What _is_ necessary is plainly the power to produce these things in

large quantities as they are required. And this power is furnished by

the durable instruments of production, which we thus rightly regard as

the true representatives of modern capital. If it is argued that this

power to produce consumable goods may be regarded as being _in effect_

a store of consumable goods, it must be sternly replied that this is

the language of symbolism, not of science, and that symbolism is

highly dangerous in this connection. The false conception of capital

as essentially a store of consumers' goods has led and still leads to

many serious fallacies. It was this that gave rise to the notorious

doctrine of the Wages Fund; the notion that the sum which can at any

time be paid in wages is equal to the quantity of capital, _alias_

consumable goods, which happens to exist. To this day it blocks, with

an undergrowth of obscurantist controversies, the way to a

straightforward account of the problem of trade cycles.

§5. _The Essence of Waiting_. But it is with positive conclusions that

we must here concern ourselves. What is the essence of this waiting,

as we have called it? What are its results from the point of view of

the community? The individual, who saves and lends, waits in the

obvious sense that he postpones consumption. He foregoes his right to

purchase now a quantity of consumers' goods in consideration of the

prospect of purchasing a larger quantity of such things in the

future. From the standpoint of the whole community, there is a similar

postponement of consumption, though it need not commence so soon. The

store of consumable goods is what it is: the quantity of goods in

_process_ of manufacture, which will shortly be coming forward, is

also what it is. For some time, therefore, a sudden access of saving

cannot affect the quantity of goods available for consumption; and if,

in fact, they should be consumed less rapidly, that will represent an

unfortunate defect, not an essential condition of a smoothly working

system. The _necessary_ consequence comes later. The increased saving

will cause labor, materials, land, agents of production generally, to

be devoted to distant purposes. Men will be set to work producing

durable goods, largely durable instruments of production like ships or

railways or factories or plant. If the increased saving is

considerable, the labor, materials, etc., required for these purposes

will be withdrawn even under our present system, as under a smoothly

working system they clearly must be, from the production of other and

more immediately consumable things. Hence, some time later, the

supplies of consumable things will be diminished, while at a later

period still they will be more than correspondingly increased as the

result of the assistance of the new durable instruments. That is the

essence of saving from the social standpoint. An early future is

sacrificed to a more remote future. The aggregate consumable income of

the present is unaffected; the aggregate consumable income of the near

future is actually diminished; it is not until at least some years

later that the aggregate consumable income is increased.

§6. _Individual and Social Saving_. This conclusion is important: but

there is an obvious misinterpretation against which it will be well to

guard. It is customary for social moralists to preach thrift and

saving as a public duty, and to impart to their appeals a special note

of urgency in times like the present, when, as the result of the havoc

of the war, destitution is widespread over Europe. Now obviously these

advisers do not mean to recommend something which will impoverish the

world next year and the year after and the benefit of which will

accrue only in a distant future: it is the immediate urgency of the

world's needs which is rather the substance of their case. Nor would

it be right to conclude that these wise men are the victims of a

delusion, and advocate a course, the consequence of which they do not

understand. The explanation of the paradox is simple. The more the

community as a whole saves now, the less in the near future will be

the aggregate consumable income of the whole community: but not of the

_remainder_ of the community, exclusive of the savers. It is the saver

who must wait, whose consumption must be postponed to perhaps a

distant future; but _at no time_ does his saving result in a smaller

income of consumable goods for other people. The aggregate consumable

income of the near future will be diminished, but it may be better

distributed, and it may consist of things of a different _kind_. For

consumers' goods, we must remember, comprise champagne and motor cars

as well as food and clothes; and, if a rich man saves, it may be

purely articles of luxury, the production of which will shortly be

diminished. Moreover, if his saving has the effect of transferring

purchasing power to impoverished people, like those in Central Europe,

it will not be devoted to a distant future; it will very likely be

devoted to quite immediate ends. In other words, it may not result in

any "creation of capital"; it may not represent any saving on the part

of the community as a whole. A relatively rich man waits, and a

relatively poor man _anticipates_ his income to a corresponding

extent; and it is precisely this that is so urgently desirable in a

time of widespread poverty and chaos.

This is no matter of hair-splitting, and making plain things

obscure. While it is always better for the _rest_ of us that an

individual, who can afford to save, should save rather than spend

(though it might be better for us still if we could have his money to

spend ourselves) and while this is the more important the greater is

the poverty which generally prevails; yet, as a community we cannot

save so much, we _ought_ not to save so much, when we are impoverished

as when we are prosperous. It is vital to appreciate this truth,

because, as we shall see, by no means all the saving of the world is

done by individuals. There are many forms of "collective saving,"

which take place in actual fact; still more which we are often urged

to undertake. And it is of practical importance to realize that the

very considerations, which call most urgently for individual thrift,

forbid a great indulgence in such projects. A time of national poverty

is not a time when it is suitable for the State to embark on large

schemes of capital development: we require our resources for more

immediate ends. Faced with such problems, our practical sense may no

doubt suffice to keep us straight; but it is apt to do so at the

expense of a complete inversion of the real issues. If, for instance,

we call for Governmental retrenchment on what we deem extravagant

policies of housing and education, we usually speak as though they

represented the profligacy of a spendthrift as contrasted with the

saving that is indispensable. The truth is rather that these policies

represent a saving, an investment for future purposes, which may

conceivably be greater (this must not be taken as representing my

personal opinion) than the community can properly afford. This is

another instance of what I mean by looking at the problem of capital

the right way up.

§7. _The Necessity of Interest_. It is only now that we are in a

position to appreciate the true functions of a rate of interest, and

the nature of its claims to be regarded as a "real cost." Interest, it

is sometimes said, is necessary to provide for the future. It is far

more certain that interest is necessary to provide for the present. It

is a matter of legitimate doubt how far it is necessary to _pay_

interest to secure a supply of capital; there is no doubt at all that

it is necessary to _charge_ interest to limit the demand for it. As we

saw in Chapter I, a world socialist commonwealth would require to

retain a rate of interest, if only as a matter of bookkeeping, in

order to choose between the various capital undertakings that were

technically possible. And this is the primary function which the fate

of interest fulfils in our present-day society. It separates the sheep

from the goats. It serves as a screen, by means of which capital

projects are sifted, and through which only those are allowed to pass

which will benefit the future in a high degree. For this essential

purpose it is hard to imagine how a better instrument could be

devised.

§8. _The Supply of Capital_. Let us dwell for a moment on this image

of a screen, or sieve. One condition of a good sieve is that its

meshes should all be of the same size. This condition the rate of

interest almost perfectly fulfils. But it is also important that the

meshes should be of the _right_ size. Whether this is true of the

actual rate of interest is a far more doubtful matter. It is, indeed,

plain that it is not altogether devoid of merit in this respect. In

times of general world poverty, like those which follow upon a great

war, it is desirable, as has been argued, that more of our productive

resources should be devoted to immediately useful purposes, and a

smaller portion dedicated to a distant future. This readjustment the

rate of interest helps to bring about. For it rises to a higher

level, and there is accordingly a strong inducement to all

manufacturers and traders to economize their use of capital, and thus

to set free productive resources for more urgent needs. But, while the

meshes of the sieve, as it were, contract in times when it is

desirable that they should contract, we have no reason for supposing

that they will contract in just the degree that is desired, neither

more nor less; or, indeed, that at any time they approximate to the

right size. We in the twentieth century owe much of the material

wealth that we enjoy to the fact that over the last century men saved

as largely as they did. But our natural gratitude should not restrain

us from doubting whether they were really well advised to do so. If we

ask the question _how_ they managed to do so, our doubts are

deepened. For first place among the explanations must be assigned to

the inequality in the then distribution of wealth. It was because many

men in England were rich enough to save that our railways were built,

and the resources of new Continents were opened up. But England, a

century or even half a century ago, was not really a rich

community. And if the national income in those days had been

distributed more evenly among the people, can we doubt that they would

have spent a far larger proportion of it on immediate needs; can we

doubt that they would have been right to do so? We may rather doubt,

in view of the reactions of poverty on physical and mental efficiency,

on social harmony, even possibly on population, whether we to-day

would have been really injured as much as might appear. How, then, can

we suppose that the sum of the amounts which it suits individuals to

save will bear any close relation to the resources which the community

can properly devote to future ends? Are we to regard an unjust

distribution of wealth as a mysterious dispensation of Providence for

securing perfect harmony between the future and the present? The

point need not be labored further. There are no grounds for assuming

that we save, as a community, even roughly what we ought to save. If

we wish to believe we do, we must turn for support from economics to

theology.

It is important to be clear upon this issue in order to distinguish it

from another, with which it sometimes seems to be confused. This is

the question, briefly outlined in Chapter II, of the effect of changes

in the rate of interest on the supply of capital. As was there

indicated, there are good reasons for supposing that a fall in the

rate of interest would induce some people to save more, and

conversely. But the balance of probability is in favor of the

conclusion that the _net_ effect of changes in the rate of interest,

though perhaps slight, is usually of the more ordinary kind. The

decisive argument in this connection is the fact, upon which we have

just touched, that savings are supplied largely by people who are

relatively rich, and who become richer when the rate of interest

rises. For at this point it is necessary to be careful. It is easy to

slide from the above conclusion into an argument of the following

kind. A higher rate of interest leads to more saving; it is thus

necessary to _evoke_ more saving; it is thus required as an

_incentive_ to induce people to incur the _sacrifice_ of waiting; this

sacrifice represents the "real cost" for which interest is paid.

This terminology of incentive, inducement and sacrifice is of very

dubious validity. A rich man, who is made richer by a rise in the rate

of interest, will probably save more, but it will be rather because he

has become richer than because he is tempted by the higher rate: and

the less we talk about his sacrifice the better. Nor is it clear that

the attraction of a high rate of interest is an operative factor on

the mind of a man to whom saving means a real sacrifice of immediate

comfort or enjoyment. Certainly it is only one among many factors, and

seldom an important one. A really poor man will think not so much of

the annual income which will accrue from his savings, as of the

capital sum upon which he or his family can fall back if a rainy day

should come. And for this purpose he might save as much as he saves

now, even if there were no interest to be obtained thereby. He might

even be prepared to lend what he had saved, at least to banks (a

deposit with a bank is in effect a loan), for the mere advantage of

safe custody. The people who save rather for the sake of the capital

sum that can be realized than for that of the annual interest are very

numerous, and probably include many men in receipt of quite

considerable earned incomes. Moreover, those who consider mainly the

future annual income which their savings will yield them, are usually

more concerned with its absolute amount than with the ratio it bears

to the amount they must save in order to acquire it. For this reason,

as has been often recognized, they may save less when the rate of

interest rises, since a smaller quantity of savings will insure to

them the future annual income they desire to obtain. There is no need

to be dogmatic upon any of these points. The psychology of saving is

both complex and obscure. Our conclusion must be the negative one that

we have insufficient evidence to warrant the assertion that the

particular rate of interest which happens to prevail is a measure of

the sacrifice involved in saving, even in the case of what we might

regard as the "marginal saving." And, if we cannot assert this, we

must be careful not to assume it as the basis of other arguments, or

as part of a general analysis of price or exchange value.

It is of some interest to observe that the difficulties which our

world socialist commonwealth would encounter if it attempted to

dispense with the rate of interest, would not necessarily include that

of obtaining a supply of capital. It might, indeed, not find it easy

to determine the proportions in which it should allocate its

productive resources between immediate and distant ends. Our present

system cannot be said to have evolved satisfactory principles for the

solution of this question; and the socialist commonwealth would have

to work out its own solution. But when it directed that labor and

materials should be devoted to purposes of long-period utility, there

would be an automatic collective saving, of which no one would be

conscious as an individual sacrifice. Even at the present time, our

capital is not supplied entirely by the savings of individuals, but to

an extent, which though quite incalculable is yet certainly

considerable, by involuntary saving of an essentially similar type to

the above.

§9. _Involuntary Saving_. When a municipality embarks on a municipal

tramways scheme or any other industrial enterprise, and pays off by

means of a sinking-fund the capital which it borrows in the first

instance, the proceeding amounts, as the defenders of municipal

trading have rightly claimed, to a compulsory and unconscious saving

on the part of the citizens. Their consumption has been postponed

willy-nilly as the result of the increased rates or the high charges

which they have had to pay; and, when the subscribers to the original

loan have been paid off, the capital of the community is enhanced to

the extent of that loan. Central governments might similarly increase

the supply of capital by devoting annual revenue to capital purposes;

though their actual record, as it happens, is mainly of a different

kind. But what is chiefly a possibility in the case of Governments has

actually been carried out on an enormous scale by other institutions.

The development of the joint-stock company system has introduced a new

factor into the problem of the supply of capital, which is of immense

though but dimly perceived importance. The directors of a company are

technically no more than the servants of the shareholders. It is the

profit of the shareholders that it is the directors' duty to promote

with a single mind, and the whole capital of the concern, including

its reserves both open and concealed, is the shareholders' exclusive

property. But realities have a way of differing from forms, and just

as in political affairs it is common to regard the State as a very

different thing to the people who compose it, as a sublime entity with

a separate existence of its own, so directors are apt to distinguish

between the company and the shareholders. It is the company to which

they owe allegiance. To pay away in dividends to shareholders money

which they could employ in extending the business or strengthening the

position of the company appears to some directors a necessity hardly

less unpleasant than an increased wages bill, or an Excess Profits

Duty. Concessions must indeed be made to the shareholders' rapacity:

but when something has been done in this direction, dust can easily be

thrown in their not very observant eyes. Reserves, which within

limits are a necessity of sound finance, can be accumulated beyond

those limits, and, when the further limits of an extreme but just

arguable conservatism have been passed, there remain the innumerable

devices, known to every resourceful Board, of hidden reserves, the

secret of which is unmenaced by the meager information of a

balance-sheet. In all this the shareholder, as the directors

occasionally assure themselves, has no real grievance, for he will

gain in the long run, from the appreciation in the capital value of

his shares, all and perhaps more than all that he foregoes in the

meantime in the way of dividends.

In the long run the shareholder is not injured; but in the meantime he

is in effect compelled, without any consciousness of the proceeding,

to save and to reinvest in the company a portion of the dividends,

which he might otherwise have spent. The reserves which are

accumulated are not allowed to lie idle: they are employed either in

what are really capital extensions of the business, or in the purchase

of outside securities, and in either case they represent an increase

in the total supply of capital. The principal which these proceedings

represent is capable of indefinite extension.

But however possible it might be to secure a supply of capital without

the inducement of a rate of interest, that rate is indispensable for

dealing with the demand. It is no good saying, "Three per cent seems

a fair rate of interest; let us try and limit it to that." Given the

amount of savings which are supplied, the rate of interest must be

allowed to reach whatever figure is necessary to confine the demand to

that amount. Given the quantity of resources which you have available

for future needs, the meshes of the sieve must be made as narrow as is

necessary to confine the projects that pass through within those

limits. And so, indeed, it becomes necessary for any particular

business to pay for its capital interest at the market rate, not so

much to secure the saving of it as to secure its allocation from the

common pool.

§10. _Interest and Distribution_. It is unavoidable that this interest

should accrue to whoever it is that supplies the capital. If the

capital were supplied, as it might conceivably be, collectively by the

community, the interest would accrue to the community, and all would

be well. But as things are, the capital is supplied mainly by the

savings of individuals, and largely by individuals confined to a

relatively narrow class. The profits of Capital have thus a vital

influence on the very serious matter of the distribution of wealth

between social classes. Now, as experience shows, there is no element

in profits which is capable of such radical change in so short a space

of time, as is the rate of interest. Even before the war it had become

hard for people in Great Britain to realize that 3 per cent Consols

had stood at 114 as late as 1896. "How blest," wrote two cynical

satirists of society in the same period:

"How blest the prudent man, the maiden pure,

Whose income is both ample and secure,

Arising from Consolidated Three

Per cent Annuities, paid quarterly."[1]

It is impossible to read those lines now without a sense of irony,

different from that which they were intended to convey.

Not only is the rate of interest now double what it was a generation

ago; we have no good reason to suppose that the present high level

will quickly be reduced. The havoc of the war, of which the

widespread poverty of Europe and the huge debts of Governments are but

two different aspects, makes it almost inevitable that the rate should

rule high in the present decade. This cannot but exercise a profound

influence, of a most disquieting character on the general level of

profits, and to a lesser extent (for here we must allow for the

effects of high taxation) on the distribution of real wealth between

social classes. Here we are on the threshold of tremendous issues. We

almost feel the earth quake beneath our feet. We hear the muffled roar

of far-reaching social controversy:

"And 'mid this tumult Kubla heard from far

Ancestral voices prophesying war."

[Footnote 1: _Narcissus_, by Samuel Butler and Henry Festing Jones.]

CHAPTER IX

LABOR

§1. _A Retrospect on Laissez-faire_. When, a century and a half ago,

the foundations were being laid in the Western world of systematic

economic theory, the public attention was much occupied with a

subject, which indeed has not ceased to hold it: that of the failings

of Governments. The general interest in that topic was shared by the

pioneers of economic thought, of whom, in Great Britain, Adam Smith

was the most notable. It was indeed their practical concern with the

concrete economic issues of the day which very naturally gave the

impetus to their scientific quest. It was hardly less natural that

they should have expressed their opinions on these concrete issues

with considerable emphasis.

Now the keynote of their practical conclusions was that Governments

were doing immense mischief by meddling with a great many matters,

which they would have done better to leave alone. In this they were in

general agreement with one another; incidentally--let there be no

mistake about it--they were right. But, as invariably happens in

public controversy, their opinions became crystallized in a compact

formula, or cry, with unduly sweeping implications. This was the cry

of "_laissez-faire_." Let Governments preserve law and order; and

leave the economic sphere alone. The economists picked no quarrel with

this formula; it served well enough for workaday purposes to indicate

the lines of policy which they rightly thought essential in their day.

The history of this cry is the history of every cry which has won a

wide acceptance from mankind. It did good work for perhaps half a

century; but then many crimes were committed in its name. The

instrument which had been forged to clear away a noxious tariff jungle

and the monstrous laws of Settlement, was turned against Lord

Shaftesbury and the Factory Acts. Not only was inaction recommended

to Governments as the highest wisdom; other institutions, like trade

unions, were warned off the economic grass. An ideal of perfect

competition became an idol to which much human flesh and blood were

sacrificed.

But, what is more to our present purpose, the idea took root of an

intimate association between the laws of economics and the policy of

_laissez-faire_. People who opposed some long-overdue measure of State

regulation believed themselves to be justified by the eternal verities

of economic law, and this claim even the advocates of the measure

seldom ventured to dispute. They took refuge rather in a conception of

economic law as a dangerous monster, whose claws must be clipped in

the interests of the higher good. This notion that all interference

with so-called "free competition," is a violation (though very likely

fully justified) of economic laws has sunk deep into our common

thought. So that to this day, whenever we see at work the hand of a

State department, a trust or a trade union, we are apt to say "Demand

and supply are here in abeyance," and possibly we add "A good thing

too." Since in the matter of wages, the hand of the trade union is

very generally evident, it is impossible to discuss the subject-matter

of this chapter, until we have rid our minds of this quite baseless

prepossession. To sweep away this cobweb, I urge the reader to recall

here the general tenor of the analysis of the preceding

chapters. Whether we were dealing with the price of an ordinary

commodity, with joint products, land or capital, we came across

relationships which seemed altogether more fundamental than our

present industrial system; nor, we may incidentally observe, were we

ever required to suppose that the present system was one of "perfect

competition." These relationships were almost invariably such that

even a world socialist commonwealth would find it necessary to

maintain them. It was not suggested, and most certainly it must not be

thought, that a world socialist commonwealth, or even a more modest

remodeling of the social order would not effect great changes,

possibly for good, and possibly for ill. The same economic laws might

be made to bear very different fruits, but they themselves would

remain unchanged. What is true in all these other fields--this should

be our predisposition--is not likely to be quite untrue in the field

of labor.

§2. _Ideas and Institutions_. Another point is worth noting here. We

are sometimes advised to distinguish sharply between "What should be"

and "What is"; often two very different things. The advice is

pertinent and useful, particularly in the sphere of sociology. But

our incorrigible habit of confusing the two things together is not

without justification, or at least excuse. For, in fact, they

gravitate towards one another with a force which is just as strong as

the capacity of man for understanding and controlling his

environment. When we have a system which is clearly bad, _and_ when we

see our way to make it better, we generally make the change however

tardily. Our sense of "What should be" thus reacts upon "What is."

Meanwhile, until we can make the system better, our appreciation of

"What is" affects our sense of "What should be." And the more so, as

we are sensible. For "What should be" is pre-eminently an affair of

relativity. A man may hold very strongly that equal pay to every

individual is desirable, as he puts it, as an ideal. But this will not

prevent him, in a world in which managers are paid far more than

manual workers, from maintaining hotly (at any rate, if he is

sensible) that to pay the manager of a particular concern a manual

worker's wage would be monstrously unfair. He would also argue that it

would be highly inexpedient. Equity and expediency are, in fact,

intricately intertwined in our sense of "What should be"; and our

sense of "What should be" in the particular is governed by our

knowledge of "What is" in the general.

These may seem unnecessary commonplaces. But they have a vital bearing

on the _modus operandi_ of economic laws. These laws do not work _in

vacuo_. They work through the medium of the acts of men. The acts of

men are greatly influenced by their institutions, and by their ideas

of right and wrong. Both institutions and ideas may serve to smooth

rather than obstruct the path of economic laws; because the laws may

represent either "what should be" in the general, or "what is" in the

general, and therefore "what should be" in the particular. This may

hold true even of a trade union or a sense of "fair wages." The

business of economic theory is not to justify a regime of

_laissez-faire_, still less to show the folly of bringing morals into

business. Its value is rather that it may help us, by improving our

understanding, to shape our institutions, and to adopt our moral

sentiments so as to promote the public welfare. With these general

notions in our minds, let us turn to see how stands the case with

Labor.

§3. _The General Wage Level_. The term Labor may be used in a broad or

in a narrow sense. It may be confined to weekly wage-earners: it may

be extended to include all those who work, as the phrase goes, "with

either hand or brain." It is with all classes of Labor, in the

broadest sense of the term, that we must here concern ourselves. It

will be convenient, however, in the first instance to ignore the

differences between them, and to consider the forces which determine

what we may regard as the general wage-level.

The general laws of supply and demand hold good. The wages of labor

tend to a level at which the demand is equal to the supply. For, if

the demand exceeds the supply, if, in other words, labor is scarce,

wages tend to rise, sooner or later in any case, and the more promptly

in proportion as the workpeople are organized. Conversely, if the

supply exceeds the demand, if in other Words there is general

unemployment, wages tend to fall, and the strongest trade unions

cannot resist the tendency, though they may delay it. Moreover, the

higher the wages that must be paid, the smaller, other things being

equal, is the demand for labor. For, even if we leave foreign

competition out of account, and consider, as it were, labor throughout

the world as a whole, the demand for labor is by no means

inelastic. It is derived along with the demand for the other agents of

production in the manner described in Chapter V. As was there shown,

the greater the supply of the other agents of production, the greater

is likely to be the demand for labor; but these other agents can be

substituted for labor in a great variety of ways, and an increase in

wages (unless accompanied by increased efficiency) will make it

profitable for employers to effect such a substitution, where it was

not profitable before. Thus, higher wages for the same labor

efficiency must stimulate the tendency for capital to act as a

substitute for labor at the expense necessarily (since the aggregate

supply of capital will not be increased thereby) of its tendency to

serve as a complement; and this must mean a decrease in the volume of

employment. Hence the power of labor to secure a general advance of

wages by concerted or simultaneous trade union action, applied if you

will, not merely to every industry, but to every country, is

necessarily very limited. Beyond a certain point, such a policy must

result in general unemployment; and, if pushed sufficiently far, in

unemployment so extensive that it would continue even in periods of

active trade. Such a policy could neither be maintained in practice

nor would it be a wise policy from the workers' point of view.

In other words, given on the one hand the conditions of the demand for

labor (i.e. the supply of capital, natural resources, business

ability, risk-bearing and knowledge of technical processes, etc.,

which happens to exist), and given on the other hand the supply of

labor (i.e. both the numbers of workpeople and their efficiency), the

wage-level in the long run is fairly rigidly determined. The

introduction of the phrase "in the long run" in this connection is apt

to provoke comment which may be pertinent, but may be misconceived.

The worker, it is pointed out, is deeply concerned with "the short

run" in which he has to live. It is very true; and it is this that

supplies one of the many justifications of trade unionism. To secure

for the workers advances of wages, which economic conditions justify,

sooner than would otherwise have been obtained, is certainly no

trivial or contemptible function. But it is none the less an illusion

to suppose that the general wage-level can be appreciably and

permanently raised by trade union action, except in so far as it

increases the efficiency of the workers or incidentally stimulates the

efficiency of the employers.

§4. _The Supply of Labor in General_. The efficiency of labor may be

regarded as affecting either the demand for labor on the one hand or

the supply of it on the other, according as we look at the matter from

the worker's or the employer's standpoint. The employer is concerned

with the labor costs per unit of his output, the worker is concerned

with the wages he receives. An increase in the efficiency of labor

may, and usually will, mean both a decrease in labor costs to the

employer and an increase in the earnings of the worker. It is thus

wholly to the good. But the effects of an increase in the supply of

labor in the sense of a growth in the numbers of the population are

far more dubious. Unaccompanied by an increase in the _demand_ for

labor, it _must_ result in a diminished remuneration for the

individual worker. To some extent indeed the demand for labor would

almost certainly be increased. The supply of Capital may expand,

perhaps proportionately, perhaps more than proportionately to the

increase in population. But one factor of production, as we have seen,

is not capable of such expansion. This is the factor of Land, or

Natural Resources. It is the limitation of this factor which gives

rise to what we have most of us heard of as The Law of Diminishing

Returns. It is this that is the essence of the problem of Population,

portrayed in somber hues more than a hundred years ago by Malthus.

This problem will form the subject of the sixth volume of the present

series. In the meantime it may be suggested that we are easily

credulous if we suppose that the problem has been finally disposed of

by the peculiar progress of an abnormal century. But that experience

has at least destroyed the view that there _need be_, or even is in

fact in Western countries, a relation between real wages and the

numbers of the people so close and direct that an improved standard of

living must be temporary only, doomed to destroy itself by the

increased population it engenders. One may perhaps go further and say

that it is doubtful even in what direction changes in remuneration

will influence the aggregate supply of labor. When we pass to "what

should be," it is plain that there is nothing whatever to be said for

the sort of relation indicated above. The view once widely held that

the principle of population must inevitably keep the mass of people

close to the verge of the bare means of subsistence was no statement

of a desirable ideal. It was a nightmare; a nightmare none the less

though it may haunt us yet. It is far from fanciful to suggest that it

is because this relation is so obviously _not_ "what should be" that

it may be ceasing to hold true in fact. But it would be very fanciful

indeed to maintain that as yet "what should be" is represented by the

actual population. Thus, just as with capital, so with labor, there is

no reason to suppose that the aggregate supply is determined by any

fundamental economic law, or corresponds in practice to what is

socially desirable.

§5. _The Apportionment of Labor among Places_. Again, as with capital,

it is when we turn to the _apportionment_ of labor between different

employments that both economic law and social ideal make their

appearance. It will be well, however, to consider briefly in the

first instance the different question of its apportionment between

places. This was hardly necessary in the case of capital, because the

possibilities of foreign investment are very numerous and easy: the

mobility of capital is thus sufficiently strong (once again it is only

_marginal_ adjustment that is necessary) to establish over at least a

large part of the world something near to a uniform rate of

interest. But this is not the case with labor. People do indeed move

from place to place within a country, and from one country to another,

in response to economic opportunities. That even the latter movement

may be a considerable thing, the present population of the United

States is a striking testimony. But obviously the mobility is very

incomplete. Here, then, we have what we might _loosely_ call an

economic law that labor tends to "flow" (as it is sometimes unhappily

phrased) to those places where it can command the highest reward; we

have this tendency in evidence, but it is far too weak to enable us to

lay down what would deserve more strictly the title of an economic

law, that in the long run the reward of the same kind of labor is

roughly equal in all places. Perhaps we can say this for many

districts in a single country; but for few countries is this true as

between all their districts. As between countries, it is not remotely

true.

Here, however, the imperfection of economic law is balanced by an

extreme uncertainty as to the ideal. Perfect mobility of labor may be

_economically_ desirable in a very narrow sense of the term; but it

opens out a vista of racial, national and cultural problems, into

which it will be better for us not to enter here. We must take for

granted the population of a country, like that of the world, as a

given fact.

When we do this, the question of its remuneration is on all fours with

the more general question discussed above. That the remuneration of

the labor of a country is mainly governed by the relations between

demand and supply is an inexorable fact. In view of the international

mobility of capital, the main distinctive factor in the demand for the

labor of a particular country is the supply of natural resources,

which it knows how to use. Where the natural resources are great

relatively to the population, there wages will rule high; where the

converse is true, wages will rule low. This result of economic

analysis is abundantly confirmed by experience. The relatively high

wages in the new world, the low standard of living in the densely

populated East; the economic history of Ireland are so many

object-lessons of its truth.

§6. _The Apportionment of Labor among Social Grades_. The question of

the apportionment of the labor of a country among different

employments falls under two heads. Some differences of occupation are

associated particularly in Great Britain with differences of what we

know as class. The movement of labor between different social grades

is clearly a very different thing from its movement between different

occupations in the same grade. The grades themselves are not easy to

define: not a little ingenuity has been expended on the attempt, and

perhaps the best brief classification that has been put forward is one

which divides labor into the following four grades:--

(1) Automatic manual labor.

(2) Responsible manual labor.

(3) Automatic brain workers.

(4) Responsible brain workers.

But the matter is one perhaps for the satirist of manners rather than

the economist. It suffices for our purpose that the distinctions,

however vague, are very real.

It is obvious the mobility of labor between the occupations of a

platelayer and a barrister is not very great. It may seem perhaps to

be even smaller than it is. For here it is important to bear in mind a

general consideration which is equally applicable to horizontal

movements within any social grade. There may be a considerable

movement of labor between different employments without any individual

worker having to change his occupation. The personnel of any industry

is constantly changing. At one end, men die, retire, or are pensioned

off; at the other end, young recruits are taken on. By a diversion of

the new recruits from one employment to another, a radical change can

be made in the occupational census in a comparatively short space of

time. It is in this manner that such movement as takes place is

largely effected at the present time. Within the ranks of the

professional classes, a man does not commonly leave the profession to

which he has been trained. But his _choice_ of profession is

determined by him or his parents not solely on pecuniary grounds but

usually with an anxious scanning of the general prospects, which

include pecuniary advantages together with many other things. The same

thing is true in no small measure of manual wage-earners. This general

consideration must be borne in mind throughout the remainder of this

chapter.

But even the sons of platelayers do not commonly practise at the

bar. The obstacles in the way are various and subtle. Many of them are

ideas, inherited from a bygone epoch, about keeping other people "in

their proper stations," which the whole drift of circumstance, and the

spirit of the age are rapidly wearing down. In the new world such

obstacles are rare. But an obstacle of a more tangible and formidable

kind arises from the fact that the liberal professions and many

business careers require a long and expensive education and training,

which the platelayer is quite unable to afford to give his son.

Now this expense of training is highly relevant not only to "what is,"

but to "what should be." It includes, it should be observed, a

negative as well as a positive element; a long period of waiting

before income begins, as well as the actual outlay on educational and

other charges. When the burden both of the waiting and the positive

costs must be borne either by the individual or the family, there are

few people who would seriously dispute that this goes to justify, on

grounds of fairness as well as of expediency, a higher level of annual

remuneration later on; though many people would doubtless argue that

the amenities and dignities of the professions should be taken into

account on the other side. But the same consideration makes it a

matter of legitimate doubt whether it would be desirable, even as an

ideal, that the community should provide so completely the costs of

training and of maintenance in the waiting period, as to make it no

longer "fair" that the individual should be remunerated more highly

than workers in less expensive occupations. For this would mean that

more labor would be absorbed in the former employments than in

principle would be socially desirable, for reasons which the argument

of the next chapter will make plain. But the most desirable number of

doctors, barristers, teachers, etc., is not a thing which can be

settled on purely economic grounds, and it is unprofitable to carry

further this particular line of thought. Few people would advocate, as

an ultimate ideal, that the remuneration of the professional grades of

labor should exceed that of lower grades by _more_ than the extra

expense of training and waiting they involve. That the excess is

usually greater than this at the present time seems very probable:

though it is a matter on which it is very hard to generalize. But it

would certainly be far greater than it is if the principle of

_laissez-faire_ ruled supreme in these affairs. Fortunately it does

not, and has never done so. Even before the days of free elementary

education, the endowment of education was not unknown. The ancient

public schools and universities, which have come down to us from the

Middle Ages, are a standing witness to what in this field a far poorer

community thought fit to do. Their systems of scholarships and

exhibitions, no less than their courts and towers, deserve our

notice. For these were designed to form what we now call "a ladder" by

which talent could climb from the humblest origins to the callings

which then seemed the summit either of spiritual or of worldly

ambition.

This reference to "talent" makes it well to consider here a factor

which necessarily complicates, though it does not substantially

affect, the whole argument of the present chapter. There are

differences of natural ability, which no education or training can

obliterate, which it should rather be their business to excite. These

differences are associated to a great extent with differences of

occupation; they _should be_ so associated far more closely than in

fact they are. They are also associated with differences of

remuneration even within the same occupation; "what should be" here is

a question which we may excuse ourselves from discussing. The

principle which, however vague, is sufficient for our present purpose

is that the same _natural ability_ should command the same reward in

all occupations, subject to differences which should not exceed the

differences of educational cost and initial waiting they involve. We

cannot assert, as an economic law, that this is generally true in

fact. If ever it becomes true, it will be due not to

"_laissez-faire_," or "free competition," but to social arrangements,

which express a sense of what is right.

§7. _The Apportionment of Labor among Occupations_. When we pass to

the apportionment of labor among different occupations in the same

social grade, the same principle as to "what should be" applies in a

simpler form. Equal natural ability should command an equal reward in

all occupations; assuming that differences in cost of training can be

ignored. The reward must, of course, be interpreted not in terms of

money only but of "real wages," with allowance for the varying

amenities of different tasks. Now it was here that the extreme

advocates of _laissez-faire_ made one of their cardinal mistakes. They

assumed that this ideal would be best secured by "perfect

competition." The employer would choose the worker who would come for

the lowest wage; the worker would choose the employer who would pay

him the highest wage; and so, by a process similar to the higgling of

a commodity market, the desirable uniform wage-level would become

established. But in fact the conditions of the labor market differ

greatly from those of a commodity market. People are ignorant, do not

look ahead, cannot afford to risk the loss of a job, however wretched,

which they happen to have got. For reasons such as these, a

considerable departure from _laissez-faire_ is necessary in order to

realize the theoretical results of _laissez-faire_. To prevent the

putting of boys in large numbers into "blind alley" occupations, you

must supplement the foresight of parents with Juvenile Employment

Exchanges and After-Care Committees. To secure a proper uniformity of

wages within the same occupation, you must have trade unions. To

secure a proper uniformity between different occupations, you must

have again trade unions, or, failing them, Trade Boards.

That the actions of trade unions are very largely of this type is a

fact insufficiently appreciated by the middle-class public. The

elaborate system of piece-rate lists which has been evolved in the

Lancashire cotton industry is primarily designed to secure the same

wage for workers of equal efficiency in all mills, irrespective of the

degree to which the machinery is antiquated or up to date. This result

is wholly to the good: not only does it secure "fairness" for the

worker, it stimulates the employer wonderfully to efficiency. The same

result could never be secured so effectively by the free play of

competition. But this tendency, which is easily the predominant

element in the trade union regulations of the cotton trade, is at

least an important element in the policy of "The Common Rule" of all

trade unions, though it may often be mixed up with the more

questionable tendency to eliminate differences of pay for differences

of natural ability, and the unquestionably bad tendency to discourage

output. As between different occupations, the insistence of a trade

union that wages must be leveled up towards the wages obtaining in

similar trades acts again as a far more powerful force than

competition.

But the actions of trade unions are by no means wholly of this

type. They often serve rather to secure still higher wages for workers

who, comparatively speaking, are already highly paid. It makes little

difference whether this effect is secured directly by wage demands, or

indirectly by restricting the right of the entry to the trade. In

either case the consequences are the same, and there should be no

ambiguity as to their nature. They are certainly bad for the

community, certainly bad for the _other_ workers of the grade, almost

certainly bad for the workers of the grade regarded as a whole. The

higher wages must raise the money costs of production, and result,

sooner or later, in fewer workpeople being employed in that

occupation; larger numbers must accordingly seek employment elsewhere;

and this cannot but depress the wage rates of less strongly organized

trades. Thus the effect is twofold: a larger proportion of workpeople

will be employed in badly paid occupations; and the wages there will

be lessened.

The power of a strong trade union to secure wage advances of this type

is considerable, but it must not be exaggerated. Trade unions employ

as a matter of course devices which, in the case of trusts, we regard

as the extremest weapons of monopoly. To say, "If you buy from anyone

except us, you must not buy at a lower price than ours," which

Messrs. J. & P. Coats are represented as having done, is analogous to

insisting that if non-unionists are employed, it shall be at the trade

union rate, as every trade union very properly insists. To say, "You

must buy _only_ from us," the method of the boycott, as it is called,

is analogous to the very common refusal to work with non-unionists at

all. But in one important respect the tactical position of a trade

union is weaker than that of an ordinary combination. It has usually

got a buyers' combination up against it, in the shape of an

association of employers. The latter will be governed in their

attitude towards the workpeople's demands, not only by immediate

expediency, but also by their own sense of "what should be"; and they

will usually resist demands for wages greatly in excess of those

obtaining in comparable trades. In this way, the tendency for workers

of the same efficiency to receive the same real wages in all

employments is far stronger than might at first sight appear.

If we had to rely for this result upon trade unions alone, it would be

highly problematical. For here a psychological curiosity emerges,

which, familiar and intelligible as it is, is none the less a

curiosity. So far from still higher wages for well-paid workpeople

being regarded in the world of manual labor as detrimental to the

interests of other workpeople, it has become almost a point of honor

to believe the contrary. A wage dispute in a particular trade is

conceived as an engagement in a far-flung battle between Capital and

Labor, in which success at any part of the line will facilitate the

victory of the whole army. This conception contains a measure of

truth, as regards immediate and purely temporary effects; though, even

here, it is made to seem unduly plausible by the recurrence of trade

cycles, which cause wages at any time to move in the same direction

all along the line. But, if the foregoing analysis has been

appreciated, the essential falsity of this notion should be evident.

It is an illusion, which should receive no endorsement, either tacit

or express, in any work on economics. The general wage level of a

country cannot be regarded (except temporarily, and within narrow

limits) as a function of the efficiency of labor organization; it

depends on the far deeper economic facts set out in §3 above.

Let us now try to summarize the conclusions of this section. There

_is_ a tendency towards a uniformity of real wages for workers of the

same grade and of the same efficiency. This tendency is not due to

competition alone. It is helped by many acts of a collective kind,

arising from a sense of "what should be"; it is obstructed by other

acts of a like kind, where the sense of "what should be" is based on

imperfect understanding. The more people act in accordance with "what

should be," and the better their understanding, the more will this

tendency approximate to an accurate economic law.

§8. _Women's Wages_. The wages of women represent a problem of great

public interest, upon which the principles laid down in this chapter

have a most important bearing, and which in its turn serves to

illustrate these principles further. It has been suggested that male

and female labor can be regarded as a strong case of Joint Supply, and

the suggestion is not merely facetious. The essential point, that the

proportions of available male and female labor are fairly constant

(not that they may not alter with time and circumstances, but that

they are essentially independent of the conditions of demand) holds

true not only of a country as a whole, but hardly less of a particular

district. If men and women are to be regarded as separate grades, they

are grades between which immobility is complete. Now men and women

differ in many ways which affect both the demand for and the supply of

their services. On the one hand, far fewer women wish to enter

business employments of any kind, as women have plenty of work that

must be done at home. On the other hand, though women can do many

kinds of work as well as or better than men, it so happens that for

much the greater number of services, which are in large demand in the

business world, men are the more efficient. Incidentally, it happens

that many occupations which women _might_ do as well as men are closed

to them by exclusive regulations. The resultant of these forces is

that men and women are for the most part employed in different

occupations, and the scale of payment in women's occupations is far

lower than that in men's. Of this last fact singularly small

complaint is made.

It is otherwise, however, when we come to occupations where men are

either wholly or partially employed, where women are at least

approximately as efficient as men, and where the barriers to their

entry are at least formally removed. There a ferocious controversy

rages over what is known as the principle of "equal pay for equal

work." It is easy to understand why the male trade unionists in, let

us say, the engineering trades, should support this claim. It is also,

indeed, _intelligible_ why the enthusiasts for Women's Rights should

urge it; but it is much more doubtful whether they are wise. Possibly

they are wise enough in their generation, since it might not serve

them on this matter to get across the men. But it is clearly not

prudential considerations of this kind by which they are mainly

actuated. They make the demand, with extreme intensity of feeling, as

a demand for fundamental justice. They are also very obviously

inspired with the belief (similar to the illusion which is a point of

honor with the male trade unionist) that high wages for women in

well-paid occupations will help to raise the wages of sweated women

workers in other trades.

Now, here again, any lack of candor would be inexcusable. The effect

of this policy on the wages in women's trades is certainly to reduce

them. The policy serves, as powerfully as any trade union custom, to

restrict the entry of women into the men's employments, and often

spells virtual exclusion. For the "equal efficiency" may be

approximate only, and there may be advantages in male labor from the

employer's standpoint which are none the less important, because they

are not easy to define. Moreover, from the employer's standpoint, the

efficacy of female labor will be largely a matter for _experiment_,

and "equal pay" will give him no inducement to experiment at all. The

diminished number of women in these occupations (as compared with what

might have been) increases the number who must fall back on the purely

women's trades; and it _must_ serve to reduce the wages there, where

organization is by no means strong. I am far from asserting that this

consideration is conclusive against the principle of "equal pay for

equal work" (though I think it conclusive against a rigid

interpretation of it); for other matters, such as the standpoint of

the male trade unionist must be taken into account. But the reactions

on the wages in women's trades permit of no ambiguity.

In occupations of another type, the issue takes a somewhat different

form. In the teaching profession, "equal pay" would not exclude the

women; it would be far more likely to exclude the men. For, though the

advocates of the principle would declare that their intention is that

the salaries of women should be leveled up to those of men, it is more

probable that the ultimate outcome would be a leveling down.

Educational authorities have the ratepayer and the taxpayer to

consider; and, apart from this, they have their own interpretation of

"what should be." To pay a woman less than a man for the same work may

seem glaringly unfair; but it is not very clear why a woman, who is an

elementary school teacher, should be paid much more than, say, a

hospital nurse, merely because in the former case a number of men

happen also to be employed. In fact, there is a clashing of equities

in this connection; and there is little doubt which of them the

educational authorities would prefer. A leveling down of the men's

salaries would make it all but impossible to attract men of the

desired type into the profession, and would thus lead to the virtual

extinction of the male elementary school teacher. This might seem in a

narrow sense to be economically desirable. Why should not men take

their services to the tasks for which they can command a higher

reward, and which women cannot do as well? But whether this would be

desirable in the true interests of education is a far more doubtful

matter. And this is the real problem of "equal pay for equal work" for

male and female school teachers. The reader will notice that I have

refrained from alluding to the controversy as to whether men should

receive more on the grounds that they have wives and families to

maintain. That, although a most absorbing issue, is not the real issue

in practice at the present time. The real issue is a clashing between

a sense of "what should be" on obvious general grounds and a sense of

"what should be" in the particular, derived from the very patent and

general "what is" that men receive as a rule far higher pay than

women.

CHAPTER X

THE REAL COSTS OF PRODUCTION

§1. _Comparative Costs_. Beneath the great diversity of the

considerations which are applicable to the different agents of

production, certain general conclusions emerge from the analysis of

the last four chapters. In no case did we find that the aggregate

supply of the agent was determined by clear and certain economic laws,

possessing any fundamental significance. The supply of natural

resources is a fixed thing, quite independent of the efforts or the

desires of man. However the supply of capital and the supply of labor

may react under present conditions towards economic stimuli, these

reactions possess no quality of inevitability and bear no clear

relation to "what should be." The supply of risk-bearing responds

perhaps more decidedly to the prospects of increased reward; but it is

so intimately associated with special knowledge and the qualities of

business enterprise, as to leave some uncertainty attaching even to

this conclusion. When, on the other hand, we turn to the

apportionment of these factors among different uses, we find relations

which are both clear and fundamental. Laws emerge which state at once

not only "what is" or at least "what tends to be," but also "what

should be"; and it is the fact that they taste "what should be" that

gives them their fundamental character.

These conclusions enable us to give a general answer to the question

which was raised at the end of Chapter V: What are the ultimate real

costs to which the money cost of production correspond? The attempt

has often been made to relate money costs to such things as the effort

of working and the sacrifice of waiting. The existence of such costs

is beyond dispute. Much saving does mean a sacrifice of immediate

enjoyment to the man who saves. Most labor is irksome and disagreeable

in itself, and involves strain and wear and tear; while all labor

means a deprivation of the utility of leisure. Workpeople, moreover,

do not grow on gooseberry bushes, but must be fed and clothed from the

cradle; and their rearing and maintenance represents a real cost which

someone must incur.

But the existence (or the importance) of such costs is one thing,

their relation to money costs is another. In Chapter VIII we saw how

difficult it was to establish any clear relation between the rate of

interest and the sacrifice of saving. The costs of labor present

similar difficulties. The relative irksomeness of two occupations may

affect the relative wages which will rule in the two cases; so,

certainly, will the differences in the cost of education and training

which they require. But these are matters which concern the

_apportionment_ of labor between different employments. There is no

good reason to suppose that the general wage-level would be reduced,

merely because work as a whole became less irksome, or involved a

smaller physical or mental strain. The supply of people is not

determined by the same kind of influences as is the supply of a

commodity. Parents do not produce children for the sake of the wages

which the children will receive when they go out to work; or, if this

happens, we rightly regard it as a horrible anomaly. In so far as

parents are affected by economic conditions it is by their own

economic conditions; the question is rather one of how many children

they can afford to have, than of a balancing of the cost to them

against the incomes which their children may subsequently acquire. But

other considerations enter in; and, in fact, it is doubtful how the

aggregate supply of labor will react to changes in prosperity.

Finally, the supply of land involves neither effort nor sacrifice;

and, among our money costs, we have to account for the item

of the rent of land. To dispose of this difficulty by arguing that

rent does not enter into marginal costs (in any sense which is not

equally true of wages and profits) is to lose contact with

reality. Thus the attempt to explain money costs in terms of the costs

of producing the ultimate agents of production leads us into a

quagmire of unreality and dubious hypothesis. For a systematic theory,

which will rest on firm foundations, we must interpret money costs in

very different terms.

The real costs which the price of a commodity measures are not

absolute, but comparative. Marginal money costs reduce themselves in

the last analysis to the payments which must be made to secure the use

of the requisite agents of productions. These payments _tend_ to equal

the payments which the same agents could have commanded in alternative

employments. The payments which they could have commanded in

alternative employments, tend in their turn to equal the derived

marginal utilities of their services in those employments. It is thus

the loss of _Utility_ which arises from the fact that these agents of

production are not available for alternative employments that is

measured by the money costs of a commodity at the margin of

production.

This conception of ultimate costs encounters an instinctive

repugnance, arising from a mistaken sense of logical symmetry, which

it will be well to examine. Cost, it is objected, so interpreted

loses its character as an independent entity. It is merely something

derived from utility. Now in the earlier chapters of this volume, we

found reason to be impressed with the general symmetry which pervades

the relations of demand and supply. Moreover, when we considered the

case of ordinary commodities we found that at the back of demand and

giving rise to it was utility; at the back of supply, and limiting it,

was cost. The general symmetry between demand and supply thus seemed

almost to imply a fundamental symmetry between utility and cost. If,

then, cost in the last analysis is derived from utility, does not this

make nonsense of the symmetry between demand and supply, or, if we

cling to this last symmetry as a demonstrable truth, must we not

refuse to admit that cost can be derived from utility?

This is one of those false dilemmas which supply the wiseacres of the

world with a plausible case for distrusting the logical faculty. If we

have good reason for believing that both of two apparently

inconsistent things are true, the explanation is seldom that one of

them is really false; it is more usually that they are not really

inconsistent. So it is here. The symmetry between demand and supply is

very great, and we should always look to see if it holds good, but it

is by no means perfect, and it is in the last analysis that it most

notably fails. It is most important to distinguish clearly between the

utility and the cost of a commodity as two separate and independent

things. In Chapter V, it will be remembered, we did not permit

ourselves to derive the costs of producing cotton lint from the

utility of cotton-seed. The refusal to do so was essential to clear

thought; it led to some very useful practical corollaries. But to

derive the cost of a commodity from the utility of something which is

produced _with_ it, as part of the same productive process; and to

derive the cost from the utilities which the agents, which help to

produce it, possess for other purposes, are two entirely different

things. In works on International Trade, the reader will discover that

the comparative nature of real costs is so unmistakable that a

Doctrine of Comparative Costs is expounded with much formality at the

outset. This doctrine is apt to prove somewhat puzzling, when we have

to deal with it as an apparent exception to the general tenor of

economic theory. Its difficulties disappear when we realize clearly

that the real cost of _anything_ is the curtailment of the supply of

other useful things, which the production of that particular thing

entails.

§2. _The Allocation of Resources_. However strange the above

conception may seem, there should be no doubt that this cost is very

"real." Here the irregularities and maladjustments of the economic

world, the recurrence of trade depressions and the like, do much to

obscure a clear vision of the essential realities. At a time when

there is much unemployment, and much machinery standing idle, it is so

clear to common sense that we _could_ produce more of some particular

thing without diminishing the supply of other things, that any

apparent statement to the contrary may perhaps seem the height of

academic pedantry. But let me ask the reader to consider with an open

mind a familiar parallel. During the recent war there was inevitably

much waste and muddle in the utilization of the military resources of

the Allies. Some regiments would be kept inactive for long periods,

not for purposes of rest or training, but owing to some defect of

organization. In the manufacture of munitions, an insufficient

appreciation of the principles of joint demand led to the piling up of

excessive stores of certain materials, which were useless until

commensurate supplies of the complementary factors could be

obtained. It is unnecessary to multiply examples. The waste of both

man-power and material was immense. But the allocation of these

resources between, for instance, the various theaters of war was none

the less a very real problem, which gave rise to much engrossing

controversy. It was an axiom that the more resources you employed in

Mesopotamia or in Palestine, the less resources remained available for

France. No one thought of maintaining that, as long as there was any

waste of these resources, so long as there remained any men to be

"combed out" of unessential industries, you could pour troops and

munitions into Salonika without stopping to consider the needs of

other theaters of war. Such a notion would have been clearly imbecile,

for the sufficient reason that the sending of armies to Salonika would

do nothing in itself to secure (however much it might incidentally

stimulate) the more efficient use of the resources which remained.

Now this is precisely analogous to the problem of the allocation of

our resources for the purpose of peace. Notwithstanding all the

wastes and maladjustments of the economic system, the use of resources

to produce one commodity _does_ in general curtail the production of

others. The mere launching of a new business enterprise does no more

than the sending of an army to Salonika, to eliminate waste in the

remainder of the economic organism. Unemployment, broadly speaking, is

a function not of the magnitude of the normal demand for labor (which

affects rather the wage-level), but of fluctuations in the demand for

labor; fluctuations from one day to another as at the docks, from one

season to another as in the building trades, above all from one period

of years to another as in the cycles of general trade boom and

depression. Nothing will diminish unemployment which does not serve to

diminish these fluctuations. A new business will not, as a rule, have

any such effect. If it is launched during a trade depression (a most

unusual proceeding), it may temporarily absorb unemployed labor and

idle materials. But when the next boom comes, it will be using, though

presumably to greater advantage, labor and materials which, but for

it, would have been employed for other purposes. Meanwhile the causes

making for unemployment will be unaffected. Miscalculations will

still be made, the building trades will still become slack in the

winter, the casual methods of engaging dock laborers will still

continue, trade cycles will still recur, while beneath them, and

concealed by them, some industries will expand and others will decay.

Thus, like the armies at Salonika, the new business would in effect

divert resources from elsewhere.

This truth needs to be firmly grasped in mind. It is this that makes

it in general unsound policy to subsidize industries, either directly

or indirectly, by means of a protective tariff. It is this, indeed,

that supplies the answer to half the economic fallacies that are

always current.

The allocation of resources so as to yield the maximum effect was

rightly recognized as one of the most vital and difficult of our

war-time problems. To cope with it, the Allied peoples devised one

instrument after another, and finally evolved the Supreme Allied

Council. The analogous problem in the economic world of peace time is

no less important and far more difficult; but there is nothing to

correspond to the Supreme Allied Council. There we rely upon a

co-operation which, as was stressed in Chapter I, is unco-ordinated.

That co-operation has been evolved by the mutual competition

of innumerable business concerns, controlled by men largely

animated by the motive of pecuniary profit. But it has not

been evolved wholly by such means: and how far that competition or

that motive of profit is essential to its efficiency are questions

with which this volume has not been in any way concerned. The economic

laws, the relations between utility, and price and cost, with which it

has been occupied, are an entirely different matter; and these _are_

essential to the efficiency of any system of society. For if the

marginal utility of a commodity is equal to its marginal cost, and if

this marginal cost is composed of payments to the various agents of

production at least as great as they could have obtained if they had

been used otherwise, this amounts to saying that the agents of

production are so utilized as to yield the maximum utility; and this

is the same thing as saying that they are so utilized as to produce

the maximum wealth.

§3. _Utility and Wealth_. Upon this last point it is important to be

quite clear. An increase in wealth seems a solid, tangible reality;

something, which, however much we may scorn it in our more precious

moods, we recognize, for a rather poor community, to be an important

object of endeavor. But an increase in utility seems a vague,

impalpable notion, hardly deserving the same practical concern. None

the less the two things are identical. We greatly deceive ourselves if

we suppose wealth to be an objective reality. It is true that, when

we get behind the money in which it is measured, we come upon

commodities, like food and clothes and houses and factories, which

seem comfortably solid and objective things; but we also come upon

many services, like those of gardeners and doctors and hospital

nurses, which we are bound to reckon as part of our wealth, although

they are not embodied in any tangible commodities. Moreover, although

material commodities are objective realities in themselves, and in

many of their properties, they are _not_ objective realities in their

property as wealth. A pair of boots is an objective fact; so is the

number of pairs in existence at any time, so is their size, their

weight, the quantity of leather or of paper which they happen to

contain. But the wealth which those boots represent is not an

objective fact. It depends upon the opinion which men and women

entertain as to their utility; and these opinions take us into the

subjective regions of human psychology. Let us suppose, for instance,

that we calculated, on the basis of present prices, that the boots in

existence at the present time represented 1/1000 part of our total

wealth. Suppose, then, that a miracle were to happen; that the skies

opened and rained boots upon us, of every size and shape and pattern,

until we had 1000 times as many boots as we had before. Could we say

that our total real wealth had been doubled? Clearly we could not. To

obtain boots for nothing, and to wear a new pair every week, would

make us somewhat better off, but not twice as well off as we were

previously. In other words, the real wealth of a thousand times as

many boots as we have now, is not a thousand times as great as the

wealth of the present number of boots. We are, indeed, practically

restating the Law of Diminishing Utility; and this perhaps is enough

to show that wealth is fundamentally the same thing as utility.

Another point, however, is worth noting. Our real wealth would be

somewhat increased in the case supposed; but if we were to turn to the

money measure of wealth, the opposite result would be far more likely,

For the price of boots would most likely fall to nothing, and the

total value of boots, in the commercial sense, would accordingly be

nothing also. This shows that money values may be a most imperfect

measure of aggregate wealth; for what money values represent is the

product of the quantity of the commodity and its _marginal_ utility,

while aggregate wealth is _total_ utility, which is a very different

thing. This, it may be observed, makes all attempts to compare the

wealth of different countries or different times, and no less to

construct Index Numbers of Prices, imperfect of necessity, and

arbitrary in their foundations.

§4. _Criteria of Policy_. The point has now been reached at which we

must take into account the very important fact which was mentioned at

the close of Chapter III. The maximum utility which the laws of

supply and demand tend to bring about is a maximum _total_ utility

indeed, but one still measured in terms of money. An unequal

distribution of wealth destroys any necessary correspondence between

that and the maximum _real_ utility. This consideration, however, does

not affect the general validity of the conclusion that the laws of

supply and demand represent what is socially desirable now or under

any system. For what is at fault here is the distribution of wealth;

and it is that which should be changed, in so far as it is possible to

do so. Now it is important to realize that whenever it is possible to

supply a commodity to poor people below cost price, it is possible to

alter the distribution of wealth, for that in effect is what is

done. Purchasing power, which may be taken from richer people by

taxation, or which may be obtained from "collective" profits on other

trading, is in effect transferred to the poor people in question,

though the transference is coupled with the condition that the

purchasing power must be expended in a particular way. It is _in

general_ desirable that the transference should be made without this

condition being attached. To this general statement, exceptions indeed

exist so numerous and important as possibly to justify a great

extension of social expenditure of this type. Education should

certainly be provided free of charge, there are strong arguments for

subsidizing housing; the provision of milk to expectant mothers, the

feeding of school children, such instances can be multiplied into a

very extensive list. But it is important to observe that in each case

the justification of the policy rests in the presumption that the

service supplied is one which it is particularly important that the

beneficiaries should have, _as compared with_ the other things upon

which they might have preferred to expend the equivalent purchasing

power, had it been transferred to them without conditions. Where there

is no such presumption, as surely there is none in the case of the

great bulk of commodities, the relation between price and marginal

cost should be rigidly maintained; it is the distribution of

purchasing power which we should rather seek to alter. How far is it

possible to alter that?

I suppose that it is inevitable that many readers will have concluded

that the preceding chapters must be taken to mean that the

distribution of wealth is not susceptible of any appreciable change. I

would remind those readers of an important distinction upon which

impatient people have sometimes based a complaint against

economists. The economist, it is said, analyses with great pomp and

ceremony the laws governing the distribution of wealth among the

agents of production, but says practically nothing about the

distribution between individuals and classes, which is the only thing

of any real interest to practical people. Now the economist

concentrates on the agents of production for the very good reason that

it is only with respect to them that any clear and certain laws as to

distribution can be laid down. Into the distribution between

individuals and classes there enter other and variable factors,

governed by no fundamental economic law; and _here_, the conclusion

should at once suggest itself, is the field for action designed to

alter the distribution of wealth. What is possible or desirable in

this field, it is again not the purpose of this volume to discuss. It

is an obvious, even if not a very helpful conclusion that an increase

in the habit of saving among weekly wage-earners might, without

appreciably affecting the distribution between Capital and Labor,

greatly modify the resulting distribution between social classes. But

questions as to how far it might be possible or justifiable to achieve

a similar result by the use of the weapon of taxation, by changes in

inheritance laws, or by the public ownership of industry take us into

a far more uncertain and controversial sphere. The difficulties and

objections which present themselves are familiar and formidable; but

they are of quite a different order from the economic laws which we

have been examining. The laws themselves do not entitle us to make any

dogmatic pronouncement upon these large issues of social policy.

But this is not to deprive these laws of practical importance. They

represent essential criteria of sound policy in the sphere of social

reorganization no less than in ordinary business. In our days a

curious obsession has led many people to disparage these criteria, as

though they were the sordid prejudices of a stupid tradesman. Because

it has been found a matter of obvious practical convenience to

maintain the roads out of taxation or of rates, and to dispense with

charges for their use, it is suggested that the same principle should

be applied to the railways. Or, more commonly, because it has been

found convenient to make the same charge for the carrying of letters

between Land's End and John o' Groats as between Hampstead and

Highgate, it is suggested that _this_ principle should be applied to

railway rates and fares. It may be well, therefore, to point out that

the justification of uniform postal charges rests upon the facts: (1)

that the costs of collection, sorting, etc., are so large a part of

the costs of carrying a letter, that the real cost between John o'

Groats and Land's End does not differ from that between Hampstead and

Highgate by as much as might at first sight appear, (2) that the

charges in any case are very small; so that (3) the avoidance of the

small degree of taxes and bounties which the present system implies is

not worth the book-keeping expenses which differential charges would

involve. It should be obvious that these considerations apply to the

railways with a greatly diminished force. They might possibly justify

what is known as the "zone" system of charges, i.e. uniform rates

within certain narrow areas. But the notion of uniform rates

throughout Great Britain conjures up a vision of trains taking coal

from South Wales to Scotland, and others taking coal from Scotland to

South Wales, in accordance with the slightest preferences of the

consumers, and without regard to the extra real cost involved, on a

scale to which the "wastes of competition" afford no parallel. It

would in fact achieve the essential folly of "sending coals to

Newcastle." These considerations, however, are not what interest the

advocates of the postal principle. They seem to recommend the

obliteration or the confusion of the relations between price and cost

as a superior ideal. It is important to be clear what exactly this

ideal involves.

It involves, in the first place, as the whole argument of this volume

has gone to show, a less economical employment of our productive

resources; they would be diverted to ends of less utility, and so

produce less real wealth. But this is not the worst. There is plenty

of waste and maladjustment in our economic system at the present

time. The desirable relation of price to marginal cost is but

imperfectly attained. The further departures from this relation, which

would follow from any likely applications of the postal principle,

might not matter in themselves so very much. What is far more serious

is that the criteria of efficiency would become blunted, and the clear

aims of management would be confused in fog. It is essential that

every manager should be on the alert to eliminate waste and to improve

efficiency, that he should be always trying to secure the best

results; but how can he do this if he has no simple means of

_measuring_ what results are good and what are bad? The measure which

he has at present is that of price, cost and the resultant profit, and

it would be fatal to take that away, unless an equally simple and more

accurate measure could be substituted for it.

This is not a question, it should be observed, of motive or

incentive. Very likely we much exaggerate the importance of the profit

motive. It may be true that men would work, perhaps that they already

work in fact, as zealously for a fixed salary, as for personal

gain. But aim and motive are two somewhat different things, and the

_aim_ of profit, is, and will remain, essential to the efficient

conduct of business. In a game the players are not animated by the

motive of scoring runs or points, but they aim at them; and the zest

disappears very speedily from the game, if that aim ceases to be of

interest. Moreover, while a scoring system is always a somewhat

arbitrary thing, measuring imperfectly the true merits of the play, if

it measures them with the roughest accuracy, we prefer the issue of

our games to be decided so, rather than by the decisions of an

impartial judge, who can take into account the finest points of

skill. So it is in the world of business. The scoring-board of profits

may be an imperfect one; let us, by all means, where we can, alter the

rules of the game so as to make it better. But let us not imagine that

it displays a finer insight or a superior intellect to speak as though

the scoring-board could be dispensed with, and the test of profit and

loss treated as irrelevant. Quantitative measurement is essential to

efficiency. Let us be careful to remember all that this implies.

INDEX

Ability

Accountancy

Allocation of resources

Ambiguities

Australasia

Bastiat, Frederic

Beef and hides

Borrowing and lending, system of

Business efficiency

Business man as a purchaser

Business risk

Capital;

as representing a period of waiting;

distribution;

distribution and rate of interest;

effect on labor of an increased supply;

not a stock of consumable goods;

reaction of price charges on;

reflections upon;

supply;

supply as affected by charges in interest rate

Capital goods

Capital market

Capitalism

Capitalist

Chance

Coal industry, cost of production and price;

miners' wages

Coats, J. & P.

Collective saving

Commodities;

labor as a commodity

Competition

Composite demand

Composite supply

Consumable goods

Consumers' goods and producers' goods

Consumption, margin of;

waiting for

Control and risk-taking

Controversy

Coöperation;

unorganized

Cost, general relation of price, utility and cost;

price relation to;

rent as factor in real costs;

ultimate;

utility and

Cotton and cotton-seed;

contrast to wool and mutton

Cotton industry

Criteria of policy

Currency inflation

Cycles

Demand, ambiguity of expression "increase in demand,";

derived;

elastic and inelastic;

_see also_ Composite demand; Joint demand; Supply and demand

Derived demand

Derived utility

Diagrams, use of

Diminishing utility;

money and

Directors

Distribution of wealth;

interest rate and

Dividends

Division of labor

Economic laws;

fundamental character

Economic theory;

fact and

Economic world, orderly nature

Education

Efficiency

Elastic demand

Employers' associations

Enterprise

Entrepreneur

"Equal pay for equal work,"

Expectation

Fact and theory

Farmers

Fortunes

Gambling

Government, enterprises;

failings

Hides and beef

Houses

Housewife as purchaser

Housing

Ideas and institutions

Incompetents

Increase in demand, ambiguity

Index numbers

Inelastic demand

Inflation

Institutions and ideas

Insurance companies;

significance

Interest;

necessity of

Interest rate;

changes and their effect on supply of capital;

distribution and;

price of land and

Intuition

Joint demand;

importance of the unimportant;

marginal utility under;

summary of considerations

Joint products;

cost of production

Joint-stock company

Joint supply, marginal cost under;

summary of considerations

Keynes, J. M.

Labor;

apportionment among occupations;

apportionment among places;

apportionment among social grades;

as a commodity;

cost, difficulty of estimating;

division;

effect of increased supply of capital;

four grades;

mobility;

product of;

reaction of price changes on;

supply in general

_Laissez-faire_;

retrospect on

Land, characteristics;

differential aspect;

margin of transference;

marginal;

price and rent, relation;

question of real costs;

scarcity aspect;

supply;

tenure;

urban;

_see also_ Rent

Landlords

Large scale business

Laws, fundamental

Malthus, T.R.

Management

Margin, danger of ignoring

Margin of consumption

Margin of production

Margin of transference

Marginal cost, aspects;

misinterpretation;

under joint supply

Marginal land

Marginal purchaser

Marginal utility;

price relation to;

under joint demand

Market

Marshall, Alfred

Marx, Karl

Mill, J. S.

Miners

Monetary changes, disturbances of

Money, diminishing utility

Monte Carlo

Mutton. _See_ Wool and Mutton

Natural ability

Normal conditions

Occupations;

apportionment of labor among

Order, economic

Pasture versus tillage

Pigou, A. C.

Policy, criteria

Population

Postal charges

Poverty;

national

Price, consequences of higher;

general relation with utility and cost;

law of tendency;

marginal utility and;

post-war;

reaction of changes in demand and supply;

relation of demand and supply to;

utility and

Producers' goods

Production, power of;

real costs;

waiting for

Professions

Profiteering

Profits;

elements;

general analysis;

in risky industries

Protective tariff

Psychology and economics

Purchasers, business man;

housewife;

marginal

Purchasing power

Railway rates

Railways

Rate of interest. _See_ Interest rate

Rent;

complex character;

marginal land;

necessity;

rate of interest and

Reserves

Residuary profits

Resources, allocation

Risk, reward for;

under large-scale organization

Satisfaction

Saving;

individual;

involuntary;

psychology;

social

School teachers

Service

Serving cotton

Shareholders

Sinking-fund

Situation

Smith, Adam

Social grades, labor movement among

Socialism

Speculation

Steel smelters

Subsidies, industrial

Substitutes

Supply, reactions of price changes on;

_see also_ Composite supply; Joint supply

Supply and demand, changes in, and their reaction on price;

forces behind;

general laws;

relation of price to;

wages and

Supreme Allied Council

Teachers

Theory, economic

Thrift

Tillage versus pasture

Trade cycles

Trade depression

Trade unions;

actions;

wage level and

Ultimate real costs

Unearned increment

Unemployment;

trade union policy and

Utility;

cost and;

derived;

general relation of price, utility and cost;

law of diminishing utility;

law of diminishing utility as applied to money;

marginal;

price relation to;

wealth and

Wages, general wage level;

trade unions and;

women's

Wages Fund

Waiting, essence of;

for consumption;

for production

Waste, economic

Wealth, distribution;

utility and

"What should be" and "What is,"

Women's wages

Wool and mutton;

contrast to cotton and cotton-seed

Workers' control

End of Project Gutenberg's Supply and Demand, by Hubert D. Henderson