Class-i^ /i / / / Book — OUTLINES OP ELEMENTARY ECONOMICS HERBERT J. DAVENPORT Author of " Outlines of Economic Theory " THE MACMILLAN COMPANY LONDON: MACMILLaN & CO., Ltd. 1901 All rights reserved HBni b Copyright, 1897, By the MACMILLAN COMPANY. Set up and electrotyped September, 1897. Reprinted August, 1898 ; September, 1899 ; June, 1901. By Transfer D. C. Public Library AUG 17 1934 NorfajoDti ^rrss /. S. Cashing & Co. — Berwick & Smith Norwood Mass. U.S.A. "^^nm^ 2'-:"J" '«op», Public Library, RECEIVED, DEC - 2 190? -^ ''^-'<^ LIBRARY Wzshmgto note'^ to the iCHER The importance which the author attaches to ohe method of suggestive questions is perhaps oufficiently indicated by the space which he has assigned thereto. The purpose is several- ^old : — (1) To summon to the aid of the student his fund of observation, experience, and crude generalization. This is the essential feature of the inductive method as applied to the study of social phenomena ; (2) To effect, through economics, a new cor- relation of the student's mental acquirements ; (3) To stimulate the interest of the student through the association of the discussions with the familiar facts of his every-day experience ; and (4) To concentrate his attention upon the difficulties which will furnish the basis for the discussion which is to follow. vi NOTE TO THE TEACHER It is very possible — indeed it is intended — that out of many of these questions the student will merely become puzzled. It is believed that this is pedagogically helpful ; answers have no place except as following questions. It must happen also that one question be found of profit to this or that student, while entirely failing to appeal to a third. The author has made an earnest effort to avoid definitions and sub-classifications, and in general, everything which pertains to what may be called the catalogue method of presentation. Outside of the work which the questions require of the student, the treatment is studiously theo- tetical rather than descriptive. Rightly taught and rightly learned, political economy is of the utmost value as a culture study, as well as a preparation for the duties and activities of practical life. In neither of these aspects can any training be adequate, or the results of it steadfast in the mental equip- ment, if the treatment is merely descriptive and discursive, instead of offering a close-knit and coherent body of elementary theory. Students who are able to master the abstract conceptions of algebra and geometry, need experience no difficulty with the simpler aspects of economic NOTE TO THE TEACHER vii theory, if these are presented with such sim- plicity of statement and arrangement as the subject permits. While, however, as is already indicated, it has not been the purpose of the writer to make an easy text-book, the method is such that the measure of difficulty or of exhaustiveness in the treatment will largely rest in the decision of the teacher, in view of the age of the pupils and the time at their disposal. The teacher is advised to require, in general, that written answers to both the introductory and the review questions be brought to the class- room. It is important also that the answers to the introductory questions be attempted, or a discussion of them had in the class-room, before the text is read by the student or appointed him for study. In conclusion, the teacher is especially cau- tioned against the notion that he is expected to furnish for himself or his class a satisfactory answer to every one of the questions, or even in all cases to divine the drift of them. Not a few of the questions the author would himself be unable to answer. In many cases the pur- pose has been merely that the difficulty should be honestly met, or again that it be brought Vlll NOTE TO THE TEACHER out clearly that the j)roblem suggested is not one requiring the attention of the economist as such. HERBERT J. DAVEN^PORT. Chicago, August 10, 1897. ANALYTICAL TABLE OF CONTENTS (References ake to Sections) CHAPTER I PAGE The Scope of the Science 1 The important thing not money, 1 ; but goods, 2. Value and price defined, 3. Political economy defined, 4. CHAPTER II Man and Environment 8 The law of adaptation, 5. Man is one term in the adjustment, 6-8. The two terms considered together, 9-11. Environment affects man, 10. Man in energy and effort, 12 ; in moral qualities, 12 ; in forethought and intelligence, 12; liberty and security, 12. CHAPTER III Utility and Wealth 23 Utility explains desire ; desire the primary force, 13. Utility not an ethical question, 14. Production is not creation, 15. There is no material measure of wealth, 16. The lines of increase are (1) external, (2) inter- nal, 17. Services, 18. Intellectual acquirements are not wealth, 19. ix X ANALYTICAL TABLE OF CONTENTS CHAPTER IV PAGE The Factors in Production 33 Are man, natural opportunity, and capital, 20. Capital an intermediate term, 21. Advantages of machinery, 22. "Wages, Profits, Rents, and Interest 38 These factors have their respective remunerations, 23. Profit is essentially wages, 24-26. The inter-relations of profits and wages, 27. CHAPTER V Value 47 All remunerations flow from value, 28. All outlays made in view of value, 29, 30. Desires are satiable, 31, 32. . Value is fixed by the process of marginal adjust- ment, 33-36. Is an expression of sacrifice, 37. Is in antagonism with utility, 38. Production is a purchase from nature, 39. CHAPTER VI Cost of Production 67 Human actions follow line of least sacrifice, 40. Economic action not necessarily selfish, 40. What sacrifice measures value, 41. Outlays not the ultimate cost, 42 ; nor labor, 42. Cost of production analyzed ; the marginal doctrine, 43, 44. CHAPTER VII Rent of Land 78 Value of product controls outlays, 45. There are differences in land, 46. ANALYTICAL TABLE OF CONTENTS xi Increase of population raises rent, 47. Lowers wages and interest, 48. Law of diminishing returns, 49. Urban lands, 50. Rent not a part of price, 51, 53. Margin of cultivation and prices, 52. CHAPTER VIII Interest 95 The demand for capital, 54, 55. The importance of time, 56. Interest is premium of present over future, 58, 59. How fixed, 60. Effect of machinery on wages, 61, 62. CHAPTER IX Wages and DisTRinuTioN 108 Fundamental question is product to divide, 63. Standard of living unimportant, 64. Bearing of demand and supply on wages, 65. Particular classes of laborers, 66. Harmony and conflict in relations of employers and employees, 67. Machinery raises wages, 68 ; because the tendency of profits is downward, 69-71. CHAPTER X Population, Increasing and Diminishing Returns 124 Malthus and the English poor laws, 72, 73, Increase of population may lower the per capita product, 74. Diminishing returns, 75. Is over-population coming ? 76. Increasing returns, 77, 78. xii ANALYTICAL TABLE OF CONTENTS CHAPTER XI PAGE Money 135 Its usefulness, 79, 80. Necessary qualities, 81. Credit is one aspect of exchange, 82. Peculiar qualities of gold and silver, 83. There is no ideal money, 85. The silver question, 86. The demand for money is limited by the division of labor, 87 ; is increasing, 88. The value of money, 89. Quasi-rents explain the demand for money, 90-92. Supply of money, 93. Effect of increase of supply, 94. Credit an^l bank currency, 95. Government issues, 96. Gresham's law, 97-99 ; proves local expansions futile, 100. Commercial crises, 101-104. Advantages and disadvantages of credit, 105. Remedies, 106. CHAPTER XII The Competitive System 179 Can humanity improve its own condition ? 107-110. Examination of present system, 111-114. Socialism examined, 115. CHAPTER XIII Population, Rent, and Socialism 191 Disquieting doctrines not necessarily false, 116. Diminishing returns again, 117. Would socialism help ? 118. Increasing returns again, 119, ANALYTICAL TABLE OF CONTENTS xiii CHAPTER XIV PAGE SoM£ Current Questions in Economics .... 201 Speculation, 120-127. r Combination and Monopoly, 128. ■^"""''^ Trades-unions, 129. The Eight-hour Day, 130, 131. The Sweating System, 132. Labor of Women and Children, 133, 134. Wages of Women, 135. The Tariff Question, 136-147. CHAPTER XV Taxation 237 Is essential fact in government, 148. Governments are worth more than they cost, but they cost, 149. No miracles in taxation, 150. All taxes fall on consumption, 151. How best collected, 152 ; Practical rules, 153. The shifting of taxes, 154. Taxes on rent ; Henry George, 155. Taxes on interest, 156. Taxes on income, 157-159. Taxes on liquors and tobacco, 160. Taxes on inheritances, 161. Distribution between central and local government, 162. Taxes on personal property, 162. CHAPTER XVI Consumption, Standards of Life, and Fashion . 257 Which is first cause, production or consumption ? 163, 164. Expansiveness of desires, 165, 166. Disappointing and non-disappointing desires, 167. Ostentation, 168. xiv ANALYTICAL TABLE OF CONTENTS CHAPTER XVII PAGE Conclusion 267 Is business overdone ? In what directions is there room ? 169. What tilings in life are best worth while ? 170. The purpose of culture, 171. ELEMENTARY ECONOMICS oo><>iO« CHAPTER I SCOPE OF THE SCIENCE What do you suppose Political Economy is about? Would the study of the Australian ballot system fall within it? The popular election of senators? 'J'he sil- ver question? Money generally? The tariff question? Do you see any way in w^hich Geology Could bear on what you suppose to be economic questions ? Geogra- phy? History? Ought the economist to understand the piocesses of the iron industry? The science of electricity ? Chemistry? Have these anything to do with Political Economy ? How? Is more required than that the economist understand the laws and facts common to industries in general ? What are scientific laws as distinguished from moral laws and civil laws ? Is Economics concerned with the relations of employ- ers with employees ? Does the study of markets, values, and prices require the examination of transportation questions ? How ? How does climate become important in Economics ? Waterways ? Mineral resources ? Human wants and needs? Religion? Morals? Public health? General intelligence ? B 1 2 • ELEMENTARY ECONOMICS Why should any one produce wealth ? Do you know any one who has more wealth than he needs ? Than he thinks he needs? Is either condition likely ever to become common ? Does demand limit consumption, or is it supply? What is the practical limit to consumption ? Does average consumption depend upon the amount of money in the world, or upon the amount of wealth pro- duced ? Suppose there were no money, how could the farmer use his grain to procure machinery or clothing? Do you see any respect in which this would be incon- venient ? In what sense can money be termed a common denomi- nator of values ? 1. If one were to offer you a ten-dollar bill on the condition that you should always keep Why we use i*» J^^ probably would not greatly money. prize the gift. Even were a ten- dollar gold piece offered you, and you were bound to keep it as such, not making it over into something of service or ornament, you would not very warmly thank the giver. Money is good to buy things with. Men in society and societies as a whole are well off, not in proportion to the money they have, but in pro- portion to what they can get to consume. We are used to selling things for money and to buying things with money, so that it comes to SCOPE OF THE SCIENCE 3 stand Avith us as the most general symbol or representative of the things whicli we buy. ]Men commonly reckon their riches in terms of money, as we commonly state the value of each commodity in money. It would be inconvenient to exchange sheep for cattle, or tooth-brushes for iron. When we go to the concert, it is not practicable to pay in hay, or chickens, or jack- knives. The doctor or the new^spaper man ob- jects to garden truck as pay. It is better for all concerned to pay in money and to allow the receiver to expend the money for the things he may desire. We use money as a common de- nominator just as, in arithmetic or algebra, if we are going to w^ork in fractions, it is most convenient to reduce these fractions to a com- mon denominator. 2. But what things we can get with our money, and not the money itself, is the impor- tant matter. People could g^et on ^ ^ ° Things and not without money, making their ex- money the im- 1 . , 1 1 j^i Til portant faoti changes w^itli each other directly by trade or barter, though doubtless this would be inconvenient. So people in ancient times used cattle as money, the Indians in early colo- nial days used beads or wampum, the Virginia colonists tobacco, and even of late years in 4 ELEMENTARY ECONOMICS some parts of the South, twists of perique tobacco have served as the medium of exchange. The use by children of pins in their small com- merce of store-keeping is a familiar fact. How much any people can have to eat and wear and enjoy — its share in the good things of life — must depend upon how much is pro- duced. Consumption is limited by production. It is a question of factories, and herds, and crops, and not of money. Money is the meas- ure — the common denominator of value — the medium of exchanging goods between men — and not the cause or the basis or the test of well-being. Doubling the amount of money in a country would not double the production of the fields and factories, or the strength and skill of human beings. All these would remain as they were before. Each of us would like to have his own money doubled, just as each of us- would like an increased number of orders or of coupon books upon the grocer or dry-goods man. But increasing the coupon books would not increase the amount of goods which the grocer or dry-goods man has in his shop. In- creasing the money does not increase the com- modities. The aggregate production is the essential fact in any society. Who has the SCOPE OF THE SCIENCE 5 orders or coupons for it — the money — is a question of who gets most in the division or distribution of the goods produced. We there- fore call the aggregate production of a nation or of a society the national or social dividend. The average of consumption is found by divid- ing the aggregate production by the number of shares in it; that is to say, by the population. Average consumption is of the nature of a quotient. Thus we see that those nations which used to make great efforts to acquire and keep in the country money or jewels and precious stones, were mistaking the symbol for the substance. It is as if a nation should regard itself as rich in proportion to its yardsticks or coupon books, or as if a farmer were to estimate his crop by the number of wagons he had in which to carry it to market. To say that the love of money is the root of all evil is a conveniently short but inaccurate method of expressing a great truth. Love of money is Cupidity in some of its forms is love of wealth. the root of endless evil ; but people want not money, — they want the things which money will buy. Only people with diseased brains care for money as a thing in itself. When we 6 ELEMENTARY ECONOMICS speak of the love of money, Ave use a sort of shorthand expression for the love of the things in life which are bought and sold. Money is the general form in which desires express themselves and temptations present themselves. But human needs and desires are the source of all well-doing, equally with all ill. If we wanted nothing we should do nothing. The evil is in the improper direction and insuffi- cient restraint of desires. Money is helpful because it enables us easily and conveniently to make exchanges of goods. Barter would be inconvenient and impracticable. 3. This brings us to the difference in mean- ing between the terms "value" and "price." Value and This difference is important in ^"^®' Political Economy, though it is not always observed in common speech. When, in the technical use, we speak of the value of the thing, we mean what it is worth of other things ; when we speak of the price, we mean its value measured in terms of money. Thus a horse may be worth two cows, a cow five sheep. Put in terms of price, we should say that the horse was worth, for example, fifty dollars, the cow twenty-five dollars, and the sheep five dollars each. SCOPE OF THE SCIENCE 7 4. Political Economy is, in a general way, an investigation of the manner in which men think and act in the business affairs political Econ- of life, — a study of their activity omy defined, as related to the things Avhich are bought and sold. Thus we are set to inquire about farms and crops, factories, stores, railroads, banks, wages, interest, rents, values, and prices, and the countless facts and influences bearing upon matters of this sort. Political Economy is not merely the tariff question or the money ques- tion, as many beginners are apt to believe, but a great deal more than this, and much of it of a great deal higher importance. Perhaps the fol- lowing will answer as a fairly accurate statement of the scope of our subject : Political Economy treats of men in their coinmercial and industrial activities from the standpoint of markets and values, SUGGESTIVE QUESTIONS Define, as far as you now can, the terms " value " and " price." If things were all doubled in price, what effect would this have on values ? Mention some relations of Chemistry to Medicine. Of Mathematics to Physics. Ot' Geology to Zoology. From the point of view of how many sciences can you discuss a stick of wood ? CHAPTER II MAN AND ENVIRONMENT Why is the polar bear white ? Why are many snakes striped? Why are some forms of life able to change in color to fit the color of the background ? Why have northern animals heavy coats of fur ? As far as we can see, is the world adapted to the forms of life upon it, or are the forms of life adapted to the world? Illustrate your answer from Botany and Zoology. What becomes of such forms of life as fail of adapta- tion ? What of the forms best adapted ? What is the " struggle for life " ? What influences limit or tend to limit the numbers of buffalo, trout, flies, rats, squirrels, men ? Are similar influences at work in the vegetable world ? How? The cultivated strawberry set in the field reverts to the type of the wild berry. Why? What influence would bring it back to the garden type? Why? Explain the fact that orchard apples have much pulp. Of what utility is the pulp to the wild apple ? Mention some kinds of seeds distributed by animals. How may color help toward distribution? What is Natural Selection ? What is Artificial Selection ? MAN AND ENVIRONMENT 9 What is Correspondence to Environment? Why are tropical races dark? Northern races vigor- ous and industrious ? Mention such different elements of success in life as you can. On what does the raising of a good crop depend ? Has a good chance in life much to do with success? Why not raise bananas in Canada? Could Shakspeare's plays have been written in the Sioux language? Thought out in a Sioux civilization? Are there any millionaires in Greenland? Why? Where are they found ? Why ? Is an opportunity to get a good education to be re- garded as part of yourself or part of your surroundings ? When you have obtained the education, which is it? Mention such necessary conditions as you can to the prosperity of a great silk factory. Apportion these elements into two classes, (1) those which are human in their character, (2) those which are not. Apportion these elements into, (1) those which pertain to the owner, (2) those which pertain to his surroundings and opportunities. Describe the social conditions necessary to the exist- ence of a great silk factory in (a) public tastes, (h) trans- portation, (c) machinery and mechanical skill, (<:/) motive power, (e) social security and morality, (/) laws, (g) in- ternational relations. 5. Polar bears are found to be white ; snakes which live in the grass are green Adaptation to . . 1 p !•'• • environment — or striped; races of men living in ^,^,,^^i,^, hot climates are generally dark, portunity. We say that these things are due to the condi- 10 ELEMENTARY ECONOMICS tions in which these different orders of animal life have lived. Bees taken to a climate of continual summer are said to lose their habit of accumulating honey. The fish in Mam- moth Cave are without eyes. Not only in animal life, but in vegetable life as well, similar facts are observed. Large trees grow in fertile soil and fostering climate, the finest vegetables in rich and well-tilled gardens. On the other hand, the cultivated plant set in the poor soil of the field to make its way against grass and weeds reverts to the type of its wild ancestor. Botany and Zoology should already have taught the student this great law of adaptation in its two aspects of correspondence to environ- ment and of survival of the fittest. Lack of correspondence means disadvantage in the struggle for growth and life. This principle holds for man as well as for the lower orders. Human life and human society must be studied with constant attention to the conditions which surround and limit activity and development. Individual success in the contests of social life is not purely a question of pluck and brain; something must be allowed for education and opportunity. Good legs and a fair field are MAN AND ENVIRONMENT 11 both needed for fast running. So in economic relations both actor and opportunity require examination. 6. Thus the human race in its relations to its environment, and the individual of the race in his relations to an environment n 1 • 1 , 1 , 1 1 CI- Man is a force. 01 which the other members oi his race are themselves a part, are the subject matter of all economic and social study. Man, as one term of the science, is regarded as stand- ing over against an outside world of fact and circumstance. He is neither entirely the mas- ter of his fate, nor yet entirely the puppet of the forces by which he is surrounded. He is himself a force, a centre of energy and activity. He is one of the facts in the complex interplay of human with natural energies. If he re- ceives, he gives; if his environment rains its influences upon him, he puts forth his own efforts in adapting self to environment or en- vironment to self. He strives and resists and reacts. George Eliot has put the case help- fully, when, in supplement to the half-truth " Our deeds are fetters which we forge our- selves," she adds, "Aye, but I think it is the world that brings the iron." The history of human development is the story of what cir- 12 ELEMENTARY ECONOMICS cumstance has done for man and man for cir- cumstance — the play of outside forces upon him and his reactions thereupon. There are thus two forces in the problem of history, — man and nature. The resultant is the direc- tion of human development. 7. This is not a difficult notion. As has already been stated, it is merely one aspect of that which men of science call the law of adap- tation or of correspondence to environment. Life, for each one of us, is a question of what there is in us plus what is outside — of our powers and energies in the face of our sur- roundings and opportunities. Give Crusoe his island, what will he do with it? This is in part a question of Crusoe and in part a ques- tion of his island. Likewise for races the problem is on one side a matter of character and capacity, on the other, of surroundings and opportunity. 8. It is unnecessary for the purposes of Political Economy to push the question into an inquiry as to which of these No matter now ^ *^ whicii is pri- two forccs in humau development, if either, is the primary fact and which the derivative. We may, for example, regard coral polyps as a product of the sea; it is MAN AND ENVIRONMENT 13 none the less true that once existing they not merely suffer but work the processes of sea change. It constantly occurs that a result becomes in turn a cause, — as, for example, in Chemistry, where a product of combination or decomposition furnishes a basis for a ncAv series of chemical changes, or in Physics, where in a row of blocks one falls as the result of an impact received, and by delivering its impact causes the next to fall, or again in Chemistry where combustion liberates gases wliich them- selves furnish material for further combustion. Economic science is not, however, greatly concerned with the history of human develop- ment; the main purpose of our discussion is to fix clearly and definitely the first important dis- tinction in economic theory — the division of its subject matter into the two terms of man and environment, the human and the non- human elements in the problem. Taking man as he is in relation to his environment as it exists, Political Economy treats of him in his commercial and industrial activities as viewed from the standpoint of markets and values. 9. The production of wealth by man, so far as it does not rest with the character of the actor himself, must therefore find its expla- 14 ELEMENT AEY ECONOMICS nation in the nature of his environment, — in Production of the elements, in the varying condi- Tn^ci) man^^ ^ tions of temperature, rainfall, sun- (2) opportunity, shiiie, liumicUty, healthfulness, etc. — in the soil, or, more accurately, in the land, its fertility and workability, its mineral re- sources, its convenience for industry Environment. _ . , . and commerce; m the varying sum of natural forces more or less within the control of man, such as winds, tides, electricity, gravi- tation, and steam. This enumeration is of necessity both incomplete and inexact. Clim- ate cannot be definitely distinguished from winds, electricity, and light, nor can natural, forces be treated apart from questions of navi- gation and convenience for commerce. Light, which may be used as a natural force for power or for the purposes of chemistry or art, is, from another point of view, an important factor in the fertility of the soil. But it is important merely to hold in mind that wealth depends upon the correspondence of two factors, — (1) man himself, (2) the conditions surround- ing him. He may, in large measure, modify surrounding conditions. But it will still remain true that the arctic regions and the tropical deserts do not offer favorable oppor- MAN AND ENVIRONMENT 15 tunities for his wealth-producing activities. He may adapt himself in some degree to an unhealthful climate^ But, in some measure, an unhealthful climate must exercise an un- favorable influence on his powers. He may make for himself artificial lines of communi- cation, but rivers, lakes, and seas will retain an economic importance for this purpose. He may exist making small use of the opportuni- ties offered by natural forces, but it will remain true that in these rest the possibility of the greatest efficiency and the largest field for economic progress. 10. Turning to a closer examination of the factor, man, we find wide differences between different races of men, and between jj^n as affected different men of the same race, ty environment. We need not assert that all of these differences are due to environment; clearly enough, how- ever, some of them are. The human race ex- hibits the effects of correspondence otherwise than in color and physical power. Not only have men been profoundly influenced by their surroundings in health, strength, and stature, but also in habits, character, and intelligence. The student need only call to his aid his knowledge of Geography to find this many 16 ELEMENTARY ECONOMICS times verified. Civilization is too difficult a problem in the frigid zones for any race yet fully to have solved it. The problem of mere existence in the tropics is so over-easy as to have degraded man, through stagnation and ignorance, into an incapacity for civilization. 11. The student should now be able to ap- preciate the truth that wherever there is found a high stag-e of civilization, or gfreat How explain . . ' & high and low prosperity, or a high average pro- ^ duction and consumption of wealth, the explanation must always lie in the charac- ter of the people under examination or in the character of the country in which they live. If the people in China have less per capita to con- sume than the people in France, it is because the Chinese produce less per capita than do the French; and the explanation of this must be found in the lower vigor, or skill, or energy, or intelligence, or scientific attainments of the Chinese, or in the unfavorable character of the opportunities in which they live. If Ameri- cans are more prosperous and live better than Europeans, it must be that Americans are better producers, — more active, more inventive, more enterprising, — or that the soil and climate and other natural resources of America offer more MAN AND ENVIRONMENT 17 advantageous opportunities for production. No one has great difficulty in understanding this principle as illustrated in the affairs of everyday life. Long ago it was remarked that not even the most skilful workman could make bricks without straw. Bad tools place the heat of mechanics at disadvantage. Men do not gather grapes of thorns or figs of thistles. It takes more than a good farmer alone, or than a good farm "alone, to make a good crop; this needs both farm and farmer. Only opportunity improved is success. 12. It is obviously true that the producing powers of men are, in large measure, matters of physical strength and endurance. Man in energy Perhaps an equal measure of im- *°^ ®ff°^*' portance should be ascribed to agility and intensity of effort. The German economist, Wilhelm Roscher, writes in this regard: — "According to the reports of English manufacturers an English workman produces on an average almost twice as much as a Frenchman ; the latter in turn more than an Irishman. An English wage-earner who had worked in a French factory speaking before the Parliamentary Committee gave his opinion of the French as follows : It cannot be called work they do ; it is only looking at it and wishing it done. Thus, for example, a good English spin- ner with an eight-hundred spindle machine could produce c 18 ELEMENTARY ECONOMICS daily sixty-six pounds of yarn ; a Frenchman only forty- eight pounds. . . . The report of an Agricultural-interest Commission places the North American workman above the English in good conduct, fidelity, and interest. A Berlin woodcutter accomplishes as much in ten days as an East Prussian in twenty-seven days. (Hoffman.) English planters on the Hellespont prefer to pay Greek laborers ten pounds sterling a year and their keep rather than Turkish laborers three pounds. So the Malay field- laborer gets two and a half dollars per month, the Mala- bar four, the Chinese six." Perhaps equally important in production are the distinctively moral qualities of men, and the social and moral conditions in which they live and for which they are largely responsible. Under modern conditions every corner of the world does business with almost every other. Business affairs are complex, of Moral qualities! enormous magnitude, and highly centralized. Great factories, employing thou- sands of men, sell goods all over the world. Their force of officers, clerks, and agents is necessarily large. The system of buying and selling on credit is widespread. Business must therefore be largely done on terms of trust and confidence. A high moral develop- ment in certain directions is essential to the success of this system, and any society lacking in this respect must suffer thereby. Not only MAN AND ENVIRONMENT 19 tliis, but under present conditions most men must be wage-earners serving under employers. The productive effectiveness of society must therefore largely depend upon the good faith of the employees. No advanced society can reach its highest possibilities in production if men are not free to work for their own benefit and, if they so desire, under their own direction. Labor must be voluntary or it will not be vigorous and care-taking. Slavery or any other form of severing reward from effort, weakens the springs of motive, while at the same time relaxing the energy of those who wrongly profit thereby. Feudalism in the middle ages suffered by this defect. Likewise, no society which, through disorder, crime, war, or over-taxation, unsettles the con- nection between industry and rcAvard, can fail of enfeebling its productive forces. Security of life, property, and invest- ment is essential to high economic efficiency. Again, in no society in which people lack in forethought for the future will work go on, un- less under stress of immediate need. mi 1 -T • 11 Forethought. ihe ability to wait, to see aliead, and to provide for the far-off want, drains the 20 ELEMENT AET ECONOMICS land, clears the forests, plans the machinery, builds the railroads, and constructs the fac- tories. But most important among the characteristics of man as producer are his intellectual powers and acquirements. If we compare Intellectual powers and modern industrial processes with the acquirements. xi i .c • j. j.- ^- ^ methods oi ancient times, we get some notion of the importance of science and art in production. Especially in the world of economics is it true that knowledge is power. The savage made an enormous step forward when he acquired the knowledge of the bow and rod. Tools increase by many fold the effec- tiveness of human energies. But when, by the use of machinery, man has harnessed to his aid the forces of nature, the field of progress is in- finitely widened. By spindle and loom he mul- tiplies his product by hundreds. Steam and electricity, the printing press, the cotton gin, and the countless contrivances which make of every county fair a collection of marvels, and of every world's exposition a display of miracles — these are the fruits of that civilization into which each one of us is born as to a free heri- tage. And remember that behind the art and the skill in all these processes and methods, MAN AND ENVIBONMENT 21 there is a world of pure science. No one has grown more grain than the chemist. The dif- ficult problems of industry are wrought out in the laboratory of the specialist. The investiga- tors and the inventors have revolutionized the opinions and the organization of the modern world. The ruling forces of civilized life are the intellectual forces. The moral code of eighteen hundred years ago left, indeed, not much to be added. Laws, governments, insti- tutions, science, art, invention, and discovery, — these are the facts which measure the dis- tance between civilization and savager}^ In these directions the progress of mankind is seemingly without limit. SUGGESTIVE QUESTIONS To what zones is civilization mostly confined ? Why ? Where did it originate? Why? In which direction, north or south, has it moved? Why? What physical reasons do you find for the lead which western Europe has taken in civilization ? What is the trouble with the polar regions in this re- gard? With the tropics? In (a) human needs, (b) ease of satisfaction? What determines the character of industries in Can- ada ? In Colorado ? In the Southern States ? What natural resources have made England the lead- ing manufacturing country of the world? 22 ELEMENTABT ECONOMICS Explain by natural advantages England's commercial and maritime supremacy. In what sense was the American Eebellion a question of climate? CHAPTER III UTILITY AND WEALTH Can matter be destroyed ? Or created ? How about force ? What is the Liw of the conservation of energy? What do we mean when we say that coal has been produced ? What change is wrought by combustion ? By decay? By digestion ? In what respects do human needs coincide with the needs of the brute creation ? In what respects are there differences ? Do brute needs expand greatly in scope or intensity? Why do men produce wealth ? Do you think of any attribute common to all things which are desirable? If you had ten dollars to spend what would you do with it? Would you probably buy one thing or several? AMiich thing would you choose if you had the money to buy but one ? Are things of unvarying desirability to all men ? Of all nations ? In all seasons? In all ages? Give exam- ples. What conditions must exist (a) as to men, (b) as to the thing, in order that it be useful ? Books are not useful to savages. Why? But are useful to civilized men. Why ? 23 24 ELEMENTARY ECONOMICS Is this a material diiference? Is usefulness a quality or a relation ? Why ? What are the two terms in the relation ? What is matter? AVhat is it made of? What is an atom ? How do you know that there are any? 13. The French economist, Gide, neatly ob- serves that " The concern of the economist is Desires and ^^i^^^ ^^^^ ^ants of men, — of the utility. lawyer, with his rights, — of the moralist, with his duties." Man is a creature of needs and desires. Primarily, and as a con- dition to his mere existence, he requires food, commonly also clothing and shelter. He has appetites for art, music, philosoj^hy, cigars, and vice. He desires comforts and luxuries, pro- tection from the violence of nature, from the Avrongs of men, and from the attacks of beasts and microbes. He wants his steak broiled and his clothes brushed. He likes to be preached to and sung to. He wants books and boats and race-horses, laces, parks, theatres, and eye- glasses, chairs, balloons, railroads, panoramas, fortune-tellers, phrenologists, and humbugs. In a secondary way he wants the machines and inventions and tools and processes by which his primary wants are helped towards satisfaction. Look at the price-currents, the tariff schedules, UTILITY AND WEALTH 26 the inventories of stocks in trade, or the adver- tising pages of the daily paper, and you get some notion of his manifold desires. He Avants also love and pity and respect and place, and sometimes these also are bought and sold upon the market. All these things he wants because they minister to his desires — that is to say, because they are, in his opinion, useful to him. The one characteristic common to all objects of human desire is this quality of service to a human requirement. This attribute of service- abilit}^ the economists term utility. That is, the term utility is used in economics to mean desirability in relation to a person who desires. The thing or fact possessing this attribute of utility is called a good. Wealth includes all material goods that have value. 14. Note that the commendable character of the desire in question or the good sense of its satisfaction is not suggested in the utility is not a economic use of the word utility, moral auestion. Men put forth effort and undergo privation for the possession of whiskey, cigars, and burglars' jimmies, as well as for food, or statuary, or har- vest machinery. As long as men are influenced by evil purposes, or by ignorance, to buy and sell foolishness and evil, so long the student 26 ELEMENT ABY ECONOMICS must recognise these desires as economic facts, and the commodities as of market standing. Whether we like it or not, utility, as an economic term, means merely adaptability to human desires. 15. To produce is not to create. So far as we know, neither matter nor force can be created or destroyed. The law of the con- Men do not create but servation of energy appears to be rearrange. ^^ universal validity. Waste and decay are the mere breaking apart of matter — the taking on of new forms — the undergoing of new distributions. Motion may be changed to heat, heat to electricity, but the equivalence is constant if all wastes and leakages are al- lowed for. Economic production is the putting of things into places, combinations, or times so that the things take on or increase their usefulness — that is to say, acquire fitness for satisfying human needs and desires. The growing of wheat, for example, is merely a process of se- lecting and combining materials already exist- ing in the earth and the air. Dirt may be roughly described as the right thing in the wrong place. A drop of syrup on the floor or on the tablecloth is filth; in a dish it is food. UTILITY AND WEALTH 27 So, to change tlie location of a thing, the mere act of transportation — for example, rais- ing iron from the mines or bringing soda from the plains —is an act of production. Likewise mere preservation may, through lapse of time, serve as production, as in the keeping of ice from winter to summer. 16. Thus to measure wealth in any degree in terms of material existence is misleading. There is no more matter in the There is no ma- Avorld at present than there was a teriai measure thousand years ago ; but matter has ° ^^^ * • been modified so as better to answer human needs. The house which was mere clay or stone, the cloth the material for which was not grown but was in the earth or the air, are now wealth to mankind. Work produces no new matter, no new forces. The applicability of matter and force to human uses does chano-e. The iron in the earth mined, melted, freed from impurities, hammered and fashioned, forms a pocket knife. Nothing has been added to the matter of the earth; something has been added to the wealth. Thus as human needs, desires, and know- ledge expand, there is, by that very fact, room for an increase in wealth. "Of the one hundred 28 ELEMENTARY ECONOMICS and forty thousand species of vegetable life we How wealth in- ^^^^ o^^lj ^^^^^ hundred of sufficient creases. value to Cultivate ; and of the thou- sands of species in the animal kingdom we make use of but about two hundred " (De Candolle). 17. Wealth therefore develops along two lines: (1) by changes which man impresses upon the outside world in making it more fit for his uses ; (2) by changes in man himself — in strength, in knowledge, in desires — by which he becomes better able to make use of the outside world. Pianos could not be wealth in a society lacking musical tastes, or books wealth to savages. That a mineral becomes wealth presupposes a human use to which it may be put, an ability to mine the mineral, and a knowledge to adapt it to use. It is this capacity of service, this attribute of utility, which marks all objects of desire and brings them within the broad classification called ^6>(?c?s. 18. There are, however, goods which are „ . commonly termed not wealth but How services •^ differ from scrviccs. A book is Wealth, or a sheet of music, or a piano. These afford us pleasure or advantage. They may be pre- served, handled, possessed. That is to say, they are fixed and embodied in matter. But UTILITY AND WEALTH 29 we are equally and as truly served by the advice of the physician, by the efforts of the singer or the actor, >by orators, preachers, and teachers. These goods, which are termed by the economists services, are very important facts in life, and furnish the occasion for a large share of our expenditures. On the street car or the railroad we pay for being carried. The policeman, the judge, and the lawyer supply us, in securit}^, direction, and advice, with things we acutely need. From house- hold servants we purchase attention, care, and attendance. In truth, it is sometimes hard to draw the line between services and commodi- ties. We eat the. broiling of our steak as truly as our steak. Thus the performance of a ser- vice must be accounted an act of production, since it is the creation of utility. SUGGESTIVE QUESTIONS What do you mean by intrinsic or extrinsic utility? Intrinsic or extrinsic value ? Are charms and relics now greatly prized? Have they changed their intrinsic qualities? Are color and taste intrinsic qualities? Did Niagara roar before there were ears? What is sound ? Is heat a quality of an outside thing, or a mere effect upon the senses? 30 ELEMENTARY ECONOMICS Is the difference hi vahie between winter and summer ice an intrinsic or an extrinsic matter ? Why not call singing wealth ? or acting ? or preaching ? A dog has been trained to guard sheep; is this an increase in wealth? Is it a material or an immaterial increase ? Is the ability to sing wealth? Define services. UTILITY AND WEALTH {Continued) Is food wealth ? Is the strength which comes from it wealth ? Is medicine wealth ? Accurately speaking, can any one's face be his fortune ? Suppose that A devotes a year to clearing the land for a farm ; B to constructing a locomotive ; C to perfecting an invention ; D to the study of a profession ; which of these are cases of wealth-production ? Are intellectual acquirements wealth ? Is health wealth ? Eyesight? A good voice? Strong muscles? Inherited character? Our digestive apparatus? Our bodies ? Our minds ? 19. A distinction must be made between those things in the outside world which are Man, and things useful to man and those things outside man. -which, in the last analysis, are a part of man himself. Breadi for example, is clearly enough an outside good, an external thing adapted to human needs. How after it is eaten? We say that it has been consumed. UTILITY AND WEALTH 31 It no longer exists as bread. Its service has been rendered in maintenance of life or increase of strength. But how shall we regard this re- sult, this strength? In the primary division of economic facts into man and environment, does bread fall into one classification and strenofth into another? The thing was bread; it is now life or strength. Is it now something possessed by man, or is it a part of man himself? Is it subject or object, possessor or possessed, man or environment ? Man is the beginning and the end of produc- tive effort. The creation of utility is purposed by him for his consumption. He puts forth effort that he may enjoy its rewards. The economic cycle begins and ends in him. He works that he may live. He is the producer and not the thing produced. The more strength the better producer — later Only the outside the larger product ; but the strength things are goods , 1 J. o it, "J- or wealthi IS not product, bo the mixtures prepared by the chemist, and the doctor's com- poundings of medicinal gums, fall Avithin the class goods, while my good health to resist contagion and your good sense to avoid it are ranked as human attributes. Note, however, that while the knowledge 32 ELEMENTARY ECONOMICS which avoids disease is a human attribute and is not wealth, the outside fact from which this knowledge is obtained, the book, or the advice of the physician, is either wealth or service. The mental power of the physician, his know- ledge, however, is not wealth ; it is the source of his ability to do a useful thing, to speak a word or write a prescription which shall be of advantage to another human being. This knowledge is a part of the physician's equip- ment for the production of utility. When this equipment shall come to service the result will be a good. As equipment, however, it is not utility or good but physician. QUESTIONS Define utility. Why is not knowledge wealth ? Are all outside goods wealth ? How about services ? What is the line of distinction ? THE FACTORS IN PRODUCTION In what respects lias man changed his environment to suit his purposes? Give instances. What things would you need when going into wheat raising? Into piano making? What different reasons might one have for saving money ? What for hiring money? What for hiring land ? 20. Suppose that there is a demand for some commodity, fish, for example. Given this de- sire for fish as motive force, we have . Are man and now to inquire Avhat other condi- opportunity tions are essential to obtaining the commodity. In the simplest possible case two facts must concur, — there must be a fisher and a place for fishing, — man and environment. But ordinarily something more than the primitive environment is necessary; in most cases of production some sort of tools or appli- ances must be had. Suppose it to be raw cot- ton that one wants to produce. There must at D 33 34 ELEMENTARY ECONOMICS least be seed ; there ought to be various appli- ances to be used in the process of cultivation. But now suppose that the cotton is intended to be made into cloth. In this case there must certainly be more than worker and opportunity to work ; there must also be something to work with. Mankind has a world in which to live and work, land to cultivate, streams to make his wheels turn, water to convert into steam, and coal with which to convert it. But something more is needed. Even the primitive fisherman finds it desirable — often indeed necessary — to have poles, lines, and nets. Farming would not greatly prosper with nothing for the case but a farmer and the natural opportunity. The farmer needs tools and machinery; he must do some "getting ready " or some one must have done it for him. The weaver requires still other and more complicated appliances. At least he must have his hand spinning-wheel and his loom. His work gains enormously in effectiveness when he is able to work in a factoiy with great power engines to help him, and with the spindle and loom of modern industry. 21. Between man and nature there is, then, THE FACTOBS IN PRODUCTION 35 a kind of intermediate term, that which we call capital. The things which are Tools and ma- called capital are not, a part of man, chinery capital, they are a part of his surroundings, and yet differ from land or nature in this, that they are the result of man's activity; they are an addi- tion to the original condition or opportunity. Ultimately speaking, capital is nothing but stored-up labor. ^ When one wishes to bring about some particular result, it is often best to take a roundabout method. If, for example, a man intends to dig up stones, it may be best, if he has much of it to do, first to make a lever or crowbar with which to apply his strength or multiply its effectiveness. If he intends to raise wheat he will ordinarily find it best first to adapt his land to his purposes by clearing, ploughing, and manuring, or by improving it in some other way, or by obtaining work-animals to aid him in his task. This labor of preparation 1 The student is not to regard this statement as a definition, but as an account of the origin of capital. A machine is a typi- cal example of capital. Ordinarily a machine is produced in some measure by the aid of machinery already existing — that is by capital. So again, the wood work of the machine was pro- duced by the land. But it is none the less true that, traced far enough back, all that which is not due to the original environ- ment is due to the effort which has been applied to that environ- ment. Strictly defined, capital is all wealth, other than land, used to aid in the production of wealth. * 36 ELEMENTARY ECONOMICS is sometimes enormous, as when the giant factory is erected, with all the machinery and appliances which it contains ; or when, instead of carrying things upon the back, men build costly roads and bridges, rear beasts of burden, and construct wagons and drays ; or, going still further, construct great railroad or electric sys- tems with all their costly and intricate arrange- ments of tracks, cars, locomotives, and stations. All these extensive preparations for production are really the same thing as the loom or the plough : they are savers or multipliers of human power. We call them labor-saving appliances ; they are forms of capital. Thus within his environment man thinks and acts, works, manages, and contrives. He has his own energies to work with, land and nature to work through and upon ; with the help of these he fashions and prepares his different appliances which we call capital. r man.. Factors in production -i ~~~~ ( capital. [ environment ] [ land. 22. The advantages derived from machinery in production are commonly due to the fact that the machine brings into more effective co-opera- THE FACTORS IN PRODUCTION 37 tion with man the forces of nature. This truth is expressed clearly in the familiar distinction between hand-labor and advantages of machine-labor. It is probable, how- °^^° ^°^^^^ ever, that we fail to realize to the full the wonderful possibilities and meaning of ma- chinery for mankind and human civilization. The trip-hammer and the pile-driver strike the blows of gravity. Water power is the pressure of gravity harnessed to the service of men. Niagara is about to turn the wheels of industiy for half the cities of the East. The tides and the winds are not yet fully tamed to our uses, but long ago were discovered the treasures of power where the sun has stored up its heat in the deposits of coal. We may yet learn to gather the energy of heat rays directly, as we are now rapidly finding out how to turn to our service the pulse and throb of electric energy. But even ages ago the farmer had learned to plant his seed and wait for the sun and the rain to mature the harvest, while the wind was set to pump the water and grind the corn. SUGGESTIVE QUESTIONS Mention some of the great inventions. Show whether they have benefited mankind and how. 38 ELEMENTARY ECONOMICS Mention cases in which scientific knowledge has modi- fied the processes of production. What effect does machinery have on the aggregate social product (social dividend) ? On average consump- tion of goods ? Does capital help the borrower? How? Society? How? Does the land produce the crop ? Does man produce the crop ? Has capital any share in it ? WAGES, PROFITS, RENTS, AND INTEREST DEFINED Does the wage-earner in the factory produce the cloth ? Who else help ? How about the designer of the patterns ? The chem- ist who compounds the dyes? The investigator who worked out the formulas? The capitalist who furnishes the machines? The office-clerk who keeps the books? The foreman who oversees ? The owner who directs ? Who produced the building? Who produced the food for the carpenters and the masons while they worked ? Who paid for the food? Where did he get the where- with to pay ? Why does the owner want men to work for him ? Why should not the men prefer to do something else? Why does the owner consent to pay interest ? Would you call interest received on a note profit? Rent of a house ? A dividend on bank stock ? Salary received and spent ? Salary received and put by? Wages received and spent ? Wages received and put by? WAGES, PROFITS, RENTS, INTEREST 39 * 23. It is commonly true that useful things are produced by the union, in varying pro- portions, of the different productive agents. Often, however, it is true that the capital be- longs to one man and the land to another. It is often true, also, that one man hires other men to work for him. Suppose, for exam- pie, that you start a market garden, co-operate in renting land, borrowing your tools, P^^^uctioii? or the money with which to buy them, and hir- ing a man and a boy to work for you. You must pay to the landowner something for the use of his land, — to the man Avho supplies the tools something for his capital, — to your employees something for their Avork. What is left after your different expenses are covered goes to you as the reward of your individual effort — your thinking, your planning, and your risk. These different compensations are given dis- tinctive names in Political Economy. Your own reward is profit. Your laborers' reward is wages. The landowner's reward is rent. The capitalist's reward is interest. r wages, man, remunerated in i [ profits. Productive agents {capital — in interest, land — in rent. 40 ELEMENTARY ECONOMICS 24. There is room for confusion with regard to this term profit. The word is used in ordinary affairs with per- plexing indefiniteness. One man means by Necessary to profit that surplus Avhich remains use t^e word ^^ j.^^^ after charging, against the lately. gross gain, interest and rent and a fair compensation for his own services. Another, a storekeeper, owning his own store- building worth $5000 and carrying a stock of goods worth $10,000, makes a gross gain per year on his sales of $4000. This 14000 is merely the difference between the cost price and the selling price of the goods he has sold. It is not unusual to find this whole $4000 included in the term profit. A second mer- chant would insist upon deducting interest on the capital invested in land and stock, say $900, and would regard the residue of $3100 as profit. Another would deduct also the value of his own time and effort^ say $1500, and would allow but $1600 to stand for profit. Yet another would look at his inventory of wealth at the end of the year as compared with the beginning, and would regard as profit whatever increase had been made, treating his living expenses as part of his expenses of business, WAGES, PROFITS, RENTS, INTEREST 41 Were one to ask a real estate speculator what profit he had made upon a lot costing him flOOO which he had held foT one year and sold for 11500, he would answer either |500 or |500 minus interest, and if asked Avhat he had done with the profit, he would have no hesitation in replying that he had used it in his living ex- penses, nor would it ever occur to him in fixing his profit to deduct the wages of his own super- intendence. His business is to make profits and to live off them as a wage-earner lives off his wages. So with the trader in grain or live stock. And in no one of all these cases would it ordinarily occur to charge up anything for risk of loss. Crusoe, if asked at the close of his harvest season what the season's work had profited him, or what wages he had made, would probably interpret the question as an inquiry into the effectiveness of his season's labor after deduct- ing his outlays of seed and the wear and tear of his primitive appliances. If he could have done better on another piece of land, or with a different crop, he would not find it unnatural to say that another course would have been more profitable. In this sense evidently all produc- tive effort is profitable as compared with idle- 42 ELEMENTARY ECONOMICS ness. Different lines of prodnction are only relatively, never absolutely, unprofitable as long as anything remains above expenditure. 25. The sense in Avhich the term is used in this Crusoe illustration, is the economic sense extended and developed to Profit may 1)8 absolute or ^pply to the complex relations of re ative. ^j^^ business world. In this view profit is one form of remuneration for labor — for human effort. The existing industrial system is a competi- tive system organized upon lines of division of labor and exchange. Social life adds important factors to the Crusoe problem. Division of labor becomes possible only on terms of possible exchange of products. We will suppose, for illustration, that a man needs or desires ten different sorts of commodities which he may, if he will, produce for himself. If he finds that by producing some few or one of these com- modities in large quantities, and obtaining the others of the ten by exchanging for them some portion of his product, he can thereby obtain in the aggregate a greater sum of satisfactions than by the other method of direct production, he will make use of the opportunities afforded by exchange. In this he simply follows the WAGES, PROFITS, RENTS, INTEREST 43 prospect of the greater profit, and if tlie out- come justifies his expectation his labor is rehi- tively profitable. EVen if the outcome is disappointing, his labor may be absolutely profitable. The further development in the exchange system by Avliich the producer employs not only his own activities, but the activities of others, — immediately in the form of services, or remotely in the form of commodities, — does not involve any essential modification in the nature of profit. 26. Profit is perhaps best regarded as one form of the remuneration of labor, and as essen- tially in strict parallel with wages. Distinguished Had usage so decreed, the two terms ^^^^ wages. might well have been merged in the one term ivages^ But as the terms are established in use, profit points to remuneration without the inter- 1 The student should be warned that the economists do not agree in the definition of the term profit. The earlier econo- mists considered it to include interest and pay for risk as well as pay for time and care. It is now more commonly thought that the returns on capital, as such, should be excluded, being covered by the term interest; though it is not always easy in practical business to separate interest from profit. Accurately the term profit seems to mean the wages of him who takes the risk — on whose wealth or credit the hazards of the business rest, and to whom the gains of good management or good fortune are to go. If the profit maker is a borrower or an employer, he guarantees fixed sums in interest and wages. 44 ELE31ENTABY ECONOMICS vention of an employer, — wliere the laborer is himself the projector (imprenditor, undertaker, entrepreneur, Unternehmer) of the enterprise. Wages indicate the intervention of an employer. Profit may be conceived as a form of wages re- ceived from society as employer. Rightly con- sidered, all individual workmen, other than wage-earners, are imprenditors. That enter- prise promises to be relatively profitable which affords the prospect of a better return to the imprenditor than with equal sacrifice he ma}^ Lenders and wage-earners have no care of the outcome of the business. The real difficulty is in what to do with this risk share of profit-maker's return. If men take chances of loss, they naturally look for the greater gain, if the enterprise succeeds. Is this gain a part of profit or something outside? In practical business it is hard to separate this risk share from the rest, just as it is hard to divide interest into payment for the use of wealth and payment for the risk of not getting it back — that is, into pure or net interest and risk interest. The best way on the whole, it seems, is to divide gross profit into pure profit and risk profit. The objection to this is that, just as when one lends his capi- tal, he charges something extra for risk and calls it interest, so when he puts his own capital at risk in his own business, it seems by analogy that he should reckon his risk-gain as part of his interest on his invested capital. Particularly is this a tak- ing view when we recall that the losses of any enterprise must really be paid out of the operator's wealth. Profit-makers pay losses, when losses come, in their capacity of wealth owners and not of mere operators. From any point of view the risk question is an awkward thing to handle ; but as we shall use the word, pure profit is merely an aspect of wages. This use seems desirable as follow- ing out the distinction between man and environment. WAGES, PROFITS, RENTS, INTEREST 45 reasonably expect in another line of activity. And if no line of activit}^ promises profit, as compared with wage-eUrning or with produc- tion for direct personal consumption, the im- prenditor can, without sacrifice, betake himself to one of these courses. 27. In the present form of social organiza- tion, that life which excludes exchange and any form of industrial interdependence with one's fellows, is practically out of the question. We may therefore safely consider that some one of the different forms of wage-earning furnishes for each man that form of activity from which the comparative profit of any other activity is to be estimated, and to which, meet- ing elsewhere with unsatisfactory rewards, he may betake himself as a last resort. From this point of view, the intimate asso- ciation of Avages, profits, and interest becomes manifest. If wages are anywhere found to be high, profits may also be expected to be high, — in any event as high as wages, — since otherwise employers and self-directed laborers would tend to become wage-earners. Also where labor is productive of large results in goods, capital, which is an indirect application of labor to like ends, may normally be expected 46 ELEMENTARY ECONOMICS to be highly productive of goods, and therefore to command a high rate of interest. SUGGESTIVE QUESTIONS Does nature produce anything? Does it produce every- thing ? Is man a producer ? What do you call his productive activity ? Is labor the only productive thing? In what different forms is labor remunerated? What aids does man have in production? Does he consume immediately all that he produces? Why not? What do you call that part of this residne which is used as an aid in production ? What do you call its compensation? Is a lawyer a producer? A minister? A cook? A factory hand? The employer of a factory hand ? A school teacher ? What do you call their respective remunerations ? A farmer has a farm worth $1000, machinery and stock worth $1000, hires a man at $300 per year, works himself, gets $1000 worth of crop. Apportion this into wages, interest, rent, and profits. A carpenter takes the contract for the carpenter work on a building at $1000, works six months himself and pays his men $800. It cost him $300 to live during the six months. He might have worked by the day, receiving $400 in wages. What is his profit ? Is it possible to have absolute profit and relative loss? " Every misery that we miss is a new blessing ; there- fore let us be thankful." (Isaac Walton.) Criticise this doctrine. CHAPTER V VALUE If employees insist upon wages more than equalling the market price of their product, what will the employers probably do ? If wages, together with interest and other outlays, leave no balance for profit, what result is probable ? What motives would induce you to hire laborers at the ruling rates of wages, or to borrow money at the ruling rates of interest ? Is labor valuable in itself ? What fact gives it value ? Does this reasoning apply equally to capital and in- terest? To land and rent? How? Why do some producers stop producing when prices faU? What do they do then? What commonly fixes the price which the country storekeeper pays for eggs ? When one hires laborers, borrows capital, or rents land, on what basis is it decided how much he shall employ of any one of these? Why raise beef instead of mutton, or wheat instead of flax? 28. When you hire land, employ laborers, and borrow capital for the purpose of raising garden "truck," your payments of rent, wages, 47 48 ELEMENT ABY ECONOMICS and interest are made or promised in antici- pation of the products which you sell. The „ , ,. , amounts which you Avill consent to delation be- -^ tween selling pay in the total must fall inside the price and wages, ^ • ■, rent, and inter- amount which you expect to reccivc ®^*' from the sale -of your product. What you have left above your outlays is your own pay, or, in technical language, your profit. If by your own estimate you could have done better in some business other than market gar- dening, you would not have tried this line of production. Thus your products must be ex- pected to cover not only your total expense, but as well an indemnity to yourself for not having done something else. There is, then, in all cases of production the question of what men — capitalists, landlords, wage-earners, and employers — are to share in the result, and in what proportion. What fixes how much you shall pay in wages to your laborers in order to get their aid in your under- taking? What determines in what measure the landlord or the tool-owner is to share in the product toward Avhich each has contributed? In a general way of course you pay as much as you must ; they make you pay as much as they can. But how much? VALUE 49 What you can at the outside pay depends of course upon what you receive for the product. It is time then to analyze the processes by which market prices and values are fixed. 29. In most lines of production men know, before they produce a thing, pretty nearly what they can sell it for after it is pro- Outlays are 1 J rnpi , mil '.1 made in autici- duced. The stores are filled with p^ti^^^fg^Ui^^g goods and there is every day a fairly P^^^®- definite price for them. These prices change somewhat, but not ordinarily very widely or very rapidly. We all know in a general Avay about how much most things are worth. Even with such things as crops, people know months or seasons ahead about what it is reasonable to expect in prices, and each farmer plants accord- ing to his "guess." Taking an average of years, wheat or potatoes or hay will be found to command a fairl}^ definite price. This is a surprising fact, when you come to think of it, that everything has its reasonably definite price to-day, and that we Possible to can count with reasonable certainty ^timates^of upon the prices of the future. At selling prices. all events the future is so far to be depended on that men are willing- to enter this or that line of business, or to undertake this or that line of 60 ELEMENTARY ECONOMICS production, receiving at the end the prices which rule when the product is ready to be sold. The prices which rule to-day mostly furnish the basis for estinmting what the prices will be. One knows approximately what it will cost him to produce a given article. He can tell what he could get for it if it were ready now. He can foresee roughly what he can get for it when, after a few days or months, it shall be read}^ All things are produced for prices as they are or as they are expected to be. If it were otherwise — if there were no basis for hope, no place for reasonable expectation — very little would be produced, for almost all production takes time, and most of the expenses have to be incurred before the product is ready for sale. How much one shall pay per day in wages, what he can afford to invest in machines or lands or buildings or raw materials, how high interest it will do to promise, and how much capital it is worth while to borrow, all of these questions must depend on what the product can be sold for when the producer is ready to market it; and it is only by basing his estimates upon the selling price which is to be, that any man will become renter, borrower, investor, or employer. VALUE 51 30. It is evident that people produce things because there is a demand for them — because they will sell — that -is, will exchange on de- sira,ble terms for other things. One expects to get money for his product and with this money to buy such other products as People produce he needs. Each man produces be- because there is cause he has desires to satisiy, and produces that which will supply the demands of others, expecting thereby to obtain from them the wherewithal to supply his OAvn desires. Desire or demand lies back of all production. The ruling market prices are the expression of the demand as it exists. Thus, if Ave are to understand the forces Avhich lie behind produc- tive effort, if Ave are to comprehend the way in which demand causes and directs production, it is again evident that Ave shall have to under- stand the AA^ay in AAdiich prices are fixed; Ave must study the processes by Avhich market values are determined. SUGGESTIVE QUESTIONS Is the laborer commonly paid out of the A^ery products he has helped to produce ? Is the payment of wages commonly deferred till the sale of the product, so that the laborer gets a share of the very money for wliich his product sells? 62 ELEMENTARY ECONOMICS In what sense is the value of the product the source of I wage, rent, and mterest payments? At the end of the week's or month's work has the em- ployer received his equivalent for the wages paid, even though the product is still in the warehouse ? In what sense is the employer a daily purchaser from his employee ? Trace the parallel between the relation of farmer to egg-raerchaut, and of wage-earner to employer. Is the farmer paid out of the value of his product? In what seuse ? Does any man live out of the value of his product? In what sense? Is this as true of wage-earners as of other persons ? VALUE (continued) Would any system of Political Economy be possible for a man alone on a desert island ? Is there any sense in which Crusoe could be said to buy one thing with another or to exchange things ? Mention Crusoe's probable wants. Which would be the more pressing? What would he set himself to obtain first ? Secondly ? Thirdly? What would determine him to change from first to second? What would be the reason for his working ? Why do men in society work ? Do we live to eat or eat to live ? Do we live to work or work to live ? Why does water sell for less than wine? Iron than gold? Wool than silk? Does a clerk in a candy shop eat much candy? Why? VALUE 53 "Why bring wood or hay to town ? Is this bringing an act of production ? Wliat does it produce ? Is this increase in vakie intrinsic ? 31. It is a commonplace fact that if you are going to sell things at a very high price, you Avill not sell many of them. While , ^ Lower prices bananas are ten cents each, most mean larger people purchase in limited quan- tities. If I am exceedingly hungry for bana- nas I may buy one at this price. As the price falls my desires express themselves in larger numerical volumes. Wliile my wants have not in truth enlarged, there have new conditions arisen in Avhich banana appetites of lower intensity come into play, as one may imagine to himself the gradual subsidence of a lake or sea, and the appearance one after another of reefs, and bars, and islands. It does not follow, however, that with in- creasing plenty and falling price I shall enlarge my consumi)tion without limit. No But there is a matter how cheap bananas get, there limit desires . • J J. 1 • 1 T are satiable. mnst come a point at wnicn 1 shall consume no more. Apples sometimes rot upon the ground or in the cellar, because we liave more than we want. That is to say, use- ful things may exist in such abundance as to 54 ELEMENTARY ECONOMICS have no value; you cannot sell them or even give them away. Water, for example, may be worth nothing — not that any particular amount of water has become less capable of satisfying human needs, but because the supply of water outruns the total need. Some part of the total stock is thus absolutely without utility. This is simply another manner of saying that human desires and needs are not infinite in any par- ticular direction, and this again means simply that needs and desires become less intense with partial satisfaction. One does not ordinarily care as much for a second glass of water as for the first. Were this not true our work could bring us no great good, eating would leave us always hungry, and our wealth would afford us no comfort or content. The same principle is illustrated in our daily expenditures, and explains how we come to make them as we do. No one applies his entire income to the purchase of food or shelter. Food is the primary necessity, but clothing is more acutely required than is a second dinner. We supply our wants in the order of their in- tensities. When one has purchased himself a reasonably large wardrobe, the fact that he makes no further purchases of this sort does not VALUE 55 prove that he has no further desire for clothing, but that he has a stronger desire for something else. He follows the line of least sacrifice. So the purchase of apples at ten cents each would mean to you or me the lack of other things which we desire more intensely than we do apples. So, again, if one is picking and eating wild berries, it is certain that somewhere he must tire. The first berries are well worth climbing ledges for. Finally there comes a berry equally large and juicy which is just worth the bother of picking. The next berry does not get picked at all. Remember for future purposes that the last berry picked and the first berry not picked are technically called marginal berries. They lie on either side the line of choice. The direc- tion of least resistance changes at this point from picking to not picking. 32. In a certain fashion all the phenomena of exchanges are comprised in the above exam- pies. A castaway upon a desert „ ■^ . Crusoe could island has no one to trade with, and exchange yet can essentially trade one thing for another, and manifests in his own life a complete cycle of economic activities. So far as Crusoe's work was rationally planned he was 56 ELEMENTARY ECONOMICS constantly turning his efforts to that undone thing, the doing of which was of leading im- portance. At a certain point fishing was aban- doned for game ; more fish were refused in the interests of more game. The game cost fish or the fish bought game, since the Avork which would produce either fish or game was applied to game and withdrawn from fish. The English economist, Marshall, excellently illustrates this principle as follows: — " The primitive housewife, finding that she has a Umited number of hanks of yarn from the year's shear- ing, considers all the domestic wants for clothing, and tries to distribute the yarn between them in such a way as to contribute as much as possible to the family well- being. She will think she has failed if, when it is done, she has reason to regret that she did. not apply more to making, say, socks and less to vests. That will mean that she has miscalculated the points at which to suspend the making of socks and vests respectively ; that she has gone too far in the case of vests, and not far enough in that of socks, and that, therefore, at the points at which she actually did stop, the utility of yarn turned into socks was greater than that of yarn turned into vests. But if, on the other hand, she hit on the right point to stop at, then she made just so many socks and vests that she got an equal amount of good of the last bundle of yarn that she applied to socks, and the last she applied to vests." 33. If a man has only one bushel of beans to sell he may be able to find some one willing to VALUE 57 pay, if necessary, a very high price for them. If there are one hundred bushels to „ To what point be sold, the price will: probably have does large sup- to be lower, in order that purchasers ^ ^ ^^^^ ^"^^ may be found for all. Large supplies of product must be marketed at low prices, else some share cannot be marketed at all. In fact, for the entire supply the price will fall as low as the price at which any share must be sold. It is not always easy to see how this works out. At best it can be illustrated only by taking artificially simple and, in some measure, unusual conditions. We have, for example, to assume perfect competition — a condition which rarely exists — and a degree of care and accu- racy on the part of purchasers which is not always found. But the general reasonings of the illustration hold, and greatly help to an understanding of demand and supply as they work in the mass in actual markets. Suppose you have one hundred bushels of beans. One man desires beans sufficiently to be willing to pay a dollar for one bushel. If he were going to buy a second bushel, he Avould pay, we will say, only 99 cents therefor, 98 for a third bushel, and so on. If you are a sharp trader, you may make him think that 58 ELEMENTARY ECONOMICS you have only one bushel, and sell him that at fl.OO. Then if you can convince him that you have only one bushel more, you may get 99 for this, and so on. But evidently if you offered to sell him three bushels at $1.00 each, he would not take them. That third bushel he cares for only to the extent of 98 cents. If you offered to sell him as many bushels as he wanted at 90 cents a bushel, he Avould take just eleven bushels [1 (100) 2 (99) 3 (98) 4 (97) 5 (96) 6 (95) 7 (94) 8 (93) 9 (92) 10 (91) 11 (90)]. But he Avould not pay 95 per bushel for the whole eleven ; he would rather go without five of them — unless, indeed, he had to pay 95 per bushel for the whole eleven in order to get any (which, in fact, is often the actual case). If the price is really a per bushel price for as many as he wants, he will buy such a quantity as to leave no bushel costing him more than he cares for it. Make the price 80 cents per bushel, and he will take twenty-one bushels ; nor will he pay a higher rate per bushel, if he has any choice in dividing the quantity — if* he can throw out any. 34. And likewise if one hundred bushels are offered, not to a single purchaser but upon the general market, the price will fall to one cent VALUE 59 each, if, in order to sell all, one bushel must be sold to some one who would rather .j,^^^^ jg ^ ^^^^ go without than pa}- more than one ^®* P^^^^' cent for it. True, if there were only one seller, he might try to trade with the purchasers sepa- rately, charging one a dollar, another 99 cents, a third 98, etc. Still, if one purchaser knew that others were buying at a lower price, he would know that he himself could obtain the lower price by holding out. There cannot be several prices where buyers and sellers all Know, in a general way, what is going on, — where there is what is called by economists a perfect market. Tliis is easier to see in the ordinary case of a larcre number of sellers as Avell as of buyers, as, for example, where there are a hundred dif- ferent offerers of beans, each Avith a bushel for sale, the buyers remaining as before. The prices must be fixed at one cent per bushel, else some one willing to sell as low as one cent will not be able to make a sale, and will be cr3dng his beans about at this price where other people are trying to sell at twice or half-a-dozen times as much. The price would thereby necessarily be brought to his mark. Undoubtedly in the case of one producer or 60 ELEMENTARY ECONOMICS 0113 merchant or a combination in control of the entire supply, it mis^ht be found The market ri J ' & price is the mar- profitable to destroy or keep back some part of the supply rather than to accept a price low enough to market it all. Cases of this sort are indeed becoming familiar in connection with trusts, monopolies, and combinations. But wdiere, as is ordinarily the case, there are competing buyers and sellers, it can rarely be of advantage to any one seller to withdraw or destroy his share, -er any part of it, in order to hold up the market price for all sellers. The price therefore falls to the level of the weakest, or, as it is called by many economists, the final or marginal demand. 35. We must now allow for differences in the prices which the sellers will consent to take. The process of ^^^^ wholc proccss of adjustment adjustment. ^lay be illustrated as follows : Suppose there are offerers of hats disposed to sell, if necessary, at prices ranging at unit inter- vals from 120 down to 100, what will the price be ? One might guess 110. But this must depend on the kind of people who want to buy. If there are full twenty of them willing to pay 120 rather than not purchase, the price may stand at 120 for all. If there are not over VALUE 61 nineteen of this disposition there must be one hat unsold at 120. The price will therefore have to be lower. But with lower prices fewer hat owners Avill sell. This is merely to say that high prices bring more goods and fewer buyers. Now, if we assume that the buyers' desires range from 110 to 130, where will the price be fixed ? It will not do to take averages. If the price were 130 only one man would buy and all hat-owners would be eager to sell. At 125 six men would be disposed to buy and twenty to sell ; at 118 tAVO hat-owners would refuse to sell, eighteen still consenting. But at 118 only thirteen men will buy. The price must fall nearly to 115, where fifteen men will sell. Yet sixteen would buy at this figure. At 116, on the other hand, sixteen would sell and only fifteen buy. The price must then be somewhere between 115 and 116, and the num- ber of hats sold fifteen. 36. This case is typical of all market adjust- ments, except where there are combinations or some other sort of imperfect compe- The marginSi tition. Notice now that at the point of equilibrium between demand and supply — the price point — there are sellers upon the jDoint of refusing to sell with any fall in price, and 62 ELEMENTARY ECONOMICS other holders on the point of consenting to sell with any rise in price. These men are called the marginal seller and the marginal excluded seller. Likewise there is a buyer on the point of with- drawal if price goes higher, and a possible buyer who will appear if price goes lower — the mar- ginal buyer and the marginal excluded buyer. It is evident from the above illustration that many sellers receive a price higher than that necessary to induce them to sell ; while at the same time many buyers make their purchases at a price lower than that which they would pay if necessary. Thus in a certain sense buyers as well as sellers make profits on the market. These profits or differentials are (by many economic writers) termed respectively buyers' and sellers' quasi-rents. The terms are helpful. Fix them and their meanings thoroughly in mind. The commodity sold to the marginal buyer or sold by the marginal seller may be called marginal commodities.^ 1 While the student is required to make himself thoroughly familiar with this doctrine of margins, and with tlie differential quantities called quasi-rents, he is at the same time warned that hoth the doctrines and the terms are of comparatively recent appearance in economics, and are not universally accepted among economists. In the opinion of the author, however, this doctrine of margins is the very heart of economic theory. VALUE 63 37. A few other points require attention. We have treated the liats as sold for money. We might as well ha^e taken the vake is anas- example of cattle sold for wheat, or pect of sacrifice. sheep for cows. But sheep and cows do not divide readily in trading, and these cases would therefore be awkward to handle. But ask your- self why the marginal buyer refuses to pay a higher price. It is not that because of a higher price he would no longer desire the article in question, but that at this price he would ratlier buy something else ; in other words, he would go without something that he wanted more; he would sacrifice more than he obtained. Things are not commonly to be had for nothing in this world. Whatever has what we call market value is to be had only on terms of sacrifice ; something has to be given for it, or done for it, in order to get it. Where so much is required as to overweigh in importance the thing to be got, we refuse to make the sacrifice required. Thus we see that in all questions of value things have to be compared with other things. To take one, no matter which, is to refuse another; to enjoy one thing of value is to sacrifice another for it. 38. If useful things were to be had in 64 ELEMENTARY ECONOMICS unlimited quantities and without effort, they A certain antag- would bear no value. Value comes onism between ^^^^^^ ^. ^^^^^^ ^Yiqy^ is resistance value and "^ utility. to be overcome, — where there is a disproportion between desires and the means of satisfaction. Value, then, is more nearly the measure of the scarcity of useful things than of their usefulness. It is not the measure of utility, but the measure of the sacrifice involved in obtaining utility. The value of any particu- lar thing is the measure of its power of com- manding the sacrifice of other things. And note carefully that even for marginal buyers or sellers, where the slightest unfavorable change in price would prevent the trade, value does not stand as the measure of the absolute utility of the commodity in question, but only of the utility of it relatively to the utility of that which it is necessary to forego. It is evident, for example, that the poor man goes without wliat the rich man purchases, not Value is mar- bccause tlic poor man needs the Syf-mlr- ^^^^^^ 1^^^^ ^^^^ bccausc he needs ginai sacrifice, something else more. A pound of meat may be many times more useful to the poor man than to the rich, but to the poor man to have the meat means to lack for bread, while VALUE 65 the choice for the rich man lies between bread and a cigar or a theatre ticket. So, again, one may forego the bread to-day which he would have purchased a Aveek or a year ago, though no less hungry to-day. The strength of the desire for other things is a necessary element in the decision. The marginal case is, then, a case of marginal I'elative utility — that is, of marginal sacrifice. A given case is marginal simply because the utility gained and the utility sacrificed are equal. 39. When one wants a barrel of flour, it may be possible to obtain it at the store by Avorking a few days for the proprietor, or Production is a perhaps by exchanging garden truck purchase from or eggs for the flour, or by paying ^^^''®' the price of the flour in money. But in this last case that which is really sacrificed for the flour is not the money but the things which the money will buy. Again, it would be possible, that instead of buying the flour one set to work to produce it. In this last case, instead of paying money or truck for the flour the payment is made with labor or effort. All cases of production really trace back finally to exactly this case. If one does not produce the flour directly, he produces the garden truck or 66 ELEMENTARY ECONOMICS the eggs, or he earns in some way, through labor or service, the wealth or money witli which to make the purchase. Thus production may be helpfully and rightly viewed as a pur- chase of utility from nature at the price of effort. But it is none the less true in any case, that each thing of value costs something else, since the labor which produced one thing but is none the less an exchange might have been applied to the pro- ^^^^' duction of another. And so we re- turn again to the fact that all value is attended by sacrifice, and that were there no sacrifice there would be no value. QUESTIONS Find the market price in the following problems : Boys desire base balls according to the following scale : 100, 95, 94, 87, 82, 78, 60, 55, 53, 48, 47, 45, 39, 3G, 31, 26. With only 6 base balls in the market, what will be the price? With 9? With 12 ? With 15? Let the above scale represent the falling intensity of one boy's disposition to buy base balls ; will this affect the results ? Sellers' minimum prices are as follows : 36, 35, 33, 31, 30^, 29^, 28 ; buyers' maximum payments as follows ; 40, 38, 36, 34, 33, 32. Find price. Sellers' 19, 18, 17, 14, 12, 7, 6, 5, 4, 3; buyers' 1, 2, 3, 4, 5, 6, 7, 8, 9. Find price. CHAPTER VI COST OF PRODUCTION Suppose yourself to have a pear and a peach ; some one tries to take them from you. You can retam one, the peach, by letting the other go. What has the peach cost you? If one offers you a ride or an evening at the theatre, and you choose the ride, what does the ride cost you ? If your work wdll produce for you two bushels of corn or one bushel of wheat, and you raise corn, w^hat is the cost of production of the corn per bushel ? If with a dollar you have decided to buy either a book or a pocket knife, and finally buy the book, what does the book cost you ? Why do men work ? When they stop does this indicate that they want no more product ? If you were picking berries to eat, when and why would you stop picking ? If you were given one hundred dollars to spend would you probably buy one thing or several ? Would your purchase of a second or third variety of goods show that you did not care at all for more of the first? Why not limit your purchases to one thing? 40. You have learned in your study of Physics that force always follows the line of least resistance. Water seeking an outlet 67 68 ELEMENT ABY ECONOMICS breaks through the weakest point in the barrier ; the chain gives way at its weakest All men act on . . lines of least link ; when two opposing tendencies resistance, niect the weaker is overbalanced. The line of least resistance includes as well the line of the greatest pull ; the stronger attraction prevails. So men in choosing between different pains or discomforts, refuse the greater, sub- mitting to the less ; in choosing between pleas- ures they select the greater, following always the line of least motive resistance. That is to say, the line of human action is the line of least sacrifice. Accurately speaking, one cannot act contrary to his choice. Men always do the thing which they prefer. If the thing done were not the preferred thing, another thing would be done. The choice may be between several evils ; in that case the choice of the least is none the less a choice. Do not, however, make the mistake of sup- posing that men always act selfishly. One has but not sel- ^^^^J ^^ remember his home and his fisMy. parents to know that this is not true. Nor, indeed, is it always true in matters of business. The world is full of people who refuse to do wrong for gain, as it is of men who, in business or outside, do kindnesses for the COST OF PRODUCTION 69 pleasure of doing them. In determining the line of least sacrifice we have to take account of human sympathy and conscience as well as of human frailty. Inside ourselves are the strongest forces of temptation and of restraint. The mother sacrifices health and strength for her child, because the greater pain is in the other course. 41. In buying and selling commodities men likewise exchange the less desirable for the more desirable commodities. When ^^^-^^ ^^^^^^^ one has money to expend he buys "^^^^ures value? the things he wants most. We commonly say that the hat or the suit of clothes costs this or that number of dollars. This however is not a full or an accurate statement of the case. The money is not valuable merely for keeping. Had you not bought the hat or the clothes you would have bought something else. And now note that the thing, which you desire next to the thing which you actually buy, shows what the thing you buy really costs you. Thus if you would pay a dollar for a hat you would with still greater readiness pay any smaller sum. Your greatest sacrifice shows most nearly how highly you prize the hat. If you have the opportunity of going to the 70 ELEMENTARY ECONOMICS theatre or to a picnic or for a walk, and prefer theatre to picnic and picnic to walk, your love of the theatre is better measured by your pic- nicking than by your walking inclination — by the most you will sacrifice rather than by the least. If for a bicycle you would give your gun or your Irish setter or even your pony, your pony best indicates the degree in which you desire a bicycle. If with your next month's wages you decide to buy either a new coat or a tennis set, not your month's work but the coat measures what the tennis set costs you. It has been said that greater love hath no man than this, that he should lay down his life for his friend ; if so, not the smaller services of kindness, but the very love of life itself measures man's highest devotion to his fellow. 42. In attempting to estimate the cost of production of commodities, we commonly say that such or such a thing cost so many days' work, or so much outlay in wages, rent, and interest. But just as the money paid out in wages, rent, or interest is unimportant, other- wise than for what it would obtain if expended differently, so the labor applied to the produc- COST OF PRODUCTION 71 tioii of a particular commodity is unimportant otherwise than as bearing upon Avhat it might elsewhere have been made to pro- ,, . ■•■ ^ot rent and duce. Labor has no value in and interest, but £ -J. ir TTT- 11 goods, the real or itseli. Wages are really never cost of prodnc- paid for labor. The value of a ^^°°' saAV or plane depends upon the help it may afford to the mechanic. What the field is worth depends upon what it will produce — the cow upon the milk it Avill give or the meat it will furnish. So the value of labor depends upon what can be got out of it. Nobody wants labor as such. Mere motion, simple activity, is void of value. Only for product and in proportion to product can labor command a price. Ulti- mately the employee purchases not labor, but the goods which labor produces. Man produces that he may consume ; labor is a process of value creation. He labors because this is the condition on which his ',, . „ Which IS first enjoyment of certain goods depends, cause, value or labor ? Labor is not the cause of the utility — the utility is the cause of the labor. So utility is tlie cause of value — the scarcity which compels effort being a mere condition. Product is the return upon effort. Labor has value merely in the sense that the value of the product may 72 ELEMENTARY ECONOMICS be ascribed to the labor which will produce the product. It is therefore not logical to measure the value of the product by the value of the labor ; the labor is measured in value by the product. 43. The value of a thing has been shown to be fixed by the sacrifice which it commands in exchang-e for other commodities. Cost of ^ , , production Cost of production is to be stated in similar terms. As to any particular article, cost of production is the sacrifice of other possible values producible by the same produc- tive energies. Each man seeks for himself that line of pro- duction which seems to him to offer the most „, . favorable opportunities. Some men Whose cost IS ^ ^ equal to market COuld not, Or WOuld not, UulcSS at a very great change in the selling price of their products, change their direction of activity. Others, on the other hand, are near to the margin of change to another line of pro- duction. The market price considerably more than remunerates some producers ; it barely remunerates others, : — that is to say, barely in- duces them to continue in their present line of production. A producer is often not merely a laborer, or an employer of labor; more often, COST OF PRODUCTION 73 indeed almost of necessity, lie is an employer of capital and land as well. If by a fall in market prices the returns become inadequate, many producers tend to drop out of this line of production, and to seek other lines. As the price falls, the producers nearest to changing their employment fall out earliest. These men are called marginal producers. If wages fall in any particular emplo3'nient wage-earners like- wise tend to desert this line of employment. On the other hand, when profits or wages in any employment tend to increase, increased production tends to follow. Fewer goods re- sult from a fall in price, more goods from a rise. Thus unusual advantages or unusual dis- advantages in production tend to be cancelled by resulting changes in the supply of goods. It thus comes about that the market price of each commodity is on the average high enough to induce a supply which is ordinarily sufficient for the market, and that this average price is the same as the marginal cost (sacrifice) of production. In this sense it is true, and in this sense only, that marginal cost of produc- tion fixes market price. The relative strength of the demand for other products fixes the value of any particular commodity, and fixes 74 ELEMENTARY ECONOMICS as well the amount of it which will be produced. For example, if a given amount of wheat will exchange for a hat, but can be produced with less labor than the hat, wheat production will increase or hat production decrease, till this advantage in selling is cancelled by a fall in the price of wheat relative to hats. To make this clearer let us ask why a given producer withdraws from production when the The cause of price falls. From his point of view lower produc- -^ • g^fficieut to Say that further tion. It IS a «^ relative matter, production is a matter of no profit or of absolute loss ; but the ultimate answer is that his productive powers can be elsewhere employed to better advantage. If, working elsewhere, he can produce products of more value, he changes his occupation, not because cost of production is too high absolutely, but too high relatively. To continue production in the old direction would be to sacrifice a greater value possible in another direction. The difficulty is not that cost of production is too high in the first employment, but that for an equal effort a higher remuneration is obtainable elsewhere. 44. The student should now be prepared to see that from every change of a producer from COST OF PRODUCTION 75 one line of employment to another two results follow. The producer makes the change in view of a change in mar- ket values, but the change in employment tends to cause a rise in the value of the commodity which he abandons, and a fall in the value of the commodity which he sets himself to pro- duce. In the beginning his change was the result of market conditions ; but that which is primarily an effect often becomes in turn a cause, and works to counteract the original cause. This indeed is almost ahvays the case in economic questions. The physical sciences excellently illustrate social forces in this respect. Water flowing from one receptacle to another sets ^ ■^ Interaction of its own limit to the process. Freez- cause and ing brings an end to the solidifying process through a self -manufactured protection against the cold. The brisk fire finally smothers itself in ashes. A spring hard pushed increases its resistance to a new point of equilibrium. Chemical reactions themselves bring about new equations. Likewise in human affairs: wars bring the peace of exhaustion ; satisfaction of desire results in satiation ; continued labor makes ever shriller the cry for rest. 76 ELEMENTARY ECONOMICS Market values indicate a shifting point of adjustment between the opposing forces of demand and supply, both, however, taking their origin in the primary fact of demand. SUGGESTIVE QUESTIONS What was the utility to Crusoe of a day's labor ? Would the utility have been something else had his island been another island ? Do you think the value of a man's working powers depends upon what it has cost to raise him? Why don't you study Hebrew ? Do you think it alto- gether useless ? What do you expect to do for a living ? Why not something else ? What is the reason that all farmers in your neighbor- hood do not raise rye exclusively? Why not produce silk in the United States ? Does the marginal producer's or seller's sacrifice fix price? Or is it the marginal purchaser's sacrifice? Or is it the equation of demand and supply ? Which is the primary force ? Why does the nearest excluded buyer not buy? Near- est excluded seller not sell? AVhy do some producers stop producing when price falls ? What do they do then? Why do others continue to produce? Do producers expect to determine price by their sac- rifice ? Would it be well for most of them if they could ? Or COST OF PRODUCTION 77 do they adapt production to price? How does your answer apply to monopoly producers? Are wages fixed by demand and supply, or by produc- tiveness of labor, or by both? How may you reconcile affirmative answers ? CHAPTER VII RENT OF LAND If you were renting land for farming would you pay more for some lands than you would for others ? Why ? How much do you think you could handle advantage- ously without hiring men ? Why not get along with half as much? One fourth as much? Twice as much? lour times? From 320 acres do you think two men in diversified farming could get twice as much as one ? Four twice as much as two? Eight as four? Sixteen as eight? AVhere would this stop, if ever? Would it matter for this purpose whether the crop were strawberries or wheat ? Would the advantages of increase of numbers ever cease in the case of strawberries ? Can two men harvest more hay or wheat than one? Two times as much ? Three times as much ? If you were renting land for building would you pay more for one town lot than for another ? Why ? 45. The producer, estimating as best he may the price which he will be able to obtain for The market bis products, lias before him the value of the problem of how to produce most crop IS the ■'- -^ primary fact, cheaply the products in question. Suppose, for example, that he undertakes the 78 RENT OF LAND 79 production of wheat. He will need land, capi- tal, and laborers. But is it best to till much land, or shall he tak^ less land and employ more laborers, or shall he rather increase the amount of machinery and fertilizers used ? The selling price of his product fixes the out- side limit of his expenditures. Out of this sell- ing price he must get back the interest, rent, and wa ;es, and derive wdiatever is to remain to him as the remuneration for his superin- tendence, risk, and effort. He finds the rate of wage payment practically fixed, for examj)le, at 'f 1.50 per day. He will increase his number of men as long as he believes that his product will thereby increase so as to justify the larger outlay. His demand for labor is evidently a demand for the results of labor — for the commodities Avhich it produces. His demand for labor must then find its limit at the point where the wage payments approach equalit}^ with the increase in the value of the product due to the laborer. We come, therefore, to the general proposition that wages are at the maximum limited by the value of the laborer's own contribution to the value of the prod- uct. We shall later see that, through the op- portunity open to laborers of producing upon 80 ELEMENTARY ECONOMICS their own account, and through the competi- tion of employers seeking profit from the ser- vices of employees, the actual wage payment commonly does not fall very far short of this maximum. Our wheat producer finds also that capital is worth a certain per cent per year ; that is, he finds an established rate of interest. How much capital he shall employ must depend upon the amount of it which he can advan- tageously apply, while retaining for himself a balance of profit over the cost of production. 46. But with wages and interest and market prices as tiiey are or are expected to be, he Lands differ discovcrs great differences in the de- greatiy. sir ability of different lands. One piece but scantily remunerates the application of labor and capital, producing, we will say, ten bushels of wheat to the acre. Under con- ditions of cost and price as they exist, this land is therefore barely worth changing from pasture to tillage, and is barely worth hiring at a rental sufficient to induce the change. Lands which, with the same expenditure of capital and labor will produce more bushels per acre, command a proportionately high rental — approximately the value of these BENT OF LAND 81 extra bushels. Just as men pay different prices for different qualities of machines, tools, horses, or pianos, they rent or purchase different pieces of land at different rental or purchase prices. 47. So far then there is nothing peculiar or striking in land or rental questions. But if we turn to consider the effect upon . . , Effect of in- rent from increasing population, or crease in popu- from increasing demand for agri- ^^^^^' cultural products, we shall find that some im- portant tendencies become manifest, which are peculiar to questions of land and rent. These tendencies are all explained by the fact that the effectiveness of labor in agricult- ure suffers severely if the supply of land is inadequate. Hoav much land one man may advantageously work depends, of course, upon what crop he is going to raise. But one cannot ordinarily raise as much from five acres as from ten, nor can one ordinaril}^ by doubling the labor and capital on his ten acres, thereby double the jDroduct. Were it possible continu- ally to double product by doubling the expenses of cultivation, there could never come any need of more cultivated land, no matter what increase might take place in the demand for agricultural 82 ELEMENTARY ECONOMICS product. As it is, however, a larger demand for product is met in part by cultivating more land. Evidently, if population were sufficiently sparse, only the best land would need to be cultivated, and were land of the best quality unlimited in supply, no rent would have to be paid by any one, since if rent were demanded the cultivator would have his choice of other land equally good. But as population should increase, lands of inferior quality or lands at in- convenient distances would have to be brought under cultivation, and rent would then be paid for the land of better quality. So when third-quality land was brought into use, the second-quality land would command a rental and the first-quality a still higher rental. 48. Note now that this application of labor and capital to poorer and poorer lands must There come a involve a Constant tendency toward i-? ^^'''^ the lowering of wages and interest, QiviQend, and o ^ ' higher rents. since there is necessitated a con- stantly decreasing product in proportion to the labor and capital applied. True, there is an increase in product, but there is not an increase proportional to the increase in the num- ber of claims against it. But all the while as BENT OF LAND 83 poorer lands are brought into cultivation there results a larger volume of rent receipts ; that is to say, an increasing share of the product goes to the landlords as payment for the oppor- tunity to cultivate the land. In view both of the difficulty and of the im- portance of this principle, further explanation seems desirable. It is clear that The results are wao^es must somewhat fall, since the J^Po^^^°*; t> The marginal total harvest — the dividend — di- doctrine, vided by the number of cultivators, gives a lower quotient — a lower per capita of product. But it is also true that this lower aggregate product and lower individual share of the quo- tient does not measure all the fall. We have seen that to sell one hundred apples the price must go low enough to take the last one, the marginal purchaser marking the price level for all other purchasers. So when men are being hired, no one of them will be paid more than would be lost in product if he did not work. Thus each advance of cultivation to poorer soils lowers wages all along the line. The laborer can receive as wages only what he adds to product. Therefore what is paid for labor in the most unfavorable of the oppor- tunities used, limits the wage payment for 84 ELEMENTARY ECONOMICS labor of similar quality and effectiveness else- where employed. In a similar manner less and less produ-ctive opportunities in the employment of increasing capital tend to reduce the interest paid upon capital used in any employment. In the case of the apples, it was not the aver- age demand but the marginal demand which explained the price of apples. In the case of land, it is not the productiveness of the best land or of average land, but of the poorest land in cultivation, which gives the rate of payment for the productive energies — labor and capital — applied thereto. Thus the very causes Avhich serve to increase rent work at the same time to lower wages and interest. 49. This tendency of agriculture toward diminishing product relative to increased labor and capital applied, is easy enough to under- stand, if we think of farming or gardening as „, , „ any one of us may see it round about The law of -^ diminishing him. You canuot double the product of your garden indefinitely by doub- ling the care and fertilizers. If a farmer has a farm of reasonable size, he will not get ten times the grass or wheat from it by multiply- ing by ten the number of hired men. This BENT OF LAND 85 tendency toward lower returns in agriculture is called in Political Economy the law of diminishing returns. By this law is in part to be explained the fact, that in densely popu- lated countries, like China and Japan, Avages are low and the standard of living depressed. When average production is small, average consumption — that is to say, the average reward of effort, wages — must be correspond- ingly small. Where low average productive- ness results from insufficient land, it comes about that the better lands bear high rents and command high prices ; that is to say, a large share of the product goes to landowners in the form of rent or of interest on landed invest- ments. Bad environment brings small pros- perity. The newer countries, like America and Australia, have the advantage in this re- spect over old and thickly populated lands, like those of Europe. Where the land is adequate, the rents are low. QUESTIONS Compare the Chinese and the English in point of (a) intelligence, (6) strength, (c) activity, (d) progres- siveness, (e) scientific knowledge, (/) inventiveness, (g) freedom, (h) hopefulness, («) ambition. 86 ELEMENTARY ECONOMICS Compare the respective environments in (ci) climate, (b) mineral resources, (c) fertility, (<:/) adequate supply of land. URBAN LANDS 50. Accessibility to market is also a matter of very great importance in fixing the value of Travel or pay ^^^^^' ^^"^ example, you might be money. willing to pay a good sum for the privilege of drawing water from a spring near by your own home, rather than obtain the water gratis from a distant spring. In the case of the second spring your walk is a sort of rent — you pay in effort instead of in money. The matter of location becomes of over- shadowing importance in the case of city rents, where convenience, health, beauty, and social advantages are the leading subjects of interest. As with agricultural lands, so with urban lands there are locations of vanishing value which are nearly marginal and therefore almost non- rent-paying. The better locations command rent in the measure that they are more de- sirable than the marginal locations. Rent is therefore the measure of the difference in de- sirability between better lands and marginal lands. The word differential is a common and useful term in describing any form of URBAN LANDS 87 rent — whether land rent or the different quasi- rents. SUGGESTIVE QUESTIONS Assume an island with lands ranging in productive quality from 28 to 20 as shown by the diagram. Consider that with each 100 of population a new tract has to be cultivated and 20 20 20 20 20 20 that the diagram covers all the land 21 21 21 21 21 21 to Vvhich the society has access, oo 90 90 99 99 99 What will be the sum total of rent ^ with a population of 900? 1,300? "^ 1,800? 2,300? 2,500? 2,900? -'^ -^ 26 26 26 26 Assume also that the fertile lands 27 27 27 28 28 28 are nearer the market, and that each grade of more distant land must pay one bushel as trans- portation charge to reach the market. How are your foregoing answers modified? Assume again that it is the poorer lands which are nearest the market, the better lands being subject to trans- portation charges. Revise your answers to fit this case. What effect, other things being equal, does population have on aggregate rents ? Suppose the State owned the land, should we pay any rent? Do we now in any way pay what amounts to a land rent to the State ? What does a perpetual lease without rent amount to? If you were a tenant, and the landlord remitted your rent, would you have to, or would you, sell your products at lower prices ? Suppose all land rent were released ; how would this affect prices? AVhat effect would the general forgiving of rents have 88 ELEMENTARY ECONOMICS on the demand for products ? On the supply of products ? On amount of land cultivated ? On prices ? What effect from a percentage tax on rents? Would it force any land out of cultivation ? If tenants were required to pay more rent what would they do? If consumers were charged higher prices what would they do ? On whom then would the tax fall ? If a large body of fertile land — a new continent for example — were discovered, what effect would it have on rents in Europe ? Rents and land values, rural, have largely fallen in Europe. Why? What would be the tendency of rents on the new con- tinent ? What effect on supply of products ? On margin of utility of land ? On social dividend ? On average comfort ? If the land of the world were all owned by one man or company, could rents be raised profitably for the owner ? Is there any reason why landowners cannot combine? Would some land be thrown out of use? Why? Who would lose the rent on this ? If a large amount of land were taken from agriculture for parks, etc., what effect would this have on the aggre- gate of rents ? On prices of products ? Is it the increase of rent or the decrease of supply which causes prices to advance ? What will the tenants do if prices fall? Will all tenants do this? Which ones? If you were a farmer with a large farm, would you hire men to work for you? Why? How many? When and where would you stop ? URBAN LANDS 89 Could yon fix prices of products ? Wages of employees ? Rents ? What bearing has productivity of marginal land on agricultural wages ? What bearing have wages in other employments on agricultural wages ? An increased demand for agricultural produce exer- cises what effect on the margin of utility of land ? On rents ? On prices ? On agricultural wages ? On wages generally? Is the wages question the solution of the fraction social dividend over social divisor f Interpret the following : social dividend — rent — interest wages = wage-earners What would you do with taxes in this formula? W^hat makes a town lot valuable ? Who made it valuable? Who gets the advantage ? What do you mean by the unearned increment ? In what sense are the interests of landowners opposed to the interests of all other classes of society ? Read in the encyclopedia articles on Malthus and Mal- thusianism. Prove that rent does not commonly add to price. In justice ought the tenant to pay rent upon the im- provements which he himself has made upon the land? How may he be compelled under free competition (rack rent) to do this. AVhat effect on the condition of farmers? What effects upon the habits of husbandry? What relation do you perceive to the history of Ire- land? What effect on rents from improved machinery? 90 ELEMENT A R Y ECONOMICS What effect on rents from improved methods and science in cultivation? What effect on rents from improved transportation ? What effect on social dividend from improved ma- chinery? What effect on social dividend from improved methods and science ? What effect on social dividend from improved trans- portation ? RENT AND PRICES When and why is there an increase in the amount of cultivated land ? An abandonment ? W^hen prices rise for products is this a cause of higher rent or a result? If increased quantities of cloth are made and marketed will the price per yard rise or fall ? Why ? What effect from higher prices on amount produced? Will these higher prices last? W^hat effect from higher prices on agricultural prod- ucts ? Will these higher prices last ? Is the supply of land equally as flexible as that of cloth ? On what terms in point of cost can agricultural prod- ucts be increased. When will poor land find occupiers ? Why ? What effect on the rental value of better land ? 51. We now approach a more difficult prob- lem. Evidently as poorer lands have to be cultivated the prices of agricultural products will tend to rise. Shall we say that the rise in prices results from the cultivation of the RENT AND PRICES 91 poorer land, or that cultivation results from the rise in prices ? The student will do well to stop here and think this out for himself. Clearly enough the necessity of cultivat- ing poorer lands explains the rise in prices. But no individual cultivator would ^ Do rents cause enter upon this poorer land other- prices, or prices wise than as induced so to do by the higher prices. Producers accept the offer held out to them by market values. Increas- ing demand for agricultural products is the primar}^ force which makes these higher mar- ket prices possible. Increasing resistance from nature, that is to say, a higher necessary sacri- fice in production, is the fact which, added to the demand, makes these higher prices neces- sary. When you push hard upon a spring, the resistance of the spring is the result and the counterpart of the force with which you press it. When snow packs hard before the plough of the locomotive, it is in reality the snow which is getting packed by the force directed against it. In all cases where action and reaction meet in equilibrium, it is the action and not the reac- tion which is the primary force. And so with the cultivation of poorer land and the attendant 92 ELEMENTARY ECONOMICS rise in prices. Increasing difficulty is the oc- casion of the rise in prices — the condition — while increasing demand is the cause. Thus we again face the fact that utility alone — demand — does not explain value. Value is the measure of the resistance — the sacrifice at- tendant upon obtaining the utility and satisfy- ing the demand. Value increases as goods move farther and farther from the condition of pure bounties of nature. 52. The land which is just upon the point of not being cultivated if prices fall, or which Margin of ciiiti- would not be cultivated if a rent vation results j^- i ^^ ^^^^^^ ^^^ ^^^^^ ^f ^^^ ^,^^^ from price, and o explains rent, for pasture or forestry were im- posed, is called land at the margin of cultiva- tion. Cost of production on this marginal land and the market value of the product are equal. The cultivation of this land is a result of market value, and cost and value on this land are commensurate, just as, in the bean or hat illustration, price was the outcome of demand, and the marginal demand was found to be the equivalent of price. We say truly that value is always the re- sultant of demand and supply, the point at which they are in equilibrium, — but it is still RENT AND PRICES 93 to be remembered that supply comes about as the result of demand. Price is high because resistance is high. Where resistance would be greater than the price, production will not take place. 53. Now note that grain produced on land better than the marginal land could be pro- duced profitably if prices were loAver. on better land A surplus remains after the outlays ^°f* \]^^^ p^''^ ■•■ -^ price, therefore of production are covered. Who rent is paid, gets the benefit of this surplus ? It is due to the superior quality of the land. If the culti- vator is a renter, he must turn it over to tho landlord. Otherwise the landlord will rent to some one else. At any rental payment less than this advantage, cultivators of marginal land would be eager for this better land. ^This surplus in the market value of the product of the better land over the outlays of labor and capital in its production, is the fund from which rent is paid. Rent, therefore, like wages or interest, is drawn from the selling price of the product. It thus appears that rents are the result of market prices and not the cause of them. The rents paid in excess of marginal rent clearly cannot affect market prices. They are merely 94 ELEMENTARY ECONOMICS a question between landlord and tenant as to how much each shall get out of the Rents do not market value of the product. As affect prices. iQj^g ^s poor land must be culti- vated to supply the demand, so long prices must be high enough to compensate the pro- duction on this poor land. To cancel the rent on the better land would affect neither the market supply of products nor the demand; it would merely transfer to the tenant the advantages which must attach to superior land. Increasing demand pushes cultivation upon poor soil, where the resistance to pro- duction is greater. Rent, therefore, is the outcome of increasing resistance to produc- tion. Were there no necessity for cultivating poorer land, that is to say, Avere there no in- crease in resistance, there could be no increase in rent. But this is not to say that low rents bring low prices and high rents high prices, but merely that the conditions of de- mand and supply which bring low prices bring low rents, and that conditions which bring high prices bring high rents. CHAPTER VIII INTEREST What different motives might one have for laying aside money ? Do people commonly get interest on money deposited in national banks? Would you ever pay for having your travelling bag guarded ? Why ? Why not pay the banker for keeping your money? If charges for keeping money were common would any saving still take place ? What different motives might one have for borrowing money If for use in farming what would determine the rate which one could pay ? Could a starving man afford to borrow at 100 per cent per annum? Is bread always of the same utility to the consumer ? Does the borrower get an advantage from borrowing? How? The lender from lending ? How ? What effect upon the social dividend from fertilizers? What effect from improved methods of transportation ? From opening up of new supplies of land? AVhat effect from better farm macliinery? Better skill in working land ? 95 96 ELEMENTAEY ECONOMICS What effect from more effective machinery in the factory? Does the laborer M^ork for his own benefit or for some- one's else? Who consumes his wages ? How is it with machines ? Is machinery humanity's assistant or its competitor? Does machinery sometimes turn laborers out of employ- ment ? How ? Who make the machines? What effect from machinery upon the purchasing power of other men's wages? Would wages be higher if we had to use gas for light instead of sunshine ? If pioducts can be produced at small effort will labor- ers be well or ill rewarded in products;? Is m.achinery the laborer's assist/^nt or his competitor? 54. If one has to-day a great appetite and no dinner, and will later have ai his disposal two Advantages of dinners with no increase of appetite, borrowing. borrowing must be greatly to his advantage, and if necessary he may pay enor- mous interest rates without exhausting this ad- vantage. Neither money nor wealth u of stable utility to men, but varies in utility relatively to their needs. So the young man rationally borrows the money to complete his education, counting upon paying at a more convenient time. So a business man, in straits for means to save his credit from injury or his property INTEREST 97 from forced sale, pays with advantage for the right to await a better market or for time to muster his resources. ^ These cases are typical of the rational demand for loan funds. The demand for capital to be used in a,id of production is also a familiar matter. There is, as well, an improvident de- mand — the spendthrift near-sightedness which burdens a needy future in favor of a luxurious and wasteful present. ^^. But for the most part the demand for loans rests upon the fact that production can be increased through the help of capital. A farmer, for example, finds that witli the expenditure of #1000 in ditching, he can in- crease by i200 the annual productiveness of his meadow. If necessary, then, he can afford to pay nearly 20 % for borrowed money with which to effect this improvement. If the market rate of interest is 6%, he can profitably borrow more than this $1000. S^ippose the gain in produc- tiveness from added supplies of capital to be as follows: — Second i$l,000 . . |150 Fiftli $1,000 . . $70 Third 1,000 . . 120 Sixth 1,000 . . 60 Fourth 1,000 . . 90 Seventh 1,000 . . 50 With tlie rate of interest at G% he can afford 98 ELEMENTABY ECONOMICS to borrow at least f 1000 additional. To borrow yet a full 'flOOO more would profit him only as much as the necessary interest payment. He will therefore borrow say 1750, at an increase in productiveness of say $50. The account then stands as follows : — 11,000 at -160 interest and |200 advantage. 1,000 at 60 interest and 150 advantage. 1,000 at 60 interest and 120 advantage, 1,000 at 60 interest and 90 advantage. 1,000 at 60 interest and 70 advantage. 750 at 45 interest and 50 advantage. 5,750 345 680 Note that his demand for capital at an estab- lished rate finds its limit at the point where usefulness falls to a level with interest pay- ment. Were some more effective method of ditching discovered, it would be advantageous to increase his borrowings. Note also, that the limit of his demand is not at all affected by the amount Avhich his pre- ceding borrowings have already profited him. Each addition of capital stands on its own merits as a separate question. The manufacturer, likewise, may find it of great profit to increase the volume of his busi- INTEREST 99 ness, or to improve his processes of production. He also stops at the point of disappearing ad- vantage in view of the rates of interest which he is compelled to pay. 56. It is evident in all these cases that some- thing is borrowed on terms of a larger repay- ment later. That is what interest . .The value of means. ^ This increased payment in- time with dicates merely that for one reason ^^^^ or another men prefer to have a thing now rather than a year from now. We can make use of it during the year. The earlier we get it and the longer we have it, the more benefit we obtain from it. This is really why a note payable in the future is subject to a discount. The future dollar, or machine, or farm sells at a disadvantage as against the present. If we had the thing now we could be using it — add- ing to it — making it a percentage larger at the end of the term. So putting it the other way, we say that the present thing is at a pre- mium over the future thing. 57. Some part of the explanation of interest is doubtless to be found in liuman shortsight- 1 Keep in mind that we are discussing pure interest, net in- terest, and not this or that rate imposed or paid as a kind of insurance charge against risk of loss of the principal. See note to Section 26. ' 100 ELEMENTARY ECONOMICS edness and stupidity. Just as the object wliich is near by appears to the eye larger than the Irrational distant object, SO in the mind's eye interest. ^]^q pleasure, or pain, or burden of a year hence fails to impress us at its real im- portance. We consume or waste to-day, not realizing the want in the future, or the burden of payment or of replacement. At the year's end, likewise, the pleasure of to-day will look insignificant, when placed by the side of the needs and burdens of that time. Clear-headed and far-sighted men do not m.ake this mistake to the same extent as the stupid people and the spendthrift ; but almost all of us make it in some measure ; most of us are prone to get into unnecessary debt. It is characteristic of sav- ages to make small provision for the future or no provision at all. 58. What then shall we take as a definition of interest ? Is it a payment for the use of Is interest a nioney, or, as it is sometimes ex- rent on money? pressed, a rent on mbney? Not accurately, since what we commonly borrow is really the things which money will exchange for. This notion of interest as payment for the use of money, is what is in the minds of those people who believe that interest is INTEREST 101 morally wrong. Can ducats breed ? Keep your gold pieces never so long, will they mul- tiply? If tliey will not increase in your hands, why receive an increase from the hands of the debtor who has borrowed them ? True enough — but the sheep, which the money buys, breed; cows pay interest in the guise of milk and butter, and the farmer cuts coupons of grass and grain from his fields, Avith which to redeem the interest coupons on his mortgage note. Why not then say that interest is payment for the use of capital ? But as we have seen, not all wealth is capital. Only that Is it paid for share is termed capital which is used the use of as an aid in the further production '^^^^ ^ ' of wealth. Interest, however, is paid on any sort of wealth. As the famous Frenchman Turgot wrote : " Men borrow with all sorts of views and from all sorts of motives. This one borrows to embark upon an enterprise which shall make his fortune ; that to buy a tract of land ; another to pay a gambling debt ; still another to cover a loss of revenue due to acci- dent; yet another to live until he may earn something by his labor. But all of these mo- tives that influence the borroAver are alto- gether indifferent to the lender. This latter 10^ MLEMENTAEY ECONOMICS is concerned but with two things, the interest which he shall receive and the safety of his capital. He takes no more thought of the use to which the borrower will put it than does the merchant of the use which a buyer will make of the food supplies which he buys." Interest is often defined as payment for the use of wealth. For most purposes this is all that or for tiie use of could be wished. But it does not weaitt? tipply quite accurately where goods are borrowed and are consumed instead of being used and returned. If we speak in this case of payment for the use of wealth, we must have in mind a use which the borrower might have made, but did not make. 59. We therefore adopt as our final state- ment a definition which, in the absence of all The accurate ^^^^^ explanation and illustration, defiuition. probably would not mean much : Interest is a difference in value in favor of pres- ent over future goods. This difference results in part from the habit of underestimating the needs of the future and of burdening tlie future in aid of the present ; in part from the fact that with the help of capital an increase in product is possible. That is to say, the de- mand for present goods on terms of a larger INTEREST 103 payment in the future, is due in part to the helpfulness of wealth in productive processes, — in part to a desire for wealth for purposes which are non-productive. This demand for unproductive uses depends in part upon the call for money to pay existing debts, in part upon the disposition of men to discount the future, in part, also, upon the fact that in some cases a larger service is afforded hj immediate consump- tion of a given sum of values than will be sacri- ficed by the later payment of a greater sum. 60. To say that the rate of interest is six per cent ^qv annum really means that 100 of wealth can be sold to-day ao^ainst ^ How is the 106 at a year from to-day ; men interest rate £ l^ 1 fixed? pay a premium tor the present thing. At what rate of premium present goods can be sold against future goods, is a question of adjustment between demand and supply. The process of adjustment is exactly like the cases, already analyzed, of selling hats or apples. The rate of premium must be low enough so that supply and demand may be in equilibrium. The helpfulness of wealth as an aid in production occasions the larger share of the borrowing demand. Wlien the opportuni- ties for employing capital are limited, or the 104 ELEMENTARY ECONOMICS increase in product from the use of capital is small, the rate of interest must be low. The rate of interest is, then, commensurate with the marginal desirability of wealth — speaking roughly, with the marginal produc- tivity of capital. All borrowers, however, ex- pect to make something more, and many of them very much more, from the use of capital than they pay as interest. Many of them in fact do obtain this surplus, that is to say, interest payments to lenders fall a long way inside the usefulness of capital. If lender and borrower, then, are benefited by the existence of capital and the loaning of it, it is left to in- quire whether any one is injured. 61. We have seen that with wages and in- terest to be paid, the producer of commodities . , , has the question before him whether Are capital and laborers com- to hire morc men or to employ more capital. Shall he purchase labor- saving machinery? Or shall he do his work by hand labor? The factory owner is constantly replacing employees by machinery. Type- setting machines are displacing the printers. Air-brakes take the place of brakemen. In a certain sense, then, capital is the competitor of the laborer ; which will do the work the INTEREST 105 cheaper decides which shall get the job. Yet somehow we feel certain that labor-saving appli- ances make for the general well-being, that the riots of English and French workmen against the spinning-jenny and the power-loom were ig- norant mistakes. In truth, the hostility of wage- earners toward inventions is an error which is fast fading from the world. All these new pro- cesses and inventions are methods of increasing the social dividend. They are savers and mul- tipliers of human energies in production. 62. But suppose the wage-earner to answer, " This may be true, but we don't get the in- crease. It is caused by capital ; it goes to the owner of the capital ; and we are driven from our places to starve while the machines do the work." Is this a fallacy? And how shall we prove it a fallacy? A full demonstration of it must await the discussion of Profits and Wages in the next chapter. But it is well in this connection to recall again the origin of capital, tj.^^ question It is merely stored-up labor. Labor "S^^^y P^^^^^' is employed in creating it, and it continually wears itself out and must be replaced by labor. This is illustrated in the constant wear and tear of machinery, in the consumption of coal, and 106 ELEMENTARY ECONOMICS in the repair of factories, buildings, cars, and ships. And not only does it require wage- earners to make and repair the machinery, but to oversee and operate it. Capital is a round- about application of labor to production. It would be odd if in the resulting increase of product the stored-up labor should get all or most of the advantage. Nor does it so in fact, though we have as yet seen no reason to assert that the laborer gets the advantage. It must, however, be true that as capital increases, inter- est, which measures the marginal desirability of capital, must fall ; the borrower obtains the services of capital more cheaply. The advan- tage must then fall to either the laborer or his employer. The case is, therefore, not one of laborer against lender, but rather of laborer against employer, — against the user rather than against the owner. Are the benefits of increased capital really somehow intercepted by the employer or by some one else, so that they fall short of reaching the wage-earner? Doubtless it often happens that by falling prices the market is so much widened that the number of wage-earners is really increased, without reference to those employed in making machines. This is ordinarily the case when a INTEREST 107 small fall in prices brings about a more than proportionate increase in consump- ,, , . ^ ^ ^ Machines some- tion, as, for example, in the case of times displace books; but this is as clearly often not true, as, for example, where agricultural ma- chinery displaces hand labor ; no great increase in food products can be marketed. Evidently, if machines did not economize labor they would not be used. An increase of product must result from a given sum of expenditure. But Avhether machines in any particular industry do or do not take the place of labor, it will be made clear in the next chapter that the wage-earner, in the out- come, gets most of the benefits from the econ- omy of effort made possible through machinery. SUGGESTIVE QUESTIONS In what case does a ph3^sician treat his horses as capital? In what case as mere consumption goods? Would an increased supply of money aifect the crop from any piece of land? The butter from any cow? The ratio between the yearly output — dividend — and the market value of any property ? Assuming that doubling the currency would double the price of cows, sheep, and farms, would it do the same thing for calves, lambs, and harvests ? What effect, then, on interest rates ? In what sense is interest a ratio? What forces determine this ratio? Which is ultimate? CHAPTER IX WAGES AND DISTRIBUTION Are machines productive ? In what sense ? Are they productive alone? What must go with them ? How were they produced ? Is there any relation between high standards of living and high efhciency ? Does our higher standard of living make our wages higher than European wages ? What does make our wages higher ? Has the fertility of our soil anything to do with it ? What limits the employer's disposition (ability) to pay wages? Can the farmer increase the crop by being hungry? If so, in what sense? Can he increase his ability to pay wages by the fact that his hired man has a large family ? Can the hired man use this fact to increase his wages? Do wages equal wants or wants wages? Which is the nearer the truth ? Are women's wages lower than men's because they can afford to work for less ? Why does not the employer have to pay tliem more ? Why may he not pay tliem still less ? Do employers make more by hiring women than men ? If the population of the world should double, what 108 WAGES AND DISTRIBUTION 109 effect on the aggregate production of commodities? Would the] per capita production maintain itself? AYliy? Discuss the effect (X,) on agricultural production, (2) on other production. 63. It cannot be too firmly held in mind that in any investigation of economic facts we are studying mankind in its relations to its environment. Man is the Son qnes^-'" actor and the central fact. Neither ^^^^^ of corre- spondence. land nor capital serves for produc- tive purposes, except as subordinate to man and directed by him. Neither is productively independent. The economic point of view conceives of man as the actor, and of all other things as raw material at his hands. All pro- duction takes place for his benefit, in response to his demand, and goes to his benefit. Rent is not paid to land, but to landowners, interest not to capital, but to capital owners. The national dividend is distributed among the members of the producing society for consump- tion by them, and not by land, or machines, or wealth. -True, the advantages do, in some measure, go to particular members of society by virtue of their possession of land or capital, but it is none the less true tliat consumption depends upon production, and that average 110 ELEMENTARY ECONOMICS consumption is the equivalent and outcome of average production. 64. The question of wages is too often treated as if what the wage-earners receive ^ were fixed by what they need to wages a ques- -^ ^ tion of product, Kye upon, instead of by what they and not of , tj^ • standards of ^l'© able to producC. it IS con- hvmg. stantly asserted that wages are gov- erned by the standard of living. That people live well is put forward as a reason that they are well paid — as explanation for the fact that they are able to live well. But in truth high living has little to do with the case, otherwise than as wholesome, healthful, contented living, with good food and in healthful surroundings, may aid in bringing about a high productive efficiency. But the only way for society to consume more, to establish a high average of comfort, is to produce more. 65. The question of wages is confused, as are many other economic questions, by a mis- understanding of the meaning of demand and supply. To say that the value of any com- None the less "lodity is fixed by the equation of a question of demand and supply is a correct and demand and x i. ^ supply. a safe enough proposition. But to suppose that the more laborers there are, the WAGES AND DISTRIBUTION 111 lower wages will be, or that the fewer hours or the more lazily they work, the higher wages will be, is grossly to' pervert the meaning of the demand and supply doctrine. The demand for labor, and the wages at which this demand will employ the labor, depend upon the value of the product which the laborers will bring to the employer. If a farm hand adds to the crop by only one bushel of wheat a day, it is certain that his wages will not stand at two bushels of wheat per day, or at an amount of money which will buy the two bushels. If operatives in a factory make each but one pair of shoes a day, they are safe from ever getting two pairs each for doing it. So if the population of any one city or of the world should double, wages would not fall by a half, or at all, unless the average produc- tiveness of labor fell as a result of the over- crowding and of the attendant disadvantages of opportunity. QQt. But something remains to be said in explanation of the wages of particular laborers or of particular classes of labor- Wages in par- . , . -. , , ticular indus- ers. It is not to be interred that tries, the employer always pays all he can. He employs men for the profit he gets out of it. 112 ELEMENTARY ECONOMICS He will not pay more than the value to him of the labor or its product. How near he comes to a full payment will depend upon what the competition of his own or of other industries compels him to pay. The practical working of this competition will shortly come up for further discussion. Also it must be held in mind that precisely because wages depend on product, wages must be low if so many people work at one thing as to compel a low selling price in order to sell the entire product. We shall later see that this largely explains the low wages of women. Again, it is found that the same sort of work is well paid in one country and ill paid in and in different another. How explain, for exam- countries. p2e^ the high wages of domestic servants in America, and the relatively low wages in Europe ? Do not the European servants do equally good work? Are not the results as valuable to the employer? Or is it true that Americans desire this sort of services more strongly than do Europeans? The difference is really in the demand. It is doubtless true in a sense that the low wages are a result of the large supply of laborers in this particular industry. But how great WAGES AND DISTRIBUTION 113 this supply is depends on what Avages other industries offer, and how many laborers they will take. That is to say the demand — the competition — that bears upon wages in any given industry or employment, is in largest part the demand or competition of other industries and employments. If domestic servants in Europe earn less in other employments than they can earn in these other employments in America, it will be possible to hire them as servants in Europe at lower wages than they can obtain as servants in America. Their producing powers as servants may be equally high there, but their producing powers in general are much lower there than in America. They will therefore have to work there as ser- vants at a lower marginal utility. In America we have to pay high if we get them to work as servants. In Europe the employers might most of them be willing to pay equally high wages if they had to ; but they do not have to The proposition therefore stands, that produc- tion fixes wages ; but we must look at the entire range of productive employment. 67. It should now be clear and it is funda- mental that the first concern of society in the problem of distribution is to have the largest 114 ELEMENTABY ECONOMICS possible product to divide. While Ave may „ „. „ find reason in later discussions to Conflicts of interest in question liow far human well-being production. . , -, -ii xi is bound up with the maximum com- mand of wealth, the question of distribution is evidently, for the various participants, a ques- tion of how to obtain the largest share in the dis- tribution. Behind distribution is production. For each of the factors in production there are but two possible methods of increasing its distributive share — (1) by increase in the total social output ; (2) by increase in one share at the expense of one or all of the others. Primarily the interests of all producers run parallel in the attempt to attain the highest possible social dividend. But in the distribu- tive process it is equally clear that the interests are adverse. When, for example, two boys go fishing or hunting on shares, harmony is probable until the time comes for dividing the spoils ; then peace is less certain. So partners in business are each as loyal to the partnership interests as either would be were the enterprise all his own ; against the busi- ness world they stand united. But in the division of the profit and in the settlement of the partnership accounts they are not one, but two. WAGES AND DISTRIBUTION 115 Thus we must beware of the sweeping propo- sition that the interests of all classes of produ- cers are parallel, or that the interests of capital (capitalists) and labor (laborers), or of em- ployers and employees, are one. They are never so in distribution, and are not always strictly so in production. This fact is strikingly illus- ti'ated in trusts, monopolies, and combinations. It is to the interest of each that others should produce as much as possible ; but it is often to the interest of one producer that his own prod- uct be materially limited, and the price thereby increased. A small product may have a greater market value than a large. It is better to receive 50% of 75 than 30% of 100. At all events, the saving through smaller expense in wages and raw material generally outweighs any decrease in the value of the entire product. But excepting cases of this sort all producers are concerned in bringing about the largest possible production. 68. If there were no employers and each man worked for himself, it is evident enough that more and better tools and ^j^^^ machinery machinery, and more effective pro- l^iestiou. ductive processes and falling rates of interest on the use of capital would vastly benefit the 116 ELEMENTARY ECONOMICS producers. It would be for each producer like a multiplication of his productive powers. But is the same thing true in the system of great employers and monster factories ? This is the question left over from the last chapter for discussion. We saw that the benefits of advancing civilization in better processes, larger capital, and improved machinery do not remain with the owners of wealth and capital ; but do they remain with the employers — the managers of the capitalized wealth? Evidently not entirely — for it is open to the laborer to work for himself if he prefer.^ Many of them do this, and gradually themselves become employers of labor. Other laborers, again, find it more to their advantage to work 1 As a practical fact, of course, insufficiency of capital, even for the simpler hand industries, makes an important limitation to this statement. It is true also that the mechanic, trained to one small part of an industrial process, is ill prepared to undertake the complete process on his own hehalf. But it is none the less true that if the position of wage-earner were not, on the whole, more desirable than that of independent producer, men could and would, as they once did, accept the methods and compensa- tions of the independent system. The condition of employee is imposed upon no one, otherwise than as it is self-imposed by those who have judged it to be the more advantageous opening ; and in large measure the decision is revocable, if any one cared to revoke it. That laborers wovild so rarely consider to return to the old method, no matter how readily open, is merely an- other aspect of the fact that the modern system is not purely for the benefit of some one else than the laborer. WAGES AND DISTRIBUTION 117 for an employer. Each follows his line of greatest advantage or of least sacrifice. The employer-class exist because of their ability, by reason of the possession in peculiar degree of capital loaned or hired, or by reason of superior ability in management, or by reason of economies in production possible only in in- dustries conducted on a large scale, to procure from labor larger utilities and to provide for it a larger recompense, risks being considered, than laborers could obtain from society without the intervention of the employer. The demand of the employer is an interme- diate form of the demand of consumers for the goods produced. The employer Employer as a may be regarded as the as'ent or "^^^^^^^^"^ is '^ ° o subject to corn- representative of the social demand petition. engaged in the purchase of the productive power of labor, and compelled by competition, if effective, to recompense laborers approxi- mately in the proportion in which their ser- vices have contributed to the selling price of the product. No distinction in principle ex- ists for present purposes between the goods commonly termed services and those goods fixed and embodied in matter commonly termed commodities. 118 ELEMENT ABY ECONOMICS 69. Before we proceed to theoretical analysis, let us see how things go on in actual business. One shoe manufacturer, A, has exceptional ability of management ; he shows, we will say, unusual skill in directing men so as to get the most work out of them, or so as to make their work the most effective, — or he has exceptional skill in judging to whom to give credit, or in advertising, or in buying supplies, or in obtain- ing the top price for his goods. Evidently he The supply of ^^^ employ his men as cheaply as employers. another employer, and sells his prod- uct on the same general market. He is making large profits, but not at the expense of wages or by higher prices to consumers. B, a competitor of less skill, finds it necessary to pay the same rate of wages and to sell on the same general level of prices. His inferior ability shows itself in lower profits. Still a third employer, C, has small skill in manage- ment; he would almost better keep out of the race, — could make nearly as much by working for A or B. C is a marginal manufacturer. His outlays in wages and other expenses hold his profits down to nearly or quite to the wages mark ; if things get much closer with him, he will go out of business. Now suppose that A WAGES AND DISTRIBUTION 119 decides to enlarge his trade by putting prices down a little, or that, X, a wage-earner in hat- making, concludes to try his fortune at manu- facturing. It is time for C to drop out. If Y and Z enter the field, A and B will meet an increase of competition which may further force down prices and profits. Possibly B will become marginal and be the next to give up the struggle. A's profits suffer, but do not entirely disappear ; prices, however, are falling for consumers. It is of no use for the employers to try to hold up their profits by lowering wages. Even if they combine, the success can be only tempo- rary ; other industries will get the laborers, if those employers fix their wages below the mar- ket level. The only resource in the long run for getting exceptional profits is to form some sort of pool, or trust, or combination, and by limiting the product to push up the prices. We are now ready for the theory. Relatively to society, employers stand as a class of wage-earners whose remuneration, other things being equal, is competitively determined by the supply of them. As with other forms of wages or profits, so with employers' profits ; peculiar advantages in ability or capital will 120 ELEMENTARY ECONOMICS bring correspondingly large returns, the amount of the profit being mostly determined by the degree in wliich the employer is able to reduce his expenses of production below those of the marginal producer, whose profits are practically of equal importance with the wages he could earn in working as wage-earner. A tendency toward a fall in the profits peculiar to ability, analogous to the tendency toward a fall in rents, exists as the differential advantages of ability become, by increase in intelligence and educa- tion, less marked. 70. The line which separates the independent workman from the employer on the one hand and the wage-earner on the other is easily crossed. Wage-earners are continually chang- ing to self-employment, as are the self-employed to wage-earners or to employers. There are marginal wage-earners and marginal indepen- dent workmen — men who are upon the point of changing to employers. There are em- ployers whom any fall in profits will push into wage-earning or independent production, -. — marginal employers. It is then evident that the profits of employers are never safe from competition from the outside, and that wages and profits, being in truth but different as- WAGES AND DISTRIBUTION 121 pects of reward for human activity, have a normal and natural relation to each other. The profits of the marginal employer are not greatly larger than the wages of employees. Employers of greater skill make proportionately greater profits. They produce and sell upon the same market conditions as does the marginal pro- ducer, but are able to reduce their outlay of production below his outlays. In the competi- tion of different employers with each other, the market price is the measure of the sacrifice of the marginal producer. The larger profits of other producers can, therefore, from no point of view be regarded as forming an addition to price. The marginal employer is driven from business by the ability of his competitors to achieve economies in production to which he cannot attain ; prices go too low for him. This competition of employers with each other is sharp and effective. They bid against each other for the services of capi- .j^y^^ competition tal as well as of labor. As more ^^ employers. capital is offered and rates of interest fall, these competing producers find it possible to produce and sell at lower prices ; thereby by competition they cancel for each other the advantages of these lower rates of interest 122 ELEMENTARY ECONOMICS upon capital. That is to say, the benefits of lower interest rates are passed along to con- sumers under the form of lower prices. 71. It follows, then, that the increased social product due to the larger use of ca^Dital in the form of machines and labor-saving devices, is not intercepted by capitalists under the form of interest or by employers under the form of profits, but goes for the benefit of humanity as a whole, and is distributed among individuals or classes in proportion to their consumption. In their character of consumers, wage-earners get their share through the increasing purchas- ing power of their wages. As we have already seen, it is the competition of employers to obtain the services of laborers, which guaran- tees to the laborers a compensation proportion- ate to the services rendered. SUGGESTIVE QUESTIONS Who are ultimately benefited by lower rates of inter- est following upon larger supplies of capital? By lower rents ? By lower profits ? Do lower profits come about chiefly through payment of higher wages or through fall in prices? How does the marginal law apply to employers? Do wages and profits tend to preserve any general relation to each other ? (See Section 27.) WAGES AND DISTRIBUTION 123 Does the laborer get 'wages in proportion at all to the profits of his employer ? Ought he? The wage-paying ability of what employer is commen- surate with market wages ? Is this fair to the wage-earner? Can it be changed by trades-unionism? Or in any other way ? CHAPTER X POPULATION; INCREASING AND DIMINISHING RETURNS Look up Malthus in the Encyclopaedia. What bearing lias density of population on rent? On wages ? Explain the law of the survival of the fittest as it ap- plies to the lower orders of life. Does it apply in equal degree to humanity in the com- plex conditions of modern life ? Do we let it apply ? Have lower orders of life any standard of comfort similar to that among men ? Do their standards change ? Do ours ? 72. During the earlier years of this century the English Poor Laws were the subject of The Poor Law i^^ch discussion and criticism, agitation. ^he provisions under which help could be procured by the poor were extremely lax. As a practical fact all men so lacking in energy as to refuse to work, and so lacking in pride as to accept charity, found help waiting for them through special taxes levied for this 124 POPULATION 125 purpose and called the poor rates. These taxes Avere assessed upon the cultivators of land. In some cases the poof rates became so great a burden as to bring about the abandonment of cultivation. In any case the ability of the cultivators to pay wages was seriously affected. The resulting lower wages made a still greater call for help from the rates. Industry and energy were discouraged, and a premium placed at their expense upon idleness and improvi- dence. But the full effect of these injudicious laws did not stop with this. Aid was given to pauper families in proportion to the size of the family. To the pauper this meant that the more children he had the more help he could get. As it became more difficult for the in- dustrious man to support his famil}^, it became more easy for the shiftless. A direct incentive was given for the multiplication of the shift- less. English agriculture was made to suffer in order that English manhood might be de- graded. 73. Most effective among the protests against tliis system was the celebrated Essay upon the Principle of Population^ written by the Rev. Thomas R. Malthus, a clergyman in the Eng- lish Church, who held, for a large part of his 126 ELEMENTARY ECONOMICS life, a professorship in Political Economy and History in an educational institution belonging to the East India Company at Haileybury, Eng- land. Malthus went much further than merely to condemn the artificial stimulus to improvident child-bearing. He elaborated two general propositions of great importance. The first was in substance what we have already stated as the law of diminishing returns in agriculture — the assertion that with increasing demand for food products there is a marked increase in the difficulty of procuring them. Over-popu- lation is therefore linked with poverty. His second proposition was that the tendency of the human race is strongly toward over-population, and that nothing but conscious and continuous resistance can overcome this tendency. 74. Setting aside all investigation of what tendencies are likely to develop with regard to Production and population, we are none the less population. concerned to determine what effect will come from an increase of population, should such increase take place. The agricultural law of diminishing returns is of especial importance in this regard, by virtue of its bearing upon the productive power of human labor. First we POPULATION 127 must observe that over-sparseness of popula- tion is unfavorable either to the production of wealth or to the development of civilization. Pushed by increasing numbers men swarm from the parent hive somewhat as do bees. Migra- tions to new continents, the development of the variety of natural resources which different re- gions present, the growth of international trade, the exchange of the different products of art and science and industry, and the accompanying interchange of science, thought, literature, and institutions, make powerfully for the material and intellectual progress of the race. Hunting or pastoral or purely agricultural types of society are rarely progressive. Even upon the farm, and still more noticeably in the shop, the advantages of associated effort are apparent. One man to pitch up the hay and another to make the load are of mutual advantage. New colonies often suffer acutely from lack of numbers. 75. But just as on the farm there comes a point at which an increase in the number of laborers takes place only at a lower Diminigiiing per capita productiveness, so in a returns. state or continent there may come about a con- dition of over-population. The very fact that 128 ELEMENTARY ECONOMICS nations swarm is a proof of this. After a cer- tain point is reached, the tendency of over- population is toward a reduced productiveness of labor, and therefore toward lower wages for the laborers. This is the old law of diminish- ing returns. Proceeding in substance upon this law as a basis it was urged by Mai thus, and is still urged Is overpopuia- ^J many economists, that the world tion coming? ^g unavoidably set toward poverty — that the human race, like all other orders of life, is certain to increase in numbers until starvation sets a limit, unless, indeed, the human race, unlike the lower orders, shall take thought of its tendencies and set itself to rational, purposed, continuous resistance. 76. All orders of vegetable life press hard upon one another, and increase to the limit of their opportunity. The weaker go to the wall simply because the stronger are pushing for place. Wherever fertility allows and condi- tions permit, there life multiplies to the limit of possibility. The stress never relaxes, or if it relaxes gives only a short respite for a more rapid increase. Vegetable life maintains itself primarily upon the inorganic, or, as we com- monly say, the mineral, and in turn furnishes POPULATION 129 the nourishment upon which the animal king- dom is maintained. True, animal life may prey upon itself, but its ultimate supply of nourish- ment is found in the vegetable kingdom. In this power of vegetable life to assimilate inor- ganic matter, and in the dependence of the animal kingdom upon the vegetable, is found the ultimate basis of the classification into the three kingdoms. Vegetable life is distin- guished from animal life by this power of assimilation of inorganic matter. All flesh is indeed grass, as the horse in the old song is said to have pleaded in excuse for biting his master. Wliile one form of animal life is the prey of another, it is only as an intermediate form of grass. Although some day the scien- tists ma}^ tell us how to obtain from the nitro- gen in the air and the coal in the bin our necessary food, it remains certain that till then the number of human beings upon the earth must be limited by the capacity of the earth to bring forth its supplies of vegetable product. All orders of brute life disclose the same ten- dency toward increase which we have remarked in the vegetable world. The limit is the limit of subsistence, modified only by the measure in which animal life preys upon itself. 130 ELEMENTARY ECONOMICS But humanity is rarely the prey of other orders, and war and murder do not, in modern days, greatly affect the total of the world's census. Famine is not common, epidemics are mostly famine in disguise, and famine itself is merely temporary insufficiency in vegetable product. The world has made an unexampled increase in population during the last two hun- dred years. Where is it to stop, unless when famine has become the normal and usual state of man ? We have not space to examine closely into the correctness of this gloomy Malthusian fore- cast, but only to bring clearly into view its dif- ferent and difficult aspects. There is room for question how far what is true of vegetable and brute life can be assumed to hold with the human race. If, as nations and individuals prosper increasingly in resources, wealth, and civilization, they come to bring into the world and to rear fewer and fewer children rather than more, there is need enough to worry, but for an altogether different reason from that of the Malthusian foreboding. What is your ob- servation as to the homes which contain the most children? Do the children indicate by their number the relative wealth of parents, POPULATION 131 and their relative ability to furnisli sufficient bread and butter for the child aj^petite? Is it the rich or the poor wlTo are prolific? 77. At any rate, the law of diminishing returns appears to apply chiefly to the agri- cultural industries — the industries of raw material. How far, if at all, it applies to min- ing or to sea-fisheries is not so clear. And it may happen that other industries disclose as important tendencies toward increased produc- tiveness. Such, indeed, is the fact. While the race may find it increasingly harder to pro- duce its food, it may have an increasingly larger share of time and capital to apply thereto. The tendency by which this becomes possible is called the law of increasing returns. In a sparsely settled country enterprise will commonly be found to busy itself for the most part with the extractive industries „, , ^ . , The law of — the industries of ra^v material — increasing since these are the industries which, for the time, offer the highest remunerations and require the smallest outlay of capital. But these are the industries to which the law of diminishing returns applies. As population increases, this law tends to become increasingly manifest, and the advantages of the extractive 132 ELEMENTARY ECONOMICS industries correspondingly less. On the other hand, as population and capital increase, the relative disadvantages of manufacturing and kindred industries decrease. Manufacturing industries soon gain a foothold; nor is this entirely due to the tendency toward diminish- ing returns in extractive industries; it is in part due, also, to the tendency toward increas- ing returns manifested in other industries. It is easier to make ten hats after one pattern than to make ten different patterns of hats. This is true even with the methods of hand industry, and more noticeably true in more highly developed conditions. The larger the market, the greater the possible economies in production; the more extended the division of labor, the more marked the advantages to be derived from machinery, and the more im- portant the economies possible in the use of capital. Every improvement in transportation which enables a larger number of customers to be served from one centre of supply, renders possible larger economies of production at this centre. An .increase in population acts in a parallel manner. So manifest is this tendency toward diminished proportional expense in manufacturing industries, that it is rarely over- POPULATION 133 come by the tendency toward advancing ex- pense characteristic of raw material, excepting in cases Avhere the manufacturing processes have comparatively small part in the cost of the finished product. It follows, then, that if food comes to require more time and effort to get it, the race will have more time and effort to spare for that purpose. 78. It is not clear that, as usually stated, the tendency toward increasing returns deserves to be termed a law. The economies jg ^-^^^^ ^^^^ ^ possible from larger markets and ^^^"^ increased division of labor give no indication of being inexhaustible. But the tendency toward increased productiveness, through the develo2:)ment of man in tastes and desires, as well as in the science and technique of indus- try, is seemingly persistent. On this side alone the law of increasing returns is open to no question. SUGGESTIVE QUESTIONS Why have cities grown so rapidly within the last fifty years ? What kinds of business centre in cities? Do improvements in agriculture tend chiefly to the in- crease of the rural or of the urban population ? Is the great growth of cities peculiar to the United States ? 134 ELEMENTARY ECONOMICS Are there proportionally more or fewer people em- ployed in agriculture now than fifty years ago? Why? Is this growth of cities likely to continue ? What effect will improvements in transportation have ? Improvements in machinery? What effect from improved suburban transportation on the density of cities ? What effect may the electric motor as power have on the large-factory system ? In what degree ? CHAPTER XI MONEY GENERALLY Why is the value of gold more stable than that of coal or iron? In what sense is the value of gold fixed by sacrifices of production ? Is this a quick or a slow process ? In what sense can money be consumed ? What do you intend to do with the next money you get? If a ten-dollar bill were given yon on the condition that you should always keep it, would it be worth your while? If a hundred-dollar bill were given you, would this in- crease the total wealth of the world ? AYould it increase your wealth? Suppose each man's cash were increased by one hun- dred dollars, would this increase the wealth of the world? If the money in the possession of each member of society were doubled, would this increase the wealth of any individual ? Do you suppose that after this doubling, each dollar would buy as much as before? If there Avere no money, how would you go to work to buy a book? Would the bookseller be willing to take hay in payment? Why would not iron make good money? Brass? Wheat? Cattle? Hay? Diamonds? Tobacco? So far as we now see, in what important respects do 135 136 ELEMENTARY ECON 031108 gold and silver differ in characteristics from the above- named substances? Mention some uses for gold and silver other than as money. Is paper money useful otherwise than as money? Mention some of the advantages of division of^ labour. 79. It was sufficiently explained in the open- ing chapter that people want money only in the sense that they want the things which money will buy. When you sell something, your pur- pose does not stop with getting the money. That is only a half-way stage toward getting the things you want in place of what you sell. That is to say, the receipt of money marks the half-way point in an exchange of goods. It may of course be true that when you sell and get the money you may not know what you are going to buy, but if you were never to buy anything, you would have preferred to keep the thing you had. And so, as was said in Sec- tion 2, when we speak of the love of money we really have in mind the love of the things in life which are bought and sold. Money stands only as a general symbol. In substance it is a power of purchase founded on the fact of a prior sale or service. 80. The function of money is analogous to MONEY GENEBALLT 137 that of tools ; Ave do not desire these for them- selves, but for the things they enable ^^^ ^g, ^^^^ us to do; we do not desire labor for ^^^^^ serve? itself, but for the things Avhieh it produces ; so money is helpful because it enables us easily and conveniently to make exchanges of goods. Barter Avould be an inconvenient and imprac- ticable way of carrying on exchanges. The advantages of currency are best illustrated by assuming the absence of it: suppose that A desires to exchange hats for boots ; B lias boots, but refuses to trade with A, because B himself wants, not hats, but flour. If it turns out that C, who has coats, wants neither boots nor hats but potatoes, the three men can do nothing with each other. A must hunt about until he finds some one who has boots and wants hats ; B, some one who has flour and wants boots; C, some one who has potatoes and wants coats. And even if A finds a man having boots and w^anting hats, it may be impossible to trade because of a difference in value between the desired quantity of boots and the desired quan- tity of hats. B and C may meet Avith similar difficulties. Jevons gives the following illus- trations : " Some years since. Mademoiselle Zelie, a singer of the Theatre Lyrique at Paris, 138 ELEMENTARY ECONOMICS made a professional tour round the world, and gave a concert in the Society Islands. In ex- change for an air from Norma and a few other songs, she was to receive a third part of the receipts. When counted, her share was found to consist of three pigs, 23 turkeys, 44 chickens, 5000 cocoanuts, besides considerable quantities of bananas, lemons, and oranges. At the Halle in Paris, as the prima donna remarked, this amount of livestock and vegetables might have brought 4000 francs, which would have been good remuneration for five songs. In the So- ciety Islands, however, pieces of money were very scarce, and, as Mademoiselle could not consume any considerable portion of the re- ceipts herself, it became necessary, in the mean- time, to feed the pigs and poultry with the fruit. . . . When Mr. Wallace was travelling in the Malay Archipelago, he seems to have suffered rather from the scarcity than the super- abundance of provisions. In his most interest- ing account of his travels, he tells us that in some of the islands where there was no proper currency, he could not procure supplies for dinner without a special bargain, and much chaffering upon each occasion. If a vendor of fish or other coveted eatables did not meet with MONEY GENERALLY 139 the sort of exchange desired, he would pass on, and Mr. Wallace and his party had to go with- out their dinner. It therefore became very desirable to keep on hand a supply of articles, such as knives, pieces of cloth, arrack, or sago cakes, to multipl}^ the chance that one or other article would suit the itinerant merchant." If trading Avere impossible, each of us would have to produce everything that he consumed; we should be Jacks at all trades, masters of none. Under the opportunities of exchange, individuals and nations folloAv the lines of their greatest ability and advantage, and exchange their surplus in product for the surplus of others. Thus the aggregate social product is increased, and thereb}^ the individual share — the quotient — is enlarged. Currency facili- tates this specialization of labor, commonly termed division of labor, by facilitating ex- changes. Whenever we trade, it is because the thing that we get we value more highly than the thing that we part with. Money, or more accurately currency, is a means of trans- portation as truly as are railroads and steam- ships. 81. It is important to understand what qualities are essential in any material used for 140 ELEMENTARY ECONOMICS money. Primarily the money commodity must be adapted to the needs of ordinary cash ex- The necessary changes: great purchasing power qualities. must be Contained in small bulk; all specimens must be of equal quality; divi- sion and combination must be possible without loss of value ; the value must not be so great as to render the medium over minute for small transactions. Hay would be too bulky and too variable in quality; diamonds too valu- able, too variable, and practically not subject to subdivision or recombination. The pin and needle ■ business would not flourish with diamonds for money. Any material which should answer these requirements would servfc acceptably as a medium of exchange, were it not for the fact that exchanges are sometimes a long while in completing themselves. When you sell your hats you may not want immedi- ately to purchase their equivalent; possibly you do not yet know what you will purchase, or, if you know, you are not yet in want of the thing. Thus the money which you get must be something which will not fall in purchasing power by reason of chemical changes or by reason of fluctuations in supply. Your money is a note of demand payable by society in market MONEY GENERALLY 141 products. Wheat and hay would deteriorate in quality, and are at one time abundant and at another time in short supply. 82. Again, while not so clearly, yet ulti- mately as truly, all cases of mortgages, notes and bonds, bank deposits, and . Credit is credits m general are protracted protracted instances of exchange. The whole- ^^^ ^^^^' saler sells his groceries at three months' time. Instead of receiving his pay immediately in commodities, or in money with which to buy commodities, the payment side of the trade is postponed for a term of months. It is im- portant, then, that the medium of exchange shall not vary in purchasing power. When you lend, you really sell the right to things; when you are repaid, you get things in return. Thus a loan is, in essence, a long-time barter. When 3^ou have sold jouv hats, j^ou alloAv X to take the money for which they sell. It is the same as if 3'ou had sold X the hats or the goods which he buys with the money. When he pays you, he really returns to you your remuneration for the hats. If the pay- ment is a fair one, the money in which he pays must not have gained or lost in its control over the means of satisfying human needs. Thus, 142 ELEMENTARY ECONOMICS money has to serve not only as a medium of quick exchanges, but as a standard of deferred payments — a means of effecting exchanges re- quiring long periods of time for their com- pletion. 83. Gold and silver approximate most nearly of all commodities to these requirements. Nei- ther is greatly subject to rust, decay, or chemical action. Both are absolutely uniform in quality wherever found, and are subject, without loss of value, to division and combination. Both comprise large value in small bulk. Not only this, but the annual product of each is so small in proportion to the entire supply, that rapid fluctuations in value from supply causes are im- possible. An amount of water which, poured into a washtub, will noticeably change its level, will not greatly affect the depth of a cistern. 84. Currency has, then, three distinct func- tions: that (1) of facilitating ordinary ex- changes; (2) of serving as a measure of value in current business ; (3) of affording a standard of deferred payments or a reservoir of savings. 85. Now while all agree that gold and silver possess, in a remarkable degree, the qualities desirable in money, no one will assert that either can be regarded as an ideal money. The MONEY GENERALLY 143 failure chiefly lies in this third function — that of serving as a standard of deferred payments. It is sometimes argued that if one is there an ideal has borrowed an ounce of gold, or ^lo^ey? a dollar of gold, or a pound of gold, he ought to be Avilling to return an equal weight in paj- ment, just as if he had borrowed a ton of iron or a barrel of flour. The iron or the flour may have changed in value either by rise or fall, but this is a risk which each party to the contract accepts and from which no agreement to be performed in the future can be free. No one is wronged; the contract is a fair one — onl}^ it is in some measure speculative. So it is urged Avith respect to gold; one has borrowed a pound — let him return a pound. No one can expect either gold or silver to be absolutely stable upon the market, relatively to other com- modities — that is, to preserve an unfluctuating exchange poAver. Everybody knows that some- times prices rise on the average and again they fall — that is to say, gold increases or loses in purchasing poAver, and there seems to be no Avay to help it. Gold is a commodity like other commodities ; Avhile it may fluctuate less than others, it can hardly be expected to be free from all fluctuation. Hoav is the debtor 144 ELEMENTARY ECONOMICS wronged, if, when the time of payment comes, the gold will buy more than when it was bor- rowed? Suppose the creditor not to have loadied, or suppose the debtor to have kept in hand the very gold coins which he borrowed: why should the creditor be worse off for having loaned or the debtor differently treated for hav- ing spent? Would he likewise object to carry- ing out a contract for flour or iron ? But an ideal money would.be a money that did not fluctuate in purchasing power. Possi- bly enough there will never be found an ideal money; probably there will not. It may be that there is less of speculation in gold contracts than in other contracts, but a perfect money would not be speculative at all. When we buy wheat, or cattle, or groceries, we commonly promise to repay in money rather than in kind precisely because we want to attain as nearly as possible to an equality of purchasing power be- tween what was received and what is returned. If the standard of payment itself fluctuates, this is in itself an evil. We must remember also that one does not borrow money for the purpose of consuming it, but of spending it. So when the lender is paid he uses the money for reinvestment or MONET GENERALLY 145 for purchases, and not as a commodity to be consumed. 86. The fluctuation of the purchasing power of money is so slight that it does not materially interfere with the ordinary day-to- „ *^ ^ *^ How this bears day business. It is only in long- upon the silver time contracts that the question be- ^^^^ ^°°' comes of great importance. As bearing upon American political questions, it is now, for ex- ample, of great interest to determine whether gold has not in the past twenty or twenty-five years considerably increased in purchasing power, and if so, in what degree. The advo- cates of silver coinage make it one ground of attack upon the gold standaid, that under it the debtor is constantly put to loss to the corre- sponding advantage of the creditor. In sup- port of this they point to the general fall in prices, which they assert to have taken place for a number of years and to be still taking place. The opponents of silver coinage meet this attack in different ways. Some deny any general or average fall in prices. Will this denial hold? Others admit the fall, but insist that this is not an increase in the value of gold, but rather a decrease in the value of other commodities, consequent upon the cheapening J. 146 ELEMENTARY ECONOMICS of the methods of production. Do you see what they mean by this? What is value ?^ 87. We have seen that the utility of cur- rency lies, for the most part, in its service in The demand for facilitating exchanges. There is, money. then, as truly a demand for money as for any other commodity. The demand for a medium of exchange is approximately meas- ured by the volume of exchanges to be made. 1 The Silver Question. — From 1834 up to 1873 a certain weight of gold or sixteen times this weight of silver was per- mitted under the United States law to be coined as a dollar ; any one in possession of either gold or silver was entitled free of charge to have these stamped at the mint as money, a given weight of silver making one-sixteenth as much money as a like weight of gold. This is what is meant by free coinage of gold and silver at the ratio of 16 to 1. Practically no silver was ever coined under this law, because silver was too valuable relatively to' gold. Evidently if silver were of equal value with gold, weight for weight, no one would have it stamped as money at a ratio of 16 to 1. This would be to stamp sixteen gold dollars worth of silver as worth one dollar. So if silver were at the ratio of 15 to 1, that is, worth one-fifteenth of gold, no coining of silver would be done at a valuation of one-sixteenth. The reason that no coinage of silver was ever done under so-called free coinage was that silver never came to be worth as little as one-sixteenth of gold till 1873, and a little before this point was reached the coinage right was withdrawn. Gold has since remained the only metal freely coined for whoever may present it. The silver which has been coined since that time, as well as that coined before, has been bought by the government and made into money, just as are nickel and copper, without any attempt to make the bullion value equal to the face value. The ratio of silver to gold is now about 33 to 1. It is asserted by the opponents of free silver that as long as gold is worth thirty-three times as much as silver, it cannot be coined or kept in circulation if treated as only worth sixteen times as much, — that silver would be coined in immense quantities, MONEY GENERALLY 147 We say approximately, since barter is always possible, though ordinarily not of considerable volume. Clearly enough there would be no necessity for money and no demand for it, if each of us were to produce everything that he , ^ . . Demand limited consumed. it is equally obvious by division of that division of labor becomes pos- ' sible only on terms of possible exchange of and the purchasing power of the dollar lowered to something like one-half what it now is. They reason that gold would entirely disappear from circulation as money, according to Gresham's Law. Of the advocates of free silver, one part helieve that with ■free coinage silver would he so raised in value hy the increased demand, and gold so lowered in value hy the suj^plies set free from use as money and thrown upon the market, that the ratio would return to IG to 1, and the two metals circulate side hy side as money. These are the National Bimetallists. Others of these advocates admit that gold would he excluded from circu- lation. These are the Silver Monometallists. The International Bimetallists helieve tlie co-operation of the European nations necessary in fixing tlae coinage ratio. Some of these regard IG to 1 as a practicable ratio : others advise a higher ratio. The extent of your investigations into the silver question must rest with yourself and your teacher; the subject is too large for adequate treatment in an elementary course. The writer may, however, remark in passing that he does not con- cur in either of the methods, set forth in the text, of meeting the silver argument; that he believes that prices have consider- ably fallen in the last twenty-five years; and that this fall is not entirely, or even in larger part, to be ascribed to temporary disturbances in the way of crisis or panic. He is also disposed to admit that had our government, in 1873, adhered to silver as a standard instead of gold, the silver standai'd would have afforded a much closer approximation to the ideal than has gold ; and yet he does not favor a return to the free coinage of silver in America alone on any terms. 148 ELEMENTARY ECONOMICS products. It now becomes important to note that, population and per capita production remaining the same, the volume of exchanges increases as division of labor is more extended; that the aggregate of exchanges is approxi- mately limited by the degree in which division of labor is extended; and that, therefore, the advantages of exchange are exhausted when no further economies in production are promised by an increased division of labor. 88. But population and per capita pro- ductiveness do not remain stationary; the Demand is population of the earth is rapidly iacreasing. increasing; the development, also, of the sciences and arts, and of machinery and transportation, not only stimulates the division of labor, the specialization of industry, but increases the per capita production of commodi- ties. The ends of the earth now trade with each other. It ought, then, to be clear that the need for currency is not proportionate to population alone, or to wealth, or even to per capita pro- ductiveness alone. , It is the volume of ex- changing to be performed which furnishes the measure of the demand for currency. This is largely a matter of degree of civilization and MONEY GENERALLY 149 manner of industrial organization. In a gen- eral way, the per capita requirement for cur- rency is enlarging. No amount can be said to be required per capita simpl}^, but only per capita in view of tlie average productive effi- ciency and the established industrial methods. A sufficient per capita for one country may be entirely inadequate for another. 89. The value of the currency unit, the dol- lar or franc or pound, is the point of adjustment between the demand for currency The value of the and the supply of currency. To ^°^^J ^i'- this extent, there is nothing difficult or pe- culiar in currency principles. If the demand increases without a correspondingly increasing supply, money rises, that is, prices fall. So, increases in supply tend toward higher prices, that is, toward depreciation in the purchasing power of the money unit. If the relation between demand and supply changes, the value of the unit changes to correspond. A perma- nently insufficient currency is therefore an im- possibility; prices must fall until at the new unit vakie the supply is sufficient. So, if the currency is redundant, prices rise until the redundancy is cancelled. Currency is like a gas which always fills its receptacle. A cur- 150 ELEMENTARY ECONOMICS rency out of equilibrium is always in process of becoming sufficient. But this process of becoming is rarely a comfortable one, and is always attended with injustice, and commonly with disaster, as will be more clearly seen in our examination of commercial crises. These fluctuations in prices are to be avoided if possible. It is by this test, then, that the normal supply of money is best determined. A supply sufficient in kind and quantity to preserve unchanged the purchasing power of the dollar would be the ideal condition for all ordinary cases. SUGGESTIVE QUESTIONS Explain the analogy between exchange and transpor- tation. Outline inconveniences of doing business without a medium of exchange. Show that a sale for money is only half of an exchange of goods. Show that a loan and repayment of money really equal an exchange of commodities. What forces are working to increase the demand for a circulating medium? As far as you can see, is gold alone, or are gold and silver together, increasing in volume with a rapidity cor- responding to the demand? If not, what strikes you as a necessary result ? DEMAND AND SUPPLY OF CURBENCY 151 What will happen if currency is in excess? Is insuf- ficient? AVho are injured when prices rise? "Who, when prices fall? DEMAND AND SUPPLY OF CURRENCY What effect would falling prices have on the produc- tion of gold ? Would tJiis result probably be sufficient fully to over- come the tendency toward a fall in prices? What effect would an increased output of gold at the mines have ? Suppose the output of this j^ear to be double that of last year ; would this double prices ? Have you any gold about your person ? Is it in the form of money? In what forms? What effect would more plentiful gold have on its use for other than currency purposes? AVould this effect be sufficient entirely to prevent a rise in prices ? 90. In a general way the nature of the demand for currenc}^ is clear enough. This demand rests upon the utility of currency in permitting the division of labor, which divi- sion of labor becomes possible only on condition of possible exchange of products. With cur- rency, as with all other commodities, value marks the equilibrium point between demand and supply. As the business to be transacted 152 ELEMENTABY ECONOMICS becomes greater, the value of currency will rise, that is to saj^, prices will fall — money will buy more — unless at the same time the supply of currency expands. If the volume of the currency increases, prices Avill tend to rise — that is to say, a given amount of currency will buy less goods. 91. As has been said, the demand for cur- rency results from the disposition to trade — „, to exchansfe things. Now note that The cause of the ^ ... demand for this disposition to trade is strong ^ just in proportion as there are ad- vantages to be obtained thereby. Both buyer and seller believe themselves to be benefited in every trade, else they will not trade. The quantities, therefore, which we have already studied as buyers' and sellers' quasi-rents explain the demand for currency. 92. But there are many things owned by us which we would hardly sell at any price, or, at all events, at anything which any Should onrrency he equal to One would givc. 1 ou Ordinarily ^^^ * buy things because you want them for use and not for re-sale. Whatever you sell, you sell with a view to replacing it by another thing which you want more. When you have obtained this other thing, you commonly intend DEMAND AND SUPPLY OF CURRENCY 153 to keep it; that is why you bought it. Thus, only a small part of the wealth of the world goes to swell the demand for currency — only that part which is being offered for sale at any particular moment. Those people evidently misunderstand the case who believe there must be as much money as there is w^ealth, or who fancy that the general Avelfare would be in- creased by indefinitely increasing the number of dollars. 93. We must now briefly examine some of the sources of supply of currency. Almost all peoples use, in some measure, either ^^^^^ ^^^^^ silver or gold as money. Where *^® supply? this is true, and where also it is true, as it generally is, that anybody having the bullion can have it stamped as mone}^, the value of the money will be equal to the value of the bullion which it contains, and the purchasing power of the money will equal the marginal cost of pro- duction of the bullion. That is to say, if a day's labor applied to gold digging will procure more hats than will a day's labor applied di- rectly to hat maki^ig, the production of gold will increase until this advantage is cancelled. Thus, any increase in the purchasing power of money will tend to stimulate the production of 154 ELEMENTARY ECONOMICS the money metal, and after time enough has elapsed, the value of the money will come to equal the marginal cost of producing it. 94. Suppose, however, that a great increase takes place in the product of the mines, richer Effect of in- mines having been discovered or creased supply, better processes of working them devised. This will tend to enlarge the volume of currency and thus to raise prices. But not all the new product Avill be made into money. Not all the gold already produced is used as money. Increased supplies would lower its value, and gold would come to be employed for many new uses as well as in larger measure for old uses. Only a part of the new product would go to expand the volume of currency. In the next chapter we shall examine the ways in which paper and credit come, for some purposes, to take the place of money. We are, however, already prepared to note one im- portant difference between a currency having a real commodity value — a currency marketable for ordinary use and consumption — and a cur- rency made, for example, of paper, and having no value, or an inappreciable value, for other than currency uses. A considerable increase in the supply of gold would not considerably DEMAND AND SUPPLY OF CUliRENCY 155 affect the amount of gold used as mone}", if the ordinary market demand were capable with- out a great change in value of absorbing the larger portion of the new suppl}^ At any rate, to increase the world's supply of gold by an amount equal to the volume used as money would not be to double the amount used as money. But with paper the case is different. Paper put out as money will remain as money unless it gets paid back to the government or becomes so worthless as to be used for rags. The supply adjusts itself to the demand only by a fall in purchasing power — a rise in prices — proportional to the increase in volume. DIFFERENT KINDS OF CURRENCY The following is the report of a typical coun- try bank in the fall of 1894. A careful analysis should be made of this report. Notice that the bank has, of capital, surplus funds, and undi- vided profits, about $76,000 invested, and has with it upon deposit 1255,887.94 : — 156 ELEMENT ABY ECONOMICS FIEST NATIONAL BANK Charles City (Iowa), 1894 Loans and dis- counts .... $237,600 40 Overdrafts ... 385 30 U. S. Bonds to se- cure circulation 12,500 00 Due from other Na- tional Banks . 32,713 04 Furniture and fixt- ures 1,000 00 Due from State Banks and bank- ers 782 52 Due from approved reserve agents . 24,888 90 Checks and other cash items . . 1,649 79 Bills of other Na- tional Banks . . 7,972 00 Fractional cur- rency .... 93 63 Specie 10,035 50 Legal tender notes 8,000 00 Redemption fund with U. S. Treas- urer 662 50 Total 181 64 Capital stock paid in o Surplus fund $50,000 00 10,000 00 Undivided profits less current ex- penses and taxes paid 16,533 70 National Bank Notes outstand- ing 5,760 00 Individual deposits 255,887 94 Total ,181 64 QUESTIONS Show what has become of this money. How^ much in notes or overdrafts is due the bank from borrowers ? How much has been loaned to other banks by way of deposits ? DEMAND AND SUPPLY OF CURRENCY 157 How much may this bank be called upon to pay on any day ? What are its immediate resources for this purpose? How much €ash has it on hand ? How much of this is gold or silver? How much of its resources are in the form of demand rights against other banks ? What has the bank, in fact, to show for this depositors' money ? How are national bank notes secured ? In what payable ? Get one of these notes and see what the bank agrees to do. Is it probable that all depositors will call for their money at one time? What would happen if they did? Would there be much profit in banking if, for eveiy dollar left at the bank, the bank must keep a dollar on hand? 95. Suppose that D gives to L an order upon you for fifty dollars. L pa3's a grocery bill with this, and the grocer brings it to 3'ou and discharges a claim serves as cui- which you hold against him for that amount; you tear up the order. A large amount of business has been transacted by the use of this order and without the need of money. Credit has served as a substitute for money. So when you pay a debt by a check upon the 158 ELEMENTARY ECONOMICS bank, this check may pass through several hands, doing work similar to that of money, permitting exchanges, making payments, etc., and finally, when the check comes to the bank, it is merely charged up to you and credited to the person who deposits it. No money need have been used in the entire series of trans- actions. We thus see that the circulating medium is composed of different elements. The student may have been puzzled by the use in one place of the term "money" and in another of the term "currency." Money and currency are not equivalent terms. Currency includes all forms of exchange media; money is but one form of currency. We speak of coin, greenbacks, and the like, as money. But the larger part of business is transacted through credit substi- tutes for these, — through drafts, bills of ex- change, negotiable notes, and the check and book-keeping devices of deposit banking. In their origin, it is probably true that all cur- rencies were composed solely of commodities, with a well-defined utility for other than cur- rency purposes. But with the development of society, the use of substitutes has increased. The bank customer thinks of his deposit in the DEMAND AXD SUPPLY OF CURBENCY 159 bank as money, and it really serves him all the purposes of money. The right to have the money when desired "is as good as the actual possession of it, and is as readil}^ and as ser- viceably transferred. When the bank customer wants to pay a bill, he draws a check or order against his account. The receiver of the check places it in the bank and gets credit for it, the drawer is charged with it, and the transaction is completed, no money having been transferred. These deposit accounts in banks commonly aggregate several times the cash resources of the banks. These cash resources also are largely made up of deposit claims against other banks. London, for example, is the banking centre not only for a large part of the business of England, but also for a con- siderable portion of the business of the world. International interest payments and the trans- actions of foreign exchange are effected by drafts on London. Balances between Lon- don banks are settled, not in money, but in checks and book-keeping at the Bank of Eng- land. It results that the enormous business of the London banks, aggregating hundreds of millions of dollars daily, requires the transfer of only a fraction of one per cent in money. 160 ELEMENT AEY ECONOMICS It becomes intelligible that the English people are able to handle their business affairs upon less than twenty dollars per capita of money, while Franc3 employs over forty dollars per capita, though doing a much smaller per capita of business. One rarely comes across a bank in French cities — deposit banking is scarcely practised, checks unknown in ordinary affairs, and even the Paris clearing-house, the only one in France, is scantily patronized. Work- ing people keep their salaries in their pockets ; peasants their savings in their stockings; and each merchant serves as his own banker. 96. Not only have business men invented methods of convenience in doing business Government whicli in effect are creations of cur- issues, rency, but governments and bank- ing .institutions have made large issues of forms of money known as bills, bank-notes, "greenbacks," and the like. We have seen that all these substitute forms of currency per- form the functions of bullion currency (coin) in effecting exchanges, and therefore operate in this regard as would an actual increase in the supply of the commodity used as money. GRESIIAM'S LAW 161 SUGGESTIVE QUESTIONS When a merchant deposits in the bank, say ^1000, is all of this usually in actual money? In what else? Suppose you have $1000 to your credit — on deposit, as it is called — at the bank, is this money really there? How much is probably at the bank to answer for your $1000 ? If you desired to pay a bill, would you probably draw money or make a check ? How could the merchant make the check serve him as money without ever seeing the real money for it? What is a clearing-house? See a banker and ask him to explain it to you. GRE SHAM'S LAW The Cheaper Money Drives out the Dearer As aluminum has become cheaper, what new uses have been found for it? What effect would a decrease in the exchange power of gold have on its use as plate and gilding and orna- ment? When a piece of gold in your possession will make for you a gold watch case or will buy you a second-grade bicycle, we will suppose that you choose the watch case; now suppose prices change so that the gold will command a first-gi-ade wheel — what change would you probably make in your application of the gold ? 97. Any expansion of the currency, whether by credit or otherwise, tends to lower the pur- chasing power of each money unit (dollar, M 162 ELEMENTARY ECONOMICS franc, pound, etc.). This fall in the exchange power of the money commodity, for example gold or silver, makes it possible Poor money drives out for the Commodity to be applied ^°° ' to many new uses. So, as paper money or credit comes to circulate as cur- rency, there is some tendency toward disap- pearance from money uses of that part of the currency which can be used for something else. The gold flows out into other chan- nels. So we say, in the terms of what is called Gresham's law, that the cheaper money drives out the dearer. But do not allow this expression to mislead you. The expansion of currency causes a fall in the purchasing power of the unit. This fall releases the gold or silver to the stronger pull of the outside market — the market of art and in- dustry. The dear money is not elbowed or pushed out, but rather induced or beckoned out. Cheaper money relaxes the currency de- mand, and thereby releases, in some measure, the currenc}^ which is the object of other kinds of demand. In truth, expansion by cheaper currency does not differ fiom expansion through an increased supply of the original currency commodity, except that, in the case of an GEES HAM'S LAW 163 addition of cheap money, all the outflow is confined to the dearer money, the cheaper continuing in its currency use. 98. What we have already said as to Gresh- am's law applies in any society, and would be true were the society in question « , . , ^ ^ Gresnam's law the only one in the world. But in international commonly these domestic tendencies are not of very great importance. Similar tendencies are, hoAvever, to be remarked in international trade. In domestic movements of currency, Gresham's law means that inflation (expansion or increase) makes some forms of currency more desirable outside of the cur- rency use than inside — more valuable for use than for exchange. In international affairs Gresham's law means that expansion makes some forms of currency more desirable outside of the country than inside — more desirable for buying abroad than for buying at home. Suppose, for example, that by some form of domestic expansion — for example, by paper money or by increased use of credit — prices have been raised ten per cent; that which was originally 90 here and 100 abroad and was ex- ported, now rising to 99 here ceases to be exported; that which was 90 abroad and 100 164 ELEMENTARY ECONOMICS here and was ijiiported, now rising to 110 here, is still more largely imported. That part of our currency which stands best abroad, and upon which therefore the pull of the for- eign market is strongest, will be exported to pay the money balance which we come to owe abroad. This tendency toward the export of money will continue till we have cancelled the difference between domestic and foreign prices. While the export of our money tends to bring our prices down, the import to for- eign countries tends to raise the prices there. 99. Let it be supposed, in further illustra- tion of international currency movements, that the money circulation of the United States is one billion five hundred millions, and that of Europe ten billions; suppose, also, our billion and a half to be all gold. If now an attempt be made to double our money volume by the issue of a billion and a half of paper dollars, it is evident that our prices will tend to rise. The result must be an increase in imports and a decrease in exports. As long as we have the gold to send, our unfavorable trade balance will be settled in exported gold, and prices will tend to rise abroad. When interna- tional prices have reached their new level, the GEESHAM'S LAW 165 case will stand as follows: the aggregate cur- rency of Europe and America will have increased from $11,500,000,000 to 813,000,- 000,000, and a general advance in prices of 13 % will therefore have taken place. Our currency must, then, have increased from 11,500,000,000 to ($1,500,000,000 x 1.13) |1,- 669, 500, 000, — $169, 500, 000 of this being gold, and the remainder of our gold having left to swell the circulation of Europe. An issue of two billions of paper by us would give the following outcome: all our gold would have departed for Europe ; rise of prices in Europe of 15%; our need for money on this new gold basis, $1,725,000,000; our actual circulation, $2,000,000,000; gold at pre- mium of 15.9%; rise in prices as reckoned in paper mone}^, 33%. 100. Bearing these facts in mind, the futility and danger of any local effort toward an in- creased currency becomes evident. Attempts of this sort can attain their purpose only in propor- tion as the currency of the world is expanded, unless the currency of the nation attempting expansion wholly loses its commodity elements — e.^. gold — and becomes a non-international currency — e.g, fiat (irredeemable paper). 166 ELEMENTARY ECONOMICS SUGGESTIVE QUESTIONS Is it possible permanently to have exports exceed im- ports ? What effect on the volume of money abroad? On the volume of money here? What effect on prices abroad ? On prices here? What effect on further exports ? What ultimate effect on exports must follow from the prohibition of imports ? Is it worth while to increase the domestic currency and to expand prices by restricting purchases, unless we expect later to increase our purchases? What has this to do with protective tariffs ? Is it true of nations that international division of labor is possible only on condition of possible exchange of products ? Is division of labor well for people inside the same country ? Is international division of labor well ? Do you see any bearing of Gresham's law upon the silver question? In a commodity currency, where does the supply come from? What would measure value if the legislature fixed the supply, for example in paper ? Would paper or commodity currency best adapt itself to demand? Would an increased use of silver as money set free any gold for commodity uses? Why? How would the value of gold as commodity be af- fected ? How would its purchasing power as money be affected? COMMERCIAL CRISES 167 Would its purchasing power as money fall, unless its value as commodity fell also? Why? Is the purchasing jiower of gold as money given to it by the fact that it is stamped by the government? Does its purchasing power result in any degree from the fact that it is used as money ? May its use as money be effective in this regard, though the government stamp is not effective? Is it true that the stamped coin is worth exactly the value of its contained bullion ? If the stamp does no more than certify the weight and fineness, wiio pays for the stamping? What is seigniorage ? COMMERCIAL CRISES What kind of years generally precede panic times, as to (rt) prices, (&) wages, (c) speculations? What kind as to the creation of .(a) capital, (ft) the building of houses, (c) of factories, {d) of railroads? Have the people been mostly at work, or have large numbers been unemployed? Has the social product been large ? How about savings ? If prices have been high and business large, what must have been true as to the volume of currency? Has the volume of money increased? Are flush times times of relatively large production of the precious metals or times of unusually marked tendency toward the coinage of accumulated stocks of precious metals ? How did these high prices become possible ? 101. AVe have already seen tliat a large share of modern business is transacted through 168 ELEMENTARY ECONOMICS the use not of mone}^ but of substitutes for money — through different forms of circulat- The great ^^S Credit, Or through the book- credit system, keeping devices of deposit banks and clearing-houses. In local trade, checks supply a large part of the currency demand. Drafts and bills are the media of debt payment, not only between city and city, but between country and country. Only balances are paid in money, and the clearing-house greatly re- duces this latter employment. Bank balances in London are paid by book-keeping in the Bank of England. It is evident that all exchanges completed without the use of money stand with relation to the demand for money as if they had not taken place. Not only this, but more rapid transportation has shortened the time of employment of money in the payment of balances. These influences together have worked powerfully to lessen, if not to cancel, the tendency toward appreciation in the cur- rency unit, due to enlarged demand for ex- change media. The customer pays the retail trader by check. The retailer pays the whole- saler by draft. Railways and telegraphs have almost cancelled the element of distance in book-keeping and payment relations between COMMERCIAL CRISES 169 communities. Negotiable notes, bills of ex- change, open accounts of debt and credit, all contribute to the economy of money. In England and America the credit system is widespread, thoroughly organized, delicately adjusted, swift, effective, and complicated. It is carefully protected by guaranty or- ganizations, by great trust companies, by all-powerful and all-inquisitorial mercantile reporting and collection agencies. In ad- dition to these, there are the investment companies, the savings banks, and the insur- ance companies, all of which are intermedi- aries for the gathering and distributing of credit. Their business is to guard the credit system Avith extreme watchfulness in protec- tion of their legal guaranties. Thus the credit system, resting upon infinitely intricate rela- tions between manufacturers, jobbers, whole- salers, retailers, and consumers, has for super- structure the many-storied fabric of deposit and discount banking, of stock investment and collateral borrowing, of savings and insurance investment, and of trust and mortgage guar- anty companies. There are even companies to guarantee the validity of titles and the good faith of employees. 170 ELEMENT ABY ECONOMICS 102. Not all of these credit devices serve as economies in the use of money. Where items in open account offset each other, the economy- is manifest. Where credit circulates, the econ- om}^ is manifest. But the mere granting of credit, awaiting a later settlement, does not lessen, in the outcome, the demand for money, but merely postpones it. Credit must be used by transfer in payment of indebtedness before it works as substitute for money. Neverthe- less, this non-currency element in credit is none the less credit, and in the making up of disaster is as important as any other. For, carefully inspected and supported as is this credit system, it is the sheerest card-house. Its contrivances for watchfulness and safety are its most shifty and unstable features. No fire-trap could be more skilfully planned for purposes of destruction, with heavy supports and girders of spontaneously combustible timber. 103. The period preceding a financial crisis is commonly a period of seemingly great pros- perity. There is a popular impres- Ante-panic . . . years are pros- siou that such prosperity is a mere seeming, and that panic is in the nature of a necessary collapse. It Avould be COMMERCIAL CRISES 171 going too far to claim that no bubbles are formed in the course of business expansion, or that these bubbles ^re not sources of finan- cial danger; but, speaking generally, the pop- ular impression is a mistaken one. The years preceding a panic constitute a period of great industrial activity and of great productiveness. Wage-earners have been well employed; the industries of distribution have been in smooth and successful operation. At the close of the ]3eriod it will be found that the wage-earning classes have rarely been as Avell housed, as well clothed, or as w^ell fed. They are exception- ally well supplied with the smaller conven- iences and comforts of life. Measured by their own standard, the laborers are prosperous in pleasant homes and large personal belong- ings. In the aggregate, they represent a large total of material wealth. It will be found true of the farmer that his farm was never under better cultivation, or his herds larger, his buildings more substantial or in better repair, or his home better furnished. Likewise of the manufacturer and the merchant; never were there larg-er stocks or more warehouses burst- ing Avith merchandise. Never were factories daily pouring forth more goods. Turning to 172 ELEMENT ABT ECONOMICS general conditions, it will be found that these prosperous years have rebuilt cities in brick, interlaced states and even continents with railroads, dotted the prairies with farmhouses, beautified them Avith fields of grain, and covered them with herds. The period has been one of Avidespread plenty, of remarkable industrial activity and efficiency, of boundless energy and hope. It is strange, it is even impossible, that extensive building operations should, in themselves, result in houseless ex- posure; that overflowing granaries and fatten- ing herds should foster hunger, or that ware- houses of cloths should be the sufficient cause of nakedness. It is doubtless true that these meshes of railroads, these cities of brick and iron, these immense factories and fattening herds, are largely the outcome of reckless hope and borrowed capital; yet it all counts in the world as wealth; it is here. That the capital is borrowed chips nothing from this fact. 104. The elements of danger are not to be found in the industrial situation, which was Where is the possibly never before so prosperous difficulty? {yi thorough efficiency and organiza- tion. The difficulty is financial. We have seen that the volume of exchanges COMMERCIAL CRISES 173 is the measure of the demand for currency; double the volume of currency without increas- ing the number of exchanges, and you double prices. To halve the currency is to lower prices approximately in the same ratio. These propositions are unquestionable; they hardly reach the dignity of principles — they are mere mathematics. Yet, strangely enough, as ap- plied to the facts of industry they are seemingly untrue. Prices almost uniformly rise with in- creasing activity in business, and fall with failing business. This is apparently to say that the value of currency falls with an in- creased demand, and rises with a failure of demand. The explanation is found in the fact that, with expanding business, the currency also expands, and, commonly, in a degree more than proportionate to the demand for it. This in- crease takes place not ordinarily in the legal tender element, but in the credit element. Reviving credit always characterizes reviving business. Under existing systems, credit fur- nishes for currency the only element of ready adaptability. It furnishes, for ordinary con- ditions, the guaranty of steady market prices. It avoids an enormous application of human 174 ELEMENTARY ECONOMICS energies to the production of commodity cur- rency. Without it, great expanding business operations would carry with them their own veto in falling prices and vanishing profits. But these advantages are purchased at the risk of enormous dangers. The commercial crisis marks the period when money takes on abnormal scarcity and abnormal value from the fact that money substitutes — credit currency — contract in volume. The very height of the credit fabric measures the disaster of its fall. It is at the full tide of prosperity that the danger is greatest. If, then, for any reason, whether of extravagance at some point, or of over-production in some industries, or of fail- ure of harvests in some districts, or of over- speculation, or even of business prosperity carried to the point of over-stringency in the loan market, there sets in a contraction of credit, trouble begins. The debtor can pay only by calling in turn upon his debtor. The pressure for payment increases in almost geo- metrical progression. Not only does credit largely disappear from circulation, but the burden of liquidating existing indebtedness is thrown upon the legal tender and the un- questioned elements of the currency. Panic- COMMERCIAL CRISES 175 stricken marketings of commodities, and panic-stricken or speculative withdrawals of money from the channels of business further complicate the situation. Endless ruin and disaster follow; prices tumble; tliis is panic, when even the rich seem poor, when business is stagnant, exchanges are suspended, laborers are unemployed and in want. Immediately preced- ing it were the headlong rush and exultant activity of prosperity, — Avhen all men were hard at work, though doubtless over-confident, and possibly over-venturesome. And now fol- lows the destruction of wealth. In the course of ample credit, things had arranged themselves in the hands of those who kncAV best how to use them. Now ensues an enforced redistri- bution. In the outcome one man finds him- self with two houses, and can use but one; or with two horses, and needs but one; and with endless steam engines, and trumpery, and stocks in trade of which he wants nothing. He can only let the property grow old or rot or rust. The wheels of the factory stand still; industry has dropped its tools: and all this, not because there was too little wealth, or too much, but because what there was, was badly arranged to withstand a flurry in credit. 176 ELEMENTARY ECONMIICS 105. It is clear enough that panic is an ebb in credit, and that in proportion, as the inter- mixture of credit in currency is Advantages, ^ ^ *^ disadvantages, large, is the disaster great. What- and remedies. 1,1 t j • ever may be the ameliorations possi- ble, the gravity of the case is not to be ques- tioned. Here is the most noticeably weak point in the modern competitive system. Any- thing which shall offer a reasonable hope of displacing credit from its enormous develop- ment in modern business can hardly be other than a good fortune. The money of ultimate redemption is too small for the credit fabric built upon it. It is like a cone resting on its apex. This delicate and unstable equilibrium is a condition fraught with constant danger. Doubtless so long as credit works, it affords desirable economies in the use of bullion cur- rency and, in some measure, steadies prices. England succeeds in managing a much larger per capita volume of business than does France, And with a much lower per capita supply of bullion currency. But periodically, England suffers acutely from the commercial crisis, while France is relatively exempt. The losses probably outweigh the gains. 106. That which most naturally suggests COMMEBCIAL CRISES 177 itself as a remecl}^ is to enlarge the currency basis, — to declare that more money jg expansion a of ultimate redemption is needed; remedy? therefore start the printing presses or coin silver. But remember that it is the shape of the pyra- mid, and not the size of it, which is matter of concern. Unless there is found to be some tend- ency in silver coinage, or in any other form of expansion, to lessen the volume of credit rela- tively to money, the inflation argument fails. There is no such tendency. Silver expan- sion, or any other expansion, Avould be followed by a rise in prices proportionate . . Silver coinage. to the expansion. Ibe degree m which credit circulates depends upon the methods of business and the organization of industry, and not upon the kind of money. So long as manufacturers find it advantao-eous to borrow capital, so long as wholesalers take credit from manufacturers, retailers from wholesalers, customers from retailers, and all deposit their funds in banks and pay through checks and book-keeping, so long must the intermixture of credit remain an element of danger. In truth, the very bulkiness of silver would, in itself, tend somewhat to increase the inducements to deposit methods. 178 ELEMENTARY ECONOMICS Nor is there any great hope that these credit methods will cease because of their dangers. The advantages and convenience to the indi- vidual business man are too pronounced. Here, again, individual interests are not parallel with the general interest. No one business man could afford to stop unless all should stop, and each would gain by violating the rule intended for all. The remedy, if any is possible, lies in the discovery of a currency effectively flexible in time of need. QUESTIONS Would it prevent panic if money were all gold ? Or diamonds ? Do you see any way to prevent the granting of credit, or the use of credit as currency ? CHAPTER XII THE COMPETITIVE SYSTEM 107. Every year important discoveries are made in science, and important improvements and inventions are perfected in industry. The great advance which has been accomplished does not so much indicate that progress must soon cease, as that progress is, by the very nature of things, unlimited. It is, indeed, only when we come to examine human institutions, habits, laws, and customs, that we meet the widespread conviction that no progress is in store for the race. One man is jg ^-^^^^^ ^^^^ sceptical of progress because he ^^^ P'^osress ? believes that in a divinely ordered universe all things are for the best; to assert that what- ever is is right, seems to him to imply that whatever is not is wrong. Existing conditions therefore appeal to him as the best. He trusts and is content. A second man believes in natural law. He insists that it is q^^ ^^^^ ^^^^^ useless to run counter to the nature anything? of things. The suns blaze, the stars roll, the 179 180 ELEMENTARY ECONOMICS earth revolves, the tides flow, light and dark succeed each other, the winds destroy or save — and what can man do? He is a mere spec- tator. Set over against the universe and its power, he is merely as is an insect; studied in the light of science, he is the mere product of his surroundings, like mould or scum; setting himself to strive against the laws of the uni- verse, he is the self-deluded maker of empty motions. Whether things are best as they are or not, they are as they are, and will remain so. Do not meddle, let things pass as they must — lalssez faire, laissez passer. 108. There is a third point of view, some- what like the others, but with more of truth Can men change ^^ it. Thinkers of this third sort themselves? know that man can do much, as he has already done something, in adapting to his needs the world in which he lives, and in sub- jecting its forces to his service. He has tun- nelled mountains, hollowed mines, dredged rivers, reared dikes, spanned canons, cleared forests, and planted them anew. Steam and gravitation, wind and tide, are harnessed to his tasks. There is no problem which nature sets for man, no difficulty with which it confronts him, that man need fear to meet. But of the THE COMPETITIVE SYSTEM 181 problems which human nature and human char- acter present, let him beware. Man has not made himself, nor can ^-emake. No one can lift himself by pulling at his boot-straps, nor can any man add one cubit to his stature. In mat- ters of human nature and human society men are not directors and governors, but mere ob- servers. Man as he is, men as they are, these, they say, are a fixed term, — the known quan- tity in the equation of human life. In the years, or the centuries, human nature may be changed, but it cannot change itself. Where any social problem demands for its solution another human nature or a ncAv species of human beings, it is as well to drop the problem as insoluble. If the reformers' new millennium awaits a regenerated humanity, the millennium must be a weary distance ahead. 109. There is a trace of truth in each of these views. It is clear enough that, as related to man's environment, man is a force. ^n fl.T1 1 ^ fl. lOTCft Assume, if you will, that he is the product of his environment. He is not there- fore necessarily inert and like a mere puppet of the energies surrounding him. He may co- operate or he may resist, just as children may serve their parents or rebel. All talk about 182 ELEMENTARY ECONOMICS natural laws and social laws which fails to take account of man as a force, or which regards his share in the social on-going of things as irrational or ineffective or unnatural, is a gross perversion of both language and thought. In the large view there are no unnatural things. The sober common sense of mankind repudiates the lazy optimism which denies all room for progress, even as it condemns the lazy self-dis- trust which concedes the need but despairs of the remedy. Why should men search and study and strive, if they are mere observers, and there cannot possibly come any result of it all? Science, even, is good for something only when it is good for something. 110. But notice that the thinkers of the third class do not precisely assert the hopeless- ness or futility of all human effort. Men are forces as related to but Only the helplcssness of hu- eac er. mauity in face of the difficulties and perplexities which human nature and human character themselves present. But even this much is not true. Just how we are not able to see, yet somehow each of us is conscious of a power within himself of self-mastery, self-help, and self -improvement. But even were this consciousness a self-delusion, there remains to THE COMPETITIVE SYSTEM 183 man the power of one individual over another, since in relation to each individual his fellows are a part of his enviroliment. The human race is not a great indivisible unit, but a group made up of distinct and separate units. One can do something of good or ill in his relations to his neighbor. Societies make laws, punish criminals", and foster education. It is in the power of each man to spread vice or virtue or microbes. To deny this is to deny that good and evil, esteem or condemnation, have any place in human affairs. Society contains within itself the forces which may work for itself help or harm. On any other terms the study of society would be a fruitless exercise, the mak- ing of laws a simple farce, the clash of armies an empty parade, courts a sheer mummery, police and fire departments a silly waste. Thus, as we come to examine the present social system as a whole, or the different aspects of it in detail, we need to guard ourselves from any kind of prejudgment or from ready-made conclusions of any sort. 111. Not a few earnest and capable people regard the present industrial system as in- trinsically and irremediably bad. The private ownership of property and free competition in 184 ELEMENTARY ECONOMICS business are tlie leading cLaracteristics of the existing social order. The critics of our pres- Private prop- ent social systcm deny the justifi- erty and free ability of the private ownershii) of competitioa "^ ^ attacked. property; they insist that free com- petition is merely another term for chronic in- dustrial warfare; that business has become a bitterly cruel struggle for existence — a system productive of antagonisms and destructive of kindliness, where each is set to gain by his neighbor's loss. It is, therefore, believed that social safety can be found only in a s^^stem which shall make men common owners in the means of production, and conscious co-operators in the business of producing. By making all interests common and general, it is thought possible to avoid the Avastes of competition and to still the hates and rivalries of self-interest. 112. Stated thus broadly, the proposal of the socialists is an attractive one. It purports to Is there a ^^^^ upon the brotherhood of man, to defence? substitute unselfishness for rivalry and distrust, to make all men equal partners in the general welfare.^ But this programme will 1 This discussion must not be understood to cover all aspects of socialism or all schools of socialistic thinking. Not all social- ists expect or desire to do away with rivalry and antagonism ; not all insist upon the equal partnership principle ; not all give THE COMPETITIVE SYSTEM 185 not bear close examination. It is like those large paintings whose distant beauty changes to daub on near approach. In the first place, we observe that the rivalries and antagonisms of competition have not resulted from legisla- tion or agreement or any sort of compulsion. They have not followed from any conscious purpose or artificial arrangement. Competi- tion and contest have not been enacted. They seem certain to establish themselves unless so- ciety consciously interferes to prevent. That is to say, if all men, as men exist to-day, are to work together in a scheme of brotherly love and co-operation, and under some sort of wide- spread, common ownership of capital and prod- uct, they will have to be compelled thereto by force. The other system is the system of free- dom. Socialism is the system of compulsion. 113. On the side of the existing system it is also to be urged that there is, in fact, obscurely present in it a xery large element of co-opera- much weight to the brotherhood of man as the basis of social organization; not all look to state compulsion as fundamental to the social structure. Obviously, however, it is possible for us to examine only the more typical ideas and the characteristic traits of socialism as presented by the main body of socialistic thinkers. Almost all agree upon the necessity of the owner- ship and operation by society of all land and capital, with some manner of joint ownersliip of the product under some not very specific way of sharing it. 186 ELEMENTARY ECONOMICS tion, and this, co-operation of a purely vol- Present system untary character. The great stock is in part con- corporations, like railroads, banks, scions co-opera- J ' ' ' tion. and manufactories, the fire and life insurance organizations and the great secret benevolent orders, all point to a growing spirit of association and co-operation in modern soci- ety which seeks no aid from compulsion. 114. Not only this, but the present system, whatever it may be in purpose, is in effect an It is almost automatic system of voluntary co- entireiy uncon- operation. Where division of labor scious co-opera- J- tion. exists, each man must, by some sort of exchange, share his products Avith his fel- lows. Division of labor means a mutual inter- dependence of producers. Exchange of goods takes place for the common benefit; both buyer and seller must believe themselves to be bene- fited by trading, or they will not trade. It is true that each is trying to get the greatest pos- sible benefit for himself, but neither can reap the whole of it. Each must, in some measure, famish a help to the other. It is not true that one man necessarily or commonly gains by trade at another's loss. Nor, indeed, is it true that the rivalries of competition are necessarily or commonly harsh conflicts of interest in which THE COMPETITIVE SYSTEM 187 the well-being of one is set over against the suc- cess and prosperity of his neighbors. True, each is trying to underselKthe other — to get the trade, to gain the market, and to control it — at the expense or even at the ruin of his rival. This, however, proves, not that competition is a rivalry between each member of society and society as a whole, but only tliat it is a rivalry between competing producers. It is a co- operation between each competitor and society. When one producer or seller prospers as against another, it is by offering society the better product or the lower price. ^ Viewed therefore from the point of view of society, competition is a rivalry in offering most for least, — a contest in the rendering of largest service, a war in well-doing — where success is declared to the largest benefactor. Trade, then, is a form of co-operation — unconscious, it is true, but voluntary and effec- tive. The East Indian laborer is not aware that in result he works in order that an Ameri- can laborer may consume, nor does the iron miner in England realize that it is the demand 1 This statement must not be taken as without important exceptions. Speculation, slioddy, advertising, and trickery are not yet well controlled in the competitive system. 188 ELEMENTARY ECONOMICS of Australia which affords him employment. Bat it may none the less be true. World- wide competition has brought about world-wide interdependence and co-operation. The indus- trial brotherhood of man has already come. Thus, the charge that competition is mere conflict will not hold as a ground of criticism of the present social order. Socialism does not in this respect make good its case. But sup- pose noAV that, for a moment, Ave put socialism upon the defensive. 115. Men now work under the incentive of want, incited and persuaded to effort by their „,„ , interest in themselves and in those Will man work without self- dependent upon them, — wives, chil- dren, relatives, and friends. Include all this activity under the head of selfishness, though the term seems, in some measure, an inapt one. But how insure that men shall work strenuously, that society shall consume the largest practicable amount of wealth, if for that which we call selfishness there is substituted an interest in the nation or a love of humanity in general? It will not remove the difficulty to show that the interest of each is at one with the interest of all. How shall any one find strenuous effort to be for his own interest? THE COMPETiriVE SYSTEM 180 In America, for example, if lie is able to per- suade himself to work twice as hard and to produce twice as much, his own share will be increased thereby by one seventy-millionth. Brother-love will not stand this strain. The difficulty with the socialistic scheme of things is that it does not take full account of man as he is. Nothing will take the place of interest in self or family as a motive for effort; neither fear nor love of societ}^ in gen- eral nor any mixture of fear and love will stand the test. Slavery shows the insufficiency of fear; the experience of the Pilgrims and of the early Virginia colonists illustrates the ineffectiveness of the motive of indirect self- inteiest. Roscher puts the case forcibly as follows : — When Louis Blanc and Mably rely upon the sentiment of honour instead of personal interest as the spur of pro- duction and the rein of consumption, and in respect to effectiveness instance the army code of honour, they forget, among other things, the thirty cases of capital punishment provided in the military code. . . . Were all burdens and pleasures of life equally distributed under strict communism, and distributed equally, in line with the concepts of the masses, men like Thaer, Arkwright, and others, who now in library and laboratory produce food for hundreds of thousands, would produce with mattock and shovel, at the highest, enough for thi'ee or 190 ELEMENTARY ECONOMICS four men only. . . . General and equal popular educa- tion as the commiiuists demand it would practically work out at this merely — that no one w^ould attain to the higher scientific development. . . . " In place of the cur- rent competition to produce the most and the best possible, there would come about under socialism a competition as to who could produce least and worst." . . . AVhen the first Virginia settlers in 1611 abandoned the system of communistic labour and joint-stock methods, it came about immediately that in one day there was as much accomplished as before in a week, three labourers pro- ducing as much as thirty did before. Even in New England, among strong men accustomed to labour, who had made so great sacrifices in the interest of their faith, communism was attended with continual famine; tliis changed only in 1623, when private property was estab- lished. — RoscHER, translated from System der Volkswirt- schaft, Book II. CHAPTER XIII POPULATION, EENT, AND SOCIALISM 116. Socialists and other critics of the com- petitive system assert that the outlook of society as at present orsfanized is hopeless ^ ^ '^ -^ Is every nncom- — that adopting the reasonings of fortabiedoc- the current political economy the lot of the race must become increasingly hard. It is somehow inferred that the fault is rather with the present social S3'stem than with the theories upon which the conclusions rest, or than with the fixed facts of the world in which we live. In fact the socialists instead of quarrelling with many of the established eco- nomic theories assume the correctness of them — including some which have been abandoned. At the same time they have perfect confidence that the human environment is sufficient for a happy human destin}-, and that in fact the ul- timate destiny of the race will be a happy one. Therefore they reason that if the current eco- nomic doctrines point to dismal conditions in 191 192 ELEMENTARY ECONOMICS the future, the fault must lie in the social system. But there are two assumptions here, neither of which is free from doubt: (1) the correct- ness of the current economic dogmas ; (2) the possibility of a generously prosperous life for the race with the environment as it exists. We must therefore determine how much of truth is contained in these assumptions. In what measure is the human outlook a hopeful one ? Of what value are our economic doctrines for purposes of prophecy ? Are there any ten- dencies in human life which need render the student despondent of the future ? 117. When the pioneer enters upon a new continent, with its wealth of new resources, its DiminisMLff expanse of unexhausted lands, its returns again, store of uucarcd-for fruits, its teem- ing animal life for sport and food, he may well hope for himself a life of ease and plenty. Nature appears to be generous far beyond his needs. The wide ranges of land do not, it is true, offer unlimited opportunities and boun- ties, but in comparison with his necessities the supply far outruns the need. And yet in truth the life of the pioneer is a long way removed from ease and lack of care. POPULATION, BENT, AND SOCIALISM 193 Food is easily obtained, but only for a part of the year. Harvesting and storage are to be provided for; shelter anust be had, clothing must be fashioned. Even if the chase could satisfy the need for food and raiment, as for civilized man it never can, there will remain the need of hunting appliances and of powder and ball. No man is sufficient for his own necessities in any adequate measure. Fortu- nately for humanity, men are in great measure dependent upon each other. We must live among our fellows or Ave must suffer. Too sparsely inhabited countries are never prosper- ous. The planting of a colony is a difficult and hazardous undertaking, as the early his- tory of America testifies. Yet it is true that new countries do com- monl}^ offer favorable conditions as far as food and raAv materials are concerned. The insuffi- ciency is in the products of machines and mines and factories — in the commodities which de- pend for their production largely upon human association. But as the new continent becomes more thickly populated, the advantages of cheap food tend to disappear. The gathering of Avild prod- ucts gives place to cultivation; stock-farming 194 ELEMENTARY ECONOMICS is substituted for the chase. Pastures must be fenced; winter food must be provided for the stock. Land is no longer to be had for the taking; rents are charged. We are again face to face with the old fact, or, as we call it, the old law of diminishing returns. After a certain early stage is passed, it becomes more and more difficult, as popula- tion grows more and more dense, to obtain a living from the land. Rent is, indeed, as we have already seen, the index of increasing resistance to the increase of agricultural prod- ucts — the measure of the extent to which cultivation has been pushed to lands of lower productive capacity. In view of the fact that the population of the world is rapidly increasing, this law of diminishing returns has been shown to have disquieting implications. Recalling also the tendency, manifested by all forms of life lower than the human, to multiply as far as food, ene- mies, and climate will permit, we come in view of the evidence from which Malthus inferred that the human race tends strongly to over- population. If over-population is inevitable, it seems likewise inevitable that the human race must one day meet the barrier of starvation. POPULATION, RENT, AND SOCIALISM 195 Malthus' dismal forecast is to be questioned, if at all, not on the doctrine that over-popu- lation means poverty^ — for this is not open to question — but on the doctrine that over- population is in fact inevitable. 118. Some short discussion has been had (Sections 74-78) of the degree in which the Malthusian forecast demands ac- is Maithns to be , j^ T 1 J 1 condemned, or ceptance; now note Avhat use the the economists, socialist makes of the Malthusian ""! *^« competi- tive system, or doctrine. He attempts no condem- the facts? nation of the economists generally, as if they were to be held responsible for the facts which they declare. All men must know, even though some seem sometimes to forget, that the economists have not fixed and es- tablished the grain-bearing capacity of the fields. The messenger who brings bad news does not deserve to be choked therefor, nor is the doctor to be hated because of his unfavor- able diagnosis; even an undertaker may be a kind-hearted, worthy citizen. Instead of con- demning the economists, the socialist condemns the present industrial system. This, however, is not much more reasonable. The present economic order is likewise not responsible for the nature of the land or for the facts of agri- 196 ELEMENTARY ECONOMICS culture, nor would changing the system alter the facts. Under socialism, as well as under the present system, twenty men cultivating one acre of land would find it exceedingl}^ difficult to make a living. If the socialist regards the outcome of over- population as a serious one under the present social system, there is still no use in changing to socialism unless socialism would somehow help the case. Children now and then get angry and break things out of petulant im- patience. But this is childish. It is best never to take medicine unless one knows what it is for, and what effect is likely to come of it. Where, as under socialism, the community as a whole takes the burden of seeing every family well provided for, the tendencies toward over- population would probably not be less, and the land would be no better. ^ The law of diminishing returns is a mere fact with which every farmer shows himself familiar in failing to reduce his field from twenty acres to one and to apply all his labor and fertilizers upon that one acre. Neither the human race nor the social system can remedy this agricultural 1 One ought in fairness to add that there are socialists \\ ho maintain that a socialized community can control the growth of population as an individualistic community never can. POPULATION, RENT, AND SOCIALISM 197 fact, nor is any economic theory or theorist to be charged with responsibility for it. The human race is not able to mal^ its environment to its liking. Over-population may be far off; better knowledge of chemistry in its application to farming, better choice of products, or better varieties of products, or even the cultivation of products now unknown, may for a long time hold in check the harsh pressure of want. But population cannot endlessly multiply, without at some point meeting with resistance in les- sened supplies of food products and of the raw materials of industry. 119. But while the human environment lacks in adaptability, there is (as we saw in Section 6) a large measure of adaptability increasing in man. In science, in art, in pro- returns again, cesses, and in appliances, progress is continu- ous. A pioneer population as it increases in numbers finds that new methods of production become possible. Division of labor, which means the specialization of emploj^ments, becomes practicable. With a large market, economies in production become possible. With still larger markets the use of machinery is practicable. With increasing population improved methods of transportation become 198 ELEMENTARY ECONOMICS profitable, and manufacturing centres are estab- lished to buy and sell over a wide territory. The economies of the great factory system fol- low — the use of expensive machinery, the ad- vantages of great steam- or water-powers, the gains of scientific oversight, and of salaried designing and inventing. Thus, with increas- ing population and widening markets the field of opportunity enlarges for invention and im- provement. There was no room for great fac- tories with their machinery and complicated processes, until, with increasing population, human ingenuity had placed at man's disposal the modern methods of transportation. It is true that cause and effect are hard to distin- guish here. There is a complex interplay and reaction, all things moving forward by the aid of each and for the aid of all. But all this progress in invention, transpor- tation, and trade is human progress. It belongs to the economic factor, man. There is then a law of increasing returns for the human side of the case as well as a law of diminishing returns for the environment. It is possibly true • — indeed it is probable — that the advan- tages of division of labor and of larger factory plants are even now approaching the limit of POPULATION, RENT, AND SOCIALISM 199 increase. But the advance of mankind in sci- ence, art, skill, processes, methods, tastes, and desires, is not subject >to limitation. On this side there is really a law of increasing returns. So, even if it grows more difficult to obtain the necessary supply of raw materials from the earth, there may be, we repeat, at the same time an increasing share of productive energy which can be applied for this purpose. The human race will not necessarily be the Avorse off in the end. It is, then, evident that too much may be inferred in the way of evil forecast from the tendencies known as the Ricardian Law of Rent and the Malthusian Law of Population. At any rate, to call these tendencies laws does not make them subject to repeal through social- ism, or justify condemnation of the present economic system as if it had enacted them. Remember, however, that to reject socialism as a general remedy for all social ills is not to deny that there are real evils in modern society. It is merely to assert that these evils must be considered and treated as distinct problems rather than as one great problem awaiting one sweeping solution. The social question is in truth a cluster of questions. 200 ELEMENTARY ECONOMICS SUGGESTIVE QUESTIONS How would socialism affect inventions, new processes, the progress of science ? What eifect on literature, history, poetry, philosophy, etc.? On the per capita production of the mere necessities of life? Are there immaterial goods? Give illustrations. Suppose several men to have worked together in dig- ging a ditch : when the pay is to be divided should the shares be equal? Or according to the size of families? Or according to efforts ? Or to character ? Or to num- ber of feet dug ? Distinguish between justice and charity. CHAPTER XIV SOME CUKRENT QUESTIONS IN ECONOMICS SPECULATION 120. We saw in Section 31 that desires grow less intense with partial satisfaction. One does not become thirstier the Desires are not more he drinks, or hunm-ier the ^^f'^ ^^y ' o particular more he eats. It is possible, though direction, it is not common, to have a good thing in superfluity. There may be more food upon the table than is wanted for that meal. So it is within possibility that there should be more food in the world than is wanted by the people of the world. With pioneers in a new country, and especially in a tropical country, food supplies often exceed the necessities ; the market is glutted, so to speak. And we have seen that as men become more numerous the bounties of nature become insufficient, so that men must work in order to satisfy their wants. When things are brought to market 201 202 ELEMENTABY ECONOMICS for sale, prices, as we know, must go Ioav enough so that the demand will absorb the entire supply. It quite often happens in the cities that ripe fruits are sold at almost nothing. The reason for this is plain, when we reflect that there is not an unlimited demand for bananas or strawberries. At no matter how low a price, you would not at one time buy very many dozens of bananas. We are again in face of the fact that value cannot exist in the absence of some measure of scarcity. Un- limited abundance would mean the absence of value. Thus value is not to be taken as the measure of well-being. Utility, and not value, points directly to usefulness. Value indicates some limitation upon utility by reason of scar- city. (See Section 38.) 121. It is very important that the things we most need, like food and coal, should be cheap. The human race can s^et along" well Things acutely ° ° needed we get enough with great scarcity and high value in diamonds. Those things which the human race greatly needs are com- monly easy to get, else there would be no human race. In fact, the things which we most acutely need — • space a,nd air and water — we mostly get for nothing, the supply of them being so great. SPECULATION 203 If the springs should dry up, drinking-water might acquire value, as it does, in fact, on the desert or in the citie^. If the rains refused to fall, we should have to replace them by- irrigation ditches ; but this would be no cause for gladness. Gas and lamps in place of sunlight would be more trouble to no bet- ter results. 122. With many things — with food prod- ucts especially — the consuming capacity of the world cannot be greatly in- ^^ ^^^ ^^^^ creased. On the other hand, it is demand elastic 7 not possible largely to reduce consumption without great suffering. We say of such cases that the demand is inelastic. With many commodities, however, a very large increase in supply can be marketed with a relatively small reduction in price, while if the price should greatly advance, a large part of the demand would be withdrawn. Books, pleasure trips, sewing machines, and bicycles, are good ex- amples of this second class. In these cases we say that the demand is elastic. Where the de- mand is elastic, the supply may increase much more rapidly than the price falls ; so a decrease in supply would not greatly raise the price. But with food products prices rise out of pro- 204 ELEMENTARY ECONOMICS portion to the decrease in supply, and fall out of proportion to the increase. 123. This explains much that is peculiar in the movements of rents. As population in- Eiasticity and creases, the poorer lands must be rents, cultivated; going without the prod- ucts is not practicable. So a small increase in supply from the opening up of good lands or from improvements in agricultural methods will make possible the abandonment of poor land at the margin of cultivation. 124. This question of elasticity of demand being well understood, we are in position to Elasticity and ^cc how with food products it comes prices. about, not only that prices are high with a short crop — for this is not strange — but that the aggregate selling price of the crop is higher for a short than for an abundant crop. This fact is stated by the English economist Thorold Rogers, in the following words : — " There is one law of prices which you must know and understand before you can make the least progress in interpreting the simplest problem. It is known to some economists, I do not say all, for it is most unaccountably neglected or obscured in most treatises on the subject, as Gregory King's Law. We take it a defect in the harvest may raise the price of corn in the following proportions: SPECULATION 205 Defect. Above the common rate. One-tenth raises the price Three-tenths. Two-tenths raises the price Eight-tenths. Three-tenths raises the pribe .... Sixteen-tenths. Four-tenths raises the price Twenty-eight tenths. Five-tenths raises the price Forty-five tenths. The price of any article in demand but at present in defect rises in price by a different ratio from that indi- cated from the ascertained amount of the deficiency ; the price of any article in demand but at present in excess, falls in price by a different ratio from tliat indicated from the ascertained amount of the over-supply. The opera- tion of the above law is always most dominant in articles of prime necessity, in which no notable economy can be made without suffering on the part of the people when supply is short, and no notable increase of consumption can be expected when the quantity is in excess of supply. If the article is relatively perishable, the phenomena in- crease in intensity on either side." We may remark that, as applied to any one cereal product, the figures above given are j^rob- ably an over-statement. As applied to the total of agricultural products, the error is probably in the other direction. 125. Bearing in mind that food production is, in large measure, periodic Avith the seasons, we are now in position to under- Elasticity and stand why price fluctuations are ^fsptoktion especially characteristic of food an evil? products, and why speculation especially busies 206 ELEMENTARY ECONOMICS itself with these. It is easy to denounce the speculator for trafficking in the necessaries of life, and for profiting at the expense of society; but it is as cheap and shallow as it is easy. We need attempt no justification of the mo- tives of the speculator — they are probably bad enough; but fortunately there are many cases in this world where men, seeking only their own well-being, bring about the well-being of others. The speculator does not commonly cause the rise in prices, but merely brings it earlier than it would otherwise come. If the supply of food is short, prices will have to rise. It is well that there are men who make it their business to study the crops and the harvests, and who give early notice of a coming scarcity, thereby encouraging society to economize its supplies, and compelling it to do so by forcing prices up. Thus in times of seeming plenty, supplies are set aside for times of later need — "a service which has been well compared, by Archbishop Whately, to that rendered by the captain of a ship, who, taking account of the stock of pro- visions at his disposal, and the length of his intended voyage, adjusts to these conditions the rations of his crew " (J. E. Cairn es). 126. The advantages of speculation to the SPECULATION 207 producer are equally evident. But the farmer is prone to believe that the profits jj^^g ^^^ are made at his expense; he sees