Part II

POLITICAL APPLICATIONS

INTRODUCTION

So far I have been putting down the elements of Economics just as one

might put down the elements of Arithmetic. But Economics have, just

like Arithmetic, a _practical application_: if it were not for this,

there would be no real use in studying Economics at all.

For instance: we find out, when we do the elements of Arithmetic, that

solid bodies vary with the cube of their linear measurements. That is

the general abstract principle; but the _use_ of it is in real life

when we come (for instance) to measuring boats. We learn there from

Arithmetic that, with boats of similar shape, a boat twice as long as

another will be eight times as big; it is also by using the elements of

Arithmetic that we can keep household accounts and do all the rest of

our work.

It is precisely the same with Economics. We are perpetually coming upon

political problems which Economics illustrate and to which economic

science furnishes the answer--or part of the answer--and that is where

the theoretical elements of Economics have practical importance.

For instance: once we know the elementary economic principle that

rent is a surplus, we appreciate that it does not enter into cost

of production. We do not try to make things cheaper by compulsorily

lowering rent. Or, again, when we have learned the nature of money we

can appreciate the dangers that come from using false money.

In these political applications of Economics we also come upon what

is much more important than mere politics, and that is the question

of right and wrong. We see that such and such a thing ought to be so

as a matter of justice; but we may blunder, as many great reformers

have blundered, in trying to do the right thing and failing to do it,

because we have not made a proper application of our economic science.

And the opposite is also true: that is, a knowledge of Economics

prevents their being wrongly applied by those who desire evil. Many

men take refuge in the excuse that, with the best will in the world,

they cannot work such and such a social reform because economic science

prevents their doing what they know to be right. If we know our

Economics properly we can refute these false arguments, to the great

advantage of our own souls and of our fellow-men.

For instance: it is clearly our duty to-day to alleviate the fearful

poverty in which most Englishmen live. A great many people who ought to

know better say, or pretend, that economic laws prevent our doing this

act of justice. Economic laws have no such effect; and an understanding

of Economics clears us in this matter, as we shall see later on.

We have hitherto been following the statement and examination of

economic laws: that is, the _theoretical_ part of our study and its

necessary foundation. Now we go on to the _practical_ part, or “Applied

Economics,” which is the effect of those laws on the lives of men.

Before leaving this Introduction I think it is important to get quite

clear the difference between what is called “theoretical” study

and the practical application of such study. People are very often

muddle-headed about this, and the more clearly we think about it the

better.

A theoretical statement is a statement following necessarily and

logically from some one or more known first principles. Thus, we know

that two sides of a triangle are longer than the third, so we say it

follows _theoretically_ that a straight road from London to Brighton

is quicker motoring than going round by Lewes. But the number of first

principles at work in the actual world is indefinitely large. Therefore

one must test any one theoretical conclusion by practice: by seeing how

it works. Because, side by side with the one or two first principles

upon which our theory is built, there are an indefinitely large number

of other first principles which come into play in the real world.

Thus there is, in motoring, the principle that speed varies with road

surface. So the way round by Lewes may be quicker than the straight

road if it has a better surface. There is yet another principle that

speed is checked by turnings in the road, and it may prove that on

trial the two ways are about equal.

Or again: we know that the tidal wave is raised on either side of the

earth, and that there is, therefore, about twelve hours of even ebb and

flow, six hours each on the average and taking the world as a whole:

because the earth takes twenty-four hours to go round.

But if you were to act upon that first principle _only_ in any one

part of the world, and to say without testing the thing in practice,

“I can calculate the tide theoretically,” you would very often wreck

your ship. For many other principles come into play in the matter of

the tide besides this twelve-hour period. In one case the tide will be

delayed by shoals or by the current of a river. In another there may be

two or three tides meeting. In a third the sea will be so locked that

there will be hardly any tide for many hours, and then a rush at the

end--and so on.

Now it is just the same with Economics. Your economic first principle

makes you come to such and such a _theoretical_ conclusion. But there

are a lot of other first principles at work, and they may modify the

effect _in practice_ to any extent. When people object to “theoretical

dreaming,” as they call it, they mean the bad habit of thinking

that one conclusion from one particular set of first principles is

sufficient and will apply to any set of circumstances. It never does.

One has always to watch the thing in practice, and see what other

forces come in.

In the political applications of economic science we have to deal with

the effect of human society upon economic law. For instance: economic

law tells us that, given a certain standard of living for labour--the

“worth while” of labour--and a certain minimum profit without which

capital will not accumulate--the “worth while” of capital--there is, as

we have seen, a lowest limit of production; a set of conditions below

which production will not take place. Land which is below a certain

standard of fertility will not be farmed; a vein of metal below a

certain standard of yield will not be mined under such and such social

conditions. But all circumstances in which production has greater

advantages than this lowest limit produce a surplus value called

“Rent.” That is an economic law, and it is always true.

But it does not follow that the owner of the land, for instance,

will get the full economic rent of the land. There may be customs in

society, or laws, by which he is compelled to share with the tenant.

The theoretical economic rent is there all right, but one cannot deduce

from this truth that the landlord will necessarily and always get the

whole of it. And so it is with every other political application.

* * * * *

Having said so much by way of Preface, let us turn to the particular

problems, and first of all consider the idea which underlies all

practical economic conclusions, the idea of =Property=.

The very first governing condition of economic production and

distribution in the real world is the condition of _control_. Who

_controls_ the process of production in any particular Society? Who

in it owns (that is, has the right and power to use or leave idle, to

distribute or withhold) the means of production, the stores of food

and clothing, and houses and machinery? On the answer to that question

depends the economic structure of a society. This control is called

_Property_, and as the first thing we have to study in practical

Economics is the character of _Property_, we will make that the first

division of our political applications.

PROPERTY

THE CONTROL OF WEALTH

All the political application of Economics--that is, all the

application of Economic Science to the conduct of families in the

State--turns on The Control of Wealth, and of the things necessary to

make wealth.

The first thing to grasp is that _someone_ must control every piece of

wealth if it is to be used to any purpose. Every bundle of economic

values in the community must be under the control of some human

will; otherwise those pieces of wealth “run to waste,” that is, are

consumed without use to mankind. For instance, a ton of threshed wheat

represents a bundle of economic values. It represents a piece of wealth

equivalent, in currency measure, to say £16. If no one has the right

to decide upon its preservation and use, when and how it is to be kept

dry and free from vermin, when and how it is to be ground and the flour

made into bread, then it will rot or be eaten by rats, and in a short

time its economic values will have disappeared. It will be worthless.

The £16 worth of wealth will have been “consumed without use”; in plain

language, wasted. But if wealth were all wasted humanity would die

out. So men must, of necessity, arrange for a _control_ of all wealth,

and this they do by laws which fix the control of one parcel of wealth

by one authority, of another by another; men make laws allowing such

control by some people and preventing attempted control by other people

not authorised. This lawful control over a piece of wealth we call

_Property_ in it.

* * * * *

Thus, the coal in your cellar which you have bought is by our laws your

property. It is for you to burn it as you want it and when you choose.

If another person comes in and takes some of it without your leave, to

burn it as _he_ chooses, he is called a thief and punished as such. The

coal in the Admiralty Stores is State property. The State has the right

to decide into what ships it is to be put and how and when it is to

be burnt, and so on. But whether the control is in private hands such

as yours, or in the naval authorities who are officers of the State,

control there must always be.

When people say that they want to “abolish property,” or that “There

ought to be no property,” they mean _Private_ property: the right of

individuals, or families, or corporations to control wealth. Property

in the full sense, meaning the control of wealth by _someone_, whether

the State, or private individuals, or what not, is inevitable, and

is necessary in every human society. So, granting that property must

exist, we will first examine the various forms it may take.

At the beginning of our examination we noticed that wealth, owned

and controlled by whoever it may be--the State, or an individual,

or a corporation--is of two kinds. There is the wealth which will

be consumed in enjoyment and the wealth which will be consumed in

producing future wealth.

The wealth which will be consumed in producing future wealth is, as we

have seen, called _Capital_. For instance: if a man has a ton of wheat

and eats half of it while he is doing nothing but taking a holiday, or

doing work which has some moral but no material effect--that is not

Capital. But if he uses the other half to keep himself alive while he

is ploughing and sowing for a future harvest, and keeps a little of it

for the seed of that harvest, all that he so uses is _Capital_. Since

control of wealth is necessary, no matter of what kind the wealth be,

it is clear that there must be property not only in what is about to

be consumed in enjoyment but also in Capital. Someone, then, must own

Capital.

But here comes in a very important addition. The fertility of land,

space upon which to build, mines of metal, water power, natural

opportunities of any kind and natural forces, _though they are not

wealth_,[2] are the necessary conditions for producing wealth. Someone,

therefore, must control these also: someone must have the power of

saying, “This field shall be ploughed and sown thus and thus. This

waterfall must be made to turn this turbine in such and such a spot,

and the power developed must be applied thus and thus.” For if no one

had such power the fertility of the land, the force of the stream,

would be wasted.

Property, therefore, extends over two fields, one of which is itself

divided into two parts. A.--It extends over natural forces. B.--It

extends over wealth, and, in the case of B, wealth, it extends over B.1

wealth to be used for future production (which kind of wealth, when it

is so used, is called Capital), and also B.2 wealth which is going to

be consumed without the attempt to produce anything else: consumed,

as the phrase goes, “in enjoyment.”[3] Natural forces may be grouped,

as we have grouped them in the first part of this book, under the

conventional term “Land.” So Property covers Land and Capital, as well

as Wealth to be consumed without the attempt to produce other wealth.

You may put the whole thing in a diagram thus:--

[Illustration]

In studying the social effects of Property it is convenient to group

together _Land_ and that part of wealth which is used for further

production and is called _Capital_, and to call the two “_the means of

production_”: because, in a great many social problems the important

point is not who owns the Capital separately or the land separately,

but who owns the whole bundle of things which constitute the “Means of

Production,” without which no production can take place.

For instance: Supposing a man owns a hundred acres of fertile land,

that is his property, and though we call it wealth in ordinary

conversation it is not real wealth at all. It is only the opportunity

for producing wealth. If no one worked on that land, if no one even

worked so little as to take the trouble of picking fruit off the trees

or cutting the grass or looking after animals on it, it would be worth

nothing. Supposing another man to own the stores of food and the houses

and the clothing necessary for the livelihood of the labourers on the

land, and also the horses and the ploughs and the stores of seeds

necessary for farming, then that man owns the Capital only. But to the

_labourers_ the important thing is that someone else owns the “Means

of Production,” _without which they cannot live_, and they are equally

dependent whether one or many control or own the _Means of Production_

in any particular case. _Their_ condition has for its main character

_the fact that they do not own the “Means of Production.”_

Labour must be kept going. That is, human energy, for producing wealth

from land, while it is at work, waiting between one harvest and

another, will consume part of the stores of food and some proportion

of the housing (which is a perishable thing, though it only perishes

slowly) and of the clothing, and of the seed, etc. So we have to

examine the various ways in which labour (which is not wealth) and land

(which is not wealth) and capital (which _is_ wealth) may be controlled.

There are three main types of human society which differ according

to the way in which control is exercised over these three factors of

Labour, Capital and Land. These three types are:--

1. =The Servile State=: that is, the state in which the material Means

of Production are the property of men who also own the human agents of

Production.

2. =The Capitalist State=: that is, the state in which the material

Means of Production are the property of a few, and the numerous human

agents of Production are free, but without property.

3. =The Distributive State=: that is, the state in which the material

means of Production are owned by the free human agents of Production.

There is also a fourth imaginary kind of state which has never come

into being, called the Socialist or Communist State. We will examine

this in its right place, but the only three _actual_ states of which we

know anything in history and can deal with as real human experiences,

are these three just described: the _Servile_ State, the _Capitalist_

State, and the _Distributive_ State.

But, before going farther, we must get hold of a very important

principle, which is this:--

=The nature of an economic society is not determined by its

arrangements being universal, that is, applying without exception to

all the families of the State, but only by their applying to what is

called= _The Determining Number_ =of the families of the State: that

is, in so great a proportion as to colour and give its form to the

whole society.=

No one can exactly define the amount of this “determining number,”

but we all know in practice what it means. For instance: we say the

English are a tall race, from 5½ to 6 feet high. But that does not mean

necessarily that the majority of the people are over 5½ feet. You have,

of course, to exclude the children, and there are a great number of

very short people and a few very tall people. It means that the general

impression conveyed when you mix with English people--the size of the

doors and the implements with which men work, and the clothes that are

produced, and the rest of it--turn upon the general experience that you

are dealing with a race of about that size--5½ to 6 feet. Or again, you

say that the _determining_ number or proportion of our society speaks

English. That does not mean that they all speak English. Some are dumb;

some speak Welsh or Gaelic. Many speak with such an accent that others

with a different accent find it difficult to understand them. Yet it is

true to say that the society in which we live speaks English.

Now it is exactly the same with the economic conditions of society. You

may have a society in which there is a certain number of slaves, and

yet it is not a slave-owning society, because the number of free men

is so great as to give a general tone of freedom. Or you have, as we

have in England, a great deal of property owned by the State--barracks

and battleships and arsenals, some of the forests, and so on--but we do

not say that England is economically a State-owned society, because the

_determining_ proportion of property is not owned by the State but by

private people. The general effect produced is one of private ownership

and not of State ownership.

One more principle must be set down before we go farther, and that is

that almost any society is mixed. A society of which the determining

proportion is slave-owning will yet certainly have a proportion of free

men; for if it did not there would be no one to own the slaves. In the

same way what is called a Capitalist Society, which I will describe in

a moment (and which is the society in which we now live in England) has

a great number of people not living under purely capitalist conditions.

It is mixed.

But, though only a _determining number_ is required to mark the

character of a particular society, and though every society is _mixed_

in its character, it remains true that all societies we know of, in the

past or the present, fall into one of these three groups--the Servile

(that is, slave-owning), the Capitalist, and the Distributive.

The definition of these three systems is as follows:--

1. In the Slave-owning Society, or SERVILE STATE, a certain minority

owns a determining amount of the wealth and also of land--that is,

the means of production (land and capital) and the wealth ready for

consumption in enjoyment. The rest of the community is compelled by

positive law to give its labour for the advantage of these few owners;

and this rest of the community are, by economic definition, (whether

they call themselves by the actual name or not) slaves: that is, they

can be compelled to work for the owners, and can be punished by law if

they do not work for the owners.

2. In the CAPITALIST STATE a determining number of the families or

individuals are free; that is, they cannot be compelled by positive law

to work for anybody. They are at liberty to make a contract. Each can

say to an owner of land or capital: “I will work for you for so much

reward, such and such a proportion of the wealth I produce. If you will

not give me that I will not work at all,” and no one can punish him for

the refusal.

But the mark of the Capitalist State is that a determining amount of

land and capital is owned by a small number of people, and that the

rest of the people--much the greater number--though free, cannot get

food or housing or clothing except in so far as the owners of these

things (that is, of the means of production) choose to give it them. In

such a state of society the people who own nothing, or next to nothing,

are free to make a contract and to say: “I will work on your farm” (for

instance) “if you will give me half or three-quarters of the harvest.

If you will not, I will not work for you.” But this contract is bound

by a very hard condition, for if they push their refusal to the limit

and continue not to work they will starve, and they will not be able

to get housing against the weather or clothes to wear.

We are living to-day, in England especially, in such a Capitalist

State. In such a state the free men who contract to sell their labour

often have a certain very small proportion of things on which they can

live for a short time. They have a suit of clothes and perhaps a little

money with which they can purchase a few days’ livelihood--some of them

more, some of them less. But the tone or colour of the society is given

by the fact that _the great majority, though free, are dispossessed of

the means of production, and therefore of livelihood, and that a small

minority controls these things_.

The word “Capitalism” does not mean that there exists capital in such

a society. Capital exists in all societies. It is a necessary part of

human society and of the production of wealth, without which no society

can live at all. The word “Capitalism” is only “shorthand” for the

condition we have just described: a condition where capital and land

are in few hands though all men are free.

3. The DISTRIBUTIVE STATE is a state in which a determining number

of the citizens, a number sufficient to colour the habits, laws

and conditions of the whole society, is possessed of the means of

production, as private property, divided among the various families.

The word “distributive” is an ugly, long word, only used for want of a

better; but the reason that we have to use such a tiresome word is an

odd and paradoxical reason well worth grasping. The Distributive State

is the natural state of mankind. Men are happiest in such conditions;

they can fulfil their being best and are most perfectly themselves

when they are owners and free. Now whenever you have natural and good

conditions, not only in Economics but in any other aspect of life, it

is very difficult to find a word for it. There is always a word ready

for odd, unnatural conditions: but it is often difficult to find a word

for conditions normal to our human nature. For instance: we have the

words “dwarf” and “giant,” but we have no similar common, short word

to describe people of ordinary stature. So it is with the Distributive

State. We have to use an ugly new word, because men more or less take

for granted this state of affairs in their minds, and have never

thought out a special word for it.

However, a name it must have; so let us agree to call that kind of

society in which most men are _really_ free and dignified and full

citizens, not only possessing rights before the law, but _owning_, so

that they are at no other man’s orders but can live independently, “The

Distributive State.”

Then we have these three main types of Society within human experience:

the Servile, the Capitalist, the Distributive.

To put these three estates clearly before our minds, let us describe

the kind of thing you would see in any one of the three.

In the _Servile State_, as you travelled through the country, you would

most ordinarily see working on the fields men who were the slaves of a

master. That master would own the land and the seed, and the food and

the houses, and the horses and ploughs and everything, and these men

you would see working would be compelled to work for their master, and

he would have the right by law to punish them if they did not.

If you were in a _Capitalist State_ (as we are in England) the men you

would see working would, as a rule, be earning what are called “wages,”

that is, an allowance (actually of money but immediately translated

into food and clothes and house-room and the rest), which allowance

would be paid to them at fairly short intervals, and without which

they could not live. The ploughs and horses with which they would be

working, the seed they would be sowing, the houses they lived in would

be the property of another man owning this _capital_, and therefore

called _The Capitalist_. If you asked any one of these men who were

working whether he were _compelled_ to work by law he would indignantly

tell you that he was not. For he is a free man; his wages are paid

him as a result of a contract; he has said: “I will work for you for

so much,” and no one could compel him to work if he did not choose to

work. But in this state of society a man without capital must make a

contract of this sort in order to live at all. He is not compelled

by law to work for another, but he is compelled by the necessity of

living to work for another.

Lastly, if you were travelling through a _Distributive State_ (Denmark

is the best example of such a state in modern Europe) you would find

that the man working on the land was himself the owner of the land, and

also of the seed and of the horses and the houses, and all the rest of

it. He would be a free man working for his own advantage and for nobody

else’s. He would also have a share in the factories of the country

and be a part owner in the local dairies, sharing the profit of those

dairies where the milk of many farms is gathered together, turned into

butter and cheese, and sold.

This is what we mean by the three types of State. In each you would

find many exceptions, but each has its _determining number_--of slaves

in the one case, wage earners in the other, and independent men in the

third.

* * * * *

We will now take each of these three kinds of State separately and see

the good and evil of them and what the consequences of them are.

THE SERVILE STATE

The Servile State is that which was found among our forefathers

everywhere. It is the Servile State in which we Europeans all lived

when we were pagan two thousand years ago. For instance: In old pagan

Italy before it became Christian, or in old pagan Greece--both of them

the best countries in the world of their time and both of them, as you

know, the origins of our own civilisation--most of the people you would

have seen working at anything were slaves, and above the slaves were

the owners: the free men.

Since we are talking of the political applications of political

economy, we have to consider _human happiness_, which is the object of

all human living; and when we talk of “advantage” or “disadvantage” in

any particular economic state we mean its greater or less effect on

human happiness.

The great disadvantage of the slave-owning state is clearly apparent:

in it the mass of men are degraded: they are not citizens: they cannot

exercise their own wills. This is so evident and great an evil that it

must be set against all the advantages we are about to notice. Slavery

is a most unhappy condition in so far as it wounds human honour and

offends human dignity; and that is why the Christian religion gradually

dissolved slavery in the process of many centuries: slavery is not

sufficiently consistent with the idea of man’s being made in the image

of God. Slavery can also be materially unhappy, if the masters are

cruel or negligent. The great mass of slaves in such a society might

be, at the caprice of their masters, very unhappy; and under bad phases

of those societies they _were_ very unhappy.

But we must not be misled by the ideas that have grown up around the

word “slave” in the modern mind. Because we have no one in England

to-day who is called a slave and bought or sold as a slave, and no

one is yet compelled by law to work for another man, therefore we

regard slavery as something odd and alien; and because it is natural

to dislike things which are odd and alien, unaccustomed, we think of

slavery as something simply bad.

That is a great mistake. The Servile State had--and, if it comes back,

will have again--two great advantages: which were _personal security_

and _general stability_.

_Personal security_ means a condition in which everybody, master and

man, is free from grave anxiety upon the future: can expect regular

food and lodging and a continuance of his regular way of life.

_General stability_ means the continuance of all society in one

fashion, without the violent ups and downs of competition and without

the friction of unwilling, constantly interrupted labour--as in strikes

and lock-outs.

In the Servile State work always got done and was done regularly. The

owners knew “where they were.” With so much land and so many slaves

they were sure of a certain average annual produce. On the whole it was

to the advantage of a man to keep his slaves alive and fairly well fed

and housed. Also, the human relation came in, and a man and his slave,

in the better and simpler forms of the Servile State, would often be

friends and were usually in the same relation as people are to-day with

their dependents. For instance: in well-to-do houses of the Servile

State we know from history that certain slaves were often the tutors of

the children, and thus had a very important and respectable position,

and there were other slaves who acted as good musicians and architects

and artists. There was always the feeling of a fixed social difference

between slave and free, but this did not necessarily nor perhaps

usually lead to great unhappiness.

This stability and security which slave-owning gave to all society (to

the owned to some extent, and to the owners altogether) also produced

a very valuable effect, which is, the presence of _leisure_. Because

revenue was fairly certain, because this kind of arrangement prevented

violent fluctuation of fortune, competition in excess, and the rest

of it, therefore was there a considerable proportion of people at any

time who had ample opportunity for study, for cultivating good tastes,

for writing and building well, and judging well, and--what is very

important--for conducting the affairs of the State without haste or the

panic and folly of haste.

One alleged _economic_ disadvantage of slave-owning must be looked at

narrowly before we leave this description of the Servile State.

One often hears it said that slave labour is less productive than

free labour, that is, labour working at a wage under Capitalism.

People sometimes point to modern examples of this contrast, saying

that places like the Southern States of America, where slave labour

was used a lifetime ago, were less productive than the Northern

States, where labour was free. But though this is true of particular

moments in history, it is not generally true. Free labour working at

a wage under the first institution of capitalism--when, for instance,

a body of capitalists are beginning to develop a new country with

hired free men to work for them--will be full of energy and highly

productive. But when what is called “free labour”--that is, men

without property working by contract for a wage--gets into routine

and habit, it is doubtful whether it is more productive than slave

labour. It is accompanied by a great deal of ill-will. There is

perpetual interruption by strikes, and lock-outs,[4] and the process of

production cannot be as minutely and absolutely directed by the small

and leisured class as can slave labour. _There is no reason why a free

man working for another’s profit should do his best._ On the contrary,

he has every reason to work as little as possible, while a slave can be

compelled to work hard.

But whether slave labour be more or less productive is not so important

as the two points mentioned above, of advantage and disadvantage. The

_disadvantages_, as we have seen, are (1) that it offends our human

love of honour and independence, degrading the mass of men, and (2)

that it is so terribly liable to abuse in the hands of cruel or stupid

owners, or in conditions where great gangs of slaves grow up under

one owner who can know nothing about them personally and is therefore

indifferent to their fate. The _advantages_ are security and stability,

running as a note throughout society and showing themselves especially

in the leisure of the owning classes, with all the good fruits of

leisure in taste, literary and artistic. It was a society based on

slavery which produced what is perhaps the best fruit of leisure, and

that is the profound and fruitful thinking out of the great human

problems. All the great philosophy and art of the ancients was worked

out by the free owners in the slave-owning states, and so was the best

literature ever made.

THE CAPITALIST STATE

The Capitalist State is that one in which though all men are free (that

is, though no one is compelled to work for another by law, nor anyone

compelled to support another), yet a few owners of the land and capital

have working for them the great mass of the people who own little or

nothing and receive a _wage_ to keep them alive: that is, a part only

of the wealth they produce, the rest going as rent and profit to the

owners.

The Capitalist State is a recent phenomenon compared with the great

length of known recorded history. It is a modern phenomenon produced by

our white race alone, by no means covering the whole of that race, nor

the most of it, but of great interest to us in England because we alone

are, of all nations, an almost purely capitalist society.

Here again we can tabulate the advantages and disadvantages.

The chief moral advantage of Capitalism as compared with the

Slave-owning State is that _every man, however poor, feels himself to

be free and to that extent saves his honour_. He may be compelled by

poverty to suffer a very hard bargain; he may see himself producing

wealth for other men, of which wealth he is only allowed to keep a

portion for himself. To that extent he is “exploited,” as the phrase

goes. He feels himself the victim of a certain injustice. He remains

poor in spite of all his labour, and the man for whom he works grows

rich. But, after all, it is a contract which the free workman has made,

and he has made it as a citizen. If those who own nothing, or next to

nothing, in a capitalist state (this great majority is technically

called in economic language “the _proletariat_”) organise, they can

bargain, as our great Trade Unions do, with the few owners of their

means of livelihood and of production, and be fairly certain, for some

little time ahead, of a reasonable livelihood.

Another advantage of Capitalism, purely economic, is the _effectiveness

of human energy_ under this system, at least, _in the first part of its

development_. We spoke of this in the last section.

But the disadvantages are very grave indeed.

Under Capitalism the capitalist himself acts competitively and for a

profit. He does not, like the slave-owner, direct a regular, simple

machine which works evenly year in and year out. He is perpetually

struggling to rise; or suffering, through the rise of others, a fall

of fortune. He is always on the look-out to buy labour as cheaply as

he can and then to sell the product as dearly as he can. There is thus

a perpetual gamble going on, the owners of Capital rapidly growing

rich and poor by turns and a general insecurity gradually poisoning

all the owning part of society. A far worse insecurity affects the

propertyless majority. The Proletariat--that is, the mass of the

State--lives perpetually under the fear of falling into unemployment

and starvation. The lash urging the workman to his fullest effort is

this dread of misery. At first that lash urges men to intense effort,

but later it destroys their energy. Capitalism was marked by nothing

more striking when it first arose than by the immense expansion of

wealth and population which followed it. In every district which fell

under the capitalist system this expansion of total wealth and of total

population could be observed; and England, which has become completely

capitalist, had in the hey-day of its Capitalism--up to the present

generation--a more rapid rate of expansion in wealth and population

than any other ancient people. But already the tide has turned, and the

inhumanity of such a life is beginning to breed everywhere an ill-ease

and revolt which threaten our civilisation.

The disadvantages of Capitalism are, in the long run, so great that

now, after not more than a lifetime of complete Capitalism, and that

in only one State--the English State--nearly everybody is profoundly

discontented with it and many people are in violent rebellion against

it. This grinding and increasing insecurity which attaches to the

Capitalist system is killing it. No one is safe for the morrow.

Perpetual competition, increasing with every increase of energy, has

led to a chaos in human society such as there never was before. The

mass of the people, not being slaves, cannot be certain that they will

be kept alive. They live in a state of perpetual anxiety as to whether

their employment will continue; while among the owners themselves the

same anxiety exists in another form. The competition among them gets

more and more severe. The number of owners gets less, and even the

richest of them is more insecure than were the moderately rich of a

generation ago. All society is like a boiling pot, with individuals

suddenly coming into great wealth from below and then dropping out

again; the whole State suffers from an increasing absence of leisure

and an increasing turmoil.

There is, then, this very grave disadvantage of insecurity everywhere,

and particularly for the mass of the people, who live under permanent

conditions of insecurity; nearly all the wage-earners have had

experience at some time, longer or shorter, of insufficiency through

unemployment. Capitalism leaves free men under a sense of acute

grievance (which they would _not_ feel if they were slaves, accustomed

to a regular and fixed status in society), and, what is worse,

Capitalism _in its later stages_ need not provide for the livelihood of

the mass of citizens, and, in effect, _does not_ so provide.

The magnitude of these evils is obvious. A man who is a free man, a

citizen, able in theory to take part in the life of the State, equal

with the richest man before the law, yet finds himself living on a

precarious amount of necessaries of life doled out as wages week

after week; he sees his labour exploited by others and suffers from a

sense of injustice and oppression. The wealth of the small, owning,

class does not seem a natural adjunct to its social position, as it

does in the slave-owning state; for there is no tradition behind that

class; it has no “status,” that is, no general respect paid to it as

something naturally--or, at any rate, traditionally--superior to the

rest of men. Many a modern millionaire capitalist, exploiting the

labour of thousands of his fellows, is of a lower culture than most of

his labourers; and, what is more, he may in a few years have lost all

his economic position and have been succeeded by another, even baser

than himself. How can the masses feel respect for such a man in such a

position of chance advantage?

It is inevitable that a moral evil of this sort should make the whole

State unstable. You cannot make of great differences in wealth between

citizens a stable state of affairs, save by breeding respect for

the owners of great wealth. But the more the turmoil of Capitalism

increases the less respect these owners of great wealth either deserve

or obtain: the less do they form a class, and the less do they preserve

traditions of any kind. And yet it is under these very conditions of

Capitalism that there is a greater disparity of wealth than ever the

world knew before! It is clear that society in such a condition must be

as unstable as an explosive.

So much for the first great disadvantage of Capitalism, chaos. But

the second main disadvantage--the fact that Capitalism in its later

stages ceases to guarantee the livelihood of the people--is a little

less easy to understand. Indeed, most people who discuss Capitalism,

even when they strongly oppose it, seem unable to grasp this second

disadvantage--so let us examine it closely.

I have said that Capitalism, in its later stages, _does not provide for

the maintenance of the mass of the people_.

To see how true this is, consider an extreme case.

Supposing one man were to own all the means of production, and

supposing he were to have in his possession one machine which could

produce in an indefinite amount all that human beings need in order to

live. Then there would be no economic reason why this one man should

provide wealth for anyone except himself and his family. He might turn

out enough things to support a few others whom he wanted for private

servants or to amuse him, but there would be no reason why he should

support the masses around him.

Now it is true that we have not yet come, under Capitalism, to so

extreme a case. But the moral applies, though modified, to Capitalism

in its last stages, when very few men control the means of production,

when machinery has become very efficient, and when the great mass

of people are dependent upon employment by the capitalist for their

existence.

Consider that it is of the essence of Capitalism to keep wages down,

that is, to buy labour cheap. Therefore, the labourer who actually

produces, say, boots cannot afford to buy a sufficient amount of

the boots which he himself has made. The capitalist controlling the

boot-making machinery, when he has provided himself with a dozen pair

of boots, and the working classes of the community with such boots as

their wages permit them to buy, must either try to sell the extra boots

abroad (and that outlet can’t last long) or stop making them. He has

restricted the home market by the necessity of cheap labour, and you

have the absurd position of men making more goods than they need, and

yet having less of those goods available for themselves than they need:

the labourer producing, or able to produce, every year enough clothing

for ten years, and yet not being able to afford sufficient for one: the

labourer producing or able to produce ten good overcoats, yet not able

to buy one.

So under Capitalism in its last stages you have the abnormal position

of millions of men ready to make the necessaries of life, of machinery

ready to produce those necessaries, of raw material standing ready to

be worked up by the machinery if only labourers could be put on, and

yet all the machinery standing idle, the wealth not being produced,

and the mass who could produce it going hungry and ill-shod and badly

clothed. And the more Capitalism develops the more that state of things

will develop with it.

Now this gradual lessening of purchasing power on the part of the

working masses under Capitalism is _the destruction of the home

market_. Low wages make great masses of English bootmakers unable

to buy all the boots they would. Therefore the capitalist who owns

the boot-making machinery must try to sell his surplus abroad. But

the foreign countries, as they grow capitalist, suffer from the same

trouble: property being badly distributed and the wage-earners kept

as low as possible, their power to buy foreign goods also diminishes.

Thus you have _gradual destruction of the foreign market_. You get in

the long run the full working of what we will call the “_Capitalist

Paradox_,” which is that Capitalism is a way of producing wealth which,

in the long run, prevents people from obtaining the wealth produced and

prevents the owner of the wealth from finding a market.

There is no doubt that, on the balance, the disadvantages of Capitalism

have proved, even after its short trial, overwhelmingly greater than

the advantages.

Capitalism arose in small beginnings rather more than 250 years ago. It

grew strong and covered the greater part of the community (in England,

at least) about 100 years ago. It came to its highest development in

our own time; and it is already doomed. People cannot bear it any

longer. Future historians looking back upon our time will be astonished

at the immense productivity of Capitalism, the enormous addition to

wealth which it made, and to population, in its early phases; but

perhaps they will be still more astonished at the pace at which it

ran down at its end. Urged by the extreme human suffering, moral and

material, which capitalism now produces, remedies have been proposed,

the chief of which is generally called Socialism, or, in its fully

developed form, Communism.

But before we talk of this supposed remedy, which has never been put

into practice (it is an imaginary state of things) we must describe the

third form of state--the Distributive State.

THE DISTRIBUTIVE STATE

A state of society in which the families composing it are, in a

determining number, owners of the land and the means of production

as well as themselves the human agents of production (that is, the

people who by their human energy produce wealth with those means of

production), is probably the oldest, and certainly the most commonly

found of all states of society. It is a state of society which you

get all through the East, all through Asia, and in all the primitive

states we know. It is the state to which men try to return, as a rule,

after they have blundered into any other, though the first state we

described--the Servile State--runs it very close as a thing suitable

to human nature; for we know that the Servile State did also last for

centuries quite normally and stably in the Pagan past.

The reason men commonly adopt the Distributive form of society, and

tend to return to it if they can, is that the advantages it presents

seem greater in most men’s eyes than its disadvantages.

The advantages are these:--

It gives freedom: that is, the exercise of one’s will. A family

possessed of the means of production--the simplest form of which is

the possession of land and of the implements and capital for working

the land--cannot be controlled by others. Of course, various producers

specialise, and through exchange one with the other they become more or

less interdependent, but still, each one can live “on his own”: each

one can stand out, if necessary, from pressure exercised against him by

another. He can say: “If you will not take my surplus as against your

surplus I shall be the poorer; but at least I can live.”

Societies of this kind are not only free, but also, what goes with

freedom, elastic--that is, they mould themselves easily to changed

conditions. The individual, or the family, controlling his or its own

means of production, can choose what he will do best, and can exercise

his faculties, if he has sufficient knowledge, to the best advantage.

This arrangement also gives security, though not as much security

as the Servile State. Men in this position of ownership are not in

dread of the immediate future. They can carry on. They may, if they

choose, make a reserve of their produce to carry them over moments

of difficulty. For instance, they will probably have each a reserve

of food to carry them over a bad harvest or some natural disaster.

Further, it is found in practice that societies of this kind continue

for centuries without much change. They go on for generations with a

property well divided among them and everybody free, so far as economic

situation is concerned. No such society has ever been destroyed except

by some great shock; and so long as every shock can be warded off,

this system of having the land and the means of production controlled

by the mass of the citizens as private owners is enduring. There are

districts of Europe to-day where the system has continued from beyond

the memory of man. Such a little state as Andorra is an example,

and many of the Swiss valleys. Further, when the system has been

laboriously reconstructed, when the mass of families who used to be

dispossessed have been again put into possession of land and the means

of production, we find that the state arrived at is stable.

The best example of that sort of reconstruction to-day is to be found

in Denmark, but you have it also in a less marked fashion in most

parts of France and in most of the Valley of the Rhine, in Belgium and

Holland, in Norway, and in many other places. Wherever it has been

settled it has taken root firmly.

The disadvantages of such a system are, first, that though in practice

it is found usually stable, yet in theory it is not necessarily stable,

and in practice also there are some communities the social character of

which is such that the system cannot be established permanently.

It is obvious that, with land and the means of production well

distributed among the various families, a few may by luck or special

perseverance and cunning, tend to buy up the land and implements of

their less fortunate neighbours, and nothing will prevent this but a

set of laws backed up by strong public opinion. In other words, people

must desire this state of society, and desire it strongly in order to

maintain it; and if the desire for ownership and freedom is weak this

distributive arrangement will not last.

In the absence of special laws, and a public opinion to back them,

the idler or the least competent or least lucky of the owners will

gradually lose their ownership to the more industrious or the more

cunning or more fortunate.

Another disadvantage which has often been pointed out is that a state

of society of this sort, though usually stable and enduring, falls

into a routine (that is, into a traditional way of doing things),

which it is very difficult to change. The small owner will not have

the same opportunities for travel and for wide experience as the rich

man has, and he will tend to go on as his fathers did, and therefore

when some new invention arises outside his society he will be slow to

adopt it. In this way his society becomes less able to defend itself

from predatory neighbours and goes under in war. For a society of this

kind is unfitted to the discovery of new things. Contented men feel no

special spur to discover or to act on such discovery. That is why we

find societies in which land and all the other means of production are

well distributed among the greater part of the families of the State

becoming too conservative--that is, unwilling to change even for their

own advantage.

This, of course, is not universally true. For instance: no society in

Europe has made more progress in agriculture than the Danish society

of small owners. But, take the world all over, this kind of state is

usually backward, that is, slow to take up improvements in production

and to avail itself of new discoveries in physical science.

There is also another disadvantage which the Distributive State has

when it is in competition with a Capitalist State, or even a Servile

State, and that is _the difficulty of getting a very large number of

small owners to put their money together for any great purpose_. The

small owner will probably have less opportunities for instruction and

judgment than the few directing rich men of a Capitalist or Servile

State, and even if he is, on the average, as well educated as these

rich men in neighbouring states, it will be more difficult to get a

great number of small owners to act together than to persuade a few

large owners to act together. Therefore highly Capitalist States, such

as England, will be found more enterprising than less Capitalist States

in their investments and commerce. They will open up new countries

more rapidly, and will get possession of the best markets.

Lastly, this disadvantage attaches to the Distributive State--that it

is not so easy in it to collect great funds for war or for national

defence, or for any other purpose, as it is in a Capitalist or Servile

State. You cannot tax a Distributive State as highly as you can tax a

Capitalist State. The reason is obvious enough. A family with, say,

£400 a year finds it terribly difficult--almost impossible--to pay out

£100 a year in taxation. They live on a certain modest scale to which

all their lives are fitted, and which does not leave very much margin

for taxation. If you have a million such families with a total income

of £400 millions you may collect from them, say, a tenth of their

wealth in a year--£40 millions--but you will hardly be able to collect

a quarter--£100 millions.

But another society with exactly the same amount of total wealth, £400

millions a year, only divided into very rich and very poor, a society

in which there are, say, 1,000 very rich families with £300,000 a year

each, and a million families with rather less than £100 a year each,

is in quite a different situation. You need not tax at all the million

people with a hundred a year each, but the rich people, who between

them have £300,000,000 a year, can easily be taxed a quarter of their

whole wealth; for a rich man always has a much larger margin, the loss

of which he does not really feel.

By a very curious paradox, which it would take much too long to go

into in detail, but which it is amusing to notice, this power of

taxing a very highly capitalist community is one of the things which

is beginning to handicap our Capitalist societies to-day against the

Distributive societies. It used to be all the other way, and it seemed

common sense that countries where you could levy large sums for State

purposes of war or peace would win against countries where you could

not levy such sums for public purposes. But the fact that you can tax

so very highly a society of a few rich and many poor has been shown in

the last few years to have most unexpected results. The very rich men

pay all right; but the drain on the total resources of the wealth of

the State weakens it.

The money raised by taxation is spent on State servants--many of them

inefficient and idle.

Since it is so easy to raise large sums, there is a temptation to

indulge in all sorts of expensive State schemes, many of which come to

nothing. And this power of easy taxation, which was a strength, becomes

a weakness.

No one suspected this until taxation rose to its present height, but

now it is clearly apparent; and we in England might perhaps be in

a better way later on if there had been as much resistance to high

taxation here as there has been in countries where property is better

distributed.

SOCIALISM

It remains to deal with a certain remedy which some people have

imagined would get rid of all the disadvantages of Capitalism once and

for all. This remedy is called _Socialism_, and Socialism, as we shall

see in a moment, must mean ultimately _Communism_.

No one has ever succeeded in putting this remedy for the evils of

Capitalism into practice, and (though the matter is still very much

disputed) it looks more and more as though no one would ever be able to

put it into practice.

We have seen what the evils of Capitalism were and how they have

exasperated nearly everyone who has become subject to a capitalist

state of society. There is the increasing insecurity which everybody

feels--all the Proletariat and many of the Capitalists as well--whilst

there is the necessary tendency of Capitalism to leave a larger and

larger proportion of people unproductive, not making the wealth which

is necessary for their support, and therefore either kept in idleness

by Doles out of the wealth which is still produced (a process which

cannot go on for ever) or starving. Pretty well everyone wants to get

rid of these evils and to get out of the Capitalist system, and this

idea of Socialism which we are going to examine seemed, when it was

first put forward, an easy and obvious shortcut out of the Capitalist

muddle. When we have looked into it, we shall see how and why Socialism

does not, in practice, turn out to be a shortcut at all, but a blind

alley.

* * * * *

Ever since men began to live in societies and to leave records, you

will find the poorer people, when their poverty became intolerable,

clamouring for a division of the wealth which the more fortunate enjoy.

That is the main, obvious remedy to inequality of wealth; to divide it

up again. But such a scheme has nothing to do with Socialism, and must

not be mistaken for Socialism.

The Socialist theory was invented, or at any rate was first put

clearly, by a man of genius, Louis Blanc, who was Scotch on his

father’s side and French on his mother’s. He lived rather less than a

hundred years ago and the scheme which he and those around him started

was this:--

The Officers of the State were to own all the Means of

Production--machinery and land and stores of food, etc.--and they alone

should be allowed to own it. Individuals and families and corporations

might consume that portion of produced wealth allotted them by the

State after it had been produced, _but they might not use it for making

future wealth_. ANY WEALTH USED FOR THE MAKING OF FUTURE WEALTH, THAT

IS, CAPITAL IN ANY FORM, WAS TO BE HANDED OVER TO THE OFFICERS OF THE

STATE; AND ALL LAND AND NATURAL FORCES WERE TO BE OWNED FOR EVER BY THE

STATE. That scheme is Socialism, and from that principle all Socialist

ideas flow.

In this way, it was claimed, there would be no division of society

into Capitalists and Proletarians, no chaos of competition with its

alternating riches and ruin; insecurity would be done away with, and

insufficiency as well. Everyone in the country would be a worker, the

State itself would be the Universal Capitalist. So there would be no

struggle of capitalists going up and down one against the other, and no

unemployment or lack of necessaries for anyone.

Among the energetic and keen set of men who surrounded Blanc in Paris

was a certain Mordecai, who wrote under the name his father had

assumed, that of “Marx.” He wrote (in German) a very long and detailed

book describing the whole scheme, as well as describing the evils of

Capitalism, and showing how this scheme would remedy those evils. His

book was pushed forward by the people who were converted to the idea,

and that is why the theory of Socialism is now often called “Marxism.”

For instance: the coal-mines and all the machinery of the coal-mines

and the houses in which the miners live and the stores of food and

the clothing, etc., which keep the miners alive while the coal is

being mined, that is during the process of production--all these,

which now belong to capitalists who make a profit out of the miners’

labour, would then belong to the State, which would allot the coal

produced to all who needed it. So it would be with all farms, farming

implements, and cattle and horses and the stores of food and clothing

and houses necessary to the labourers on the land during the process of

production. So it would be with all stone-quarrying and timber-felling,

and carpentry and brick-making for the continued production of the

houses necessary to the producers during production. So it would be

with all corresponding material for making cloth for clothing. So it

would be with everything which was made in the whole country. The

officers of the State would share out the wealth produced, so that it

would be consumed by all the citizens, and there would be an end to the

exploitation of one man by another and to the uncertainty of living.

Communism is simply that form of Socialism in which all that is thus

shared out by the State would be shared equally, the State giving every

family an equal share in proportion to the numbers of people which had

to be supported in the family, from one upwards.

The reason I have called Communism the logical and only possible

ultimate form of Socialism is that there could be under Socialism no

reason for any other form of distribution.

Some time ago certain Socialists used to try to get out of this

necessity for Communism, so as not to frighten rich people with their

proposals for reform. They would say to a man who was making, say,

£5,000 a year because he owned a lot of capital and land and had rents

and profits coming to him from the work of his labourers: “You will

have just as much under Socialism, for we recognise what a superior

kind of person you are, and when the State shares out its wealth among

its citizens it will give you as much as you have now, leaving the

same difference between rich and poor, only seeing to it that the poor

always at least have enough to live on. Where we give one ticket to the

labourer to claim out of the common stores what he wants for a week we

will give you fifty tickets, so that you will get fifty times as much

if you like.” But of course this was nonsense, and was soon discovered

to be nonsense. With everybody working for the State under orders all

would naturally claim equality, and there would be no way of preventing

their getting an equal share except force. In justice, supposing a

Socialist state to arise, there could be only the Communist form of it.

This scheme has never been put into practice, and when we look closely

at it we shall discover, I think, why it never will be put into

practice.

The reason it cannot be put into practice is this: Although we use the

words “the State” this mere idea means in practice real men who act

as officials to represent the State. Actual men with their varying

characters, good and bad, lazy and industrious, just and unjust, have

got to undertake the enormous business _first_ of running production

in the interest of all, _next_ of distributing the resultant wealth

equally to all.

Now there are two qualities in man which make action of this sort

break down. The first is that men love independence--they like to feel

themselves their own masters. They like therefore to _own_, so that

they may do what they like with material things. The next is that men

like to get as much as possible of good things. Both these feelings

are universally true of the human race. You will find exceptional

people, of course, who are just as contented with a little as with

a great deal, and you will find exceptional people who do not care

about independence or about owning, and who are quite willing to be

run by other people, or to give up all possession for the sake of some

special way of living: that is, there is a comparatively small number

of men and women who, in order to live free from responsibility, or in

order to devote themselves to religion or to some form of study and

contemplation, will give up all property and have the material side of

their lives administered for them. But men and women in general will

both want to get all they can of good things with the least possible

exertion in the getting of them, and they will also desire freedom to

exercise their own wills and deal with material objects as they choose.

Now the Socialist scheme requires both these very strong emotions,

common to all mankind, to be suppressed. The people who run the

State--that is the politicians--are to be absolutely just (although

there is no one to force them to be just), they are to forget all

personal wishes and to think of nothing but the good of those whose

labour they direct and among whom they share out the wealth that is

produced. We know by experience that politicians are not angels of this

sort. It is absurd to imagine that men coveting public office (and

living the life of intrigue necessary to get it) would suddenly turn

into unselfish and devoted beings of this ideal kind. You cannot give

this enormous power to men without their abusing it.

The second force making against the establishment of Socialism is still

stronger. You will never get the run of men and women contented to

live their whole lives entirely under orders. In exceptional moments a

large part of individual freedom will be given up to the necessity of

the State--as during the Great War; for if the State did not survive

the individual’s life and that of his children would not be worth

living. The individual in abnormal crises goes through a great deal

of suffering for a moment in order that he and his should have less

pain in the long run. But even in such crises a large part of liberty

remains to him. Under Socialism he would have none. He would have

to do what he was told by his task-masters, much more than even the

poorest labourers now have to do what they are told by task-masters.

And there would also be this difference: that _everyone_ would be in

that situation and there would be no way out. Not a part of life, nor

so many hours a day, but the whole of life, would be subject to orders

given by others. This, humanity would certainly find intolerable.

That is why, I think, Socialism has never been put into practice

and never can be put into practice. There have been attempts at it,

but even when they are sincere and not the mere product of alien

despotism they break down. As in Russia to-day, where, whether the Jew

adventurers who seized power were sincere or mere tyrants, they have,

in spite of their attempt at seizing all the soil and keeping the

peasants dependent on them, been compelled at last to let nearly all

the nation live as owners tilling their own land.

It is no reply to this to say that the State always has owned, and

actually can and does own, _some_ part of the means of Production (such

as the Post Office and certain forests and lands here in England, and,

abroad, most mountain land, all mines and much else) and direct them

with success. The point of Socialism--the one condition necessary

to its existence--is that the State should own _all_ the means of

Production that really count. Between the normal exercise of a partial

function and the abnormal exercise of a universal function is all

the difference between _plus_ and _minus_. A partial State ownership

working in a society the determining character of which is private

ownership is an utterly different thing, even an _opposite_ thing

to general State ownership determining the character of Society and

allowing only exceptional private ownership. Socialism can only be

(_a_) good (_b_) possible when men desire, and are at ease in, the

latter kind of state; that is, desire and are at ease in complete

forgetfulness of self coupled with justice as men ruling, and complete

surrender of personal honour and freedom and appetite as men ruled.

INTERNATIONAL EXCHANGE

International exchange is not really different from the domestic

exchanges which go on within a nation. The foreigner who has some

product of his own to exchange against a product of ours deals as

a private man with other private men, and if you could see all the

exchanges of the world going on you would not distinguish between the

character of an exchange, say, between Devonshire and London and one

between London and the Argentine. The Devonshire man grows wheat, which

he sells perhaps in a London market, and buys manufactured products

which a merchant in London provides. The farmer in the Argentine

does much the same thing, sells wheat and receives in exchange what

manufactures he needs, precisely as though he were living in Devonshire

instead of abroad. He does not trade with “England,” but with a

particular merchant or company in England.

But there are certain points about international trade which one must

get clear unless one is to make mistakes in the political problems

arising out of it.

In the first place, international trade is always subject to a certain

interference which domestic trade does not suffer. All countries have

a _tariff_, that is a set of taxes upon a great number of the articles

coming in from abroad. Even those countries which, as England did until

quite lately, believe in leaving their citizens on equal terms with

foreign competitors and have gone in for complete free trade, examine

all goods at the port of entry or at special points on the frontier,

both in order to raise revenue and to keep out undesirable goods, such

as certain drugs; nor does any country allow _all_ things to come in

unexamined, lest forbidden things should come in unobserved. Moreover,

it is important to measure the nature and volume of a nation’s foreign

trade, and this cannot be done without stopping things at the ports or

frontiers and examining them.

In general, international trade differs from domestic trade first of

all in this--that it always has to pass through an examination at the

frontiers through which it enters. It also differs from domestic trade

in that it has to use another currency. Even when all countries have

a gold currency, there are certain small fluctuations in the exchange

values of the different currencies. For instance: before the war the

English pound was worth in gold about 25¼ French francs, but you

hardly ever had this “Parity” (as it is called) exact. The franc would

fluctuate slightly against the sovereign--sometimes above, sometimes

below “Parity” by a penny, or even sometimes more than a penny, one

way or the other. With many countries whose currency was not in a good

condition the fluctuations would be more violent, and of course since

the war, now that so many nations no longer have a gold currency at

all, but a fictitious paper currency, the value of one currency against

another fluctuates wildly. Within a year you could get only 50 francs

for an English sovereign and then a little later as much as 80 francs.

Within one country exchanges can be simply conducted by counting

all values in the currency of the country; but international trade,

involving the use of two or more currencies, cannot be so simple.

There is also a third point in international trade which must be

understood, and which proceeds from the very fact that international

exchanges do not essentially differ from the exchanges which take

place within the same country, and that is the fact that exchanges are

not simple contracts between two parties, but follow a whole chain of

contracts, covering a great number of parties.

We saw, in the first part of this book, that exchange even within one

country, was not simple barter but _multiple exchange_.

In domestic exchange a farmer sells his wheat to a broker, but does

not purchase a lorry from the same buyer: he receives money from the

buyer, and with that money buys a lorry, say, a month later. But what

has really happened is a whole chain of exchanges in between the wheat

and the lorry--a miller has bought the wheat from the broker, a baker

the flour from the miller, and so on until towards the end of the chain

a caster has sold castings to a motor maker who has assembled them and

sold the lorry to the farmer.

It is the same with international exchanges; as we saw in the earlier

part of this book. There is an international chain of exchanges.

The total number of units engaged in this international chain may be

as large as you like; there may be ten or fifty or a hundred links

before it is complete. But the universal principle holds that imports

and exports usually balance. Whatever you import from abroad into a

country you must, as a general rule, pay for by exporting an equivalent

set of values created within your own country. But there are certain

exceptions to this rule which are sometimes lost sight of.

In the first place, the imports and the exports need not all be what

are called “visible” imports and exports. Many of them may be, and

some always are, “invisible.” The most obvious example of these are

“freights,” that is, sums paid for the carriage of goods between one

country and another. Thus, in the old days before the war you would

find England importing more than she exported, and one of the principal

reasons for the difference was that the imports were mostly brought

in English ships. Thus if a man in the Argentine were sending 50 tons

of wheat to England worth £500, England, after a long chain of trade

with many countries, including the Argentine, would be exporting

values against this £500 worth of wheat, which would be worth, say,

not £500, but only £450. The difference of £50 was made up by the cost

of bringing the wheat from the Argentine to England _in an English

ship_. In other words, £50 worth of the total £500 worth of wheat stood

for the sum which the man in the Argentine had to pay to the English

sailors to bring his wheat over the sea.

Further, a wealthy or strong country very often levied tribute upon a

poorer or weaker one, and this tribute might take several forms. There

was the tribute of _interest upon loans_. If English bankers had lent

to people in Egypt a million pounds with interest at forty thousand

pounds a year Egyptian production would have to export to England,

either directly or roundabout through the chain of trade, forty

thousand pounds’ worth of goods, against which England had not to send

out anything.

Another form of tribute--though a small one--is that paid in pensions.

A man having worked all his life in the Civil Service in India (for

instance) would retire upon a yearly pension of a thousand pounds a

year; but this pension was levied upon the taxpayers of India, and if

the man came to live in England and spent his pension there--as nearly

all of them did--it meant that India had to export a thousand pounds’

worth of goods every year to England, against which England sent

nothing back.

In the same way the shareholder in some works or firms situated in a

foreign country would, if he lived in England, cause an import to come

in equivalent to his dividends or profits, and against that England

would send out nothing.

But the point to remember is, that _the mere volume of trade_ (that

is, _the total of things imported and of things exported_) _is no

indication of the wealth or prosperity of the country importing and

exporting_.

A country may be very wealthy, although it is doing hardly any

international trade, because it may be producing within its own

boundaries a great deal of wealth of a kind sufficient to nearly all,

or all, its needs. Again, of international trade (and it is exceedingly

important to remember this, because most people go wrong on it)

_nothing increases the wealth of a country except the imports_.

It ought to be quite clear, especially in the case of an island like

Great Britain, that it _loses_ what it sends out and _gains_ what

it brings in. Yet people get muddled about even this very simple

proposition, because the individual trader thinks of his transactions

as an individual sale. He does not consider the nature of trade as a

whole. The individual trader, for instance, who makes locomotives and

exports them, gets paid, let us say, £10,000 for each locomotive. In

point of fact this means that in the long run he or someone else in

England will exercise £10,000 worth of demand for foreign goods. But

the individual trader does not usually think of that; he thinks only of

his own transactions, and he would be very much surprised if he were

told that his sending the locomotive abroad was, _regarded in itself,

and apart from the import which it assumed_, a loss to the country of

£10,000 worth of wealth.

You often hear people in political arguments talking as though the

falling off of exports from a country were a bad thing and the increase

of imports also a bad thing. It cannot be so in the long run. The

excess of imports over exports is the national profit on the whole of

its foreign transactions, and any country which is exporting regularly

more than it imports is paying tribute to foreigners abroad, while

every country which regularly imports more than it exports is receiving

tribute.

Of course, if you consider only a short period of time, the falling off

of exports may be a bad sign; for it may mean that the corresponding

imports will not be gathered. If in this country we saw our exports

regularly falling year by year we should be right to take alarm, for

this would almost certainly mean that a corresponding falling off in

imports would sooner or later take place also, and that therefore our

total wealth would be diminished. But considered over a sufficient

space of time, it is obvious that the excess of imports over exports

is a gain and that the excess of exports over imports is a loss.

One last thing to remember about international trade is that the very

different importance of foreign trade to different countries makes the

foreign politics of nations differ equally. A country which can supply

itself with all it needs is free to risk its foreign trade for some

other issue. A country importing its necessities cannot risk the loss

of such trade, for it is a matter of life and death. The United States

is in the first position. It has within its own boundaries not only all

the minerals it needs, but also all the petrol and all the raw material

for making cloth, and all the leather for boots, and all the rest

of it. But a country like England is in quite a different position.

We only grow half the meat we need and about one-fifth of the corn.

Therefore it is absolutely necessary for us to have a foreign trade.

If all the foreign trade of the United States were to be destroyed

to-morrow, the United States, though somewhat poorer, would still be

very rich and able to carry on without the help of anyone else. But if

our foreign trade were destroyed there would be a terrible famine and

most of us would die.

Nations differ very much in this respect, but of all nations Great

Britain is that which is most vitally interested in maintaining a great

foreign trade, and next after Great Britain Belgium is similarly

interested, for Belgium also needs to import four-fifths of its

bread-stuffs. Almost every country except the United States _must_ have

some foreign trade if it is to live normally. For instance: France,

though largely a self-sufficing country, has no petrol. It has to buy

its petrol abroad and must export goods to pay for that import. Nor has

it quite enough coal for its needs, and, before the war, it had not

nearly enough iron. Italy has no coal, no petrol and no iron to speak

of--not nearly enough for its needs. And so it is with pretty well

every nation in Europe. But of all nations our own and Belgium--our own

particularly--are in the most need of maintaining a large foreign trade.

This affects all our policy, it is the root of both the greatness and

peril of England. It also tends to make English people judge the wealth

of foreigners by the volume of their trade, and that is a great error.

FREE TRADE AND PROTECTION AS POLITICAL ISSUES

In this matter of international trade there rose up, about a hundred

years ago, a great political discussion in England between what was

called _Free Trade_ and what was called _Protection_.

This discussion is still going on and affecting the life of the

country, and it is important to understand the principles of it, for

we have here one of the chief applications of theoretical Political

Economy to actual conditions.

I dealt with this subject briefly in the first part of this book under

“Elementary Principles,” but I return to it here in more detail because

it has given rise, in political application, to the most important

economic discussion in modern England.

The Free Traders were those who said that England would be wealthier,

as a whole, if there were no restriction upon exchange at all, whether

internal or external. A man having something to exchange with his

English neighbour was, of course, free to exchange it without any

interference; but the Free Trader’s particular point was that a man

having something to exchange with a _foreign_ purchaser should be

equally free to exchange it, without any interference at the ports in

the way of export duty taxing the transaction. In the same way he said

that the foreigner should be perfectly free to send here any goods he

had to exchange against ours, and should neither be kept out by laws

nor restricted by special import duties at the ports.

“In this way,” said the Free Traders, “we shall get the maximum of

wealth for the whole country.”

The Protectionists, on the other hand, said: “Here are a lot of people

engaged on a particular form of production in England. Those who have

their capital in it are making profits, those who own the land on which

the capital is invested are getting rents, and the working people are

getting wages. The foreigner, having special advantages for this kind

of production, which make him able to produce this particular thing

more cheaply than we can, brings in that cheaper produce and offers

it for sale to Englishmen. The people to whom it is offered for sale

will, of course, buy the foreign stuff because it is cheaper. The

result will be that the English people who have invested their capital

in producing this particular thing--that is, who have got implements

together and buildings, and the rest, suitable for producing this

thing--will be ruined. It will not be worth their while to go on, for

no one will buy their goods. Their profits will be extinguished, and

their capital will decay to nothing. The rents on the land they occupy

will also disappear, and, what is worst of all, the large population

which live on wages produced by this kind of work will starve or have

to be supported, idle, by other people. Their power of producing wealth

will be lost to England. Therefore, let us tax this cheap foreign

import so that our production at home shall be _protected_. Let us

tax the foreign goods as they come in, so that the cost of producing

abroad, with this tax added, comes to at least as much as the cost of

producing the same stuff at home. In this way it will still be worth

while for our people at home to go on producing this kind of thing. The

Englishman at home will be just as ready to buy his fellow-citizen’s

produce as the foreigner’s, for the price of each will be the same.”

The Protectionist even said: “Let us make this tariff so high that the

foreign goods are sold at a _dis_advantage--that is, let the tax on the

foreign goods be such that, added to the cost of production abroad,

they cannot be sold in England save at a _higher_ price than the

English goods. In this way only the English goods will be bought here

and the home industry will flourish as it did before.”

Such were the two political theories, standing one against the other.

Now let us look into the economic principles underlying these two

opposing parties, and see which of them had the best of the argument.

We have already seen, in the first part of this book, the elementary

economic principle that Exchange is only the last stage in the process

of production.

And we have also had fixed the principle that _freedom of exchange

tends to produce a maximum of wealth within the area to which it

applies_, and that interference with freedom of exchange tends to

reduce the total possible wealth of that area. This is so obvious that

all the great modern nations are careful to let exchange be as free as

possible _within their own boundaries_.

Goods can be freely exchanged without interference all over the United

States and all over Great Britain and all over France, etc., because if

you were to set up tolls and interferences with exchange _within_ the

country the total wealth of the country would necessarily be diminished.

Now the Free Traders extended this principle to foreign trade. They

said: “If the foreigner comes to us with something which he can sell

to us cheaper than we can make it ourselves that is an advantage to

us, and it is short-sighted to interfere with it under the idea that

we are benefiting the existing trade which is threatened by foreign

competition. For it means that we are producing something with

difficulty which we could get with much less work if we turned our

attention to things which we can produce with ease. Or, again, it means

that with the same amount of work devoted to things we make well and

exchange against the foreigner’s goods we shall get much more of the

things which the foreigner can make more easily than we can.”

If we take a concrete example we shall see what the Free Traders’

argument means.

Supposing people in this country had never heard of foreign wine, but

had to make their wine out of their own grapes grown in hot-houses,

and at great expense, the wine coming, let us say, to £1 a gallon.

Meanwhile we are producing easily great quantities of coal because

we have great coal-mines near the surface. We come to hear of people

living in another climate who can grow grapes easily in the open,

who need much less labour and capital to ripen them than we do in

our artificial way in hot-houses, and who can therefore send us wine

at 10s. a gallon. Then we can get for each £1 worth of labour and

capital twice as much wine as we got before. Instead of wasting our

time artificially growing grapes in hot-houses to make our wine, let

the people who used to work in the hot-houses become coal-miners,

so that more coal may be produced and this extra coal exchanged for

foreign wine. A pound’s worth of labour and capital in coal will get

us 2 gallons of wine from the foreigner when the same amount of labour

and capital used in making the wine ourselves would only get us one

gallon. Let the capital that used to keep up the hot-houses be spent in

developing mines, and we shall find as a result that we are as rich as

ever we used to be in coal and richer in wine. Our total wealth will

be increased.

In the particular case of the English dispute about Free Trade and

Protection not wine but a much more important thing was concerned,

namely food; and that was what gave the political discussion its

practical value and made it so violent. It is also because food was in

question that the Free Traders won, and that England was, for a whole

lifetime, up to the Great War, a Free Trade country--that is, a country

allowing all foreign produce to come in and compete on equal terms with

home produce.

This country, at the beginning of the discussion a hundred years ago,

was already producing great quantities of manufactured goods: cloth

and machinery, ships and so on. It also produced on its fields the

wheat and meat and dairy produce with which it fed itself. But as the

population increased the amount of food being produced on the soil of

England, though getting larger in the total, got smaller in proportion

to the rapidly increasing population. Therefore there was a danger of

its getting dearer. The Free Traders said: “Let foreign food come in

free. If it is produced in climates where for the same amount of labour

you can get more wheat and more meat and more dairy produce then, of

course, many of our agricultural people will have to give up working

on the land. But they can take to manufacturing, and the total amount

of food which the English will get for so much labour on their part

will be greater. Where an agricultural labourer working an hour, for

instance, can get a pound’s weight of food, the same man working one

hour in a factory will get, say, by exchange of the manufacture against

foreign food, two pounds of food, if we allow all foreign food to come

in free.”

These Free Trade arguments look, when they are first studied, not

only simple and clear, but unanswerable, and indeed most educated

men--nearly all educated men--in Queen Victoria’s reign, thought they

_were_ unanswerable, and that Protectionists here at home (who were

no longer allowed to put their theories into laws) and Protectionists

abroad who had kept up tariffs against foreign trade, were simply

ignorant and foolish men who did not properly understand the elements

of Economic Science.

To see whether the Free Traders were right or wrong in these ideas, let

us next turn to the arguments with which the Protectionists met them.

These arguments were of two kinds:--

(_a_) There were Protectionists who said: “We cannot follow all these

elaborate abstract discussions about a science called Economics; we are

practical men with plenty of common sense and experience, and all we

know is that if the foreigner comes in free we shall be ruined. He can

sell his wheat at such a price that our farmers will lose on it. Our

labourers will leave the land, the rents paid to our landlords will

vanish. You will thus ruin English wealth altogether.”

(_b_) There was another kind of Protectionist who said: “You Free

Traders take for granted, and depend upon, one capital point, to wit,

_that the labour now employed in a particular form of production, and

the capital employed in it, both of which will be destroyed by Free

Trade, can be used more profitably in some other form of Production_.

But we, the Protectionists, say that, in the particular case in

question, they would _not_ be used more profitably. We say that, in

point of fact, things being as they are, the national character being

what it is, the arrangements of our English society and its traditions

being what we know them to be, the ruined industry will go on getting

worse and worse, artificially supported by relief from the community

outside it, the farmer losing year after year and still hanging on, the

land going back to weeds and marsh, the buildings falling down, and so

forth. _We_ say that, though it may theoretically be possible to use in

other ways the labour and capital thus displaced, in practice you will

destroy more wealth than you will create.”

These two kinds of arguments on the Protectionist side are still to be

heard everywhere to-day.

It ought to be perfectly clear to anyone who thinks about the matter

at all that argument (_a_) was nonsense, for people and capital driven

out of an industry ill suited to our present conditions are not

thereby destroyed. They may very well find employment producing more

total wealth in another. But argument (_b_) was a good argument _if the

statement about the impossibility of changing from one trade to another

were in practice true_. The whole discussion really turned upon the

last point.

Unfortunately for the Protectionists, those who defended their cause

in this country nearly all used argument (_a_), and were very properly

derided as fools by the Free Traders. Argument (_b_) was only used by

a comparatively small number of thoughtful men and they were under

this disadvantage--that they were arguing with regard to a possible or

probable future with no past experience to guide them, and that many

years must pass before it could be discovered whether, in practice,

what they said was true or false; whether in practice the ruin of

English agriculture would diminish the well-being of England as a whole

or not.

Further, the population continued to increase at a great rate, and that

all in the towns and on the coal-fields. Our manufacturing productions

went up and up and up, the total wealth of the country enormously

increased, and these processes hid and made to seem insignificant the

corresponding decay of the fields. We had no need for Protection in any

domestic manufactured goods; we had begun to use coal before anybody

else; we had developed machinery before anybody else. The only thing

which there could be any point in protecting was agriculture, and that

would have meant dearer food for the wage-earners in the towns.

The great consequence was that Free Trade won hands down, and for a

long time all its opponents, however distinguished or reasonable, were

laughed at.

But if we wish to be worthy students of Economic Science we

cannot dismiss the quarrel so simply. There is such a thing as a

strong _economic_ argument in favour of Protection in particular

circumstances. The practical proof of this truth is the immense

increase in wealth which took place in the German Empire during the

thirty years before the Great War, which increase exactly corresponded

with a highly protective tariff. The same thing happened in the United

States at the same time. But the theoretical argument in favour

of Protection is much better, because the increase of wealth in

Germany and the United States under Protection might be due to other

causes, whilst it can be shown by _reason_ that Protection itself, in

particular cases, increases the total national wealth. With the proof

of this I will end the present chapter.

We have seen that the following formula is true:--_Freedom of exchange

tends to increase the total amount of wealth of all that area which it

covers._

But what gives the argument for Protection, in special cases, its value

is, as we saw on page 64, a second Formula equally true. Though freedom

of exchange tends to increase the total wealth of an area over which

it extends, _yet it does not tend to increase the wealth of every part

of that area_. Therefore, if a part of the area over which freedom of

exchange extends finds itself impoverished by the process, it may be

enriched by interfering with freedom of exchange over the boundaries of

its own special part.

Therein lies the whole argument for Protection in particular cases.

Let us take for example three islands, two close together and one far

away and prove the case by figures.

[Illustration: FIG. 1.]

[Illustration: FIG. 2.]

We will number them A, B, C. Island A is full of iron ore. Island B is

full of coal. Island C is also full of iron ore, like No. A, but it is

a long way off.

Iron ore naturally comes to the coal area to be smelted, because, being

heavier, it can be carried in smaller bulk. It is cheaper to bring iron

ore to coal than coal to iron ore. If all three islands belong to the

same realm what will happen is quite clear. Island B will import iron

ore from Island A and will smelt it and turn it into pig-iron and steel

and iron manufactures of all kinds, while Island C, a long way off,

will remain unused. We will suppose the climate of No. C to be bleak,

the soil bad, and the people there, since they cannot sell their iron

ore on account of the distance at which they stand, make a very poor

livelihood out of grazing a few cattle.

Let us suppose that the amount of iron ore imported every year by No. B

from No. A is worth £10 million. This of course has to be paid for. In

other words, Island No. B has got to export manufactured goods in iron

and steel back to Island No. A as payment for the iron ore which No. B

imports for smelting. It also has to pay for the freight on the iron

ore from No. A, that is, for the cost of bringing it over the sea to

No. B. Let us suppose this cost to be one million. The total value of

the iron goods produced on No. B, after being smelted with the coal of

No. B, is, let us say, £30 million. Of this, £11 million goes back for

the cost of carrying the ore from Island No. A and for its purchase.

Meanwhile we may neglect economic values of Island No. C, because the

few wretched inhabitants and their handful of cattle hardly count.

Here, then, we have a wealth of £30,000,000 in manufactured iron goods,

of which £10,000,000 goes to Island No. A and £19,000,000 to Island

No. B, and £1 million to whoever carries the ore in ships. If you were

estimating the wealth of the whole realm made up of the three islands,

A, B and C, you would say: “The wealth of these people consists in

manufactured iron and steel goods. It is equivalent to £30,000,000 a

year, of which some £10,000,000 is revenue to Island A and £19,000,000

is revenue to Island B and £1 million earned in freights. The wealth of

Island C is negligible.” Well and good.

Now supposing the political conditions to change. Islands B and C

belong to one realm in future but Island A has become a foreigner. The

realm to which Islands B and C belong turns Protectionist and sets up a

barrier in the shape of a tariff against iron ore coming from abroad.

We have seen that the cost of carrying iron ore from No. A to No. B

was £1,000,000. No. C being much farther away from No. B, let us say

that the cost of carrying is £5,000,000, but it is carried by subjects

of the realm. The tariff put up by the realm to which Island B and C

belong is what is called “prohibitive”--that is, it is so high that it

keeps the iron ore of No. A out altogether, and the smelters on Island

No. B are bound to get their iron ore from that distant Island C. Let

us see what happens.

Island No. B has now got to pay a freight, that is, cost of bringing

the iron ore, five times as much as it used to be. Instead of paying

£11,000,000 for its ore (£10,000,000 at the mine and £1,000,000 for

carriage) it is now paying £15,000,000 (£10,000,000 at the mine and

£5,000,000 for carriage). It still makes £30,000,000 worth of goods a

year, but it only has £15,000,000 left over for its own income, instead

of the £19,000,000 which it used to have. It is thus impoverished.

But Island C, from having hardly any income at all, has now an income

of £10,000,000 a year. Island A is ruined. Protection has put the

getting of the ore under unnatural conditions. It has compelled the

coal-owners to go much farther off for their ore than they need

have done under Free Trade. The total wealth of all three islands

altogether is less than it used to be by £4,000,000, for they are

adding £4,000,000 extra to the cost of getting the raw material. _But

the total combined wealth of B and C, even if they pay foreign ships

to bring the ore, is now greater than it used to be under the old

Free Trade._ No. B has £15,000,000; No. C has £10,000,000--the total

is £25,000,000. If they pay their own sailors to bring the ore it is

£30,000,000. Under the old conditions the total of B and C alone was

only £19,000,000. Island A is ruined and the total wealth of the whole

system is less, but the Protectionists of the realm, which now only

includes B and C, are quite indifferent to that. They are thinking of

the wealth of their common country, and are indifferent to the ruin of

others, and their policy is _increasing_ the wealth of their common

country at the expense of foreigners.

In that example lies the argument for Protection. _If Island C could

do something other than mine ore, if it had other forms of wealth,

or by ingenuity or luck could discover some new fields in which its

activities might develop, then the argument for Protection in this case

would break down._ Island B would say: “Let me get my iron ore cheap

from the foreigner in Island A, and do you, on Island C, develop (let

us say) dairy farming, or something else which I cannot do and which

Island B cannot do. In that way we shall all three benefit, and the

common realm, consisting of Island B and Island C, will be richer than

ever. Island B will have all its old profit of £19,000,000 (instead of

being reduced to £15,000,000), and Island C can well develop a dairy

produce of more than £7,000,000.”

One ought to be able to see quite clearly from an example like this

how true it is that _the argument in favour of Protection applies to

particular cases only, and turns entirely upon whether an undeveloped

part of the energies of the community can be turned into new channels

or not_.

We have an excellent, though small, example to hand in England to-day.

The English people have to send abroad about £4 worth of goods every

year per family for pig-meat, that is, bacon and hams and the rest.

There is no reason why they should do this. They could produce the

pigs on their own farms without drawing a single person from the

factories and keep this mass of manufactured goods for their own use.

The reason we are in this state in the matter of pig-meat is that our

agriculture has generally got into such a hole that people will not

bestir themselves to produce enough pigs. So here is a definite case in

point, and only experiment could show whether Protection would pay here

or would not pay.

Protection ought to take the form of saying:--

“Any pig-meat from abroad must pay such and such a sum per pound at

the ports as it enters.” This would raise the price of pig-meat in

England somewhat. If it raised the price to such an amount that the

English people as a whole had to pay £2 more a family, _and if at that

increased rate of price agricultural people could be stimulated into

feeding the right amount of pigs and taking the necessary trouble to

keep the supply going_, then the total wealth of the community would

be increased £2 per family. Even if the price had to increase till

each family on the average paid £3 more, or £3 10s. 0d. more, it would

still be of advantage to the nation _on condition that the higher price

really did make the farmers breed enough pigs, without lessening their

production of other things_. But if, when the charge on the community

had risen to £4 per family, it did not stimulate the production of pigs

in this country sufficiently to supply the market, then your Protection

of Pigs would be run at a loss.

BANKING

During the last two hundred and fifty years there has arisen, among

other modern economic institutions, the institution of _Banking_.

It has origins much older; indeed, people did something of the kind

at _all_ times, but Banking as a fully developed institution grew up

in this comparatively short time: since the middle of the seventeenth

century. It began in Holland and England and spread to other countries.

Like other modern institutions, it only became really important in

the latter half of this period, that is, during the last hundred

years or so; quite recently--in the last fifty years--it has become

of such supreme importance by the mastery it has got over the whole

commonwealth that everybody ought to try to understand its character.

The Power of the Banks comes to-day into the lives of all of us and

largely affects the relations between different nations. Indeed, it has

become so powerful quite lately that one of the principal things we

have to watch in politics is the enmity which the power of the Banks

has aroused and the way in which that power is being attacked.

The essential of banking lies in these two combined ideas: (1) that a

man will leave his money in custody of another man when that other man

has better opportunities for keeping it safe than he has; (2) that the

money so left in custody _may_ be used by the custodian of the money

without the real owner being very anxious what is being done with it,

so long as he is certain to get it when he wants it.

The putting together of these two ideas--which are ideas naturally

arising in everybody’s mind--is the origin of all banking, and the

moral basis upon which banking reposes.

A man has £1,000 in gold. He has to travel or to go abroad on a war,

or is not certain of the safety of so large a sum if it is kept in his

house. He therefore gives it into the custody of a man whom he can

trust, and who, on account of special circumstances, can keep it more

securely than he himself can. What the owner of the £1,000 wants in

the transaction is to be certain of getting a part or the whole of his

money whenever he may need it. He does not want the individual pieces

of money. So long as he can get the value of them _or of part of them_

at any moment from the man to whom he gave custody of the original sum

he is satisfied.

A good many other people feel the same necessity. The man who has

special opportunities for looking after _all_ their sums of money

collects them together and has them in his strong box in safe keeping.

Those who have acted thus would be very angry if they found their

money had been lost, or that when they came to ask for £20 or £100 out

of their thousand pounds--needing such a sum for the transactions of

the moment--the man in whose custody the whole lay was unable to let

them have the £20 or £100 required. But so long as the _depositor_

(as he is called, that is, the man who hands over his money for safe

custody) finds himself, in practice, always getting the whole or any

part of his deposit on demand, he is content; _and will not be annoyed

to find that the person in whose custody he left the money has been

using it in the meantime_.

For instance: I might leave £1,000 in gold in the custody of someone

who is better able than I to prevent its being stolen. I am saved all

the trouble of looking after it, and I can call on a part of it or all

of it whenever I like. If there were only myself leaving it thus with

one friend, and it was a particular transaction between us two, that

friend would be acting wrongly if he were to take my £1,000 and buy a

ship with it, say, and do trade. No doubt he would earn a profit, and

could say to me when I came back for £100 of it: “I am sorry that I

cannot give you your £100, but I have used the money, without telling

you, to buy a ship. The ship will earn a profit of £200 at the end of

the year, and then you can have back your £100 if you like, and if you

press me, I will even sell the ship and you shall have back the whole

of your £1,000.”

In that case I should naturally answer: “No one gave you leave to use

my money. You have embezzled it, and you have acted like a thief.”

But when a very great number of men entrust their money in this

fashion, and do not specially stipulate that it should be left

untouched, when there is a sort of silent understanding that, if

whenever they want it, the money will be forthcoming, then they do not

ask too closely what has been done with the whole of the sum in the

custodian’s hands. For if _very many_ people are thus “banking” their

money with one safe custodian only a certain proportion will _at any

one time_ want their money, and the rest can be used without danger of

the “banker’s” failing to meet any particular demand. Thus banking,

that is, the use of other peoples’ money, arises and becomes a natural

process because it is of mutual advantage. The Banker can earn profits

with that average amount of money which always remains in his hands,

the depositors have their money safely looked after and may even share

in the profit.

A hundred men, let us say, have given £1,000 each into the hands of

such a custodian, who has come to be called their “Banker.” The total

sum of money in this man’s hands is £100,000. It is found in practice,

over the average of a number of years, that this hundred men do not

“draw” upon (that is, ask for their money to be paid out to them by)

their banker more than to the extent of, let us say, £100 every month

each, and it is also found that, while they need this £100 to pay

wages or bills or what not, they also come back with the money they

earn (say, £120 per month, on the average) and give it back to their

banker for safe keeping. In several years of this practice the banker

discovers that he must have about 100 times £100, that is £10,000, in

free cash to meet the demands upon him, and that he gets rather more

put into his custody in the same period of a month, year in and year

out. It follows that he always has about £90,000 in gold doing nothing

the whole time. He says to himself: “Why should I not use this money

to buy instruments of production--ships or ploughs, or machinery or

what not--and produce more wealth? It will not hurt those who have

deposited it with me, for I have found that, _on the average_, they

never want more than a tenth of their money out at the same time (and

they are also perpetually paying in more money to me--so that they and

I are quite safe), and if I make a good profit by the use of the things

I shall have bought with this £90,000 I can offer them part of the

profit. So we are both benefited.”

That is what the banker began by doing at the very origins of this

institution of banking. It was a little odd. It was not quite

straightforward. But the depositors, most of them, knew what was going

on, and at any rate did not protest. And if, when a profit was made out

of their combined money, they got some of that profit, they were glad

enough to see that their money had been put to some use and that they

had become richer by its use; while if they had kept it to themselves

in scattered small amounts it would not have made them any richer.

In England we can trace the origins of a great many banks, and of the

fortunes of their owners, proceeding along these lines. For instance:

there was a family of silversmiths rather more than two hundred years

ago. They had a shop in which silver objects were bought and sold, and

they also had gold plate to buy and sell. They had strong-boxes in

which these things were kept, and they paid money to men who guarded

these strong-boxes. It was a natural thing for people to go to this

shop and say: “I have here a thousand pounds in gold which is not very

safe at home. Will you look after it for me, on condition of course

that I may call for any amount of it when I want it and what will you

charge for your trouble?” The silversmiths said: “Yes, we will do this,

we will charge nothing,” and in that way they got hold of very large

sums which people left with them. They found, as we have just seen,

that in practice, year after year, only a certain amount of the sums

were required of them at any one time, and rather than leave the big

balance lying idle they used it for buying useful things which would

produce more wealth. They lent the money sometimes to the State for its

purposes, that is, to the King of the time. Sometimes they employed it

in other ways which earned a profit. The people who left the money

with them always found that they could get back whatever they wanted

when they asked for it, and they were content. That is how banking

arose.

Another example of which I know the history and which is very

interesting is that of a squire in the West of England who lived rather

less than two hundred years ago and has given his name to one of our

great banks still existing to-day. This squire was a rich man who

had many friends coming to his table. He had the reputation of good

judgment and his friends would say: “I will leave this sum of money in

your custody,” for they knew that he would be able to put it to good

use and give them part of the profit. Thus, looking after the money of

neighbours, he came to look after the money of a great many people whom

his neighbours recommended, and at last had hundreds of “clients,” as

the phrase went--that is, of people who would leave their money with

him, knowing that he would earn a profit both for himself and for them;

at the same time the money would be safely kept, and they might call

for a portion of it whenever they wanted it.