Transcriber’s Note: Italics are enclosed in _underscores_. Additional
notes will be found near the end of this ebook.
The Basic Facts
of Economics
A COMMON-SENSE PRIMER
FOR ADVANCED STUDENTS
[Illustration]
By LOUIS F. POST
[Illustration]
_Author’s Edition_
WASHINGTON, D. C.
2513 TWELFTH STREET, N. W.
1927
_Price Fifty Cents_
Copyright, 1927, by
LOUIS F. POST
PRESS OF
COLUMBIAN PRINTING CO., INC.
BINDING BY
GEO. A. SIMONDS & CO.
WASHINGTON, D. C.
Accurate Observation and Clarity of Thought
are the Prime Requisites of Economic Study
PUBLICATION COMMITTEE
ANDREW P. CANNING, _Chairman_, Chicago, Ill.
JAMES H. BARRY,
San Francisco, Calif.
GEORGE A. BRIGGS,
Los Angeles, Calif.
MRS. EDWARD O. BROWN,
Chicago, Ill.
EDMUND VANCE COOKE,
Cleveland, Ohio.
STOUGHTON COOLEY,
Los Angeles, Calif.
OTTO CULLMAN,
Chicago, Ill.
MRS. ANNA GEORGE DE MILLE,
New York City.
JAMES H. DILLARD,
Charlottesville, Va.
ROBERT E. GRAVES,
Chicago, Ill.
ANGELINE LOESCH GRAVES,
Chicago, Ill.
WILLIAM C. HARLLEE,
Washington, D. C.
LEWIS J. JOHNSON,
Cambridge, Mass.
FENTON LAWSON,
Cincinnati, Ohio.
WILEY WRIGHT MILLS,
Chicago, Ill.
C. L. MOULTON,
Glen Ellyn, Ill.
JACKSON H. RALSTON,
Palo Alto, Calif.
WALTER I. SWANTON,
Washington, D. C.
EDWARD N. VALLANDIGHAM,
Chestnut Hill, Mass.
JOHN Z. WHITE,
Chicago, Ill.
TABLE OF CONTENTS
PAGE
PREFACE vii
FIRST LESSON--ECONOMICS 1
SECOND LESSON--MONEY 9
THIRD LESSON--TRADE 17
FOURTH LESSON--THE BASIC FACTS 27
FIFTH LESSON--THE PRODUCTIVE PROCESS 40
I. HUMAN FACTORS 42
II. NATURAL RESOURCE FACTORS 50
III. ARTIFICIAL OBJECTS 52
IV. SECONDARY CATEGORIES 56
1--CAPITAL 56
2--TRADE 60
3--UTILITY, VALUE, MONEY, PRICE, BANKS 63
4--BALANCES OF TRADE 67
V. AN ILLUSTRATION OF THE PRODUCTIVE PROCESS 70
SIXTH LESSON--DISTRIBUTION 74
I. WAGES FOR LABOR 75
II. RENT FOR LANDOWNERSHIP 83
III. TRADE 91
IV. MONEY 94
SEVENTH LESSON--REVIEW 97
QUESTIONS FOR SELF-EXAMINATION 101
PERSONAL ACKNOWLEDGMENTS 103
PREFACE
The purpose of this common-sense explanation of Economic phenomena is
to disclose and emphasize those comprehensive and familiar primary
facts which embody the myriads of secondary facts that are involved in
Economic science. To avoid confusing those complicated details is to
promote the clear thinking which every Economic problem demands, be the
problem one of collegiate study, of political policy, or of business
importance.
The following pages aim, therefore, at encouraging all thoughtful
citizens so to classify the details of the general subject in their own
minds as to enable them to avoid centering their mental vision upon
Economic trees so intently that they cannot see the Economic forest as
a whole. It aims also at discouraging the opposite inclination to view
the Economic forest so exclusively as a whole that the Economic trees
of which it is composed cannot be distinguished.
L. F. P.
The Basic Facts of Economics
A COMMON-SENSE PRIMER FOR ADVANCED STUDENTS
FIRST LESSON
ECONOMICS
On the surface, Economics appears to be the science of making money.
This appearance is due, however, to a careless recognition and
erroneous application of the fact that Economic accomplishments are
measured by money standards and expressed in money terms.
When, for example, a builder builds, he builds to make money. Money
measures the Economic extent of what he is doing, and money terms
express its Economic desirability. They also express and measure his
motive, which is the compensation he can command in the currents of
trade.
A merchant makes money when he manages a profitable business.
So does a manufacturer.
Farmers make money when they sell their produce profitably. Nor only
when they sell it, but also while they cultivate it; for every day’s
growth adds to the money measurement of a crop.
Wage-workers by the day, the week or month, and salary-workers by the
year, also workers on commission or for percentages or for profits,
make more or less money as working opportunities are more or less
plentiful, and wages or salaries or percentage totals and profit totals
are consequently higher or lower.
Engineers, lawyers, physicians, architects, dentists, clergymen,
teachers--all professional workers,--make money to the extent of the
marketability of the services they offer.
And investors, do they not invest by money measurements and in money
terms for the purpose of obtaining Economic incomes measured by money
and expressed in terms of money?
Manifestly, the immediate object of everybody’s activity in the field
of Economics is to make money.
Does one desire food? By making money he gets food. Does one desire
clothing? He gets it by making money. Does he wish for housing,
furnishings, automobiles, railway or steamboat transportation,
necessaries of any kind, luxuries of whatever variety, household
service, professional service, legislative or judicial service,
mechanical service, mercantile service, clerical service? By making
money he gets them. Does one wish for slaves? If slavery be an
institution of his time and place, he may have slaves by purchases with
the money he makes. Should he be a slave himself, he may purchase his
freedom with money if he can get it. Does land-ownership appeal to one?
Let him make money and he can buy land. Whatever object the Economic
field may offer for the satisfaction of human desires, that object is
attainable by making money. In no other way can it be attained through
Economic processes.
If gifts be cited as exceptions let the fact be noted that giving is
not an Economic process. It lacks the element of exchange or trade. So,
too, of theft in any of its forms. In genuine Economics there must be
two gainers in every trade. There is no such science as Economics of
the Forty Thieves variety.
Even in such seeming exceptions to the Economic importance of money
as are offered by barter, in which no money passes and no money
accounting is made, comparisons of the objects thus directly exchanged
are nevertheless contemplated by the exchangers in terms of money.
The owner of a horse that might sell for two hundred dollars, would
not barter it for a horse that could sell for only one hundred--not
unless he got “boot” enough to even up the money difference to his
satisfaction. Nor would the boy with a two-dollar penknife “swap even”
for a one-dollar jackknife. It is only when the two horses or the two
knives seem to their respective owners to be approximately equal by
money measurement that an “even swap” is conceivable.
Another seeming exception to the money-making characteristic of
Economics depends upon individual isolation. That isolated individuals
may gather food and improvise shelter and clothing without thinking of
them in terms of money, is true enough; but the activities of persons
thus isolated are not Economic exceptions, for the science of Economics
is a social science. Although some Economic phases or phenomena may be
picturesquely and aptly illustrated by reference to the experience,
actual or imaginary, of isolated individuals like Robinson Crusoe
on his island, states of human isolation are outside the limits of
Economics.
Inasmuch, then, as the object of the human factor in the science of
Economics is to make money, and as there can be no science of Economics
without the human factor, Economics is comprehensively and accurately
definable, on the surface, as the science of making money.
But making money in the Economic sense must be distinguished from
narrower uses of the phrase. To manufacture coins legitimately, as at a
mint, is to “make money,” but only in one Economic particular--only in
the narrow mechanical sense in which weaving cloth is “making cloth.”
Like weaving cloth, it is but an item in the multitudinous phenomena of
that money-making which superficially defines the science of Economics.
The same observation is applicable to the occupations of engraving and
of printing paper currency legitimately.
Illegitimate makings of either paper currency or coin, like all other
forms of forgery, are not in any sense making money within the purview
of Economic science. They are varieties of theft, and Economic science
excludes theft of every kind, even legal kinds, such as slavery. This
exclusion is not for moral reasons, it may be well to interject for the
benefit of such advanced students of Economics as recoil from mixing
moral principles with Economic science. It is due to the fact that
exchange, or trade--an essential element in Economics,--is in theft
utterly lacking.
In the Economic sense, making money is making it for all concerned
in any particular process, and not for one or more of the parties at
the expense of the others. No art of getting something for nothing
can be within the scope of Economic science. One-sided methods
of making money, whether frankly labeled “theft” or “gambling,”
or shrewdly disguised in spurious business ethics, are alien to
Economic money-making. Within the domain of Economics no money-making
transaction belongs unless it involves the making of money by all
parties to the transaction.
To make money in that mutual sense is to augment the supply or the
serviceableness of whatever commodities money terms may measure and
express, and of the portions or shares of all who contribute to the
augmentation.
In phrasing more complete than that of “making money,” Economics
is the science of making money by earning it. Getting money without
earning it is related to Economics only in a science-disturbing sense.
It disturbs the normal Economic relations of effect to cause in the
production and dissemination of humanly desirable objects. To realize
the truth of that statement, the student need only momentarily conceive
of theft as universal. Since universal theft as an Economic phenomenon
would be utterly destructive of normal Economic relationships, of
beneficial effects from normal causes, so must theft to any extent
operate destructively to that extent. The only thinkable relation of
theft to Economics is analogous to the relation of murder to the human
race. That Economic study may comprise considerations of how to exclude
stealing from Economic customs, does not go to prove that stealing is
a factor in Economic science. It goes no farther than to prove that
stealing may become an Economic parasite.
Even as a parasite, stealing could hardly have wormed its way to the
Economic border line, much less across it, but for a disposition among
advanced students to confuse normal Economic phenomena with arbitrary
business customs.
“Business” might indeed be the nearest approach to a synonym for
“Economics.” It would be an exact synonym but for one variation.
Whereas Economics relates to a comprehensive social organism which
(notwithstanding “scientific” contentions to the contrary) is subject
to natural laws of human association (sequences of cause and effect),
Business is but a limited collection of individual interests or private
organizations that are influenced and largely governed by arbitrary
customs. These customs may or may not be in harmony with the normal
relations of cause and effect in Economics. And as to each particular
business, it is operated, as accountants frankly admit, only “for the
benefit of its proprietor.”[1]
[1] The quotation is from “Modern Business”, by Thomas W.
Mitchell, Ph. D. New York: Alexander Hamilton Institute.
1918–1919.
In some of its vulgar connotations Business might very well answer to
the insolent definition that it consists in the adventures of sprightly
gentlemen trying to sell nothing for something to other sprightly
gentlemen who are trying to buy something for nothing. In so far,
however, as that definition may be appropriate, it applies only to
business abuses, not to Business as a possible synonym for Economics.
It defines Business only as theft might define morality.
To be a closer synonym for Economics, Business must deserve a
definition relating its customs to natural Economic law (a subject
to be considered in a later Lesson) and extending its functions more
completely to universal mutual service. Moreover, its definition
must widen the Business concept so as to include all kinds of such
service. Business can no more exclude from its realm particular
Business specialties, though that be customary, than it can include the
operations of “confidence men,” as it is sometimes supposed to do. Its
functions are not limited to commerce, nor to banking, nor to any other
of those Business specialties to which careless speech, and sometimes
snobbish thought, tend to narrow the meaning of the word.
Business is that function of social life which includes all serviceable
specialties. Such terms as “commercial,” “mercantile,” “industrial,”
“agriculture,” “labor,” “the professions,” and so on, denominate
specializations or sections or subsidiary departments of Business, not
Business as a whole. They are useful for subclassification; but, like
all subclassifications, whether in Economics or in any other science,
they are misleading when perverted into general terms for primary
or fundamental or comprehensive categories. The term Business, like
the term Economics, should include them all. Every kind of service
necessitates busy-ness; and serviceable busy-ness, what is that but
Business?
Considered comprehensively, then, and excluding parasitical adhesions,
Business might be, as some advanced students of Economic phenomena
suppose it to be, another name for Economics. In the scholastic sense,
Economics is the more orthodox term; in the practical sense Business
could better express the idea. Both terms might have practically the
same meaning if considerately used. Honest Business, inclusive of all
serviceable activities--service for service, to adopt a phrase in
definition of Business--would be identical with Economics. Either, like
the other, may be described superficially as the process of the science
of making money.
Quite consistently with the foregoing survey, Economics has been
described as the science of “mankind making a living.” This definition,
too, excludes the solitary life by limiting Economic science to
cooperative mankind--in other words, to Economic association. It,
too, identifies Economics and legitimate Business; for only through
legitimate Business activities can cooperative mankind make a living.
It, too, excludes theft in all its forms and guises; for so much of
a living as some may make by any kind of theft, others must lose as
victims of theft. It, too, brings Economics on the surface and Business
on the surface within the definition of “the science of making money;”
for only by means of money measurements in money terms does or can
mankind in the mass make its living.
But making money is only a surface fact in Economics. It is but a
means to the end. By no possibility can it be rationally regarded as
the ultimate object. The ultimate object of Economics is earning the
living that money will buy. Both the object and the method lie below
the surface of money-making. To Economics, making money is somewhat as
book-keeping is to a commercial business. It is the surface expression
of all underlying Economic phenomena.
Before those phenomena can be thoughtfully observed and studied,
the relation to them of money-making must be keenly scrutinized and
intelligently considered.
SECOND LESSON
MONEY
What is Money? and what are its functions? Money is the medium of
trade, its denominations the language.
Resting on the surface of Economic phenomena, Money and Money terms
spread over the whole of the Economic area. All subsurface phenomena in
Economics are measured in trade by Money units; the details of trading
transactions are discussed and recorded in Money terms.
Money terms vary with localities. In the United States, Money talks in
terms of “dollars;” in Great Britain in terms of “pounds sterling;” in
France in terms of “francs;” in Germany of “marks;” elsewhere in local
terms too numerous for other than encyclopedic description. But the
value measurements that Money makes of commodities in the processes of
trade are everywhere, at any given time, practically the same.
For lack of stability those measurements do vary from time to time
with confusing effect. To compare them with measuring rods for length,
breadth and thickness, it is as if yards, feet and inches were
constantly contracting and expanding with reference not only to the
magnitude of measurable objects but also to one another. Precisely
in that way does Money in fact fluctuate. It always has, and unless
scientifically standardized, it always will.
Nevertheless, whatever the fluctuations and local discrepancies of
Money may be, it everywhere talks, when its language is translated, to
the same general Economic effect at any given time. Stabilized, as it
might be, it would talk to the same general Economic effect everywhere
and all the time.
What language is to thought, Money terms are to trade. The trading
transactions of the whole world are effected by means of Money
standards and in the language of universally interpretable Money terms.
Conventionally defined, Money consists of coins minted by
governments from precious metals more or less alloyed. Those forms
are supplemented, however, with subsidiary forms commonly known as
“currency.”
There is an Economic theory that metal coins alone are Money, paper
currency being but promissory notes redeemable in coin. This theory is
useful for testing Money media by coinage standards. But with reference
to nearly if not all purposes of current trade, the intrinsic value of
the Money piece is of slight Economic importance, or would be if Money
were stabilized.
What counts in Economic measurements is Money denominations--Money
language rather than Money pieces. For in the world-wide processes of
trade, only a slight proportion of either metal coin or paper currency
passes from hand to hand. Nearly all Money measurements are entered in
books of account; and in these the debits and the credits so nearly
offset one another, by and large, that the difference as a whole is
too slight for consideration in passing down from the Money surface of
Economics to the basic facts. A common and impressive exemplification
is afforded by clearinghouse statistics. These show that the enormous
banking transactions in Money terms which merge at the clearings daily,
are balanced off with a trifling percentage of tangible Money.
Let the fact be emphasized then, that in defining Money as the medium
of trade, Money terms rather than Money forms are to be understood as
the trading medium.
When a customer at a retail store buys a supply of groceries, his
payment may be made in Money pieces, either metal or paper. Yet it
may be made instead with a check drawn against his bank balance, or
through a charge to his account in the retailer’s books. If paid in
Money pieces, either at the time of purchase or later, some if not all
of those pieces will go to the storekeeper’s bank and be credited to
him in Money terms on the books of the bank. If the payment be made by
check, the amount of the check will be entered in the storekeeper’s
bank account as if it were a payment in Money pieces instead of Money
terms. Be such transactions as they may, however,--cash payments or
check payments or drafts or promissory notes--tangible Money plays on
the whole but a small part.
From purchases by customers at retail stores back to wholesalers;
back of wholesalers to manufacturers of finished products and
of unfinished products and of tools and of every other kind of
merchantable object; back to land-owners for the sources of supply and
the sites for production and delivery; back to farmers, to miners,
to transportation agencies, to a vast though scattered army of
wage-workers; through many a complicated series of accounts at stores,
factories, mines, real-estate offices, railway and steamship offices,
banks, clearinghouses--must we wend our way if we would investigate
the processes of trade in detail. Yet only in slight degree do those
processes involve the use of Money forms. Though coinage standards play
their part, almost all trading transactions are made in Money terms and
not with Money pieces.
In the process, then, of making a living, mankind trades commodities
in terms of Money rather than in its forms, doing so principally
through financial accounts. Peering into the details of those accounts
(as professional accountants and other business specialists must often
do when examining the particulars of their respective specialties),
however useful this may be within the limits of the specialization,
is always futile and often confusing or misleading for purposes of
Economic study or investigation as a whole. In Economics the purpose is
not to understand the technical details of business specialties simply.
It is chiefly to relate those details to one another by determining
their respective Economic categories so that the whole subject may be
reasoned about comprehensively.
Some business specialties may necessitate a knowledge in detail of the
physical characteristics of sugar, for instance, or of cotton; but
what an understanding of the science of Economics requires in such
particulars is an intelligent grasp of the nature of sugar or cotton
with reference to fundamental Economic categories--whether they are
human, or natural, or artificial,--and to what extent, therefore, they
are Economically related to all other commodities in the realm of
trade. For into one or the other of those three categories, all the
myriads of Economic details assemble themselves.
For purposes of Economic specialization, this assignment of details
to categories is not enough; but without it no specialization is
dependable. Some such identification of particular facts with reference
to their fundamental differences or identities, is absolutely necessary
for accurate observation of Economic phenomena and clearness of
Economic thought; and are not accurate observation and clarity of
thought the prime requisites of Economic study?
Not to make those identifications and differentiations is to
turn Economics into the hopeless mixture of “masses of particular
unexplained facts” which John Morley deplored as characteristic of a
certain type of Economic science. “Scraps and pickings of reality” are
worse than useless in any study of Economic science unless harmoniously
classified according to their respective fundamental characteristics.
This comment does not mean that Economic details are to be ignored
except for classification, even by non-specialists. Far from that.
It means that they are to be thoughtfully considered and accurately
classified for further and comparative consideration. To illustrate:
Mankind must be regarded as a class or category in Economics; but not
according to personal or individual capabilities, idiosyncracies, or
social, business, or legal status. To the business specialist, the
personal qualities of an associate or assistant are important; but
Economics as a comprehensive science, the science of all “mankind
making a living,” knows those special distinctions only in a secondary
sense. It is concerned primarily with the individual man only as a
unit in the human mass--only from the fact that he is in the human
category and not in one or more other Economic categories. So of all
Economic facts. To study Economic details without reference to Economic
generalizations might be likened to studying an alphabet without
reference to language, or numerals without reference to mathematics.
Economic problems are not problems of how one individual may make a
living at the expense of others. Such problems belong in the plundering
pursuits. In Economics the basic problem is how all may make a living
at the expense of none.
To that problem business details give no clew, unless the details be
assigned to fundamental Economic categories. Piling up details without
assigning them is, as Henry James the Elder wisely expressed it, to
“sink the truth in endless confusion.” The last person in all the
world from whom to get the basic facts of Economics is the business
specialist, for he habitually limits his observations to his own
specialty. Perhaps, however, a certain type of Economic teacher may
be equally untrustworthy in that respect--the teacher who, though he
imitates the physical scientist in devotion to details, disregards the
physical scientist’s fidelity to the relations of cause and effect.
On the Economic surface we have the category of Money. To the
wage-worker Money is the medium for trading the commodities he helps
to produce for those he wishes to consume. To the merchant, however,
or the manufacturer, or other Economic specializer, Money presents
also a variety of minute details for expert study. The business
accountant, for example, must familiarize himself with numerous details
in connection with Money in its minute relationships to his specialty.
He might very likely confuse facts Economically different, yet as a
special business matter practically identical--the Money measurement of
a natural mineral deposit, for instance, with the Money measurement of
its artificial equipment. As an accountant in that specialty he would
be right in doing so. Or, in slavery days, for another instance, an
accountant might properly have classified the Money measurement of a
human chattel with that of a domesticated horse or a constructed house.
He also would have been right; for, as an accountant, he would have
been dealing with a customary classification of private property; and
not with Economic science comprehensively. It is doubtless specialty
work of such kinds that has involved the science of Economics in so
much confusion, especially among advanced students who are prone to
identify business conventionalities with Economic normalities.
As a science, Economics cannot make its categories according to
conventional maladjustments. It must make them according to essential
differences. These admit of no categorical identification of mineral
deposits with mining machinery, or of human beings with domesticated
animals or buildings. Such classifications are as absurd in Economics
as identifying sun and earth would be in astronomy, or bone with brain
in anatomy.
The science of Economics--that is to say, the science of Business in
the broad social sense in contradistinction to the narrow private
sense--neither requires nor permits such classifications as slaves
with domesticated animals, or mining machinery with natural mineral
deposits. It is obedient to the ancient but still vital maxim of
philosophy that things which are essentially different must not be
mixed nor things that are essentially the same be separated.
Essentially different things in Economics are indeed confused by Money,
which knows no difference, except in degree of Money measurement,
between slaves and cattle, or mineral deposits and mining machinery.
As the medium of trade, Money must measure the values of everything
tradable; and custom may make tradable objects--human beings, for
instance,--which in the science of Economics are no more within the
normal boundaries of trade than are transfers by theft.
Whether we think of Money as tangible coin, or only as the Money signs
and symbols of account books, Money is not a basic fact in Economics.
Mankind cannot live upon Money. It is neither eatable nor wearable. Nor
is it shelter. Likewise of Money terms. Money is a secondary Economic
factor--a representative of value, whereby the relative desirability
of commodities is measured and expressed in trade. It is therefore the
comprehensive surface-fact of Economics beneath which the basic facts
must be sought.
In other phrasing, Money is that secondary category in Economics which
comprehends every kind and form of medium for trading commodities
in the world-wide process that we descriptively characterize as
“mankind making a living.” Mankind being a basic Economic category,
and the process of making a living being the Economic human necessity
and purpose, Money can have but one comprehensive significance in
Economics. Be it in the form of coin, or in the form of paper currency,
or in the form of entries in books of account (where it appears only in
name and arithmetical denominations), it is the universal medium and
Economic measuring rod of exchanges or trade.
Whether one makes Money or not depends, as a rule, upon which side of
his accounts in ledgers the Money balance appears at final accountings.
It is Money in this sense that goes farthest to justify the superficial
definition of Economics as the science of making money.
We only skim the surface of Economic phenomena, however, by coming
to an understanding of the nature and the function of Money. Money
is only one of the secondary categories which must be identified and
properly related in any thoughtful study of Economic science. Below
that financial surface are phenomena which Money merely measures
and compares. The first of those underlying phenomena is Trade, for
which Money is the medium and upon which our attention must next be
concentrated.
THIRD LESSON
TRADE
Trade, for which Money is the Economic medium and Money-terms the
Economic language, consists superficially in interchanges of tangible
commodities, but essentially in interchanges of human service.
Tangible commodities, with a semi-exception as to real estate, are
produced by interchanges of human service from the very extreme of the
primary production of those commodities to and including their final
delivery for ultimate consumption. Real estate, too, is thus produced
in so far as it consists of structures, of soil cultivation, of
mining mechanisms, of excavations, or of any other kind of artificial
alteration.
All commodities are subjects of Trade. Artificial commodities, such
as depend upon human service for production, are not only subjects of
Trade but are also its products. This is absolutely true of every kind
of artificial commodity that is produced to completion, inclusive of
final delivery, by means of Economic specializations--specializations
in human service. The primary materials and the unfinished parts are
gathered together and delivered, both in the intricate process and
finally, by means of Trade.
A loaf of bread, for example, is brought to completion from
harvest-field to bakery, and thence as a finished product, through
many deliveries (including delivery to its ultimate consumer) by means
of Trade. So is the implement with which it is cut at the consumer’s
table, and the plate on which it rests, the table at which it is
served, the cloth which covers the table, the chair in which the
consumer sits at the table, and the dining room floor beneath them all.
Of the vast variety of such commodities as loaves of bread and knives
for cutting them and plates and tables and tablecloths by means of
which they are served for ultimate consumption, very few if any at all
of that variety of commodities--whether finished, as a loaf of bread on
the consumer’s table, or unfinished, as the growing grain or the flour
of which the loaf is composed, or the fuel that bakes it, or the bricks
or the metal of the baker’s oven, or the finished oven itself--give
distinctive expression to all the human services they embody.
That fact could be further illustrated with any artificial commodity
in course of Trade. A hogshead of molasses on a wharf would answer
the purpose. To thoughtless observation this commodity might seem
to embody no other human service than work on a sugar plantation
and by barrel-makers in a coopering shop. But if we think about it
with penetration and clarity, we readily realize that it embodies
the services also of lumbermen, of miners, of railway workers, of
bankers, possibly of importers and mariners, probably of exporters and
their assistants, certainly of draymen, of wharfmen, of merchants, of
book-keepers and other accountants--a veritable host of specialists
whose contributory services are not emphasized by the tangible
commodity (a hogshead of molasses on a wharf) as are the services of
plantation-hands and barrel-makers. Multitudes of human services in
distracting variety are concealed in that familiar commodity from the
vision of all but specialists; perhaps from their vision too in so far
as the services are outside of their respective specialties. And if we
were to follow that hogshead of molasses to its Economic destination,
we might perceive many an additional human service embodied and
concealed in commodities of Trade for which the material would have
been supplied in part by molasses from the hogshead and probably in
part by the hogshead itself.
Trade is not a mere business custom, as is sometimes carelessly
supposed. Only to the extent that they conform to natural Economic
law can trading customs be socially beneficial or continue without
developing social disaster.
Many customs do enter into Trade, even as habits enter into the life
of individuals--some beneficial and some vicious, some in harmony with
natural law and some defiant or evasive of it. But essentially Trade is
a natural expression of Economic relationships. It is consequently as
dependent upon conformity to natural laws as are the physical functions
of individuals. Drawing inspiration continuously from natural human
impulses, giving constant and increasing satisfaction to natural human
needs, bringing natural human units ever closer into a natural social
whole, contributing one of the two indispensable and fundamentally
effective as well as obvious natural powers and facilities for the
continuous and increasing production of human satisfactions, Trade is
evidently as natural to the social whole as is breathing or eating to
the individual. It must therefore be as completely subject to natural
law.
By nature man is “a trading animal.” So it has often been said, and the
saying is manifestly true. There is, however, no implication here that
man is an animal only. The suggestion is that, although an animal, he
is more than an animal, and that Trade develops phenomena which go to
prove it.
Of all animals, man only is within the jurisdiction of the natural
Economic laws of Trade. What other animal than man could be correctly
described, in a comprehensive sense, as “a trading animal”? Not only
is this characteristic distinctive. Not only is it peculiarly human.
But also, and by force of natural Economic law--not commercial custom,
but those natural sequences of effect from cause to which arbitrary
commercial customs must yield or come to grief,--it enables mankind,
the larger man, the social man, to multiply the Economic powers of each
individual of the human race.
Primary among those natural laws of Trade is the thoroughly tested
sequence alluded to above, that Trade multiplies productive power.
It does so by inviting, requiring and developing that characteristic
phenomenon of Trade which is commonly called “division of labor,”
but may be distinguished best as Economic specialization.[2] This
phenomenon gives to the world, gives to it as a natural effect of
Trade, a productive power per capita far and away beyond the productive
power of any isolated individual.
[2] The principle of Economic specialization could hardly
be better illustrated than by the reply of an old-time
compositor in a printing establishment who contemplated
making a contract for the erection of a cottage home for
himself and his family, when a friend suggested that he
might save money by digging the cellar himself between
working hours at the case. He replied: “I can dig a better
cellar and more easily at the case with a composing-stick
than on the spot with a pick and shovel.”
By means of a vast variety of Economic specialties--such for
illustration as farming, engineering, mining, lumbering and their
respective and numerous subdivisions, through a vast variety of
other Economic specialties, such as transporting and manufacturing
and merchandizing, along with their respective and multitudinous
subdivisions, all supplemented by such other Economic specialties as
banking, teaching, preaching, adjudicating, writing, acting, and the
fine arts--the necessaries for individual sustenance and the luxuries
for individual enjoyment are produced and delivered in quantity,
variety and perfection which, when calculated per capita, rise far
above and extend far beyond all the possibilities of isolated
individual life, far above and beyond the possibilities of community
life in narrow environments.
Were there but one individual to be considered, the natural advantages
of Trade would seem as fanciful as a fairy story. Were there only a
small group, the natural advantages of Trade, though manifest, would
be too few and too primitive to disclose its wondrous powers of
production. But when millions of individuals cooperate, some serving
all and all serving each through the intricacies of worldwide Trade,
mankind is welded into an Economic unity, a gigantic oneness--a larger
human being, “the social man” as this social organism is sometimes
not inaptly called--an organism composed of individuals who give it
vitality and whom in consequence it serves as a beneficent giant might
serve a cooperating pigmy.
Involving the production of commodities by individual contributors
of human service through an infinity of specializations, and their
assignment to individuals by the intricate processes of service for
service, Trade tends not only to increase the per capita supply of
commodities, but also to effect their fair per capita assignment in
proportions corresponding to the relative desirability of the numerous
and various contributions of individual service to their production.
In describing Trade as consisting essentially of interchanges of human
services, we are of course to be understood as including not only such
services as are embodied in tangible commodities, but also personal
service. Nor does it make any Economic difference whether the personal
service be of the “servant” type or of the “professional” type.
“Professional” services, such as those of Economists, Engineers,
Architects, Clergymen, Lawyers, Physicians and Teachers are in the
Economic domain of Trade. Not only are they exchanged for tangible
commodities, but they contribute to the production of such commodities
by conserving, and it may be by increasing the efficiency of more
obvious producers. The Economist studies productive relationships
for the purpose of securing harmonious industrial adjustments; and
so vital is his function that righteous social relationships are
imperiled, and righteous readjustments obstructed, if he mistakes
chaos for order. The Engineer designs, plans and directs; and so
important is his function that the work of hosts of producers depends
upon it. If he mistakes, great structures may fall. The Architect is
an Engineer in a special sense: if he makes mistakes, buildings may
lack stability or beauty or both. The Lawyer may disentangle societary
complications that would operate as a check upon production and Trade.
The Clergyman may discourage obstructive conduct; the Physician may
conserve the health of more direct producers so as to increase their
efficiency; the Teacher may increase their efficiency by instruction.
And so of personal services of the Personal Servant type. Whatever a
Personal Servant may do for a commodity specialist which otherwise the
specialist must do for himself at the cost of contributing less to the
production of tangible commodities, is to that extent a contribution
to the production of those commodities. Interchanges of human service,
if the interchangers act in freedom, each getting from the channels
of Trade the equivalent in service of the service he renders, are
contributions to Economic production.
The relative desirability of human services rendered in promoting
production, whether directly or indirectly, is commonly as well as
commercially and Economically known as Value, which, as already
explained, is expressed in Money terms and compared by Money
measurements.
To receive a share in the continuous distribution of commodities
through Trade is the human motive for all Economic activity, from
leadership in Economic service to service for “wages.”
A “wage-worker,” for illustration, lends a hand--becomes “a hand,”
if you please,--at harvesting wheat. His compensation is to be, let
us assume, his food and lodging during harvest and twenty dollars in
Money at the end of his job. The work being done, his food and lodging
having been meanwhile supplied to him, and the twenty dollars in Money
having been duly paid him, what has been the Economic nature of his
transaction? Has not this “harvest hand” exchanged his contribution
of service to the production of wheat, for his living while helping
to produce it and for a twenty-dollar measurement of any commodity or
commodities he may wish to draw from the channels of Trade?
Assume now that he draws from those channels a pair of shoes, a hat
and other commodities at the village store, including, perhaps, some
tobacco for his pipe and a bit of candy for a little friend. As
matter of Economics, then, what has he done but Trade his service at
harvesting for his living while at work and some service-produced
commodities for still further satisfying his desires?
And the Economic leader in that connection, the farmer who hired
the “harvest hand,” what has been his part in the transaction? In
the last analysis has he not for harvest service traded food, house
accommodations, household service, and his Money title to twenty
dollars’ worth of any commodity or commodities that may be flowing
through the channels of Trade--a title for which he presumably has
given, or through debit and credit adjustments must in the future
give, his own service or the service of others which he may naturally
and justly or only customarily and unjustly command as his own?
When an employer in any branch of Economics pays an employee “wages”
or “salary” or other compensation for service, he buys his employee’s
service by an interchange, through Trade, of human service for human
service.
Nor are interchanges of service limited to employers and employees.
The point of final interchange is almost invariably like the
illustrative instance of the “harvest hand” at a retail store. Through
the processes of Trade, myriads of commodities for the satisfaction
of human wants, commodities produced by human service to the point
of delivery to ultimate consumers, flow to ultimate consumers out
of retail stores. These depots for final delivery in Trade are the
customary terminals of production, where certifications of service in
terms of Money are usually exchanged for products of service in the
form of commodities.
Although such exchanges, like other exchanges throughout the processes
of Trade, are made in Money terms and by Money measurements, these
terms and measurements testify, as explained in the preceding Lesson,
only to the relative values which govern the exchangeable relations of
any commodity or commodities with any other commodity or commodities.
Curiously enough, Economic students who ignore “value levels” readily
recognize “price levels.” But what else are “price levels” than “value
levels” expressed in Money terms? If a hammer will exchange for a
chisel in the processes of Trade, they are of equal value--not price,
but value. If the Money price of one is two dollars and that of the
other is also two dollars, they are of equal price as well as equal
value. And except as Money may vary in purchasing power through lack
of stabilization, or commodities may vary in relative desirability or
industrial cost, the price level and the value level tend to rise and
fall together. That is to say, the essential consideration is one of
relative values of commodities (which is determined by difficulties
of production and delivery), but the superficial consideration is the
purchasing power of Money, by which those relative values are more or
less accurately measured and expressed in price lists.
Values thus expressed rise and fall. They do so in terms of Price when
measured by Money; they do so in the essentials of Value when measured
by comparisons of commodities. As a rule, however, Money-prices are
fair guides to Commodity values. Commodity values rise and fall
according to cost of production, inclusive of delivery; and in so
far as Money is stable, the rise and fall in prices is evidence of
variations in production cost.
The relative rise and fall in Value, be it measured by prices in Money
or otherwise, is so common a phenomenon of Trade that critics might be
pardoned for denying a Value level.
Nevertheless there is such a level. It may be illustrated by “sea
level.” We readily understand and confidently base important physical
calculations upon the assumption of a constantly level sea. Yet there
is no such thing. Waves rise above the surface of the sea at their
crest and fall below it in their hollows. Tides contribute other
variations. So with Value in Trade. Literally a level of Value is
unknown. Values continually rise and fall, like the waves and the
tides of the sea. Yet there is as to Value a “mean level.” Such a
level or tendency may be found in the relation of service-cost to
consumption-desirability.
Though we measure service-value by Money, though Money fluctuates as a
Value-measuring device, though some individual services fall in product
value relatively to the productive power of service, though some
individual services may increase in Value for one reason or another,
there is nevertheless a Value level in Trade which tends constantly
to maintain an equilibrium between service-value and service-utility.
Money-measured Value and Money standards of Value may rise above or
fall below the service-cost of produced commodities. Nevertheless,
service-cost in commodities is the determining fact--the Value level in
Trade. Measured and expressed by Money, that Value level is the Price
level.
Trade phenomena, to which this Lesson has been devoted, though they
lead down to the Basic Facts, the foundation facts, of Economics, do
not themselves, either wholly or in any of their details, belong in
the Basic Fact region. Though nearer to the Basic Facts of Economics
than the phenomena of Money, our consideration of which immediately
preceded our consideration of Trade, the phenomena of Trade are one
layer above the Basic Facts toward which we have been delving down from
the Economic surface, Money, and through the subsurface, Trade. To the
Basic Facts of Economics our next Lesson will be devoted.
FOURTH LESSON
THE BASIC FACTS
The purpose of the preceding Lessons has been to pierce through the
surface and the immediate subsurface of Economics down to the Basic
Facts. On the surface, as we have seen, Economics appears to be the
science of making Money, whereas Money is in fact only the medium and
measure of Value in Trade. We have further seen that the immediate
subsurface, Trade, consists apparently in exchanges of tangible
commodities but essentially in interchanges of human service. We are
now to inspect the Basic Facts.
The Basic Facts of Economics consist of natural groupings or categories
of all the myriads of minor facts with which the science of Economics
is concerned. Of those categories there are exactly three. By no
possibility can there be more; by no possibility can there be less.
Natural law fixes the number.
The first Basic Fact--not first in order of creation, but first in our
perceptions of Economic necessity--is Man. Without Man, Economics could
have neither incentive nor power, neither cause nor effect.