATION OF THE TENDENCIES TO
INCREASING AND TO DIMINISHING RETURN.

iv, xm, l.

§ 1 . A t the beginning of this Book we saw how the
The
extra return of raw produce which nature affords to an inSnwbkk creased application of capital and labour, other things being
chapters of e^ u a^ tends in the long run to diminish. In the remainder
L
stand to*
B °°k & especially in the last four chapters we have
nd
the earlier, 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.
A gumLooking more closely at the economies arising from an
ttwiater increase in the scale of production of any kind of goods, we
thwBook.1 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 interned economies.




SUM M ARY

315

We saw how these latter economies are liable to constant i v , x iii , i .
fluctuations so far as any particular house is concerned. An summary,
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 la T g e 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,



316

INCREASING AN D DIM INISH ING RETU RN S

iv, xra, l. they get a larger share of light and air with every increase of
Sum ary, their height, and at last in their turn they tower above their
m
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 advan­
tages 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 con­
clusions is not very much affected by the facts that many
of these economies depend directly on the size of the indi­
vidual 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



SUM M ARY

317

of average prosperity decay in one direction is sure to be iv, xm, 2.
more than balanced by growth in another.
Summary.
Meanwhile an increase in the aggregate scale of produc­
tion 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 any­
how availing themselves of the m odem facilities for com­
munication 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 pro­
duction, 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.
§ 2. These results will be of great importance when we Forecast
come to discuss the causes which govern the supply price of £tudy of
a commodity. We shall have to analyse carefully the normal p^d^tion
cost of producing a commodity, relatively to a given aggregate volume of production; and for this purpose we shall firm.
have to study the expenses o f 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 pro­
duced, the conditions of marketing them and the economic
environment generally.



318

INCREASING AND DIM INISH ING RET U R N S

iv, mi, 2.

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 Repre­
sentative 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.
W e 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 jointstock 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.
fate* of
In other words, we say broadly that while the part which
increasing
.
-i
•
t
i
return,
nature plays in production shows a tendency to diminishing
return, the part which man plays shows a tendency to in­
creasing 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 dimmish or even override
any increased resistance which nature may offer to raising
and of
increased amounts of raw produce. If the actions of the
retum.
laws of increasing and diminishing return are balanced we
have the law o f constant return, and an increased produce
is obtained by labour and sacrifice increased just in pro­
portion.
For the two tendencies towards increasing and diminishing




T H E ST A N D AR D IS SET B Y R E P R E S E N T A T IV E FIRM S

319

return press constantly against one another. In the pro- iv, xm , 2.
duction of wheat and wool, for instance, the latter tendency The
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 increasing
production brings some new economies, but not many; for diminishthe trades of grinding wheat and making blankets are already JjJSSS*
on so great a scale that any new economies that they may a 111 '* 01®
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 propor­
tionate 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 con­
form 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
unopposed1.
Increasing Return is a relation between a quantity of
effort and sacrifice on the one hand, and a quantity of relation of
product on the other. The quantities cannot be taken out <
iuantltie8,
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 o f money outlay with
*
la an article on “ The variation of productive forces’* in the Quarterly
Journal of Economics 1902, Professor Bullock suggests that the term “ Economy
of Organization ” should be substituted tor Increasing Return. Be shows clearly
ff
tmi the forces which make for Increasing Return are not of the same order as those
that make for Diminishing Return: and there are undoubtedly cases in which it
Is better to emphasize this difference by describing causes rather than results, and
contrasting Economy of Organization with the Inelasticity of Nature’s response to
iateasire cultivation.




<

320

INCREASING AN D DIM IN ISH IN G R ETU RN S

iv, x iii , 3. money returns is apt to slide into an estimate of the rate of
profit on capital1.
A rapid
§ 3. W e may now sum up provisionally the relations of
p^juM?on industrial expansion to social wellbeing. A rapid growth
Imdersome population has often been accompanied b y unhealthy and
conditions, enervating habits of life in overcrowded towns. And some­
times 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,
but not
These are serious perils: but yet it remains true that the
under
others.
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 im­
porting 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 fo r the time to be accompanied b y a more than pro­
portionate 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
1 There is no general rule that industries which yield increasing returns show
also rising profits No doubt a rigorous firm, which increases its scale of operations
and obtains important (internal) economies which are peculiar to it, will show an
increasing return and a rising rate of profit; because its increasing output will
not materially affect the price of its produce. But profits tend to be low, as we
shall see below (VI. vm. I, 2), in such industries as plain weaving, because their
▼ scale has enabled organization in production and marketing to be earned so
ast
far as to be almost dominated by routine.




PRESSURE OF PO PU LATIO N ON MEANS O F SUBSISTENCE

321

sort of traffic between them, and gives them new oppor- IV, im , 3.
tunities 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 good1.
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 pro­
portionate 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 The
•
•
cffccts of ft
growing faster than the population: and though it may be growth of
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 p ish® oae
^
to be accompanied by a more than proportionate increase of 0f the
the material aids to production: and in England at the ^eaTth by
present time, with easy access to abundant foreign supplies
of raw material, an increase of population is accompanied b y accoma 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 neces­
sarily benefit those who have no share in that wealth. And
1 The Englishman Mill bursts into unwonted enthusiasm when speaking
(Political Economy, Book iv. ch. vi. § 2) of the pleasures of wandering alone in
beautiful scenery: and many American writers give fervid descriptions of the
growing richness of human life as the backwoodsman finds neighbours settling
around him, as the backwoods settlement developes into a village, the village into
a town, and the town into a vast city. (See for instance Carey’s Principles of
Social Science and Henry George’s Progress and Poverty.)




322

INCREASING AN D DIM INISH ING R E TU RN S

iv, mi, 3. 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 ofi b y 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 Y.
GENERAL RELATIONS OF DEMAND,
SU PPLY AND VALUE.

CHAPTER I.
INTRODUCTORY.

ON MARKETS.

§1 . A b u s i n e s s firm grows and attains great strength, v. h 1and afterwards perhaps stagnates and decays; and at the Biological
turning point there is a balancing or equilibrium of the Mechanical
forces of life and decay: the latter part of Book IV . has
been chiefly occupied with such balancing of forces in t h e J j^ ^ S j
life and decay of a people, or of a method of industry or forces,
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 me­
chanical equilibrium of a stone hanging b y 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 Scope of
and supply; especially those which are connected with that
adjustment of price, by which they are maintained in “ equi­
librium.” 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.



IN TROD U CTORY. ON M ARK ETS

324

IEustrations 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 attain­
ment 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.
Markets
We must begin with a short and provisional account of
described
only pro­ markets: for that is needed to give precision to the ideas
visionally
in this and the following Books. But the organization of
here.
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.
Definition
# § 2. When demand and supply are spoken of in relation
of a
market.
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 par­
ticular 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 com ­
modity. A great city may contain as many markets as there
are important branches of trade, and these markets may or
1 Recherch.es sur Its Principes Maihematiyurs de la Thiorit dts Richesses
ch. iv. See also above III. iv. 7.



T H E SCOPE OP A M A R K E T

325

may not be localized. The central point of a market is the v, i, 3.
public exchange, mart or auction Tooms, 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, b y means of fairs, meetings,
published price lists, the post-office or otherwise, in close
communication with each other1.”
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 delivery2.
§ 3. In applying economic reasonings in practice it is Boundaries
often difficult to ascertain how far the movements of supply market,
and demand in any one place are influenced by those in
another. It is dear 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 W orld may, in a sense, be re- instances
garded as one market for many kinds of stock exchange ^JoF
y
securities, for the more valuable metals, and to a less extentm
arketsfor 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 General
narrow the market of any particular com m odity: but nearly^SSflon8
1 Theory of Political Economy, ch. IV.
*
Thus it is common to see the prices of bulky goods quoted as delivered “ free
on board’' (f. o. b.) any vessel in a certain port, each purchaser having to make
his own reckoning for bringing the goods home.




326

IN TRODU CTO RY.

ON M ARK ETS

v, i, 4.

all those things for which there is a very wide market are in
universal demand, and capable of being easily and exactly
ofthe
described. Thus for instance cotton, wheat, and iron satisfy
market for wants thau are urgent and nearly universal. They can
Suitability be easily described, so that they can be bought and sold
forgrading ^ persons at a distance from one another and at a distance
sampling.
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 did1.
Porta­
Commodities for which there is a very wide market must
bility.
also be such as will bear a long carriage: they must be some­
what durable, and their value must be considerable in pro­
portion to their bulk. A thing which i3 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 mar­
kets extending over a great part of England.
The
§ 4. Let us then consider more closely the markets for
conditions
of highly things which satisfy in an exceptional way these conditions
organized
of being in general demand, cognizable and portable. They
markets
are, as we have said, stock exchange securities and the more
valuable metals.
illustrated
Any one share or bond of a public company, or any bond
by refer­
of a government is of exactly the same value as any other
ence to
exchanges.
the same issue: it can make no difference to any purchaser

affect the

1 Thua tbe managers of a public or private “ elevator,” receive grain from
a farmer, divide it into different grades, and return to him certificates for as
many bushels of each grade as he has delivered. His grain is then mixed with
thorn of other farmers; his certificates are likely to change hands several tunes
before they reach a purchaser who demands that the grain shall be actually
delivered to him; and little or none of what that purchaser receives may
come from the farm of the original recipient of tbe certificate.




H IG H L Y O R G AN IZED M ARK ETS

327

which of the two he buys. Some securities, principally those v, i, 4.
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. Bat 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,1 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 six­
teenth 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 con­
stantly coming on the market, and the latter but seldom,
then the dealers will on this account alone require a larger



IN TROD U CTO RY. ON M ARKETS

32 8

margin between their selling price and their buying price in
the latter case than in the former1. 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.
The world
Stock exchanges then are the pattern on which markets
market
have been, and are being formed for dealing in many kinds
for the
precious
of produce which can be easily and exactly described, are
metals.
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.
§ 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, perish­
able and bulky goods, such as fresh vegetables, which can
Putting
seldom be profitably carried long distances. The first can
aside
cases of
scarcely be said to have a wholesale market at all; the
retail
conditions by which their price is determined are those of
dealing,
retail buying and selling, and the study of them may be
postponed2.
1 In the case of shares of very small and little known companies, the difference
between the price at which a dealer is willing to buy and that at which he will sell
may amount to from five per cent, or more of the selling value. If he buys, he
may have to carry this security a long time before he meets with any one who
comes to take it from him, and meanwhile it may fall in value: while if he
undertakes to deliver a security which he has not himself got and which does not
come on the market every day, he may be unable to complete his contract without
much trouble and expense.
*
A man may not trouble himself much about small retail purchases: he may
give half-a-crown for a packet of paper in one shop which he could have got
for two shillings in another. But it is otherwise with wholesale prices. A
manufacturer cannot sell a ream of paper for six shillings while his neighbour is
selling it at five. For those whose business it is to deal in paper know almost
exactly the lowest price at which it can be bought, and will not pay more than
this. The manufacturer has to sell at about the market price, that is at about the
price at which other manufacturers are selling at the same time.




LOCAL M AR K E T S

329

There are indeed wholesale markets for the second class, v, i, 5.
but they are confined within narrow boundaries; we may find wep to
ass
our typical instance in the sale of the commoner kinds of
vegetables in a country town. The market-gardeners in the seem
s
neighbourhood have probably to arrange for the sale of their narrowly
vegetables to the townspeople with but little external inter- co fin >
n ed
ference 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 th gh^
ou
market-gardeners are almost equally near a second country is subject
town, and send their vegetables now to one and now to the ^flu ^es1
en
other; and some people who occasionally buy in the first
f
c
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 com­
petition 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 com­
petition 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.



330

IN TRODU CTO RY. ON M ARK ETS

§ 6 . Again, markets vary with regard to the period of
time which is allowed to the forces of demand and supply to
Limita­
tions of
bring themselves into equilibrium with one another, as well
market
with
as with regard to the area over which they extend. And this
regard
to time
element of Time requires more careful attention just now
affect the
nature of than does that of Space. For the nature of the equilibrium
the causes
itself, and that of the causes by which it is determined,
of which
we have
depend on the length of the period over which the market is
to take
account.
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.




CHAPTER II.
TEMPORARY EQUILIBRIUM OF DEMAND AND SUPPLY.
§ 1. T h e simplest case of balance or equilibrium between
n»1desire and effort is found when a person satisfies one of his A simple
wants by his own direct work. When a boy picks black- equaiW
im
berries for his own eating, the action of picking is probably
itself pleasurable for a while; and for some time longer the eflo
rtpleasure 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 maxi­
mum: 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 add1.
In a casual bargain that one person makes with another, in a casual
as for instance when two backwoodsmen barter a rifle for a
canoe, there is seldom anything that can properly be called n ”*™
o ?7
an equilibrium of supply and demand: there is probably aequiiimargin 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
1 See IV. L 2, and Note XIL in the Mathematical Appendix.




332

T E M PO R A R Y EQ U ILIBRIU M OF DEM AND AN D SU PPLY

V, n, 2. other would in case of necessity give something besides the
canoe for the rifle.
The case of
It is indeed possible that a true equilibrium, may be
b te” a arrived at under a system of barter; but barter, though earlier
w tlC
d
eferred iQ 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.
Market
We may put aside as of little practical importance a class
or^aw u of dealings which has been much discussed. They relate to
qe
th lgs*
u
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,
niustraS 2 . Let us then turn to the ordinary dealings of modem
turn from
.
.
a local
life; and take an illustration from a corn-market m a country
market
town, and let us assume for the sake of simplicity that all
th gh
ou *
corn in the market is of the same quality. The amount
tem orary which each farmer or other seller offers for sale at any price
p
libnum.
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 G O quarters, the holders of
O
which are willing to accept as low a price as 355.; 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



M A R K E T D A Y IN A LO CAL CO RN -EXCH AN GE

333

yet another two hundred at 355. These facts may be put out v, ii, 2.
in a table thus:—
At tbe price

Holden will be
willing to sell .

Buyers will be
willing to buy

37«.
36s.
Z5a.

1000 quarters,
700
„
600
„

600 quarters.
700
900
„

Of course some of those who are really willing to take 365.
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
unless1
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 begin­
ning, 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



334

TE M PO R A R Y EQ U ILIBRIU M OF DEM AND A N D SU P PLY

v, ii,3 .

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 365. 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 circum­
stances 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 buyera 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 3 6 5 . In the
same way if the sellers had underrated the willingness of the
buyers to pay a high pribe, 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 dose
on a price of 365. and a total sale of 700 quarters1.
The
§ 3 . In this illustration there is a latent assumption
sumption, which is in accordance with the actual conditions of most
d ra* markets; but which ought to be distinctly recognized in order
eaL
tospend” to Prevent;
creeping into those cases in which it is not
money is justifiable. We tacitly assumed that the sum which purconstant chasers were willing to pay, and which sellers were willing to
through|or
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 com [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 m oney
1 A simple form of the influence which opinion exerts on the action of
and therefore cm market price, is indicated in this illustration: we shall be
occupied with mom complex developments of it later on.




SOME CAUTIONS A N D LIM ITATIO N S

335

[its marginal utility]; we assumed that that would be prac- v,n,3.
tically 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 ^a n ^ U
^d®a y
market dealings with which we are practically concerned, to a comWhen 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 market1.
The exceptions are rare and unimportant in markets for
commodities; but in markets for labour they are frequent and market the
important. When a workman is in fear of hunger, his need Soften8
of money [its marginal utility to him] is very great; and, if “tP°rtan
t
t*
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
1 For instance a buyer is sometimes straitened for want of ready money, and
has to let offers pass by him in no way inferior to others which he has gladly
accepted: his own funds being exhausted, he could not perhaps borrow except on
terms that would take away all the profit that the bargains had at first sight
offered. But if the bargain is really a good one, some one else, who is not so
straitened, is nearly sure to get hold of it.
Again, it is possible that several of those who had been counted as ready to
sell com at a price of 36*. were willing to sell only because they were in urgent
need of a certain amount of ready money; if they succeeded in selling some com
at a high price, there might be a perceptible diminution in the marginal utility of
ready money to them; and therefore they might refuse to sell for 86j. a quarter
all the com which they would hare sold if the price had been 36s. throughout.
In this case tbe sellers in consequence of getting an advantage in bargaining at
the beginning of the market might retain to the end a price higher than the
equilibrium price. The price at which the market closed would be an equilibrium
price; and though not properly described as the equilibrium price, it would be
very unlikely to diverge widely from that price.
Conversely, if the market had opened much to the disadvantage of the sellers
and they had sold some com very cheap, so that they remained in great want of
ready money, the final utility of money to them might have remained so high that
they would have gone on selling considerably below 3Os. until the buyers had been
supplied with all that they cared to take. The market would then close without
the true equilibrium price haring ever been reached, but a very near approach
would hare been made to it.




336

TEMPORARY EQUILIBRIUM OF DEMAND AND SUPPLY

V,n,3. 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 tw o
among many facts, in which we shall find, as we go on,
the explanation of much of that instinctive objection which
This
difference
the working classes have felt to the habit of some economists,
has
important
particularly those of the employer class, of treating labour
results
in theory simply as a commodity and regarding the labour market
and in
practice.
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
Reference as of the commodity itself. The practical importance of
to an
Appendix this consideration is not very great. But a contrast is drawn
on Darter.
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 com m odity
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 com es
across “ the double coincidence” of a person who can spare
what he wants, and also wants what he can spare. Conse­
quently 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.



CHAPTER III.
EQUILIBRIUM OF NORMAL DEMAND AND SUPPLY.

§ i . W e have next to inquire what causes govern v»in>*
•
supply prices, that is prices which dealers are willing to Transition
accept for different amounts. In the last chapter we looked values,
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 Nearly ail
market-day the equilibrium price is affected by calculations com odi-n
m
of the future relations of production and consumption; while
in the leading corn-markets of America and Europe dealings p|J^hable
for future delivery already predominate and are rapidly are affecte’d
weaving into one web all the leading threads of trade in hJtoSof
corn throughout the whole world. Some of these dealingsthefuture5
in “ futures” are but incidents in speculative manoeuvres;
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



338

EQUILIBRIUM OF NORMAL DEMAND AND SUPPLY

v, m, 2. 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. Anticipa­
tions 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 o f
the expenses of producing further supplies.
nowToare
But in this and the following chapters we are specially
slow and concerned with movements of price ranging over still longer
gradual
periods than those for which the most far-sighted dealers in
m enuof
futures generally make their reckoning: we have to consider
demandT*
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.
account of

supply
carried

fuiSJr.

§
In this discussion we shall have to make frequent
use of the terms cost and expenses of production; and som e
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 th e •
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 th e
supply price for that amount, with reference of course t o
a given unit of time1.” But now we have to take accou n t
of the fact that the production of . a commodity generally
requires many different kinds of labour and the use o f
capital in many forms. The exertions of all the different




1 IV.

l

2
L

REAL COST OF PRODUCTION. FACTORS OF PRODUCTION

339

kinds of labour that are directly or indirectly involved in v, m, 2.
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 o f production of the commodity. The sums of Beal and
money that have to be paid for these efforts and s a c r i f i c e s '^
will be called either its money cost o f production, or, io i ^roductton'
shortness, its expenses o f production; they are the prices Expenses
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 price1.
• The analysis of the expenses of production of a com­
modity 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 o f 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. W e may then arrange the things
that are required for making a commodity into whatever
groups are convenient, and call them its factors o f production, r actors of
Its expenses of production when any given amount of it is Produet,on'
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 com­
modity.
1 Mill and some other economists have followed tbe practice of ordinary life in
.«tng the term Cost of production in two senses, sometimes to signify the difficulty
of producing a thing, and sometimes to express the outlay of money that has to
be incurred in order to induce people to overcome this difficulty and producc it.
But by passing from one use of tbe term to the other without giving explicit
warning, they have led to many misunderstandings and much barren controversy.
The attack on Mill’s doctrine of Cost of Production in relation to Value, which is
made in Caimes’ Leading Principles, was published just after Mill’s death; and
unfortunately his interpretation of Mill’s words was generally accepted as au­
thoritative, because he was regarded as a follower of Mill. But in an article by
the present writer on “ Mill’s Theory of Value” (Fortnightly Review, April 1876)
it ia argued that Caimes had mistaken Mill’s meaning, and had really seen not
more but less of the truth than Mill had done.
The expenses of production of any amount of a raw commodity may best be
estimated with reference to the “ margin of production” at which no rent is paid.

But tills method of speaking has great difficulties with regard to commodities
(hat obey the law of increasing return. It seemed best to note this point ia
passing: it will be fully discussed later on, chiefly in ch. xn.




34 0

EQUILIBRIUM OF NORMAL DEMAND AND SUPPLY

v, m, 3.

§ 3. The typical modem market is often regarded as
that in which manufacturers sell goods to wholesale dealers
variety
prices into which but few trading expenses enter. But
in^e
taking a broader view, we may consider that the supply price
importance of a commodity is the price at which it will be delivered for
elem
ents04 sale to that group of persons whose demand for it we are
production, 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 price1. 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, o f
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 com m odity
we must take account of the fact that changes in the am ounts
produced are likely, even when there is no new invention, t o
be accompanied by changes in the relative quantities o f its
several factors of production. For instance, when the scale
of production increases, horse or steam power is likely t o
be substituted for manual labour; materials are likely t o
be brought from a greater distance and in greater quanti­
ties, thus increasing those expenses of production which

There” "

1 We have already (II. in.) noticed that the economic use of the term “ pro­
duction” includes the production of new utilities by moving a thing from a place
in which it is lea wanted to a place in which it is more wanted, or by W w
consumers to satisfy their needs.




THE PRINCIPLE OP SUBSTITUTION

341

correspond to the work of carriers, middlemen and traders v,m,4.
of all kinds.
As far as the knowledge and business enterprise of the The
producers reach, they in each case choose those factors
production which are b.est 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 o f substitution.
The applications of this principle extend over almost
every field of economic inquiry1.
§ 4 . The position then is this: we are investigating the The
equilibrium of normal demand and normal supply in their From’whfch
most general form; we are neglecting those features which westartare 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 We assume
the forces of demand and supply have free play; that there is for^emand
no close combination among dealers on either side, but each f n ^ pply
acts for himself, and there is much free competition; th a tm
arket*
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. W e 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




1 See IIL

t.

and IV. rn. 8,

EQUILIBRIUM OF NORMAL DEMAND AND SUPPLY

342

v, in, 4. 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 i t
is a retail market.
General
In such a market there is a demand price for each amount
T S S S l °* ^ e commodity, that is, a price at which each particular
amount of the commodity can find purchasers in a day o r
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 o f
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 cir­
cumstances 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 circum ­
stances of the market remain unchanged throughout this
period; that there is, for instance, no change in fashion o r
taste, no new substitute which might affect the demand, n o
new invention to disturb the supply.
The
The conditions of normal Bupply are less definite; and a
of supply8 full study of them must be reserved for later chapters. T h ey
Sth thJ
be found to vary in detail with the length of the period
le ^ o * 0f time to which the investigation refers; chiefly because
which
both the material capital of machinery and other business
is made,
plant, and the immaterial capital of business skill and ability
and organization, are of slow growth and slow decay.
But we
Let us call to mind the “ representative firm,” whoso
KnaSy economies of production, internal and external, are dependent
on the aggregate volume of production of the commodity th a t
■uppJy
it makes1; and, postponing all further study of the natur«
pnee as the
■
,
*'U£*
expenses of of this dependence, let us assume that the normal supply
production, p r j c e
a n y amount of that commodity may be taken to b e
t




‘ See IV. m

2.

LIST OF SUPPLY PRICES

343

its normal expenses of production (including gross earnings V, m, 5.
of management1) by that firm. That is, let us assume that including
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 a repreothers falling and diminishing theirs; but the aggregate Ann.
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 produc­
tion. 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 com­
panies which often stagnate, but seldom die.
S 5. To give definiteness to our ideas let us take an illus- The con,
,
„
,
T ,
struction
tration from the woollen trade. Let us suppose that a person of the list
well acquainted with the woollen trade sets himself to inquire at which
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) ,c
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 in­
surance 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 prices2: the supply price of each amount of the
commodity in a year, or any other unit of time, being
* See last paragraph of IV. xn.
a
JU. m. 4.



34 4

EQ U ILIB RIU M OF NORM AL DEM AND A N D SU P PLY

v,in,5. written against that amount1. 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 diminish2. 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 ex­
penses of production of the commodity of our representative
1 Measuring, as in the case of the demand
Fig. 18.
curve, amounts of the commodity along Ox
and prices parallel to Oy, we get for each
point M along Ox a line MP drawn at right
angles to it measuring the supply price for
the amount OM, the extremity of which, P,
may be called a $up-ply point; this price MP
being made up of the supply prices of the
several factors of production for the amount
OM. The locus of P may be called the supply
curve.
Suppose, for instance, that we classify the
expenses of production of our representative
firm, when an amount OM of cloth is being
produced under the heads of (i) Mpl, the
supply price of the wool and other circulating
capital which would be consumed in making it, (ii) ptpt the corresponding wearand-tear and depreciation on buildings, machinery and other fixed capital; (iii)
the interest and insurance on all the capital, (iv) ptpt the wages of those who work
in the factory, and (v) p«P the gross earnings of management, etc. of those who
undertake the risks and direct the work. Thus as M moves from O towards the
right pu Pt, Vi, Pi will each trace out a curve, and the ultimate supply curve
traced out by P will be thus shown as obtained by superimposing the supply
curves for the several factors of production of the doth.
It must be remembered that these supply prices are the prices not of units of
the several factors but of those amounts of the several factors which are required
for producing a yard of the cloth. Thus, for instance, ptpt is the supply price not
of any fixed amount of labour but of that amount of labour which is employed in
making a yard where there is an aggregate production of OM yards. (See above
§ 3.) We need not trouble ourselves to consider just here whether the groundrent of the factory must be put into a class by itself: this belongs to a group of
questions which will be discussed later. We are taking no notice of rates and
taxes, for which he would of course have to make his account.
*
That is, a point moving along the supply curve towards the right may either
rise or fall, or even it may alternately rise and fall; in other words, the supply
curve may be inclined positively or negatively, or even at some parts of its course
it may be inclined positively and at others negatively. (See footnote on p. 89.)




STABLE EQU ILIBRIU M

34 5

firm. But those cases in which the supply price falls as the v, m, 6.
amount increases involve special difficulties of their own;
and they are postponed to chapter xn. of this Book.
§ 6. When therefore the amount produced (in a unit of w is
hat
time) is such that the demand price is greater than t h e ™ ^ by
supply price, then sellers receive more than is sufficient t o briu m
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 Equtoi the commodity which is being produced in a unit of time 2 2 5 ?
may be called the equilibrium-amount, and the price at which
it is being sold may be called the equilibrium-price.
price.
Such an equilibrium is stable; that is, the price, if dis- stable
placed a little from it, will tend to return, as a pendulum e^uUibria>
oscillates about its lowest point; and it will be found to be a th
e
characteristic of stable equilibria that in them the demand ^ ^ rco s
fi n
price is greater than the supply price for amounts just less j 2 S tlw
y
than the equilibrium amount, and vice versa. 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



346

EQ UILIBRIUM OF NORM AL DEM AND A N D SU P PLY

v, in, 6. 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.
OscillaWhen demand and supply are in stable equilibrium, if
ap sitio * any accident should move the scale of production from its
o n
equiU-^6
equilibrium position, there will be instantly brought into
bnum
p la y 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 kind1,
are seldom
But in real life such oscillations are seldom as rhythmi£&
cal 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. 11 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
1 Compare V. I. 1. To represent the equilibrium of demand and su pp ly
geometrically we may draw the demand and supply curves together as in Fig.
If then OR represents the rate at which production is being actually carried on,
and Rd the demand price is greater than Rs the supply
Fig. 19.
price, the production is exceptionally profitable, and will
be increased. R, the amount-index, as we may call it,
will move to the right. On the other hand, if Rd is less
than Rs, R will move to the left. If Rd is equal to Rs,
kY * '
that is, if J? is vertically under a point of intersection of
d
the curves, demand and supply are in equilibrium.
This may be taken as the typical diagram for stable
equilibrium for a commodity that obeys the law of
diminishing return. But if we had made SS' a hori•o
h r*
rontal straight line, we Bhould have represented the
case of “ constant return,” in which the supply price is the same for all amounts
of the commodity. And if we had made SS' inclined negatively, but less steenly
than DD' (the necessity for this condition will appear more fully later o n )/w «
should have got a case of stable equilibrium for a commodity which obeys the law
of increasing return. In either case the above reasoning remains ••"'•hnnriiiil
without the alteration of a word or a letter; but the last case introduces
which we have arranged to postpone.




N.

MEANING OF TH E PH RASE “ IN T H E LONG R U N ”

34 7

in practice remain unchanged for a long time together, but V; m, 6.
are constantly being changed; and every change in them
alters the equilibrium amount and the equilibrium price,
aitd 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 L
oose
the element of time in relation to demand and supply, totS£2n°n
the study of which we now proceed. We shall gradually
discover a great many different limitations of the doctrine ” a 8t
^
that the price at which a thing can be produced represents duction;
its real cost of production, that is, the efforts and sacrifices caneeof
which have been directly and indirectly devoted to i t s ^ J ^ 8
*8
production. For, in an age of rapid change such as this,
the equilibrium of normal demand and supply does not thus /»the
correspond to any distinct relation of a certain aggregate of km
?run’
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
{lie real drift of that much quoted, and much-misunderstood
doctrine of Adam Smith and other economists that the
norm al, 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
frjyrm long enough to enable them all to work out their full
effect1.
But we cannot foresee the future perfectly. The un­
expected may happen; and the existing tendencies may be
m odified 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
1 See below V. ▼ 2 and Appendix H. 4.
.




348

EQ U ILIBRIU M OF NORM AL DEM AND AN D SUPPLY

v, in, 7. 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 price1,
ofutm
ty*
§
The remainder of the present volume will be chiefly
and cost of occupied with interpreting and limiting this doctrine that
o °vaiu the value of a thing tends in the long run to correspond to
n
e?n
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 xn. 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 ol
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 hot 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,
former
the same way, when a thing already made has to be
preponsold, the price which people will be willing to pay for it will
market11 be governed by their desire to have it, together with the
1
values;
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 ol
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



1 See above pp. 34—38.

U T IL IT Y , COST OF PRO DU CTIO N , A N D V A L U E

349

is governed by demand, bis brevity may perhaps be excused v, m, 7.
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 the latter
commodities which conform pretty closely to the law of ^luesT8
1
constant return; that is to say, their average cost of produc­
tion 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 any­
how 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 pf 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 per­
sistently. But in long periods these fitful and irregular



350

EQ U ILIB RIU M OF NORM AL DEM AND AN D SU P PLY

v,in, 7. causes in large measure efface one another’s influence; so
that in the long run persistent causes dominate value com ­
pletely. 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.
The
When considering costs from the point of view of the
capitalist employer, we of course measure them in m oney;
^ £ erned because his direct concern with the efforts needed for the
= 7but W
Ork 0f his employees lies in the money payments he must
toe ’
make. His concern with the real costs of their effort and
o f n orm al
of the training required for it is only indirect, though a
resdcasts!* 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 dim in ish ing
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 interpre­
tation of the term Cost in what follows, even where n o
distinct indication is given in the context.




CHAPTER IV.
T H E IN V E S T M E N T A N D D IS T R IB U T IO N O F R E S O U R C E S .
§ 1 . T h e first difficulty to be cleared up in our study of v,iv,i.
normal values, is the nature of the motives which govern the The
investment of resources for a distant return, It will be investment
PoliC [of 4
3
well to begin by watching the action of a person who
neither buys what he wants nor sells what he makes, but return
works on his own behalf; and who therefore balances theSeariy8
efforts and sacrifices which he makes on the one hand against JJJJj j l» *
the pleasures which he expects to derive from their fruit on m who
aP
the other, without the intervention of any money payments thing for
,

ii

&t 8J1.

his own

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 waitings1.
» For he might have applied these efforts, or efforts equivalent to them, to
producing immediate gratifications; and if he deliberately chose the deferred
gratifications, it would be because, even after allowing for the disadvantages of
waiting, he regarded them as outweighing the earlier gratifications which he could
have substituted for them. The motive force then tending to deter him from
building the house would be his estimate of the aggregate of these efforts, the
evil or discommodity of each being increased in geometrical proportion (a sort of
com p ou n d interest) according to the corresponding interval of waiting. The
motive on the other hand impelling him to build it, would be expectation of the
satisfaction which he would have from the house when completed; and that again
might be resolved into the aggregate of many satisfactions more or Iras remote,




use.

352

T H E INVESTM ENT AND D ISTR IBU TIO N OP RESOURCES

v, iv, 2.

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.
Transition
§ 2 . This illustration may serve to keep before us the
vestment way in which the efforts and sacrifices which are the real
byTheltal cost
production of a thing, underlie the expenses which are
undertaker *ts mone7 cost*
as ^as j ust been remarked, the m odem
oi business business man commonly takes the payments which he has to
prises.
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 t o
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 ow n
remuneration, increases at compound interest in proportion
and more or less certain, which he expected to derive from its use. If he thought
that this aggregate of discounted values of satisfactions that it would afford him
would be more than a recompense to him for all the efforts and waitings which he
had undergone, he would decide to build. (See III. v. 3, IV. vn. 8 and Note xin
in the Mathematical Appendix.)




AN ILLU STR ATIO N

353

to the time of waiting1. Under this head are to be entered V, xv, 2.
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 (allow- Accumuiaance 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 outlays
represent the present value of a future gratification. Each receipts,
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 what­
ever 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 im­
mediate enjoyment, it is used as a stored up source of future
*
We may, if we choose, regard the price of the business undertaker’s own
work as part of the original outlay, and reckon compound interest on it together
with the rest. Or we may substitute for compound interest a sort of "compound
profit.” The two courses are not strictly convertible: and at a later stage we shall
find that in certain cases tbe first is to be preferred, and in others the second.




T H E INVESTMENT AND D ISTR IBU TIO N OF RESOURCES

income, that later income must not be counted as an
additional return to the investment1.
I f 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 o f
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 o f
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 work2.
1 In the aggregate the income from the saving will in the ordinary course be
larger in amount than the saving by the amount of the interrat that is the reward
of saving. But, as it will be turned to account in enjoyment later than the original
saving could have been, it will be discounted for a longer period (or
for a shorter); and if entered in the balance sheet of the investment in
0f
the original saving, it would stand for exactly the same sum. (Both the original
income which was saved and the subsequent income earned by it are
^
income tax; on grounds similar to those which make it expedient to levy a !in%oi
income tax from the industrious than from the lazy man.) The
of this section is expressed mathematically in Note XIII.
1 Almost every trade has its own difficulties and its own customs ‘•""inwtcul
with the task of valuing the capital that has been invested in a business,
0f
allowing for the depreciation which that capital has undergone from wear-andtear, from the influence of the elements, from new inventions, and from "h-nm-ca
in the course of trade. These two last causes may temporarily raise the value of
some kinds of fixed capital, at the same time that they are lowering that of others.
And people whose minds are cast in different moulds, or whose interests ia the
matter point in different directions, will often differ widely on the question what
part of the expenditure required for adapting buildings and plant to
conditions of trade, may be regarded as an investment of new capital; and what
ought to be set down as charges incurred to balance depreciation, and treated as
expenditure deducted from the current receipts, before determining the net profits
or true income earned by the business. These difficulties, and the ~»>11|1|. .
1r 1
differences of opinion, are greatest of all with regard to the investment of




B ALANCING OP O UTLAYS A N D RECEIPTS

355

§ 3. At the beginning of his undertaking, and at every v, iv, 3.
successive stage, the alert business man strives so to modify The
his arrangements as to obtain better results with a given £{^bstiexpenditure, or equal results with a less expenditure. In tution.
other words, he ceaselessly applies the principle of substi­
tution, 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 varia­
tion 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 m 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 number­
less.
Each man’s actions are influenced by his special oppor­
tunities and resources, as well as by his temperament and
in buiMing up a business connection, and the proper method of appraising the
goodwill of a business, or its value “ as a going concern.” On the whole of this
■object see Matheson’s Depreciation of Factories and their Valuation.
Another group of difficulties arises from changes, in the general purchasing
p0Wer of money. If that has fallen, or, in other words, if there has been a rise of
general prices, the value of a factory may appear to have risen when it has really
rem ained stationary. Confusions arising from this source introduce greater errors
into estimates of the real profitableness of different classes of business than would
at fir«* sight appear probable. But all questions of this kind must be deferred till
we have discussed the theory of money.




336

T H E INVESTM ENT AND D ISTR IB U TIO N OF RESOURCES

v, iv, 4. his associations: but each, taldng account of his own means,
Th'
will push the investment of capital in his business in each
m
argin of several direction until what appears in his judgment to be
profitable,
‘
i - i i
ness is not the outer limit, or margin, of profitableness is reached; that
polnton
is, until there seems to him no good reason for thinking that
roufcTbut the gains resulting from any further investment in that
iS^ngaU^ particular direction would compensate him for his outlay,
routes.
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.
Affinities
§ 4. This principle of substitution is closely connected
theprin- with, and is indeed partly based on, that tendency to a
aubstitu- diminishing rate of return from any excessive application
resources 01
energies in any given direction, which
in^utiiity is jn accordance with general experience. It is thus linked
isbing
up with the broad tendency of a diminishing return to ia' The cone- crease^ applications of capital and labour to land in old
lationof countries which plays a prominent part in classical ecotion antf nomics. And it is so closely akin to the principle of the
production, ^ j ^ ^ i o n of marginal utility that results in general from
increased expenditure, that some applications of the tw o
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 con­
sumers: that on the other hand changes in the methods and
volume of consumption cause new developments of produc­
tion, 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 further­
ing the production of material wealth, yet production and
consumption are intimately correlated1. 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
diminish-




1 See pp. 84—

and 64—67.

M ARG IN AL U TIL ITIE S A N D COSTS

357

consumers’ purchases between different classes of commo- v, iv, 4.
dities1.
,
Let us revert to the primitive housewife, who having The dis“ a limited number of hanks of yarn from the year’ s shearing, Sources
considers all the domestic wants for clothing and tries t o in dom
estic
,
.
economy.
distribute the yarn between them m such a way as to con­
tribute 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 vests2.” If it happened that two ways of
making a vest were open to her, which were equally satis­
factory 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 u^eans towards each end.
These three classes of decisions have to be taken on a The dislarger scale by the business man, who has more complex resources
balancings and adjustments to make before reaching each “ on^my^
decision8. Let us take an illustration from the building iiiustratrade. Let us watch the operations of a “ speculative th^^idbuilder” in the honourable sense of the term: that is, ins fcradea man who sets out to erect honest buildings in anti­
cipation of general demand; who bears the penalty of
any error in his judgment; and who, if his judgment is
1 The substance of part of this section was placed in VI. 1. 7 in earlier editions.
But it seems to be neoded here in preparation for the central chapters of Book V.
* See III. v. 1.

• Tho remainder of this section goes very much on the lines of the earlier half
of Note XIV. in the Mathematical Appendix; which may be read in connection
with ik The subject is one in which the language of the differential calculus—
not it* reasonings—are specially helpful to clear thought: but the main outlines
fan be presented in ordinary language.




T H E INVESTMENT AND DISTR IBU TION OF RESOURCES

358
v

,

it

, 4.

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 re­
lation 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 work­
men 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 con­
sider 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 distri­
bution 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 distribu­
tion of her yam 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 u p




M ARG IN AL U TIL ITIE S AN D COSTS

359

to a certain point, and would then gradually dimmish. Like v, iv, 5.
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 o f'th e m 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
agriculture1.
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 re­
munerative in the long run. But he is always on the look
odTfor 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.
*

*

*

*

§ 5 . Some technical terms relating to costs may be Prime cost.
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 prim e cost, Prime or
but also bear its proper share of the general expenses of the SST**
business; and these we may call its general, or supplemen­
tary cost. These two elements together make its total cost.
There are great variations in the usage of the term SujrpUPrime cost in business. But it is taken here in a narrow

1 See above III. m. 1; and the footnote on pp. 15&-7.



e°**‘

360

v,

THE in v e s t m e n t a n d d is t r ib u t io n o f r e s o u r c e s

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 wearand-tear of plant. This is the special cost which a manu­
facturer 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 on1.
The
§ 6 . Supplementary cost must generally be covered b y
between
the selling price to some considerable extent in the short
^ L and run. And they must be completely covered by it in the
.aSts” 7 l ° n§ run> f ° r> if they are not, production will be checked.
T*tbtbe
Supplementary costs are of many different kinds; and some of
duration of them differ only in degree from prime costs. For instance, if
takingf6 * an engineering firm is in doubt whether to accept an order at
1
tionfroin a rat^er l° w Pr^ *or a certain locomotive, the absolute prime
ce
wag«nmd costs include the value of the raw material and the wages o f
the artisans and labourers employed on the locomotive. B u t
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
iv

, 6.

1 Especially in V. ix. “ There are many systems of Prime Cost in vogue...we
take Prime Cost to mean, as in fact the words imply, only (he original or direct
cost of production; and while in some trades it may be a matter of convenience
to include in the coat of production a proportion of indirect expenses, and a charge
for depreciation on plant and buildings, in no case should it comprise interest
on capital or profit.” (Garcke and Fells, Factory Accounts, ch. i )




PRIM E AN D SU PPLE M EN TARY COSTS

361

however often blurred over. For instance, foremen and other v, iv, c.
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 un­
filled 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 end longer tasks, ijimtraas for instance the working out a contract to deliver a great ouuiyon
number of locomotives gradually over a period of severalplant*
years, then most of the office work done in connection with
that order must be regarded as special to it: for if it had
v
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 in. and of This
this chapter is continued. It is shown in more detail how ouhe"0
6
those costs which most powerfully act on supply and therefore
of
on price, are limited to a narrow and arbitrary group in the
case of a single contract for, say, a locomotive; but are much inChs. r.
fuller, and correspond much more truly to the broad features vra.—x.
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



362

t h e in v e s t m e n t a n d d is t r i b u t i o n o f r e s o u r c e s

v, it, 6. locomotive, or a particular parcel of goods. And a similar
study is made in Chapters v i i i . — 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.
Te _
h
Meanwhile it may be noticed that the distinction between
b«tw °n prime and supplementary costs operates in every phase of
een
su ie-n civilization, though it is not likely to attract much attention
pp d
except in a capitalistic phase. Eobinson Crusoe had to do
operates
only with real costs and real satisfactions: and an oldneitherare fashioned peasant family, which bought little and sold little,
inmoney, 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 foe
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 it1.
1 The Supplementary costs, which the owner of a factory expects to be able to
add to the prime costs of its products, are the source of the quasi-rents which it wtt
yield to him. If they come up to his expectation, then his business so far yields
good profits: if they fall much short of it, his business tends to go to the
But his statement bears only on long-period problems of value: and in
connection the difference between Prime and Supplementary costs has no ■p—
’fcl
significance. The importance of the distinction between them is confined to short*
period problems.




CHAPTER V.
EQUILIBRIUM OF NORMAL DEMAND AND SUPPLY, CON­
TINUED, WITH REFERENCE TO LONG AND SHORT
PERIODS.

§1 . T h e variations in the scope of the term Normal, v,v, l.
according as the periods of time under discussion are long or T e
h
short, were indicated in Chapter hi. We are now ready to
study them more closely.
ch ter
ap
In this case, as in others, the economist merely brings to »» to the
light difficulties that are latent in the common discourse of time are
life, so that by being frankly faced they may be thoroughly irdStiy
overcome. For in ordinary life it is customary to use thed u
isco rse»
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 compli­
cation which in fact he has only revealed.
Thus, when it is said that the price of wool on a certain where the
day was abnormally high though the average price for the the term
year was abnormally low, that the wages of coal-miners were 2iJS2Ito
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.



364

EQ UILIB RIU M OJf NORM AL DEMAND AND SU PPLY , CONTIN UED

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.
Illustra­
We have noticed1 how a cloth manufacturer would need
tion from
the cloth to calculate the expenses of producing all the different things
trade.
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 ol
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
V ,v, 1.




* v. m. 5.

T H E T E R M NO RM AL IS ELASTIC

365

was overcrowded, that parents had already begun to choose v, ▼1.
,
other trades for their children which offered greater net
advantages and yet were not more difficult; that in con­
sequence 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 average1.
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;
1
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 con­
tinually 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
1 There are indeed not many occasions on which the calculations of a business
man for practical purposes need to look forward so far, and to extend the range
of the term Normal over a whole generation: but in the broader applications of
economic science it is sometimes necessary to extend the range even further, and
to take account of the Blow changes that in the course of centuries affect the
supply price of the labour of each industrial grade.




366

E Q U ILIB RIU M OF NORM AL DEMAND A N D SU PPLY , CO N TIN U ED

v, t, 2. 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 goods1.
The
§ 2. The element of time is a chief cause of those diffiprobiem culties in economic investigations which make it necessary
mustbe f ° r man with his limited powers to go step by step; breaking
broken up. Up a complex question, studying one bit at a time, and at
last combining his partial solutions into a more or less com ­
plete 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 Cesteris
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. W ith
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
stage2.
Fiction of a
Our first step towards studying the influences exerted
state!nary by the element of time on the relations between cost o f
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
1 Compare I. n. 7.
•
As has been explained in the Preface, pp. vi—ix, this volume is concerned
mainly with normal conditions; and these are sometimes described as Statical.
But in the opinion of the present writer the problem of normal value belongs to
economic Dynamics: partly because Statics is really but a branch of Dynamics
and partly because all suggestions as to economic rest, of which the hypothesis
of a Stationary state is the chief, are merely provisional, used only to
particular steps in the argument, and to be thrown aside when that is done.




H YPOTHESIS OF A ST A TIO N A R Y STATE

367

general conditions of production and consumption, of distri- v, v, 2.
bution 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 in &
cost of production governs value. Each effect would b e J S K e 7
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
game size, and always doing the same class of business to the



368

EQ U ILIB R IU M OF NORM AL DEM AND A N D SU P PLY , CONTIN UED

v, t , 3.

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 fa the
But nothing of this is true in the world in which we live.
Here every economic force is constantly changing its action,
yalueis °f un(^eI the influence of other forces which are acting around
woreetban ^
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 b y
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 mis­
chievous 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.
Modiflca§ 3 . The Stationary state has just been taken to be
fiction of a one in which population is stationary. But nearly all its
JtotebS distinctive features may be exhibited in a place where
toresdUfe population and wealth are both growing, provided they are
and help to growing at about the same rate, and there is no scarcity of
a complex land: and provided also the methods of production and the
problem.
con(Jition3 of trade change but little; and above all, where
the character of man himself is a constant quantity. F or
in such a state by far the most important conditions o f
production and consumption, of exchange and distribution
will remain of the same quality, and in the same general
1 relations to one another, though they are all increasing in
volume1.
This relaxation of the rigid bonds of a purely stationary
state brings us one step nearer to the actual conditions o f
1 See below, V. xi. 6; and compare Keynes, Scope and Method of Political
Economy, vi. 2.



TRAN SITION TO LONG AN D SH O RT PER IO D S

369

life: and by relaxing them still further we get nearer still, v, v, 4.
We thus approach by gradual steps towards the difficult
problem ol the interaction of countless economic causes. In
the stationary state all the conditions of production and
consumption are reduced to rest: but less violent assump­
tions are made by what is, not quite accurately, called the
statical method. B y that method we fix our minds on some
central point: we suppose it for the time to be reduced to
& stationary state; and we then study in relation to it the
forces that affect the things b y 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
effort1.
§ 4 . We may roughly classify problems connected with lliuatrafishing industries as those which are affected by very quick thrashing
changes, such as uncertainties of the weather; or by changestrade*
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 Day to day
from uncertainties o f,th e 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 cmteris paribus] during
a study of such fluctuations.
An
Let us then pass on; and suppose a great increase in theSuhe8
9
general demand for fish, such for instance as might arise SSSSSded
from a disease affecting farm stock, by which meat was * ^ j aU
y
made a dear and dangerous food for several years together. *hortW e now impound fluctuations due to the weather in cceteris Supply
1 Compare the Preface and Appendix H, 4.




pnce;

370

EQ U ILIBRIU M OF NORMAL DEMAND AN D SU P PLY , CO N TIN U ED

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 oppo­
site 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 n ot
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 th®
tendency to increasing return1,
but not #
But if we turn to consider the normal supply price w ith
SSSeriod reference to a long period of time, we shall find that it is
pnce.
governed by a different set of causes, and with different
results. For suppose that the disuse of meat causes %
permanent distaste for it, and that an increased demand
for fish continues long enough to enable the forces b y wMoli
its supply is governed to work out their action fully (ofcourwi
oscillation from day to day and from year to year would e©®.
tinue: but we may leave them on one Bide). The source o f
supply in the sea might perhaps show signs of exhaustion, an<t

V,v, 4.




1 See V. xx. 1.

LONG A N D SH O R T P E R IO D S

371

the fishermen might have to resort to more distant coasts v,v,4
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 demand1.
» Tooke (History of Prices, Vol. I. p. 104) tells us: "There are particular
articles of which the demand for naval and military purposes forms so large a
proportion to the total supply, that no diminution of consumption by individuals
can keep pace with the immediate increase of demand by government; and conse­
quently, the breaking out of a war tends to raise the price of such articles to a
great relative height. But even of such articles, if the consumption were not on
a progressive scale of increase so rapid that the supply, with all the encourage­
ment of a relatively high price, could not keep pace with the demand, the
tendency is (supposing no impediment, natural or artificial, to production or
importation) to occasion such an increase of quantity, as to reduce the price to
nearly the same level as that from which it had advanced. And accordingly
it will be observed, by reference to the table of prices, that salt-petre, hemp, iron,
etc., after advancing very considerably under the influence of a greatly extended
jpmnnri for military and naval purposes, tended downwards again whenever that
(Ifinimii was not progressively and rapidly increasing.” Thus a continuously
progressive increase in demand may raise the supply price of a thing even for
several years together; though a steady increase of demand for that thing, at a
rate not too great for supply to keep pace with it, would lower price.




372

EQ U ILIB RIU M OF NO RM AL DEMAND AN D SU P P L Y , CO N TIN U ED

Thus we may emphasize the distinction already made
between average price and normal price. An average m ay
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 m ay be
the average of sales at any time in many markets; or it m ay
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 terms1.
Restate­
§ 5. To go over the ground in another way. Market
ment of
the main
values are governed by the relation of demand to stocks
result.
actually in the market; with more or less reference to
“ future” supplies, and not without some influence of trade
combinations.
Nature of
But the current supply is in itself partly due to the action
production, of producers in the past; and this action has been deter­
mined on as the result of a comparison of the prices which
they expect to get fo~ 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 pro­
duction with their existing plant, or are considering whether
to lay down new plant for the purpose. In the case, fo r
instance, of an order for a single locomotive, which was
discussed a little while ago2, the question of readjusting th e
plant to demand would hardly arise: the main question would
be whether more work could conveniently be got out of th e
existing plant. But in view of an order for a large number
of locomotives to be delivered gradually over a series o t
years, some extension of plant “ specially” made for th e
V, ▼ 5,

Average
and
normal
prices.

‘ V. m. 6. The distinction will be yet further discussed in V. xn.
Appendix H. See also Keynes, Scope and Method of Political
ch. TU.
• Pp. 360-7.




LONG AN D SH O R T PE R IO D S

373

purpose, and therefore truly to be regarded as prime marginal v, v, 5.
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 expecta­
tions 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 in­
crease 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 The
always the same whether the period to which it refers is
short or long; but there are great differences in detail. Horm
aT
In every case reference is made to a certain given rate of supply
aggregate production; that is, to the production of a certain shorVand
aggregate amount daily or annually. In every case the periods,
price is that the expectation of which is sufficient and only
just sufficient to make it worth while for people to set them­
selves 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.



374

EQ U ILIBRIUM OF NORMAL DEMAND AN D SU P PLY , CONTIN UED

v, v, 6. 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 prac­
tically fixed; and they are governed by their expectations
of demand in considering how actively they shall set them­
selves 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.
For short
§ 6 . The immediate effect of the expectation of a high
penocUthe
ja
cause people to bring into active work all their
ofproduc- appliances of production, and to work them full time and
tactically perhaps overtime. The supply price is then the money cost
Led, but of production of that part of the produce which forces the
em
ploy* undertaker to hire such inefficient labour (perhaps tired b y
varies with working overtime) at so high a price, and to .put himself and
demand, 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 agree­
ment 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 o f



LONG AND SHORT PERIODS

37 5

plant, which is immediately and directly involved b y getting v, v, 6.
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 where
cost of goods is but a small part of their total cost; and an much fixed
order at much less than their normal price may leave a large JSJescan
surplus above their prime cost. But if producers accept j^/ow their
such orders in their anxiety to prevent their plant fr o m normal
being idle, they glut the market and tend to prevent prices without
from reviving. In fact however they seldom pursue this gpec^ur
policy constantly and without moderation. If they did, they Prime c08t»
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 con­
demns 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 expenses1.
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.
*
Where there is a strong combination, tacit or overt, producers may some­
times regulate the price for a considerable time together with very little reference
to cost of production. And if the leaders in that combination were those who had
the best facilities for production, it might be said, in apparent though not in real
contradiction to Ricardo’s doctrines, that the price was governed by that part of
the supply which was most easily produced. But as a fact, those producers whose
finances are weakest, and who are bound to go on producing to escape failure,
often impose their policy on the rest of the combination: insomuch that it is
» common saying, both in America and England, that the weakest members of a
combination are frequently its rulers.




376

EQUILIBRIUM OF NORMAL DEMAND AND SUPPLY, CONTINUED

Thus, although nothing but prime cost enters necessarily
and directly into the supply price for short periods, it is yet
o p posed
true that supplementary costs also exert some influence
by many
indirectly. A producer does not often isolate the cost of
m>stiy
each separate small parcel of his output; he is apt to treat
indirect.
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 under­
takings, 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.
The _
In other words he regards an increase in his processes
unit is a
of production, rather than an individual parcel of his pro­
process of ducts, as a unit in. most of his transactions. And the
n few than analytical economist must follow suit, if he would keep in
a parcel °f ci ose touch with actual conditions. These considerations
8 '
tend to blur the sharpness of outline of the theory of value:
but they do not affect its substance1.
General
To sum up then as regards short periods. The supply
sions as
of specialized skill and ability, of suitable machinery and
periods!
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 dis­
posal. 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 b y
conversion to other uses. Variations in the particular income
V, v, 6.

but"such

1 This general description may suffice for most purposes: but
t»a ttrlll b a fa iin ri a m n M H afailorl o ft ir lv ftf t h a t a v tii& m A U

in

chapter

X I.

_ _•
_

— -------------------- ----------- ~ — necessity of referring our reasonings to
the circumstances of a representative firm, especially when we an considering
industries which show a tendency to increasing return.




LONG AND SHORT PERIODS

377

derived from them do not fo r the time affect perceptibly the v, v, 7.
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
Tin.]. 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 other­
wise would.
1 7. In long periods on the other hand all investments in long
of capital and effort in providing the material plant and the theflowof
organization of a business, and in acquiring trade knowledge forP
^o-C*
e
and specialized ability, have time to be adjusted to the
incomes which are expected to be earned by them : and the to the
estimates of those incomes therefore directly govern supply, for the
and are the true long-period normal supply price of the ofthose*
commodities produced.
appliances.
A great part of the capital invented 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 any­
one 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
fun, is governed by estimates on the one hand of the out­
goings required to build up and to work a representative



378

EQUILIBRIUM OF NORMAL DEMAND AND SUPPLY, CONTINUED

firm, and on the other of the incomings, spread over a long
period of time, to be got by such a price.
A t any particular moment some businesses will be rising
and others falling: but when we are taking a broad view o f „
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 priva­
tions in the hope that he may gradually build up a good
business. Or it may be due to some wealthy firm which b y
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 pro­
duction.
nosharp
§
Of course there is no hard and sharp line of division
division
between “ long” and “ short” periods. Nature has drawn no
long and
such lines in the economic conditions of actual life; and in
jSriods.
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 tw o; so we
contrast long and short periods without attempting any rigid
demarcation between them. If it is necessary for the pur­
poses 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
Classifineither frequent nor important.
problems
Four classes stand out. In each, price is governed b y
of value
the _relations between demand and supply. As regards
by the
.
.
rr j
©
periods to market prices, Supply is taken to mean the stock of the
which they commo(j^ y ja question which is on hand, or at all events “ in
V, v, 8.




LONG AND SHORT PERIODS

37 9

sight.” As regards normal prices, when the term Normal is v, v, 8.
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
another1.
1 Compare the first section of this chapter. Of course the periods required to
adapt the several factors of production to the demand may be very different; the
number of skilled compositors, for instance, cannot be increased nearly as fast as
the supply of type and printing-presses. And this cause alone would prevent any
rigid division being made between long and short periods. But in fact a theoreti­
cally perfect long period must give time enough to enable not only the factors of
production of the commodity to be adjusted to the demand, but also the factors
of production of those factors of production to be adjusted and so on; and this,
when carried to its logical consequences, will be found to involve the supposition
of a stationary state of industry, in which the requirements of a future age can
be anticipated an indefinite time beforehand. Some such assumption is indeed
unconsciously implied in many popular renderings of Ricardo’s theory of value, if
not in his own versions of it; and it is to this cause more than any other that we
must attribute that simplicity and sharpness of outline, from which the economic
doctrines in fashion in the first half of this century derived some of their seduc­
tive charm, as well as most of whatever tendency they may have to lead to false
practical conclusions.
Relatively short and long period problems go generally on similar lines. In
both use is made of that paramount device, the partial or total isolation for
special study of some set of relations. In both opportunity is gained for analysing
ap<i comparing similar episodes, and making them throw light upon one another;
and for ordering and co-ordinating facts which are suggestive in their similarities,
a n d are still more suggestive in the differences that peer out through their simi­
larities. But there is a broad distinction between the two cases. In the relatively
«hort-period problem no great violence is needed for the assumption that the
forces not specially under consideration may be taken for the time to be inactive.
But violence is required for keeping broad forces in the pound of Cateris Paribus
during, say, a whole generation, on the ground that they have only an indirect
baring on the question in hand. For even indirect influences may produce great
effects in the course of a generation, if they happen to act cumulatively; and it is
not safe to ignore them even provisionally in a practical problem without special
study. Thus the uses of the statical method in problems relating to very long
periods are dangerous; care and forethought and self-restraint are needed at every
step. The difficulties and risks of the task reach their highest point in connection
with industries which conform to the law of Increasing Return; and it is just
in connection with those industries that the most alluring applications of the




'

38 0

v, v, 8.

EQUILIBRIUM OF NORMAL DEMAND AND SUPPLY, CONTINUED

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 Y I.
ch. x i i . , is given up to “ The Influence of Progress on Value,”
that is, to the study of secular changes of value.
method an to be found. We must postpone these questions to chapter xn. and
Appendix H.
But an answer may be given here to the objection that since “ the economic
world is subject to continual changes, and is becoming more complex,...the longer
the run the more hopeless the rectification” : so that to speak of that position which
value tends to reach in the long run is to treat “ variables as constants.” (Devas,
Political Economy, Book iv. ch. v.) It is true that we do treat variables -pro­
visionally as constants. But it is also true that this is the only method by which
science has ever made any great progress in dealing with complex and changeful
matter, whether in the physical or moral world. See above V. v. 2.




I

CHAPTER VI.
JOIN T A N D COMPOSITE D EM AN D ;

JO IN T A N D

COMPOSITE SU PPLY.

/

_ §1.
B r e a d 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 pro- indirect or
duction 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 join tly render in the
production of some ultimate product, as for instance a loaf
o f bread, a cask of ale. In other words there is a join t Joint
demand for the services which any of these things renderdem
and"
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 it1.

1 Compare III. ra. 6. It will be recollected that the things in & form ready
lor immediate use hare been called goods of the first order, or consumers* foods;




382

JO IN T A N D COMPOSITE DEMAND A N D SU P P L Y

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.
Illustra­
Let us pursue this last illustration with reference to a
tion taken
class of events that are of frequent occurrence in the labour
from a
labour
market; the period over which the disturbance extends being
dispute
in the
short, and the causes of which we have to take account as
building
trade.
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 tim e
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’ la b ou r.'
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 o f
course the business faculties and the business organization^
of the master builders; (that is, we assume that their lists o f
supply prices also remain valid). Then a temporary check to
V, vi, 1.

and that things used as factors of production of other goods have been
producers' goods, or goods of the second and higher orders or intermediate goods*
also that it is difficult to say when goods are really finished; that many thing, ar^
commonly treated as finished consumers’ goods before they are really ready for con­
sumption, e.g. flour. See II. ni. 1. The vagueness of the notion of instrumental
goods, regarded as things the value of which is derived from that of their products
is indicated in II. iv. 13.
^




D E R IV E D DEM AND PR IC E

383

the supply of plasterers’ labour will cause a proportionate v, vx, 1 .
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 pro­
duction will not be greater than before1. Thus new houses
can now be sold at prices which exceed by a good margin the
§um 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 Law of
a commodity is, for each separate amount for the commodity, dem
and.
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
o f the supply prices for corresponding amounts of the other
factors2.
* This is at any rate true under all ordinary conditions: there will be less
chargos for overtime; and the price of the labour of carpenters, bricklayers
others ia likely rather to go down than to go up, and the same is true of bricks
and other building materials.
* The broad account given in the text may suffice for most purposes; and the
general reader should perhaps omit the remaining footnotes to this chapter.
|| must be remembered that this Derived schedule has no validity except
oft the suppositions that we are isolating this one factor for separate study;
tfrat its own conditions of supply are disturbed; that there is at the time no
independent disturbance affecting any other element in the problem; and that
therefore in the case of each of the other factors of production the selling price
may be taken to coincide always with the supply price.
In illustrating this by a diagram, it will be well, for tbe sake of shortness of
wording, to divide the expenses of production of a commodity into the supply
prices of two things of which it is made; let us then regard the supply price of
8 frnifa ss the sum of the supply prices of its blade and handle, and neglect the
cTpan«w of putting the two together. Let *«' be the supply curve for handles and
gg*
for knives; so that M being any point on Ox, and MqQ being drawn ver­
tically to put ss' in q and SS' in Q, Mq is the supply price for OM handles, qQ is
the supply price for OM blades and MQ the supply price for OM knives. Let DD*




384

JO IN T AN D COMPOSITE DEM AND A N D SU PPLY

§ 2. When however we come to apply this theory to the
actual conditions of life, it will be important to remember
t Cautions
as to the
that if the supply of one factor is disturbed, the supply of
practical
applica­
others is likely to be disturbed also. In particular, when the
tions of
the theory. 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

V, vi, 2-

the demand curve for knives cut SS' in A, and AaB be drawn vertically as in the
figure. Then in equilibrium OB knives are sold
at a price BA of which Ba goes for the handle
and aA for the blade.
(In this illustration we may suppose that
sufficient time is allowed to enable the forces
which govern supply price to work themselves
out fully; and we are at liberty therefore to make
our supply curves inclined negatively. This
change will not affect the argument; but on the
whole it is best to take our typical instance with
the supply curve inclined positively.)
Now let us suppose that we want to isolate
for separate study the demand for knife handles.
Accordingly we suppose that the demand for knives and the supply of blades
conform to the laws indicated by their respective curves: also that the supply
curve for handles still remains in force and represents the circumstances of
normal supply of handles, although the supply of handles is temporarily disturbed.
Let MQ cut DD' in P, then MP is the demand price for OM knives and Qq is the
supply price for OM blades. Take a point p in MP such that Pp is equal to Qqt
and therefore Mp is the excess of MP over
then Mp is the demand price for
OM handles. Let id’ be the locus of p obtained by giving M successive positions
along Ox and finding the corresponding positions of p\ then dd' is the derived
demand curve for handles. Of course it passes through a. We may now neglect
all the rest of the figure except the curves dd\ ss’ \ and regard them as representing
the relations of demand for and supply of handles, other things being equal, ♦>« t
•»»
is to say, in the absence of any disturbing cause which affects the law of supply 0f
blades and the law of demand for knives. Ba is then the equilibrium price of
handles, about which the market price oscillates, in the manner investigated in
the preceding chapter, under the influence of demand and supply, of which the
schedules are represented by dd' and ss\ It has already been remarked
the ordinary demand and supply curves have no practical value except in the
immediate neighbourhood of the point of equilibrium. And the same remark
applies with even greater force to the equation of derived demand.
[Since Mp—Mq=*MP—MQ; therefore A being a point of stable equilibrium
the equilibrium at a also is stable. But this statement needs to be somewhat
qualified if the supply curves are negatively inclined: see Appendix H.]
In the illustration that has just been worked out the unit of each of the
factors remains unchanged whatever be the amount of the commodity produced■
for one blade and one handle are always required for each knife; but when a
change in the amount of the commodity produced occasions a change in
amount of each factor that is required for the production of a unit of the com­
modity, the demand and supply curves for the factor got by the above process are
not expressed in terms of fixed units of the factor. They must be translated back
into fixed units before they are available for general use. (See Mathematical Note
XIV bis.)




D E R IV E D DEM AN D P R IC E

385

instance on them; but by discharging some of their work- v ,v i, 2.
men and lowering the wages of others, they ultimately
distribute a great part of it among the other factors of pro­
duction. The details of the process b y 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 Conditions
check to the supply of a thing that is wanted not for direct
a
use, but as a factor of production of some commodity, may
cause a very great rise in its price. The first condition i s ^ c e o f
that the factor itself should be essential, or nearly essential a requisite
to the production of the commodity, no good substitute being tionT>duc*
available at a moderate price.
The second condition is that the commodity in the pro­
duction 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 com­
modity 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 market1.
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 little2.
1 We have to inquire under what conditions the ratio pM to aB will be the
greatest, pM being the demand price for the factor in question corresponding to
a supply reduced from OB to OM, that is reduced by the given amount BM. The
second condition is that PM Bhould be large; and since the elasticity of demand is
measured by the ratio which BM bears to the excess of PM over AB, the greater
PM is, the smaller other things being equal, is the elasticity of demand.
*
The third condition is that when PM exceeds AB in a given ratio, pM shall
be caused to exceed Ba in a large ratio: and other things being equal, that requires
Ba to be but a small part of BA.




386

JO IN T A N D COMPOSITE DEMAND AN D SU P PLY

v, vi, 2.

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
one1. If, for instance, bricklayers and other classes of work­
men, 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.
Moderating
The rise in plasterers’ wages would be checked if it were
of the
possible either to avoid the use of plaster, or to get the work
ofsubsti- done tolerably well and at a moderate price by people outside
tution,
the plasterers’ trade: the tyranny, which one factor of pro­
duction of a commodity might in some cases exercise over
the other factors through the action of derived demand, is
tempered by the principle of substitution2,
power of 6
Again, an increased difficulty in obtaining one of the
modifying factors of a finished commodity can often be met by m odifytionawEfch ing the character of the finished product. Some plasterers*
^toreo?1 labour may be indispensable; but people are often in doubt
production how much plaster work it is worth while to have in their
o f ft cornmodity
houses, and if there is a rise in its price they will have less
another,
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
1 That is, if Qq had been smaller than it ia, Pp would have been smaller and
Mp would hare been larger. See also Mathematical Note XV.
*
It is shown in Btfhm-Bawerk’s excellent QrundzUge der Theorie des \cirt~
tchaftLichen GiiterwerU (Jahrbuch fur Nationalokonomie und Statistic, vol.
p. 59) that if all but one of the factors of production of a commodity have available
substitutes in unlimited supply, by which their own price ia rigidly fixed, the
derived demand price for the remaining factor will be the excess of the
price for the finished product over tbe sum of the supply prices thus fixed for the
remaining factors. This is an interesting special rase of the law given in the
text




D E R IV E D DEM AND PRIC E

387

got for an ale winch differs from others only in containing v, vi, 3.
more hops; and this excess price represents the demand for
hops1.
The relations between plasterers, bricklayers, ete., 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.
§ 3. We have already2 discussed the way in which the Composite
aggregate demand for any commodity is compounded of the ll?/97*'
demands of the different groups of people who may need i t . demand*
But we now may extend this notion of composite demand to
requisites of production which are needed b y several groups
of producers.
Nearly every raw material and nearly every kind of Rival
labour is applied in many different branches of industry, and ‘k™*1'1 ,
18
contributes to the production of a great variety of commo­
dities. 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 be­
tween its various uses” in the manner which we have already
discussed8. 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 de­
mand that carries off the supply: in just the same way ag
the partial demands of several classes of society for a finished




1 See Mathematical Note XVL
* See above, III. iv. 2, 4.
• See III. v.

388

JO IN T A N D COMPOSITE DEM AND A N D SU P P L Y

v, vi, 4. commodity are aggregated, or compounded together into the
total demand for it1.
Joint
§ 4. We may now pass to consider the case of join t p ro­
supply• ducis ; ix . of things which cannot easily be produced sepa­
rately; but are joined in a common origin, and may there­
fore be said to have a join t supply, such as beef and hides, or
wheat and straw2. 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 versa. 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 it3.
1 Thus, let a factor of production have three uses. Let djd^ be the demand
curve for it in its first use. From N any
point on Oy draw Npt horizontally to cut d ^ '
in px\ then iVp, is the amount that is de­
manded for the first use at price ON, Produce
Npt to p „ and further on to P making
and fjP of such lengths as to represent the
amounts of the factor demanded at price ON
for the second and third uses respectively. As
N moves along Oy let p, trace out the curve
dfdt' and let P trace out the curve DD'. Thus
would be the demand curve for the factor
if it had only its first and second uses. DD’
is its demand curve for all three uses. It is
_______________ ____
immaterial in what order we take the several
o
a
uses. In tlie case represented, the demand
for the second use begins at a lower price and that for the third use begins at a
higher price than does th