Part I

THE ELEMENTS

THE ELEMENTS

Economics is the name which people have come to give to the study of

Wealth. It is the study by which we learn how Wealth is produced, how

it is consumed, how it is distributed among people, and so on. It is a

very important kind of study, because it often depends upon our being

right or wrong in Economics whether we make the whole State poorer or

richer, and whether we make the people living in the State happier or

not.

Now as Economics is the study of Wealth, the first thing we have to

make certain of is, _What Wealth is_.

I

WHAT IS WEALTH?

The Economic definition of Wealth is subtle and difficult to

appreciate, but it is absolutely essential to our study to get it clear

at the outset and keep it firmly in mind. It is through some muddlement

in this original definition of wealth that nearly all mistakes in

Economics are made.

First, we must be clear as to what Wealth is _not_.

Wealth is never properly defined, for the purposes of economic study,

by any one of the answers a person would naturally give off-hand. For

instance, most people would say that a man’s wealth was the money he

was worth. But that, of course, is nonsense; for even if there were no

money used his possessions would still be there, and if he had a house

and cattle and horses the mere fact that money was not being used where

he lived would not make him any worse off.

Another and better, but still a wrong, answer is: “Wealth is what a man

possesses.”

For instance, in the case of this farmer, his house and his stock and

his furniture and implements are what we call his “wealth.” In ordinary

talk that answer will do well enough. But it will not do for the

strict science of Economics, for it is not accurate.

For consider a particular case. Part of this man’s wealth is, you

say, a certain grey horse. But if you look closely at your definition

and make it rigidly accurate, you will find that _it is not the horse

itself which constitutes his wealth, but something attaching to the

horse_, some quality or circumstance which affects the horse and gives

the horse what is called its _value_. It is this _Value_ which is

wealth, not the horse. To see how true this is consider how the value

changes while the horse remains the same.

On such and such a date any neighbour would have given the owner of

the horse from 20 to 25 sacks of wheat for it, or, say, 10 sheep, or

50 loads of cut wood. But suppose there comes a great mortality among

horses, so that very few are left. There is an eager desire to get hold

of those that survive in order that the work may be done on the farms.

Then the neighbours will be willing to give the owner of the horse much

more than 20 or 25 sacks of wheat for it. They may offer as much as

50 sacks, or 20 sheep, or 100 loads of wood. Yet the horse is exactly

the same horse it was before. The wealth of the master has increased.

His horse, as we say, is “worth more.” _It is this_ WORTH, _that is,

this ability to get other wealth in exchange, which constitutes true

Economic Wealth_.

I have told you that the idea is very difficult to seize, and that you

will find the hardest part of the study here, at the beginning. There

is no way of making it plainer. One has no choice but to master the

idea and make oneself familiar with it, difficult as it is. _Wealth

does not reside in the objects we possess, but in the economic values

attaching to those objects._

We talk of a man’s wealth or a nation’s wealth, or the wealth of the

whole world, and we think at once, of course, of a lot of material

things: houses and ships, and pictures and furniture, and food and all

the rest of it. But the economic wealth which it is our business to

study is not identical with those _things_. Wealth is the sum total of

the _values_ attaching to those things.

That is the first and most important point.

Here is the second: Wealth, for the purposes of economic study, _is

confined to those values attaching to material objects through the

action of man, which values can be exchanged for other values_.

I will explain what that sentence means.

Here is a mountain country where there are few people and plenty

of water everywhere. That water does not form part of the Economic

_wealth_ of anyone living there. Everyone is the better off for the

water, but no one has _wealth_ in it. The water they have is absolutely

necessary to life, but no man will give anything for it because any man

can get it for himself. It has no _value in exchange_. But in a town to

which water has to be brought at great expense of effort, and where

the amount is limited, it acquires a value in exchange, that is, people

cannot get it without offering something for it. That is why we say

that in a modern town water forms part of _Economic Wealth_, while in

the country it usually does not.

We must carefully note that wealth thus defined is NOT the same thing

as well-being. The mixing up of these two separate things--well-being

and economic wealth--has given rise to half the errors in economic

science. People confuse the word “wealth” with the idea of well-being.

They say: “Surely a man is better off with plenty of water than with

little, and therefore conditions under which he can get plenty of water

for nothing are conditions under which he has _more wealth_ than when

he has to pay for it. He has more _wealth_ when he gets the water free

than he has when he has to pay for it.”

It is not so. Economic wealth is a separate thing from well-being.

Economic wealth may well be increasing though the general well-being of

the people is going down. It may increase though the general well-being

of the people around it is stationary.

The Science of Economics does not deal with true happiness nor even

with well-being in material things. It deals with a strictly limited

field of what is called “Economic Wealth,” and if it goes outside its

own boundaries it goes wrong. Making people as happy as possible is

much more than Economics can pretend to. Economics cannot even tell

you how to make people well-to-do in material things. But it can tell

you how exchangeable Wealth is produced and what happens to it; and as

it can tell you this, it is a useful servant.

That is the second difficult point at the very beginning of our study.

_Economic Wealth consists in_ EXCHANGEABLE _values, and nothing else_.

We must be as clear on this second point as we have made ourselves upon

the first, or we shall not make any progress in Economics. They are

both of them unfamiliar ideas, and one has to go over them many times

before one really grasps them. But they are absolutely essential to

this science.

Let us sum up this first, elementary, part of our subject, and put it

in the shortest terms we can find--what are called “Formulæ,” which

means short and exact definitions, such as can be learnt by heart and

retained permanently.

We write down, then, two Formulæ:

1. =Wealth is made up, not of things, but of economic values attaching

to things.=

2. =Wealth, for the purposes of economic study, means ONLY exchange

values: that is, values against which other values will be given in

exchange.=

II

THE THREE THINGS NECESSARY TO THE PRODUCTION OF WEALTH--LAND, LABOUR

AND CAPITAL

You will notice that all about you living beings are occupied in

changing the things around them from a condition where they are _less_

to a condition where they are _more_ useful to themselves.

Man is a living being, and he is doing this kind of thing all the time.

If he were not he could not live.

He draws air into his lungs, taking it from a condition where it does

him no good to a condition where it keeps him alive. He sows seed;

he brings food from a distance; he cooks it for his eating. To give

himself shelter from the weather he moulds bricks out of clay and puts

them together into houses. To get himself warmth he cuts down wood and

brings it to his hearth, or he sinks a shaft and gets coal out of the

earth, and so on.

Man is perpetually changing the things around him from a condition in

which they are _less_ useful to him into a condition where they are

_more_ useful to him.

_Whenever a man does that he is said to be creating, and adding to,

Human Wealth_: part of which is Economic Wealth, that is Wealth

suitable for study under the science of Economics.

Wealth, therefore, that thing the nature and growth of which we are

about to study, is, so far as man is concerned, the result of this

process of changing things to man’s use, and it is through looking

closely at the nature of this process that we get to understand what

is necessary to it, and what impedes it, and how its results are

distributed among mankind.

We must next go on to think out _how_ wealth is so produced. We have

already seen what the general statement on this is: Wealth is produced

by man’s consciously transforming things around him to his own uses;

and though not everything so transformed has true _Economic Wealth_

attaching to it (for instance, breathing in air does not produce

Economic Wealth), yet all Economic Wealth is produced as _part_ of this

general process.

Now when we come to examine the Production of Wealth, we shall find

that _three_ great separate forces come into it; and these we shall

find to be called conveniently “Land,” “Labour” and “Capital.”

Let us take a particular case of the production of Economic Wealth and

see how it goes forward. Let us take the case of the production of,

say, 100 sacks of wheat.

1. LAND.

A man finds himself possessed of so much land, and when he sets out to

produce the 100 sacks of wheat, the following are the conditions before

him.

There are natural forces of which he takes advantage and without which

he could not grow wheat. The soil he has to do with has a certain

fertility, there is enough rainfall to make the seeds sprout, and so on.

All these natural forces are obviously necessary to him. Though we talk

of man “creating” wealth he does not really create anything. What he

does is to use and combine certain natural forces of which he is aware.

He has found out that wheat will sprout if it is put into the ground at

a particular season, and that he will get his best result by preparing

the ground in a particular manner, etc. These natural forces are the

foundation of the whole affair.

For the sake of shortness we call all this bundle of natural forces

(which are the very first essential to the making of wealth) “LAND.”

This word “Land” is only a conventional term in Economics, meant to

include a vast number of things beside the soil: things which are not

Land at all; for instance, water power and wind power, the fertility

of seed, the force of electricity, and thousands of other natural

energies. But we must have some short convenient term for this set of

things, and the term “Land” having become the conventional term in

Economic Science for all natural forces, it is now the useful and short

word always used for them as a whole: the reason being, I suppose,

that land, or soil, is the first natural requisite for food--the most

important of man’s requirements, and the _place_ from which he uses all

other natural forces.

We say, then, that for the production of wealth the first thing you

need is the natural forces of the world, or “Land.”

2. LABOUR.

But we next note that this possession of natural forces, our knowledge

of how they will work, and our power of combining them, _is not enough

to produce wealth_.

If the farmer were to stand still, satisfied with his knowledge of the

fertility of the soil, the quality of seed, and all the rest of it, he

would have no harvest. He must, as we have said, prepare the land and

sow the seed: only so will he get a harvest at the end of his work.

These operations of human energy which end in his getting his harvest

are called “LABOUR”: that is, _the application of human energy to

natural forces_. There are no conditions whatsoever under which wealth

can be produced without natural forces or “land;” but there are also no

conditions whatsoever under which it can be produced without “labour,”

that is, the use of human energy. Even if a man were in such a position

that he could get his food by picking it off the trees, there would

still be the effort required of picking it. We say, therefore, _that

all wealth comes from the combination of LAND and LABOUR: That is_, of

_natural forces_ and _human energy_.

3. CAPITAL.

At first sight it looks as though these two elements, Land and Labour,

were all that was needed; and a very great deal of trouble has been

caused in the world by people jumping to this conclusion without

further examination.

But if we look closely into the matter we shall see that Land and

Labour alone are _not_ sufficient to the production of wealth in any

appreciable amount. The moment man begins to produce wealth in any

special fashion and to any appreciable extent, a third element comes

in which is as rigorously necessary as the two others; and that third

element is called CAPITAL.

Let us see what this word “CAPITAL” means.

Here is your farmer with all the requisite knowledge and the natural

forces at his disposal. He has enough good land provided him to produce

a harvest of 100 sacks of wheat if he is able and willing to apply his

manual labour and intelligence to this land. But he must be kept alive

during the many months required for the growth of the wheat. It is no

use his beginning operations, therefore, unless he has a stock of food;

for if he had not such a stock he would die before the harvest was

gathered. Again, he must have seed. He must have enough seed to produce

at the end of those months one hundred sacks of wheat. So we see that

at the very least, for this particular case of production, the natural

forces about him and his own energies would not be of the least use to

the production of the harvest unless there were this third thing, a

stock of wheat both for sowing and for eating.

But that is not all. He must be sheltered from the weather; he must be

clothed and he must have a house, otherwise he would die before the

harvest was gathered. Again, though he might grow a very little wheat

by putting in what seed he could with his hands into a few suitable

places in the soil, he could not get anything like the harvest he was

working for unless he had special implements. He must prepare the land

with a plough; so he must have a plough; and he must have horses to

draw the plough; and those horses must be kept alive while they are

working, until the next harvest comes in; so he must have a stock of

oats to feed them with.

All this means quite a large accumulation of wealth before he can

expect a good harvest: the wealth attaching to clothes, houses, food,

ploughs, horses for a year.

In general, we find that man, when he is setting out on a particular

piece of production of wealth, is absolutely compelled to add to his

energies, and to the natural forces at his disposal, a third element

consisting of _certain accumulations of wealth made in the past_--an

accumulation of food, clothing, implements, etc.--without which the

process of production could not be undertaken. _This accumulation

of_ ALREADY-MADE WEALTH, _which is thus absolutely necessary to

production_, we call _CAPITAL_.

It includes _all kinds of wealth whatsoever which man uses_ WITH THE

OBJECT OF PRODUCING FURTHER WEALTH, _and without which the further

wealth could not be produced_. It is a reserve without which the

process of production is impossible. Later on we shall see how very

important this fact is: for every healthy man has energy, and natural

forces are open to all, but _capital_ can sometimes be controlled by

very few men. If they will not allow their capital to be used, wealth

cannot be produced by the rest; therefore those who, by their labour,

produce wealth may be driven to very hard conditions by the few owners

of Capital, whose leave is necessary for any wealth to be produced at

all.

But all this we must leave to a later part of our study. For the moment

what we have to get clearly into our heads are these three things: (1)

_Natural Forces_, (2) _Human Energy_, and (3) _Accumulated stores and

implements_, which are called, generally, for the sake of shortness:

_LAND_, _LABOUR_ and _CAPITAL_. In the absence of any one of these

three, production of Wealth is impossible. All three must be present;

and it is only the combination of all three which makes the process of

producing economic values possible.

POINTS ABOUT CAPITAL.

There are _three_ important things to remember about Capital.

1. The first is that what makes a particular piece of wealth into

capital is not the kind of object to which the economic value

attaches, but the _intention_ of using it as capital on the part of

the person who controls that object; that is, the intention to use

it for the _production of future wealth_. Almost any object can be

used as capital, but no object is capital, however suitable it be for

that purpose, _unless there is the intention present of using it as

capital_. For instance: One might think that a factory power engine

was always Capital. The economic values attaching to it, which make

an engine worth what it is are nearly always used for the production

of future wealth, and so we come to think of the engine as being

necessarily capital simply because it is an engine, and the same is

true of factory buildings and all other machinery and all tools, such

as hammers and saws and so on.

But these things are not capital _in themselves_; for if we do not use

them for the production of future wealth they cease to be capital. For

instance, if you were to put the engine into a museum, or to keep a

hammer in remembrance of someone and not use it, then it would not be

capital.

And this truth works the other way about. At first sight you would say,

for instance, that a diamond ring could not be capital: it is only a

luxurious ornament. But if you use it to cut glass for mending a window

it is capital for that purpose.

2. The second important thing to remember about Capital is that, being

Wealth, _it is at last consumed, as all other Wealth is_. Capital is

consumed in the process of using it to make more Wealth, and as it is

consumed it has to be replaced, or the process of production will break

down. Take the case of the farmer we gave just now. He had to start, as

we saw, with so much Capital--horses and a plough and a stock of wheat

and a stock of oats, etc.; and only by the use of this capital could

he procure his harvest of 100 sacks of wheat at the end of the year;

but if he is going on producing wheat year after year he must replace

the wastage in his capital year after year. His stock of wheat for food

and for seed will have disappeared in the year; so will his stock of

hay and oats for keeping his horses. His plough will be somewhat worn

and will need mending; and his horses, after a certain time, will grow

old and will have to be replaced. Therefore, if production is to be

continuous, that is, if there are to be harvests year after year, each

harvest must be at least enough to replace all the wastage of capital

which goes on during the process of production.

3. The third thing to remember about Capital is that Capital is

_always the result of saving_: That is, the only way in which people

can get Capital is by doing without some immediate enjoyment of

goods, and putting them by to use them up in creating wealth for the

future. This ought to be self-evident; but people often forget it,

because the person who _controls_ the capital is very often quite a

different person from the person who _really accumulated_ it. The owner

of the capital is very often a person who never thinks of saving.

Nevertheless, the saving has been done by _someone_ in the past, and

saving must go on the whole time, for if it did not the Capital could

not come into existence, and could not be maintained once it was in

existence.

Suppose, for instance, a man inherits £10,000 worth of Capital invested

in a Steamship Company.

This means that he has a share in a number of hulls, engines, stocks of

coal and food, and clothing for the crews, and other things which have

to be provided before the steamships can go to sea and create wealth by

so doing.

All this capital has been saved by someone. Not by the man himself; he

has merely inherited the wealth--but by someone.

Someone at some time, his father or whoever first got the capital

together, must have forgone immediate enjoyment and put by wealth for

future production, or the capital could not have come into existence.

Thus, if the first accumulator of the capital had used his wealth for

the purchase of a yacht in which to travel for his amusement, the

labour and natural forces used in the production of that yacht would

have made wealth consumed in immediate enjoyment, and it would not have

been used for future production as is a cargo ship.

In the same way this capital, once it has come into existence in the

shape of cargo ships and stocks of coal and the rest, would soon

disappear if it were not perpetually replenished by further saving. The

man who owns the shares in the Steamship Company does not consciously

save year after year enough money to keep the capital at its original

level.

Nevertheless, the saving is done for him. The Directors of the Company

keep back out of the total receipts enough to repair the ships and

to replenish the stocks of coal, etc., and they are thus perpetually

accumulating fresh capital to replace the consumption of the old. How

true it is that all Capital is the result of saving by _someone_,

_somewhere_, we see in the difference between countries that do a

lot of saving and countries that do little. Savages and people of

a low civilisation differ in this very much from people of a high

civilisation. They want to enjoy what they have the moment they have

it, and they lay by as little as possible for the future; only just as

much as will keep them going. But in a high civilisation people save

capital more and more, and so are able to produce more and more wealth.

Now let us sum up in some more Formulæ what we have learnt so far.--

1. =All production of Wealth needs three things: (_a_) Natural forces,

(_b_) Human energy, and (_c_) an Accumulation of wealth made in the

past and used up in future production.=

2. =These three are called, for shortness: (_a_) Land, (_b_) Labour,

(_c_) Capital.=

3. =The last, Capital, (_a_) depends for its character on the intention

of the user, (_b_) is consumed in production, (_c_) is always the

result of saving.=

III

THE PROCESS OF PRODUCTION

You have seen how the production of wealth takes place through the

combination of these three things, LAND, LABOUR AND CAPITAL, and you

have also seen how the wealth so produced consists not in the objects

themselves, but in the economic values attached to the objects.

Now we will take a particular instance of wealth and show how this

works out in practice and what various forms the production of wealth

takes.

Wealth, as we have seen, arises from the transposing of things around

us from a condition where they are less to a condition where they are

more useful to our needs.

Let us take a ton of coal lying a thousand feet down under the earth

and no way provided of getting at it. A man possessing that ton of

coal would not possess any wealth. The coal lying in the earth has no

economic value attaching to it whatsoever. It has not yet entered the

process whereby it ultimately satisfies a human need.

A shaft is sunk to get at that coal, and once the coal is reached a

first economic value begins to attach to it. Next, further labour,

capital and natural forces are applied to the task of hewing the coal

out and raising it to the surface. This means that yet more economic

values are attached to the ton of coal. These we express by saying that

the ton of coal at the bottom of the mine, just hewed out, is worth so

much--say 15/-; and later at the pit head is worth so much more--say

£1. But the process of production of wealth is not yet completed. The

coal is needed to warm you in your house, and your house is a long way

from the pit head. It must be taken from the pit head to your house,

and for this transport further labour, natural forces and capital must

be used, and these add yet another economic value to the coal.

We express this by saying that the ton of coal _delivered_ (that is, at

your house) is worth not £1, which it was at the pit head, but £1 10s.;

and in this example we see that transport is as much a part of the

production of wealth as other work. We also see a further example of

the truth originally stated that wealth does not consist in the object

itself but in the values attached to it. The ton of coal is there in

your cellar exactly the same (except that it is broken up) as it was

when it lay a thousand feet under the earth with no way of getting

to it. In your cellar it represents wealth. In possessing it you are

possessing wealth to the amount of 30s. You could exchange it against

30s. worth of some other thing, such as wheat. But the wealth you thus

possess is not the actual coal, but the values attaching to the coal.

These economic values are being piled up from the very beginning of the

process of production until the process of consumption begins.

Here is another case which shows how the process of production will add

values to a thing without necessarily changing the thing itself.

Suppose an island where there is a lot of salt in mines near the

surface, but with very poor pasture and very little of it; most of the

soil barren and the climate bad. On the main-land, a day’s journey from

the island, there is good soil and pasture and a good climate, but

there is no salt. Salt is a prime necessity of life, and it comes into

a lot of things besides necessaries. To the people of the main land,

therefore, salt, which they lack, is of high value. To the people of

the island it is of low value, for they can get as much of it as they

want, with very little trouble. Meanwhile, meat is of very high value

to the people of the island, who can grow little of it on their own

soil, while it is of much less value to the people of the main-land,

who have plenty of it through their good pastures and climate. Here we

have, let us say, 100 tons of salt in the island and 100 tons of meat

on the main-land. A boat takes the 100 tons of salt from the island

to the main-land and brings back the meat from the main-land to the

island. Here wealth has been created on both sides, although no change

has taken place in the articles themselves except a change in position.

Both parties, the islanders and the main-land people, are wealthier

through the transaction, and this is a case where _exchange_ is a

direct creator of wealth, and the transport effecting the exchange is a

creator of wealth.

Strictly speaking, everything done to increase the usefulness of an

object right up to the moment when consumption begins is part of the

production of wealth. For instance, wealth is being produced from the

moment that wheat is sowed in the ground to the moment when the baked

loaf is ready for eating, and the wealth expressed by the loaf, that

is, the values attaching to it, are made up by all the processes of

adding values from the first moment the seed was sown. When you eat a

sixpenny loaf you are beginning to consume values created by the sowing

of the wheat and its culture and its harvesting and grinding, and the

working of the flour into dough, and the baking, and created by every

piece of transport in the process, the carting of the sheaf into the

rick, the carting thrashed wheat to the mill, the taking of the flour

to the baker, the taking of the baked loaf to your house, and even the

bringing of the loaf from the larder to your table. Every one of these

actions is part of the production of wealth.

There is attaching to the process of the production of wealth a certain

character which we appreciate easily in some cases, but with much more

difficulty in others. We have already come across it in discussing

Capital. It is this:

_All wealth is consumed._

This is universally true of all wealth whatsoever, though the rate of

consumption is very different in different cases.

The purpose of nature is not the purpose of man. Man only creates

wealth by a perpetual effort against the purpose of nature, and the

moment his effort ceases nature tends to drag back man’s creation from

a condition where it is more to a condition where it is less useful to

himself.

For some sorts of wealth the process is very rapid, as, for instance,

in the consumption of fuel, or in the wasting of ice on a hot day.

Man with an expenditure of his energy and brains applied to natural

forces, and by the use of capital, has caused ice to be present under

conditions where nature meant there to be no ice--a hot summer’s day.

He has brought it from a high, cold place far away; or he has kept it

from the winter onwards stored in an ice house which he had to make and

to which he had to transport it; or he has made it with engine power.

But the force of nature is always ready to melt the ice when man’s

effort ceases.

The moment man’s effort ceases, deterioration, that is, _the

consumption of the wealth present_, at once begins. And this truth

applies at the other end of the scale. You may make a building of

granite, but it will not last for ever. The consumption is exceedingly

slow, but it is there all the same. And whether the consumption takes

place in the service of man (as when fuel is burnt on a hearth) or

by neglect (as when a derelict house decays) it is always _economic

consumption_.

We may sum up in the following Formulæ:--

1. =Transport and Exchange, quite as much as actual work on the

original material, form part of the Production of Wealth.=

2. =All Wealth is ultimately consumed: that is, matter having been

transposed by man from a condition where it is less to a condition

where it is more useful to himself, is dragged back from a condition

where it is more to a condition where it is less useful to himself.=

IV

THE THREE PARTS INTO WHICH THE WEALTH PRODUCED NATURALLY DIVIDES

ITSELF--RENT, INTEREST, SUBSISTENCE

We now come to that part of Economics which has most effect upon

human society, and the understanding of which is most essential to

sound politics. It is not a difficult point to understand. The only

difficulty is to keep in our minds a clear distinction between what

is called economic law, that is, the necessary results of producing

wealth, and the moral law, that is the matter of right and wrong in the

distribution and use of wealth.

Some people are so shocked by the fact that economic law is different

from moral law that they try to deny economic law. Others are so

annoyed by this lack of logic that they fall into the other error of

thinking that economic law can override moral law.

You have to be warned against both these errors before you begin to

approach the subject of Rent, Profit and Subsistence. Only when we

have worked out the principles of these three things can we come back

again to the apparent clash between economic law and moral law, the

understanding of which is so very important in England to-day.

The motive of production is to satisfy human needs, and the simplest

case of production is that of a man working for himself and his family

as a settler in a new country. He cuts down wood and brings it where

it is wanted; he builds a hut and a bridge with it; he stacks it ready

to burn for fuel. The wealth he thus produces by his labour goes to

him and his, and because the labour he has to expend is what impresses

him most about the process, he calls the wealth produced at the end of

it: “Wealth produced by his labour.” He thinks of his labour as the

one agent of the whole affair, and so it is the one immediate _human_

agent; but, as we have seen, there are two other agents as well. His

mere labour (that is, the use of his brain and his muscles) would not

have produced a pennyworth of wealth, but for two other agents: Natural

Forces (or Land) and Capital. And we shall find when we look into it

that the wealth he thus produces and regards as one thing is also

really divided into three divisions: one corresponding to each of the

three agents which produce wealth.

Being a settler living by himself and possessing his own land and his

own implements, he controls all he produces and does not notice the

three divisions. But three divisions there are none the less present

in all wealth produced anywhere, =and these three divisions do not

correspond to the moral claim man has to the result of his labour=.

They are divisions produced by the working of economic law, which is as

blind and indifferent to right and wrong as are the ordinary forces of

nature about us.

These three divisions are called =RENT=, =INTEREST= (or =Profit=) and

=SUBSISTENCE=. In order to see how these three divisions come about we

must take them in the order of _Subsistence_ first, then _Interest_,

then _Rent_.

1. SUBSISTENCE.

In any civilisation you will find a certain amount of things which

are regarded as necessaries. In any civilisation it is thought that

human beings must not be allowed to sink below a certain level, and a

certain amount of clothes of a certain pattern, a certain amount of

housing room and fuel, and a certain amount of food of a certain kind

are thought the very least upon which life can be conducted. Even the

poorest are not allowed to fall below that standard. This does not

mean that no one is allowed to starve or die of insufficient warmth.

It means that any particular civilisation (our own, for instance, or

the Chinese) has its regulation minimum and lets men die rather than

fall below it. This “certain amount,” below which even the poorest

people’s livelihood is not allowed to fall, is called =THE STANDARD OF

SUBSISTENCE=.

Most people when they first think of these things imagine that there is

some very small amount of necessaries which, all over the world, and

at all times, would be thought absolutely essential to man. But it is

not so. The standard set is always higher than the mere necessity of

keeping alive would demand.

For instance, we in this country put into our standard of necessity

clothes of a rather complicated pattern. We should not tolerate the

poorest people going about in blankets. They must have boots on their

feet, which take a lot of labour and material. We should not tolerate

the poorest people going about barefooted, as they do in many other

countries, nor even with sandals. It is not our custom. They may die

of wet feet through bad leather boots and bad, thin clothing of our

complicated pattern, but they must not wear wooden shoes or walk

barefoot or go about in blankets.

Again, we do not live on anything at random, but upon cooked meat and a

certain special kind of grain called wheat. There are some grains much

cheaper than wheat; but our custom demands wheat even for the poorest,

if there is not enough wheat there is a famine, and famine is preferred

by society to the giving up of the wheat standard. Again, we insist

upon even the poorest having a certain amount of protection against the

weather in the way of houses, which must be up to a certain standard.

We do not tolerate their living in holes in the ground or mud huts.

One way and another we have set up a certain _standard of subsistence_

even for the poorest; _and every community in history has, at all

times, lived under this idea of a_ MINIMUM STANDARD OF SUBSISTENCE.

This is so true that people will suffer great inconvenience, even

to famine, as I have said, rather than give up the standard of

subsistence. When people are too poor to afford this least amount of

what we think necessaries effort is made to supply them by doles or a

poor rate, or something of that kind; but the standard is not abandoned.

Well, this _Minimum Standard of Subsistence_ is the first division

in the Wealth produced. The prosperous man, tilling his own land and

possessed of his own capital, consumes, of course, much more than the

bare standard of subsistence would allow. He eats more food and better

food, and has more and better clothes and house room and fuel and the

rest than the mere standard of subsistence of his civilisation demands.

Nevertheless, even in his case the standard of subsistence is there. It

is a minimum below which, if things went wrong, he would not fall. Ask

him to fall below it and he would simply fail to do so. He would try to

produce that minimum amount of wealth in some other way, or if he could

not do that he would die.

This “Standard of Subsistence,” which is to be found in its various

shapes in every civilisation, may be called “_The Worth While of

Labour_.” Human energy would not be forthcoming, the work would not

get done, unless at the very least the person doing the work got this

Standard of Subsistence. In England to-day it is =set= for a man and

his family at something like 35s. to 40s. a week. One way and another,

counting for allowance in rent and overtime and so on, even the poorest

labourer gets that, and if he did not get it labour would stop. Our

civilisation would run to famine and plague rather than go below this

minimum.

Another way of putting it is this: Under the standard of subsistence

in our civilisation in England a man must, on the average, produce

something like £2 worth of economic values a week, otherwise it is not

worth while living, not worth while going on.

I say “on the average.” A great many people, of course, produce

nothing. But there must be an average production of that amount to keep

society going at all, merely in labour, that is, in human energy and

brains. As a fact, of course, the average production is much higher.

But it could not fall to _less_ than this without the production of

wealth gradually coming to an end.

It is very important to recognise this principle in Economics, for it

is nearly always misunderstood, and it makes a great difference in our

judgment of social problems. You often hear people speaking as though

the subsistence of their fellows might fall to any level so long as

they had so much weight of food and amount of warmth as would keep them

alive. But it is not so. Every society has its own standard, and will

rather have men emigrate or die than fall below it: and that standard

is the basis of all production. _It must be satisfied or production

ceases._

2. INTEREST.

Now, if this “Worth While of Labour” was all that had to be considered,

things would be a great deal simpler than they are. Unfortunately,

there is another “worth while” from which one cannot get away, and

which makes the second division in the produce of wealth. This is the

“Worth While of Capital”: called “Profit” or “Interest.”

We must be careful not to mix up “Interest on Money,” that is, the

word “interest” in its ordinary conversational use, with true economic

interest. Interest on money does not really exist. It is either

interest on _Real Capital_ (machines, stores, etc.) for which the

money is only a symbol, or else it is usury, that is, the claiming of

a profit which is not really there; and what usury is exactly we shall

see later on. The thing to remember here is that there is no such thing

in Economic Science as Interest on Money.

We have seen that Capital cannot come into existence unless somebody

saves. We have also seen that since it is always being consumed and

must be replaced, the saving has got to go on all the time, if the

production of wealth (to which capital is necessary) is to continue.

Now, as you will see in a minute, capital cannot be accumulated without

some motive. You only accumulate capital by doing without a pleasure

which you might have at a certain moment, and putting it off to a

future time. You go without the immediate enjoyment of your wealth in

order to use it for producing further wealth. That means restraint and

sacrifice.

But restraint and sacrifice require some motive. Why should a man, or a

society, do without a present enjoyment if the sacrifice is not to be

productive of future good?

What happens is this: A man says: “On my present capital I can produce

so much wealth. If I accumulate more capital I shall, in the long run,

have a larger income. I will therefore forgo my present pleasure. I

will add to my capital and have more income in the future through my

present self-restraint.” Or again: “If I don’t _keep up_ my capital

by continual saving to replace what is consumed in production I shall

gradually get _less_ income.”

But here comes in a very important law of Economics called “_The

Law of Diminishing Returns_.” After a certain point, capital as it

accumulates, does not produce a _corresponding_ amount of extra wealth.

It produces _some_ more, but not as much in proportion. For instance,

if you till a field thoroughly with the use of so many ploughs and

horses and so on, you will get such and such a return. If you add a

great deal more capital in the shape of food for more labourers and

more tillage till you treat the land as a sort of garden, you produce

more wealth from that field; but though you may have doubled your

capital you will not have doubled your income. You will only have added

to it, say, half as much again. If you were to double your capital

again, making four times your original amount, using a lot more food

for labourers and a lot more implements, you would again have a larger

produce, probably, but perhaps only double your original amount: _Four_

times the original amount of capital, and only _twice_, say, the old

income.

So the process goes on; and in all forms of the production of wealth

this formula applies, and is true: “_The returns of increasing capital,

so long as the method of production is not changed, get greater in

amount, but less in proportion to the total capital employed._”

Men developing a certain section of natural forces get 10 per cent. on

a small capital, perhaps 5 per cent. on a larger one; on a still larger

one only 2½ per cent., and so on, if they apply that capital to the

_same section_ of natural forces and in the _same manner_.

Well, this advantage which a man gets by adding to his capital at the

expense of present enjoyment can be measured.

For instance, a man owning a farm and tilling it himself gets a

harvest of 1,000 sacks of wheat. In order to get this result he must

have capital at the beginning of every year--ploughs and horses, and

sacks of grain and what not--worth altogether 10,000 sacks of wheat.

His income, in wheat, is one-tenth of his capital. Every ten sacks of

capital produces him an income of one sack a year. He says to himself:

“If I were to plough the land more thoroughly and put on a lot more

phosphates and slag and get new, improved machinery I might get another

fifty sacks a year out of the land, but this new capital will have to

be saved.”

He carefully saves on every harvest, exchanging the wheat for the

things he needs in the way of new capital, until, after a few years,

the implements and the phosphates and slag and the rest on his land,

and all his other capital is worth much more than it used to be.

Instead of being worth only _one_ thousand sacks, his capital is now

worth _two_ thousand sacks, and he gets the reward for his putting by

and doing without immediate enjoyment in the shape of a larger harvest.

But though he has doubled his capital he has not doubled his income.

Instead of the old income of 100 sacks of wheat he is now getting 150

sacks of wheat. Thus though his income is larger, the _proportion_ of

that income to the total capital is less. For 1,000 sacks of capital he

got 100 sacks of wheat at harvest; but now for 2,000 sacks of capital

he only gets 150 sacks at the harvest. Or (as we put it in modern

language), his income is no longer 10 per cent. on his capital, but 7½

per cent. only. He has a larger income, but it is smaller in proportion

to the capital invested.

Now, although the 2,000 of capital invested is thus bringing him in

a smaller _proportion_ of income than the old 1,000 did, he thinks

it worth while: because he is at any rate getting more _income_; 150

sacks instead of only 100. But there must come a time when he will no

longer think it worth while to go on saving. Supposing he finds, for

instance, that after taking all the trouble to accumulate and apply to

his land capital to the value of 10,000 sacks of wheat, he gets only

200 sacks, that is 2 per cent. annual reward for all this saving, he

will not think it good enough, and he will stop saving. The point where

he stops, the return below which he does not think it worth while to

save, marks the _minimum profits of capital_. A man is delighted, of

course, to have _more_ profit than this if he can. But the point is, he

will not take _less_. Rather than make less than a certain proportion

of income to his capital he will stop saving, and spend all he has in

immediate enjoyment.

It is this obvious truth which makes the second great division in the

produce of wealth. You must, as we have seen, produce enough to keep

labour going. That is, you must produce enough to satisfy the standard

of subsistence in your society; _but you must also produce enough

more to keep capital accumulating_. You must produce, over and above

subsistence, whatever happens to be the amount of _profits_ for which

capital will accumulate in any particular society (with us, to-day, it

is about 5 per cent.).

It is very important to observe that this second division, Profit, or

Interest, must always be present, no matter how the capital is owned

and controlled, no matter who gets the profit.

Some people have thought that if you were to take capital away from the

rich men who now own most of it and to give it to the politicians to

manage for everybody, this division, Profit, would disappear. But it

is not so. The people who were managing the capital for the benefit of

everybody would have to tell the electors that they could not have all

the wealth produced to consume as they chose: a certain amount would

have to be kept back, and people would only consent to have a certain

amount kept back on condition that they got an advantage in the future

as a reward of their immediate sacrifice. Even if you had a Despot at

the head of the State who cared nothing for people’s opinions, this

division of profit would still be there; for it would be mere waste to

accumulate capital at a heavy sacrifice to himself and his subjects,

unless it produced a future reward.

If the Despot said, “This year you must do without _half_ your usual

amount of leisure and without _half_ your usual amounts, pay _double_

for your cinemas and for your beer, and all that in order to earn one

hundredth more leisure and amusements next year,” it would be found

intolerable.

So it comes to this: There are always present in the process of

production two agents, Capital and Labour, and each of these must

have in one form or another its “Worth While,” otherwise it won’t go

on. You must satisfy the “Worth While of Labour” and you must satisfy

the “Worth While of Capital.” If you do not, labour stops working and

capital stops accumulating, and the whole business of production breaks

down.

(Of course, we must be careful to distinguish between the case of

a private man increasing his investments and the general increase

of capital as applied to an unchanging area of natural forces. John

Smith having £1,000 invested at 5 per cent. can save another £1,000

and another and many more, and still get 5 per cent. But that is

because he is saving and makes up for others wasting, or because

his saving is so small a proportion of the total Capital of Society

that it has no appreciable effect. But if the total Capital of

Society be thus increased the Law of Diminishing Returns eventually

comes into play.)

3. RENT.

We arrive through this at the third division, _Rent_.

Under some circumstances the “Worth While of Labour” and the “Worth

While of Capital” can just barely be earned, and no more. Under those

circumstances production will take place, but under worse circumstances

it will not.

For instance, where there is very light, sandy soil near a heath a man

finds that by putting a thousand pounds of capital on to a hundred

acres of land he can get his bare subsistence and £50 worth of produce

over: 5 per cent. on his capital. It is worth his while to cultivate

that land, just barely worth his while. He also possesses land on

a still more sandy part over the boundary of the heath itself. He

calculates that if he were laboriously to save another £1,000 and take

in 100 acres of the new, worse land, he would make the bare subsistence

of the labour employed upon it, but only £10 extra, that is, only 1 per

cent. on his new capital. He would say: “This is not worth while,” and

the too-sandy bit of land would go uncultivated.

When the conditions are such that the capital and labour applied to

them _just_ get their worth while and no more, those conditions are

said to be “_on the margin of production_,” which means that they are

the worst conditions under which men in a particular society will

consent to produce wealth at all. Put them on conditions still worse,

and they will not produce.

Now the existence of this Margin of Production creates the third

division in Wealth, which is called =RENT=.

_Rent is the surplus over and above the minimum required by labour and

capital out of the total produce._ (We must be careful, as we saw in

the case of “Interest” not to confuse true economic Rent with “Rent”

in the conversational sense. Thus what is called “the rent” of a house

is part of it true economic rent, but part of it interest on the

accumulated or saved wealth, the _Capital_ of its bricks and mortar and

building.)

Take the case of a seam of coal, which at one end of its run crops

out on the surface, a couple of miles on is only 1,000 feet below the

surface, but dips down gradually until, within twenty miles, it is

10,000 feet below the surface.

Under the conditions of the society in which the coal is being mined,

and in the state which the science of mining has reached, it is found

that, at a depth of 5,000 feet, this seam is _just_ worth while mining:

that is, the capital which has to be accumulated for sinking the shafts

and bringing the miners up and down from their work, and raising the

coal to the surface, and providing subsistence for the miners at their

work, _just barely_ gets the profit below which it would not be worth

while to use it.

A shaft sunk at this depth, for instance, and the machinery and stores

cost £10,000, and when you get the coal to the surface that coal will

pay the standard of subsistence of the labourers and leave £500 profit

for capital; that is, 5 per cent. Capital will not accumulate if it

gets less than 5 per cent. Labour will not be exercised if it gets less

than its standard subsistence; therefore, the coal which lies farther

along the seam, deeper than 5,000 feet, will be left untouched. It is

not “worth while” to sink a shaft to try and get it. It is “below the

Margin of Production.”

[Illustration]

What happens to the coal in the places where it gets nearer and nearer

to the surface? Obviously, it is better worth while to sink shafts

there than it is at 5,000 feet. You only want the same amount of labour

for cutting the coal out, whether it is 5,000 feet below the surface

or 2,000, and you want much less capital and labour in sinking the

shafts and bringing the coal to the surface and getting the miners up

and down. There is, therefore, a surplus. Thus with a shaft only 2,000

feet deep you need, say, only £5,000 worth of capital to get £500

worth of coal over and above the subsistence of the labourers. 5 per

cent. on £5,000 is £250--so in that case there is a benefit of an extra

£250 _after_ the “worth while” of Capital and Labour are satisfied.

Over and above what is just the “worth while” of capital and labour for

getting the coal you have in the shallower mines extra value, and that

extra value gets larger and larger as the distance of the coal from the

surface gets less and less. The deepest mine is on what we call “the

margin of production.” It is just worth while to work it. The surplus

values in all the shallower mines are called RENT. If a landlord owned

the coal in quite a shallow part where it was within a thousand feet of

the surface, he could say to the labourers and the owners of capital

who were coming to dig it out: “The mine which is working at 5,000 feet

is just worth your while. If you work here at 1,000 feet you will have

a great deal more than 5 per cent. on your capital, and the subsistence

of labour is just the same. All this extra amount of values, however, I

must have, otherwise you shall not work my coal.”

Since the Capitalists are content to accumulate capital for a return

of 5 per cent. and the labourers to work for their subsistence, the

extra amount is paid to the landlord. If one set of people refuse to

pay it, there will always be another set of people who will be content

to pay it and this extra amount or surplus is called “Economic _Rent_,”

which is something, of course, much more strictly defined than, and

different from, what we call Rent in ordinary conversation.

Or again, take three farms of equal area but varying fertility. Each

requires £1,000 capital to stock it and five labourers to work it.

The £1,000 capital demands £50 a year profit. The five labourers need

£500 in a year to meet their standard of subsistence. The poorest farm

raises just £550 worth of produce a year. The next best raises £750,

and the best one £950 worth. Then there is _no_ economic rent on the

first; it lies on the “margin of production.” There is £200 economic

rent a year on the second, and £400 on the third.

* * * * *

We can sum the whole thing up and say that on the mass of all

production there are three charges:

1. =First, the charge for the subsistence of labour.=

2. =Next, the charge of profits, or interest, for the reward of

capital, that is, of saving, and lastly=

3. =In varying amounts, rising from nothing at the margin of

production, to larger and larger amounts under more favourable

circumstances, the surplus value called Economic Rent.=

These three divisions are always present whenever wealth is produced.

The same man may get all three at once, as happens when a farmer works

good land which is his own. Or again, when one man owns the fertile

land and another man provides the capital, and yet another man provides

the labour, the three divisions appear as three incomes of Labourer,

Farmer and Landlord receiving separately Wages, Profit and Rent.

Whether these divisions appear openly, paid to different classes of

men, or whether they are concealed by all coming into the same hands,

they are present everywhere and always. That is a fixed economic law

from which there is no getting away.

Always remember that these economic laws are in no way binding in a

social sense. They are not laws like moral laws, which men are bound

to obey. They are certain mathematical consequences of the very nature

of wealth and its production, which men must take into account when

they make their social arrangements. It does not follow because Rent or

Interest are present that such and such rich men, or the State, or the

labourers, have a right to them. That is for the moralist to decide;

and men can in such matters make what arrangements they will. All

economic science can tell us is how to distinguish between the three

divisions, and to remember that they are inevitable and necessary.

But we must wait until a little later on to discuss social rights and

wrongs under Applied Economics and continue here for the present to

confine ourselves to the Elements of economic law alone.

V

EXCHANGE

=EXCHANGE= is really only a form of production, as we saw in the

illustration of the island with salt and the main-land with meat. When

the exchange of the things is of advantage to both parties it creates

wealth for both, and profitable exchange is, therefore, when it takes

place, only the last step in a general chain of production.

But Exchange is so separate an action that students of Economics have

agreed to treat it as a sort of chapter by itself, and we will do so

here.

The characteristic of Exchange is that you take a thing from a place

where it has less value to a place where it has more value, thus adding

an economic value to the thing moved and so creating wealth. In the

same transaction you bring back something else against it, which has

more value in your own place than it had in the place from which you

took it, that is again adding an economic value and therefore creating

wealth. We saw how this was in the case of the salt and the meat, and

so it is with thousands upon thousands of exchanges going on all over

the world.

For instance, we in England have grown fond of drinking tea in the last

200 years. But our climate will not allow us to grow tea. Tea can only

grow in a very hot country.

Now in very hot countries specially heavy labour upon metal work is not

to be expected. Men are not fit for it. But in this cool climate men

are fit for it, and also men here have through long practice become

very skilful at working metal: smelting iron, for instance, and making

it up into machines.

Therefore, there is a double advantage to us and to the people who live

in the hot countries where tea is grown if we _exchange_. We send them

metal things that we have made and which are useful to them, and which

they could hardly make themselves, or only with very great difficulty

(and, therefore, at a great expense of energy), and we get from them

tea, which we could not grow here except in hot houses: that is, at

much more expense of energy than is needed in the countries where tea

grows naturally out of doors.

When there are present two or more objects of this kind, such that the

exchange of them between two places will benefit both parties, we may

speak of “_a potential of exchange_,” stronger or weaker according to

the amount of mutual advantage derived.

This word “potential” you will not find yet in many books, but it is

coming in, for it is a very useful word. It is taken by way of metaphor

from Physical Science. When there is a head of water over a dam, or a

current of electricity of such and such an intensity, we talk of the

“_potential_” and measure it. For instance, we say this electrical

current is double the potential of that, or the head of water working

such and such turbines is at double the potential of another head of

water in the neighbourhood. In the same way we talk of a “potential” of

exchange, meaning a tendency for exchange to arise between two places

or people because it is of mutual benefit to both.

Potentials of exchange come into existence not only through difference

of climate or differences of habit, but also through what is called

the _Differentiation of Employment_, which is also called Division of

Labour.

Thus two countries may be both equally able to produce, say, metal work

and silk fabrics, and yet if one of them concentrates on getting better

and better at metal work and the other on getting better and better

at silk fabrics, it may well be that both will benefit by separating

their jobs and exchanging the results. And this is true not only of two

countries, but of individuals and groups.

The cobbler does not make his own clothes. He makes boots, and by

learning his trade and getting used to it makes them much better and in

a much shorter time than other men could, and therefore makes a pair

of boots with less expense of energy, that is, _cheaper_, than another

man would. The tailor can say the same thing about making clothes.

So it is to the advantage of the cobbler to exchange his extra boots

against the extra clothes the tailor has made.

In general: intelligent societies always tend to build up a very

wide-spread system of exchange, because intelligent people tend to

concentrate each on the job that suits him best, and also because

intelligent people discover differences of climate and soil and the

rest which may make exchange between two places a mutual advantage for

both.

It is indeed a great mistake to do as some modern people do, and put

Exchange in front of Production. Thus you hear people talking as

though the trade a country does, the total amount of its exports and

imports, were the test of its prosperity, whereas the real test of its

prosperity is what it has the power to consume, not what it manages to

exchange.

But still, though it comes at the end of Production and must never be

made more important than the whole process of Production, Exchange is

present universally wherever there is active production of Wealth. Thus

the group of people who build ships are really exchanging what they

make against the produce of other people who make clothes and grow food

and build houses, and the rest of it; and in a highly-civilised country

like ours much the greater part of the wealth you see consumed around

you has gone through many processes of exchange.

There are a few elementary Formulæ concerning Exchange which it is

important to remember.

1. =There is a Potential of Exchange, that is, exchange tends to take

place, when of two objects the proportionate values are different in

two different communities.=

It is not very easy to understand the meaning of this until one is

given an example. Supposing a ton of coal from England to be worth £2

by the time it is delivered in Cadiz, and supposing that making a dozen

bottles of wine in England, with all the apparatus of hot-house grapes

and the rest of it, came to £5 of expense. Supposing that in Cadiz,

from the small coal mines near by, they can produce coal at only £1 a

ton, but on account of their climate they can produce a dozen of wine

for a shilling. Then you get this curious situation:

It pays the exporting country, England, to sell coal in Cadiz _at less

than its English economic value_, and to import the wine from Cadiz.

It pays your English owner of coal, although the values attaching to

it by the time it has got to Cadiz are £2 a ton, to sell a ton of coal

there for only £1, and to exchange that against the wine of Cadiz, and

bring that back to England. At first sight it sounds absurd to say that

selling thus at a lower value than the cost of production and transport

can possibly be profitable. But if you will look at it closely you

will see that it is so.

If the Englishman had tried to make his wine at home it would have cost

him £100 to make twenty dozen bottles, but when he has sold his coal

at Cadiz for £1 he can with that £1 buy twenty dozen of wine and bring

it back to England. He is much the wealthier by the transaction, and

so is the man at Cadiz. The Cadiz man could have spent his energies in

digging out a ton of coal near Cadiz instead of importing it, but the

same energies used in making wine produce enough wine to get him rather

more coal from England.

2. The second Formula to remember about Exchange is this: =Goods do not

directly exchange always one against the other, but usually in a much

more complicated way, by what may be called= _Multiple Exchange_.

Of course, the vehicle by which this is done is a currency, or _money_,

which I will explain in a moment; but the point to seize here is that

exchange is just as truly taking place when there is no direct barter

of two things but a much longer and complicated process.

For instance, a group of people called a Railway Company in the

Argentine want a locomotive. A locomotive can be produced cheaper and

better, that is, with less expenditure of energy for the result, in

England than in the Argentine. But on the other hand, England wants

to import tea. Now the Argentine grows no tea. What happens? How does

England get the tea? That locomotive goes out to the Argentine. An

amount of wheat sufficient to exchange against the locomotive goes

against it, _not_ to England, but to Holland, a country which, like us,

has to import a lot of wheat. As against the wheat sent to Holland,

the people in Holland send, say, the cheeses which they make so well,

on account of their special conditions, and the consignment goes to

Germany. The Germans send out a number of rails equivalent to the

number of cheeses and of the wheat and of the locomotive, as they are

very good at making rails, and have specialised on it. But they do not

send the rails to Holland. They send them to some Railway Company which

has asked for them in Egypt. The Egyptian people send out an equivalent

amount of cotton, which they can grow easily in their climate, and this

cotton goes to mills in India, and against it there comes an equivalent

amount of tea, but the tea does not go back to Egypt. It goes to

England.

There you have a circle of Multiple Exchange in which everybody profits

by the exchange going on, although it is indirect. In the same way,

of course, it is true that all of our domestic exchanges at home are

multiple. If I write a book which people want to read, whereas I want

not books but several other things, boots and fuel and furniture, I

do not take my books round to the man who provides boots and to the

one who provides fuel and to the one who provides furniture. I go

through the process of selling my book to a publisher, and through an

instrument he gives me, called a cheque (I will explain this when we

come to the point of money), I can obtain boots and fuel and furniture

to the amount of the value of the books of mine which my publisher will

sell. Yet when exchange is thus highly indirect and multiple it is just

as much exchange as though I went and bartered one book for one pair of

boots with the cobbler.

3. The third thing to remember about Exchange is of the utmost

importance, because it has given rise to one of the biggest discussions

of our English politics. The Formula runs thus:--

=Other things being equal, the greatest freedom of exchange in any

given area makes for the greatest amount of wealth in that area.=

It ought to be self evident, but it is astonishing how muddled people

get about it, when they become confused over details and cannot see

the wood for the trees. It ought, I say, to be self-evident that if

you leave Exchange quite free, anybody being at liberty to produce

what he can produce best, and exchange it for things which other men

can produce better than he, both parties will tend to be the richer by

such freedom and the wealth of the whole country will be greatest when

all exchanges in it are thus left free to be worked by the sense of

advantage.

If there were a law, for instance, preventing me from buying etchings,

or preventing Jones, the etcher, from buying books, Jones would have to

write his own books (or do without them, which is what he would do),

and I should have to etch my own etchings, which would be exceedingly

poor compared with the wonderful etchings of Jones. We are obviously

both of us better off if we are left free to exchange what we can each

make best. And so it is with all the countless things made in a State.

This principle applies not only to a particular nation but to the whole

world. If you left the whole world free to exchange the whole world

would be the richer for it. And any interference with exchange between

one nation and another lessens the total possible amount of wealth

there might be in the world.

So far so good; and, as I have said, such a truth ought to be

self-evident. But here there comes in a misunderstanding of its

application, and that misunderstanding has made any amount of trouble.

It is so important that I must give it a separate division to itself.

VI

FREE TRADE AND PROTECTION

Nations, as we know, put up tariffs against goods which come from

abroad: That is, their Governments tax imports of certain goods and

thereby interfere with the freedom of exchange. For instance, the

French have a tax of this kind upon wheat. Wheat grown in France will

cost, let us say, £1 a sack, but the Argentine can send wheat to France

at an expense of only 10s. a sack, because the land there is new, and

for various other causes. If the wheat from the Argentine were allowed

to come in freely, and the French to export against it things which

they can make more easily than wheat they would have more wheat at a

less total expense; but they prefer to put a tax of ten shillings upon

every sack, that is, to put up a barrier against the import of wheat

from abroad, and so keep up the price artificially at home.

When a nation does this with regard to any object that may be imported,

if the object can also be produced within the nation (which it nearly

always can) it is said to _protect_ that object, and the system of so

doing is called =Protection=. The word arose from the demand of certain

trades to be “protected” by their Governments without considering

whether it was for the good of the whole nation or not. It obviously

would be a very nice thing for people who breed sheep, for instance, in

this country, if all mutton coming from the Colonies were taxed at the

Ports, while the mutton grown inside the country were not taxed; for in

this way the value of the mutton would rise in England, and the rise

would benefit the sheep owners. But it would be at the expense of all

the other people who did not grow sheep, and who would have to pay more

for their mutton.

As opposed to this system of _Protection_, and interfering with

international exchange by a tariff, intelligent people a long lifetime

ago began to agitate for what they called “=FREE TRADE=,” that is the

putting of no tariff on to an import, or at least no tariff high enough

to give an artificial price to the producer of the same thing at home.

Thus, when England was completely Free Trading (which it was until the

war) there was a tariff on tea; but that was not Protection, for those

who would try to grow tea here would have to grow it in hot houses and

at an enormous expense, and the tax on tea, though heavy, did not make

it anything like so dear as to make it worth while to produce tea here.

Another principle of Free Trade was that if it was thought advisable

to put a tariff on to anything coming into the country which could be

produced in the country, then you would have to put what was called

“_an equivalent excise_” on the thing produced at home. For instance,

in order to get revenue, one might put a tax of a 1d. on the pound

on sugar coming from Germany, but, according to the doctrine of Free

Trade, you must put a similar excise (that is, a home tax of 1d. on the

pound) upon any sugar produced in England. If you did not do that you

would be benefiting the sugar manufacturer in England at the expense

of all other Englishmen, which would be unjust and also make England

less wealthy because it would be inducing Englishmen to make sugar by

offering them a reward and so take them away from some production for

which they were better fitted.

This idea, that Free Trade must necessarily be of advantage to

everybody, and that it was only stupidity or private avarice which

supported Protection, was very strong in England, and, in the form you

have just read, it seems beyond contradiction.

But if you will look closely at Formula No. 3 written in the last

division on page 59 you will see that there is a fallacy hidden in this

universal Free Trade theory. It is perfectly true that free exchange

over any area tends to make the wealth of all that area greater, and

if the area include the whole world, then free exchange all over the

whole world, that is, complete Free Trade, would make the world as a

whole richer.

_But it does not follow that_ EACH PART _of the area thus made richer

is itself enriched_. That is the important point which the Free Trade

people missed, and it is this which supports, in some cases, the

argument for Protection.

If we allow free exchange everywhere throughout England, England as a

whole will, of course, be the richer for it; but it is quite possible

that Essex will be the poorer. If we allow Free Trade throughout all

Europe, Europe will be the richer for it; but it is quite possible that

some particular part of Europe, Italy or Spain, may be made poorer by

the general process, and as they don’t want to be poorer they will

by Protection and tariffs cut themselves off from the area of free

exchange.

=There are conditions where an interference with free exchange over

the boundaries of a particular area make that area richer: when those

conditions exist, there is what is called an Economic Reason for

Protection.=

So we may sum up and say that the theory of universal Free Trade being

of benefit to the world as a whole is perfectly true. If we are only

considering the world, and do not mind what happens to some particular

area of the world, then the case for Free Trade is absolute. But if

we mind a hurt being done to some particular area, such as our own

country, more than we mind the hurt done to the world as a whole,

then we should look at our particular conditions and see whether our

country may not be one of those parts which will be drained of wealth

by Free Trade and will be benefited by artificially fostering internal

exchanges.

In the second part of this book I will go into this again, and show

how the discussion arose in England and what the arguments are for and

against Universal Free Trade, and how true it is that a sound economic

argument for Protection exists.

VII

MONEY

When people begin exchanging by bartering goods one against another

they at once find that there is an awkward obstruction to this kind of

commerce; at least, they find it the moment there are more than two of

them. It is this: That the person they are nearest to for the striking

of a bargain may not want, at the moment, the particular thing they

have to offer, but something else which a third party has who is _not_

present.

For instance: John is a hunter who has a surplus of skins to offer. He

can get skins easier than other people. William, farming good soil, has

surplus wheat to offer, and Robert, living near a wood and skilled as a

woodman, has extra wood to offer. John wants wood. He takes one of his

furs to Robert and says: “I will give you this fur for a cartload of

wood.” But Robert may answer, “I don’t happen to want a fur just now.

What I do want is a sack of wheat.”

Either no transaction will take place on account of this hitch, or one

of these two things will happen: Robert will take the fur from John

and give him his cartload of wood, and will then take the fur over

to William, and see whether William wants a fur in exchange for some

wheat. Or John, very much wanting the wood, will go to William, and if

William wants a fur, will exchange it for wheat; then John will take

the wheat back to Robert, and exchange it for the wood that he wants.

That is the sort of complicated and clumsy come-and-go that will be

continually happening even with quite a few exchangers, and with

quite a small number of articles. When it came to a great number of

exchangers and a great number of articles the trouble would grow

impossible and exchange would break down.

But things arrange themselves thus: It is soon found that one of the

things which are being exchanged is easier to carry than the rest, and

perhaps lasts longer and also can be easily used in small or large

amounts. For instance, in the case of our three producers, John,

William and Robert, _wheat_ might easily appear in this character.

People always want wheat sooner or later. It keeps well. It is not very

difficult to transport, and you can divide it into quite small amounts,

or lump it up in large amounts.

So the chances are that when any of the three wanted to benefit by

getting rid of some of his surplus produce he would get into the habit

of taking _wheat_ in exchange, even if he did not want it for the

moment. For he would say to himself: “I can always keep it by me and

then exchange it against somebody else’s produce when that somebody

else happens to want wheat”. Soon you would find each one of the three

would be keeping a little wheat by him for the purpose of saving

tiresome journeys to effect complicated double exchanges, and the wheat

so used by all three of them would be in effect =MONEY=. It would be

used as a common medium of exchange to facilitate the disposal of goods

one against the other, without the elaborate business of making special

barters, after long search.

Mankind has found, in most cases, that where a very large number of

articles were being exchanged _two_ in particular naturally lent

themselves to this particular use, and those two were GOLD and SILVER.

They have also used bronze, and even iron and in some places rare

shells, and all sorts of other things. But gold and silver came to be

for nearly all mankind, and are now for all civilised mankind, the

objects which most naturally are used as money.

The reason for this is as follows:

The thing which naturally becomes money out of all the things that

are exchanged will be that which best combines a certain number of

qualities, some of which we have already mentioned, and of which here

is a list.

1. It must be portable, that is, a large weight of it must take up

little room, so that quite considerable values can be taken easily from

place to place--for money has to be always moving from one to another

to effect purchases and sales.

2. It must be easily divisible, for one is always wanting to use it in

all sorts of amounts, very little and very large.

3. It must keep. That is, it must not deteriorate quickly, or it would

have very little use as Money.

4. It must be of an even quality, so that, wherever you come across it,

you may count on its being pretty well always the same, and therefore

weight for weight of the same value.

5. It must be more or less stable in value. It would be difficult to

use as money some object which was very plentiful at one moment and

suddenly scarce at another; very cheap this year, and very dear next

year--such as are, for instance, agricultural products depending upon

the season.

Now of all objects Gold and Silver best fulfil all these requirements.

Precious stones are more portable, value for value. A £1,000 worth of

diamonds takes up less space and is less heavy than a £1,000 worth of

gold. And precious stones are fairly stable in value and also keep

very well; but they are not easily divisible. Again, they are not of

the same standard value in all cases. They vary in purity. But gold

and silver have all the qualities required. Gold hardly decays at all

through the passage of time, and silver very little; and each, but

especially gold, is valuable for its bulk, and its value is fairly

stable, and each is easily divisible and can therefore be presented in

any amount, from a tenth of an ounce to a hundred pounds weight.

So, by the mere force of things, Gold and Silver became the Money

of mankind. People kept gold and silver by them in order to effect

their exchanges, and very soon a producer did not feel himself to be

exchanging at all (in the sense of exchanging goods against goods), but

thought of the affair as _Buying and Selling_. That is, of exchanging

his produce, not against other produce, but against gold and silver,

with the object of _later_ re-exchanging that gold and silver for other

things that he needed.

Money, once thus established, is called =A MEDIUM OF EXCHANGE= and

also =CURRENCY= or =THE CIRCULATING MEDIUM=. It is called “currency”

and “circulating” because it goes its round through society, effecting

the exchanges, and this running around or circulating gives it its

name: “That which is current” from the Latin for “running.” That which

“circulates” from the late Latin word for “going the rounds.”

When gold and silver become the money of mankind it is important to

be able to tell at once the exact amounts you are dealing with. This,

under simple conditions, is done by weighing; but it is more convenient

to stamp on separate bits of metal what weight there is in each, and

that is called “coining the metal.” All that a Government does when it

makes a sovereign is to guarantee that there is so much weight of gold

in the round disc of metal which it stamps.

Money does not only fill this main function of being a medium of

exchange, that is, of making a vast quantity of complicated exchanges

possible, it also has great social value as a measurer or standard,

and soon after money comes into use men begin to think of the economic

values of things in terms of money: that is, in what we call “=Prices=.”

All things which men produce are fluctuating the whole time in value.

There is now rather more of one article, and now rather less. A sack

of barley at one moment will exchange exactly against a sack of wheat,

and then in a few weeks against rather less than a sack of wheat.

Meanwhile, where it used to fetch a lamb in exchange it may, in a

few months, need two sacks for a lamb; and so with all the hundreds

and thousands of other objects. When we have money the whole mass of

transactions is referred to the current medium, and that is of immense

social value. For no one could keep in his head all the changing

exchange values of a multitude of articles one against the other,

but it is easy to remember the exchange values against one standard

commodity, such as gold. And whatever the exchange value is in gold we

call the =price= of the article.

For instance, when you say that a house is worth £500, that that is the

“_price_” of the house, you mean that the amount of gold you would

have to exchange to get it is about Ten Pounds weight of the metal.

And when you say that the price of a ticket to Edinburgh is £4, you

mean that the service of taking you to Edinburgh in the train will be

exchanged against about an ounce of the metal gold.

* * * * *

I now come to a most difficult point about money and prices which is

rather beyond the elements of Economics, but which it is important to

have some idea of, though it is very difficult.

There is a very interesting study in Economics called “_The Theory

of Prices_,” showing why _all prices on the average_ (what is called

“General Prices,” that is the value of all goods _in general_ as

measured against gold) sometimes begin to go up and at other times

go down: Why goods as a whole begin to get dearer and dearer in gold

money, or cheaper and cheaper. It is a complicated piece of study,

and people dispute about it. But the general rules would seem to be

something like this: The exchange value of things against gold, or

the value of gold, against the things for which it exchanges (that is

prices) is made up of two things: _First_, the amount of gold present

to do the work of exchange; _Secondly_, the amount of work you can make

it do in exchange: The pace at which you can get it to circulate. It is

obvious that one piece of gold moving rapidly from hand to hand will

do as much work in helping exchanges to be carried out as ten pieces

moving ten times more slowly.

If, for any reason, the total amount of gold becomes suddenly smaller

or suddenly larger, or if the pace at which it is used changes very

quickly, then prices fluctuate violently.

Supposing you could, in a night, take away half the gold in

circulation. Then, of course, the remaining gold would become much more

valuable. In other words, prices would fall. For if an ounce of gold is

rarer and more difficult to get than it was, it will exchange against,

that is, “buy” more than it did; this means that “the price of things

has fallen.” We used to say, for instance, that a quarter of wheat was

worth an ounce of gold. But if we suddenly change the amount of gold

so that gold becomes much rarer and more valuable, perhaps an ounce of

gold will buy not one quarter but two. The price of one quarter used to

be an ounce of gold. Now the price is only half an ounce of gold. Wheat

has become cheaper in proportion to gold, and “prices,” that is, values

measured in gold, in money, have fallen.

The same thing would happen if you did not lessen the amount of gold in

circulation but made the circulation much more sluggish. The amount of

gold in circulation would be the same, but as it went its rounds more

slowly it would be more difficult to get a certain amount of gold in

any one place at any one time.

Prices, then, depend upon the actual amount of money that is present to

do the work, _and_ the pace at which it is made to go the rounds: or

(to put it in technical terms), on the amount of the currency _and_ its

“_efficiency in circulation_.”

Now, there is in the human mind a very strong tendency to keep prices

stable. We think of them by a sort of natural illusion as though they

were absolute fixed things. We think of a pound, and a shilling, and

five pounds as real, permanent, unchanging values. If we find that

quite suddenly five pounds will buy a great deal more than it used

to, or quite suddenly a great deal less, if we are met by a sudden

and violent fluctuation in prices of this kind, our minds tend,

unconsciously, to bring things back, as much as possible, to the old

position; and I will show you how this tendency works in practice.

Supposing a very great deal of gold, for some cause, were to disappear.

People suddenly find prices falling very rapidly. A man with a £1,000 a

year can buy twice as many things, perhaps, as he used to buy. On the

other hand, a man with anything to sell can only get half the amount he

used to get. For gold has become rarer, and therefore more valuable as

against other things.

What is the result? _The result is a very rapid increase in the pace at

which the gold circulates._ Every purchaser feels himself richer. The

gold is tendered for a much larger number of bargains, and though the

mind, by this illusion it has of gold value as a fixed thing, cannot

bring the actual gold back, what it can do is so to increase the second

factor, =Efficiency in Circulation=, as largely as to make up for the

lack of gold; and under the effect of this prices will gradually rise

again. In the same way, if the mass of current medium by some accident

becomes suddenly increased that should lead to an equally sudden rise

in prices; but the unconscious tendency of the human mind to keep

prices stable sets to work at once. Efficiency in Circulation slows

down, the new large amount of currency works more sluggishly, and,

though prices rise, they do not rise nearly as much as the influx of

money might warrant.

We see, therefore, that the factor in the making of prices called

“Efficiency in Circulation” works like a sort of automatic governor,

tending to keep prices fairly stable; but of course it cannot prevent

the gradual changes, and sometimes it cannot prevent quite sharp

changes, as we shall see a little later on. For the moment, the

interesting thing to note about Efficiency in Circulation is that we

owe to this factor in prices the creation of _paper money_.

If, with only a certain stock of gold to work on, business rapidly and

largely increases, if a great many more things are made and exchanged,

then, as the gold will have a lot more work to do--and so become more

difficult to obtain in any one time or place--that should have the

effect, of course, of making it more valuable, that is, of lowering

prices.

Now with the beginnings of modern industry, about a hundred and fifty

years ago, a vastly greater number of things began to be made than had

ever been made before, and the number of exchanges effected multiplied

ten, twenty and a hundredfold. The stock of gold, though it was

increased in the nineteenth century by discoveries in Australia and

California, and later in South Africa, would have been quite unable to

cope with this flood of new work, and prices would have fallen very

much indeed, had it not been for the creation of _Paper Money_. Paper

money was a method of immensely increasing Efficiency in Circulation.

This is how it worked.

A Bank or a Government (but especially the Bank of England, with the

guarantee of the Government) would print pieces of paper with the

words: “I promise to pay to the bearer of this Five Pounds.” Anyone

who took one of these pieces of paper to the Bank of England could get

Five Golden Sovereigns. But since this was publicly known, people were

willing to take the piece of paper _instead of_ the five sovereigns.

If you sold a man a horse for fifty pounds, you were just as willing to

take ten five pound notes for him as fifty sovereigns. They were more

convenient to carry, and you knew that whenever you wanted the actual

gold you had only to go to the bank and get it.

Because people were thus willing to be paid in paper instead of in

the actual gold, a large number of notes could be kept in circulation

at any one time, and only a small amount of gold had to be kept in

readiness at the Bank to redeem them. In practice it was found that

very much less gold than the notes stood for was quite enough to meet

the notes as they were brought in for payment. Much the most of the

note circulation went on going the rounds, and in normal times it took

a long time for a note on the average to be brought back to the Bank.

You can see that this dodge of paper money had the effect of increasing

the total _amount_ of the current medium in practice, and of greatly

increasing its Efficiency in Circulation. Moreover, it made the

Efficiency in Circulation very elastic, because in times of quiet

business, more notes would go out of circulation and be paid into

the bank, while in time of active business more notes would go on

circulating.

_So long as every note was redeemed in gold every time it was brought

to the bank, so long as the promise to pay was promptly kept, the money

still remained good; the paper currency did not interfere with the

reality of the gold values, there was no upsetting of prices, and all

went well._

Unfortunately, Governments are under a great temptation, when they

have exceptionally heavy expenses, to falsify the Currency. People get

so much in the habit of trusting the Government stamp on paper or metal

that they take it as part of nature. What the Government is really

doing when it coins a sovereign is giving a guarantee that this little

disc of yellow metal contains 123 grains of gold with a certain known

(and small) amount of alloy to make the gold hard. When the Government

has to pay a large amount in wages, or for its Army and Navy, or what

not, it is tempted to put in less gold and more alloy and keep the old

stamp unchanged, and that is called “Debasing the Currency.”

For instance, the Government wants a hundred tons of wheat to feed

soldiers with, and the price of wheat in gold at that moment is Ten

Sovereigns a ton. It says to a merchant, “If you will give me a

hundred tons of wheat, I will give you a thousand sovereigns.” But

when it comes to paying the thousand sovereigns, instead of giving a

thousand coins with 123 grains of gold in each, it strikes a baser

coin with only a hundred or less than a hundred grains in each, and

pays the merchant with these. It is a simple form of cheating and

always effective, because the merchant thinks the sovereign is genuine.

Only when these bad sovereigns get into circulation they naturally

find their level in gold; for people begin to test them, and find

that they have not got as much gold in them as they pretend to have.

Then, of course, prices as measured in this new base coin rise. If the

Government wants to buy another hundred tons of wheat it must offer

more than a thousand of the base coins; it must offer, say, thirteen

hundred of them. But again it is tempted to put even less gold into

the coins with which it pays for the second lot of wheat, and so the

coin gets baser and baser, until at last, perhaps, a sovereign will not

really be worth half what it pretends to be. Governments in the past

have done this over and over again, but it was not until our time that

the worst form of debasing the coinage came in.

It came in as a result of the Great War, and we are all suffering from

it to-day. This last and worst form of debasing coinage worked, not

through cheating about the metal, but through a trick played with paper

money.

Before the war, if you got a Five Pound note saying “I promise to pay

Five Pounds” the promise was kept and the five golden sovereigns were

there for you whenever you went with your note to the bank and asked

for them; but when the Government had these very heavy expenses to

meet on account of the war, they first began making difficulties about

paying when people brought their paper to the bank, and at last stopped

paying altogether. At the same time, they did everything they could to

get the gold out of private people’s hands and to make them use paper

money instead. The consequence was that, people being so accustomed

to think of a paper guarantee of the Government exactly as though it

were real money, readily took to the new notes and used them as money,

thinking of these wretched bits of paper exactly as though they were

so many golden sovereigns. The Government could go on printing as many

bits of paper as it liked, and they would still be used as though they

were real money. So long as the amount of paper printed was not more

than _would have been printed_ when the notes were redeemable, and when

the currency was on a true “_Gold Basis_,” no harm was done; but of

course it paid the Government to go on printing a great many more notes

than that, because, when it could make money thus cheaply, it could pay

for anything, however great the expense; but at the cost, of course, of

debasing the currency more and more.

This kind of money, forced upon people, pretending to be the same as

real money but actually without a Gold Basis, is called _Fiat_[1]

money, and that is the kind of money the whole world has to-day, except

those countries which did not take part in the Great War, and the

United States which did not ever give up its gold basis.

Of the different European fighting countries, however, ours did best in

this matter. We are still living on Fiat money, and we have much more

of it than we ought to have. But the French have more in proportion, so

that prices measured in _their_ money are now (1923) more than three

times what they would be in gold. The Italians are worse off still.

With them it is four times. With the Germans it is millions of times,

and their currency has quite gone to pieces; a paper coin in Germany

is worth (at the time I write, October, 1923) _ten million_ times less

than the real metal coin which it is supposed to represent.

This is one of the very worst things that has happened on account of

the war, for as the money now being used all over Europe is not real

money, no one feels certain whether he can get his debts really paid,

or whether his savings are safe, or whether a contract made for a

certain payment a few months hence will be really fulfilled or not. A

man may lend a thousand francs or marks or pounds for a year, and then

at the end of the year, when he is to be paid back, he may be paid in

coin which has got so much worse that he is really receiving only half

or a tenth or a thousandth of the real value he lent. A man in Germany

sells a hundred sheep for so many marks, to be paid for in a month; and

at the end of the month the marks will only buy ten sheep!

This piece of swindling, which has been the note of the last five

years, is the first point we have touched on so far where a problem in

Economics and the study of economic law brings one up against questions

of right and wrong.

It is morally wrong for the Government to swindle people out of their

property by making false money. What is the way out, allowing for

Economic Law? It is morally wrong that some men should starve while

other men have too much: allowing for Economic Law, what is the way out

of such evils?

As you go on in the study of Economics you find quantities of questions

where you have to decide whether economic laws render possible

political actions which you would very much like to undertake, and

which seem right and just. Many such actions, though one would like to

undertake them, cannot be undertaken because our study of Economics

has shown us that the consequences will be very different from what we

hoped.

On the other hand, a great many people try to get out of what it is

their duty to do politically by pleading that Economic Law prevents it.

Before ending these notes, then, we must go into the main questions

of this kind, and see what there is to be said, in the light of

economic knowledge, for our present system of society, which is called

=Capitalism=; for other systems in the past such as =Slavery=; for

=Private Property=; for the various theories of =Socialism=; for and

against =Usury=, and so on.

It is necessary to go into these points even in the most elementary

book on Economics, because the moment one begins the practical

application of one’s economic science these questions at once arise; to

answer them rightly is the most important use we can make of economic

knowledge.