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 WEALTH
 
 WEALTH 
 
 A BRIEF EXPLANATION OF THE 
 CAUSES OF ECONOMIC WELFARE 
 
 EDWIN CANNAN, M.A., LL.D. 
 
 PROFESSOR OF POLITICAL ECONOMY IN THE 
 UNIVERSITY OF LONDON 
 
 LONDON 
 
 P. S. KING Si SON 
 
 ORCHARD HOUSE, WESTMINSTER 
 
 1914
 
 i PREFACE 
 
 ^5 The really fundamental questions of 
 o economics are why all of us, taken 
 o together, are as well off — or as ill off, if 
 •-^ that way of putting it be preferred — as 
 we are, and why some of us are much 
 better off and others much worse off than 
 r^ the average. 
 
 c] I am convinced that immense harm is 
 c. done by the common assumption that the 
 '-^ answers to these questions are so obvious 
 tj and easy that no general treatment of them 
 is necessary. We should not tolerate a 
 person who professed to explain the inef- 
 ficiency of some locomotive and to provide 
 a remedy for it, if we knew that he had 
 never studied mechanics and was quite 
 _; ignorant of the construction and working 
 l'2 of locomotives. The existing economic 
 ^ organization is a much more complicated 
 and delicate piece of machinery than a 
 locomotive, and yet, whenever some imper- 
 fection in the work done becomes par- 
 ticularly prominent, we are overwhelmed 
 with suggestions about causes and reme- 
 dies by persons who have not the smallest 
 general knowledge of the reasons why the 
 
 282.'528
 
 vi PREFACE 
 
 machinery works at all. It often happens 
 that a man of considerable eminence in 
 his own profession, but without the 
 smallest acquaintance with the funda- 
 mentals of economics, will make a sugges- 
 tion which is precisely on a level with the 
 proposition that the locomotive would be 
 much more efficient if its weight were 
 taken off the driving wheels so that they 
 could revolve more easily. The editor of 
 an important magazine accepts with joy 
 the contribution in which he develops his 
 idea, and the public feebly thinks there 
 may be something in it, and is confirmed 
 in this view by the fact that professional 
 economists are as disinclined to publish a 
 refutation of it as the Astronomer Royal is 
 to answer the theorists who declare that 
 the world is flat. 
 
 It is not refutation of ridiculous sugges- 
 tions which is required, but their non-ap- 
 pearance in consequence of there being no 
 possibility of their gaining acceptance in 
 minds already occupied by a knowledge of 
 the actual nature and working of the 
 economic machine. When, therefore, I 
 tire the reader with insistence on some- 
 thing which appears to him too obvious 
 to need mention, I hope he will ask him- 
 self whether he does not know of some 
 important propaganda, or of some oppo-
 
 PREFACE vii 
 
 sition to some important reform, which is 
 based on a doctrine incompatible with the 
 acceptance of that which seems to him 
 to be obvious. I refrain from giving 
 examples, because I would rather that all 
 the various propagandists and their oppo- 
 nents should read the book than that 
 some of them should be warned off it as 
 dangerous to their faith. 
 
 Experienced teachers, in search, as 
 usual, of the heaven-sent book to use in 
 their classes, are not likely to complain 
 of obviousness. They are much more 
 likely to say that much of my matter is 
 too difficult for beginners. But I doubt 
 the policy of trying to teach beginners only 
 what is easy. We must take things as 
 they come, and if in economics, as in some 
 other things, we find that the foundations 
 are the most difficult part of the work, 
 that is no reason for trying to build a 
 superstructure without any foundations at 
 all. I hope, therefore, that the book may 
 be found useful by academic teachers and 
 students as well as by readers who wish 
 to improve their capacity for dealing with 
 practical economic problems without 
 attendance at lectures and classes. It has, 
 at any rate, been evolved gradually out of 
 the annual course of lectures which I have 
 given for first-year students at the London
 
 viii PREFACE 
 
 School of Economics since 1898, during 
 which period I do not think a year has 
 passed without considerable changes in 
 the matter or the arrangement of the 
 exposition. 
 
 Having acute sympathy with those who 
 dislike ponderous tomes, I have tried to 
 keep the book as short as possible. A 
 great deal of the discussion of wages, 
 profits, and rent which had some local 
 importance a hundred years ago is now 
 obsolete, and should be relegated to the 
 works which deal with the history of 
 theory. By omitting this and other obso- 
 lete matter, by excluding special subjects 
 like currency and taxation, which are 
 better considered in special treatises, and 
 by forgoing detail and picturesque illus- 
 tration, I have managed to make room for 
 some very fundamental matters which are 
 often ignored in general treatises of 
 moderate length. I refer especially to the 
 hereditary character of inequalities of 
 income, the inferiority of women's earn- 
 ings, and the differences in the wealth of 
 different " countries " or " nations." 
 
 EDWIN CANNAN. 
 
 London School of Economics 
 
 AND Political Science, 
 
 Xovciiibtr, 191 3.
 
 CONTENTS 
 
 CHAPTER I 
 
 PACES 
 
 The Subject- Matter of Economics , . 1-18 
 
 The subject-matter of economics must be taken to be 
 whatever can Vje most conveniently treated under 
 economics. This is a question of the convenient 
 delimitation of the various departments of Science, on 
 which common practice is a good guide . . i 
 
 Special attention has often been given to the wealth 
 of nations, but even when economics has been defined as 
 the science of the wealth of nations, much other matter 
 has been included in practice, so that the wealth dis- 
 cussed has been the wealth of human beings generally . 1-2 
 
 The word wealth first meant a particular state or condi- 
 tion of human beings, but subsequently, especially in 
 formal definitions, it was applied to the things supposed 
 to make a person attain that condition, and was am- 
 biguously used both of the collection of things possessed 
 at a point of time and of the collection produced or 
 coming in during a certain length of time . . 2-6 
 
 But since the middle of the eighteenth century the 
 greater part of economic exposition has related to the 
 second of these collections, which was first called 
 " produce " and more recently " income " . . 69 
 
 Produce, or income, is not easy to define or measure, 
 and the effort to define and measure it has resulted in the 
 substitution of "utility" or "satisfaction " as the subject- 
 matter of economic study, disutilities and dissatisfactions 
 la '^
 
 CONTENTS 
 
 PAGES 
 
 being taken as negative and deducted from positive utility 
 or satisfaction. If we accept this result in substance, and 
 yet retain " wealth " in the definition of economics, we 
 must regard wealth as having reverted to its old meaning 
 of a particular state or condition of human beings . 9-13 
 
 The difficulty is to draw the line between wealth in 
 this sense and other kinds of welfare. The criterion of 
 exchangeability is unsatisfactory. The best we can do is 
 to say that wealth is material welfare. The fact that the 
 material shades gradually into the non-material does not 
 prevent it from being convenient to have a separate de- 
 partment of science for the study of wealth . . 14-18 
 
 CHAPTER II 
 
 The Fundamental Conditions of Weai,th for 
 
 Isolated Man and for Society . . 19-39 
 
 No man actually lives in isolation, but we can well begin 
 by asking what would be the conditions of wealth to such 
 a man. His wealth would depend upon : — 
 
 (i) The magnitude of his original natural powers in 
 
 proportion to his physical requirements . . 20-21 
 
 (2) The degree in which he had improved his powers 
 and his outward surroundings. 
 
 He could improve his original powers both by mere 
 practice and by deliberate self-training and research ; 
 he could improve his surroundings both by "good 
 cultivation " and other beneficial alterations of the 
 earth's surface, and by the making of useful tools, 
 buildings, &c. We cannot add up all such improve- 
 ments into a total susceptible of exact measurement 
 by any known standard, and we must recognize that 
 the utility of actual changes, reasonably regarded as 
 improvements when made, might disappear owing 
 to alterations in knowledge and other circum- 
 stances ....... 21-4
 
 CONTENTS xi 
 
 PAGES 
 
 (3) The goodness of the judgment with which he used 
 his powers and surroundings. 
 
 Labour as a whole is not an evil, but it is desirable 
 to minimise the amount expended in the attainment 
 of any particular end. There are differences in the 
 agreeableness of different kinds of labour, and every 
 kind becomes disagreeable when carried on too long. 
 Consequently, in distributing his powers and using 
 his surroundings the Isolated Man would have to be 
 guided not only by the urgency of his desires for 
 different goods and the time to be spent in procuring 
 them, but also by the kind of labour involved. He 
 would also have to compare immediate with distant 
 advantage, and decide how much of the one should 
 be forgone for the sake of the other . . 24-30 
 
 (4) The extent to which he saw fit to sacrifice some 
 possible wealth for some non-economic end which he 
 regarded as more important ... 30 
 
 These conditions of the wealth of Isolated Man exist also 
 in regard to Society, which will be better or worse oft" 
 according as : — 
 
 (i) Its members have great or small natural powers in 
 
 proportion to their physical requirements . . 31 
 
 (2) Much or little improvement (measured by the 
 standard of present utility) has been made in personal 
 qualities, accumulated knowledge, and material 
 
 surroundings 
 
 31-5 
 
 (3) Effort is more or less properly distributed between 
 different ends, both present and future, and any irk- 
 someness of effort is more or less properly weighed 
 against results ..... 35-7 
 
 (4) Much or little wealth is deliberately sacrificed for the 
 sake of non-economic satisfactions regarded as more 
 important ..... -38 
 
 But Society will also be better or worse off according as : — 
 
 (5) The age-composition of the population is more or 
 
 less favourable to productive effort . . . 38-9 
 
 (6) Greater or less advantage is taken of co-operation . 39 
 
 (7) Population is more or less near the most suitable 
 magnitude . . .... 39
 
 xii CONTENTS 
 
 CHAPTER III 
 
 PAGES 
 
 Co-operation, or Combination and Division 
 
 OB' Labour ..... 40-51 
 
 " Simple Co-operation " is said to take place when several 
 persons combine to do some one thing which could not be done 
 at all, or could not be done quickly enough, by each separately 40 
 
 "Complex Co-operation," usually called "Division of 
 Labour," takes place when several persons unite to produce 
 some result by each doing some difterent kind of work. It 
 has several advantages : — 
 
 (1) It enables the different qualities of difterent parts of 
 the world to be brought into useful conjunction. Some 
 things can be procured only from particular spots, and 
 many can be obtained by spreading their production 
 unequally, so that the people of one area produce more 
 of the particular product than they consume, and the 
 people of other areas less .... 40-44 
 
 The best distribution is that which enables all the 
 things required, taken as a whole, to be produced 
 easiest. The practical question is always what changes 
 are desirable ...... 44-7 
 
 (2) It enables the different natural qualities of individuals 
 
 to be fully utilised ..... 47-8 
 
 (3) It enables greater skill and dexterity to be acquired 
 
 for each occupation ..... 48-50 
 
 (4) It facilitates the acquisition and retention of the sum 
 of knowledge which is handed down from one genera- 
 tion to another by means of books and oral teaching 50-51 
 
 (5) It economises tools and machinery by keeping them 
 
 in more constant use . . . . .51 
 
 CHAPTER IV 
 
 Population ...... 52-71 
 
 In the absence of co-operation, larger population, 
 which means less land per head, would be inimical to 
 wealth. But the greater the number of people the greater 
 the advantage which can be drawn from co-operation.
 
 CONTENTS xiti 
 
 PAGES 
 
 Hence the disadvantage of less land per head may be more 
 than counterbalanced by the greater advantage drawn 
 from co-operation ..... 52-3 
 
 A dispute about the population of the ancient world 
 directed attention to the progressive rapidity with which 
 the population would grow if restrained by nothing more 
 than lack of human fecundity. This led Wallace to argue 
 that no Utopia was possible, since it would be over- 
 crowded ...... 54-7 
 
 Malthus said that there must always be a difhculty in 
 providing subsistence, because population could, so far 
 as the reproductive faculties of mankind alone are con- 
 cerned, double itself every twenty-five years, while the 
 annual supply of subsistence could not be made to increase 
 more rapidly than by an equal amount every twenty-five 
 years. He did not explain why a larger population should 
 not be able to produce as much per head as a smaller one 57-60 
 
 His omission was supplied by the "law of diminish- 
 ing returns" which, though anticipated by Turgot, first 
 came to light during the controversy about protection to 
 agriculture in 1813-15. In its crudest form this "law" 
 asserted that increase of population caused an actual 
 diminution of returns in agriculture by necessitating the 
 extension of cultivation to inferior lands, and the adoption 
 of more intensive and less productive methods on lands 
 already in cultivation ..... 60-64 
 
 In its more scientific form the law only asserted a ten- 
 dency to this result, and admitted that the tendency 
 might be defeated for a time by " improvements." This 
 was thought enough to show that increase of population 
 must be a bad thing, since it was assumed that in its 
 absence "improvements" would increase produce per 
 head. But we cannot tell what improvements would have 
 been made if population had taken some other course 
 from that which it has taken. There is, too, no ground 
 for assuming that if returns to agriculture have diminished, 
 the returns to all kinds of industry, including agriculture, 
 must have diminished, nor consequently for assuming 
 that everything which tends to diminish returns in agri-
 
 xiv CONTENTS 
 
 PAGES 
 
 culture must tend to diminish them in all industries taken 
 together ...... 64-7 
 
 In manufacture as in agriculture a large aggregate pro- 
 duction has its advantages and its disadvantages. In each 
 of them taken separately, and in both taken together, 
 there is a point at which it can be said that the produc- 
 tiveness of labour is greater than it would be if the aggre- 
 gate production were either greater or less than it is. From 
 this it follows that there is at every given time a particular 
 population which is neither too small nor too great. A 
 departure from this point either upwards or downwards 
 is unfavourable to the productiveness of labour. The 
 position of the point is, however, perpetually being 
 altered by changes of circumstances . . . 67-70 
 
 The law of diminishing returns should be so expressed 
 as to be universally true .... 70-71 
 
 CHAPTER V 
 The Social Order ..... 72-95 
 
 In order to obtain wealth it is necessary for Society to 
 be well organised ; our existing condition is far from 
 chaos, though it is also far from perfection. The present 
 organisation depends on various institutions . . 72-6 
 
 The Family inures young persons to labour, and for 
 the most part determines their allocation between the 
 various employments, and its economic solidarity affects 
 population ...... 76-8 
 
 Property in movable objects and dwelling-places arose 
 out of the dislike of being ousted from the possession of 
 anything. Property in land is of later origin, and at first 
 is indistinguishable from territorial sovereignty . 78-82 
 
 The effect of the institution of property is to prevent 
 many destructive actions, and also to make it the 
 interest of various persons to perform productive opera- 
 tions. It also obliges people to co-operate, and facilitates 
 co-operation by enabling it to rest upon innumerable 
 separate agreements between individuals. It enables world- 
 wide co-operation to take place, although there is no 
 world-wide authority ..... 82-6
 
 CONTENTS XV 
 
 PAGES 
 
 States were at first representative of groups of persons, 
 but have become territorial. They sometimes fight, and 
 even in peace they often carry out anti-social policies in 
 regard to each other, but on the whole their general policy 
 may be said to be one of co-operation . . . 86-9 
 
 Inside its own limits each is an important factor in 
 economic organisation. Laisser /aire never was nor 
 could have been practised .... 89-91 
 
 The State arranges for means of communication and 
 many other services . . . . '91-5 
 
 CHAPTER VI 
 The Controlling Power of Demand . .96-119 
 
 Under the influence of existing institutions people work 
 and allow their property to be used, not to satisfy their 
 own wants directly, but to get money . . 96-99 
 
 Some sell objects or "commodities" and some sell 
 services direct to the consumer ; others lend land, money, 
 or other objects for money-payments. Intermediaries 
 have placed themselves between workers and owners on 
 the one side and consumers on the other side, and call 
 the gains made by their occupation " profits," generally 
 calculating these profits as a percentage on their " capital." 
 This has led to the present organisation being called 
 "capitalistic," but the intermediaries have no real control 
 over what is produced, their action, like that of others, 
 being controlled by demand .... 99-105 
 
 Value and utility used to be contrasted, but there is a 
 close connection between them in the fact that the amount 
 which a person will give for a small addition to the amount 
 of a commodity supplied to him, varies with the utility of 
 that addition to him ..... 1 06-11 
 
 Therefore, so far as a single person, a number of persons 
 with equal wants and means, or a number between whom 
 means are distributed in proportion to wants are con- 
 cerned, wants may be said to control production ; but 
 where a number of persons with different means which do
 
 xvi CONTENTS 
 
 PAGES 
 
 not correspond with their different wants are concerned, 
 
 we can only say that production is controlled by demand 1 1 1-14 
 
 Demand postulates ability to pay as well as want. The 
 demand for different things is of different "elasticity," 
 and it is according to this elasticity that the price of any- 
 thing rises and falls, much or little, with variations in the 
 quantity of it offered for sale, thus offering stronger or 
 weaker inducements to further production . . 1 14-19 
 
 CHAPTER VII 
 The Control of Provision for the Future 120-38 
 
 Society has no means for consciously deciding how much 
 provision to make for the future. The actual provision is 
 chiefly made in response to the demand for certain goods 
 which comes from "saving." A small amount of saving is 
 caused simply by the desire to be able to spend the amount 
 saved at a later date ..... 120-24 
 
 In modern conditions the greater part of saving is caused by 
 the desire to secure interest. The stimulation afforded to 
 saving by a given rate of interest differs with — 
 
 (i) The strength of desire to improve the future . 125-29 
 
 (2) The ability to save ..... 129-31 
 
 Given a certain desire and ability to save, the 
 amount of saving is controlled by the rate of 
 interest ...... 130-31 
 
 If all other changes were excluded, the rate of 
 interest would fall simply as more and more savings 
 were accumulated, and the degree of the fall would 
 depend on the magnitude of the field for the employ- 
 ment of savings at each different rate . . 131-34 
 
 But increase in the number of people is a counter- 
 acting force, and invention and discoveries are con- 
 tinually altering the relative advantages of the 
 methods which require, and the methods which do 
 not require saving, so that they sometimes tend to 
 lower and sometimes to raise the rate of interest . 134-36 
 Inequality of means between individuals forms an obstacle 
 to correspondence betM een the aggregate amount saved and
 
 CONTENTS xvii 
 
 PAGES 
 
 the amount which would be saved by a society exercising 
 perfect judgment ...... 136-37 
 
 Saving does not constitute the whole of the provision made 
 for the future, as it can only be applied to things capable of 
 being property . . . . . .138 
 
 CHAPTER VIII 
 Continuous Power to Demand, or Income 139-62 
 
 Income is the great source of power to demand. It is 
 conceived as the money coming in to the receiver, but 
 we add the money value of receipts in kind when they 
 can be easily valued ..... 139-43 
 
 We do not include the proceeds of undisguised robbery, 
 nor inheritances and gifts .... 144-47 
 
 Income from ownership of property consists of regular 
 receipts after deduction of necessary expenses, and these 
 expenses are ordinarily taken to include all that is neces- 
 sary to keep the property unimpaired . . . 147-48 
 
 It is difficult to calculate how much is required for this, 
 and in fact the principle is not much applied to mines or 
 to life-annuities. ..... 148-53 
 
 Income from labour is reckoned after deduction of 
 necessary continuing expenses, but without deduction for 
 preliminary expenses of training, etc. . . 153-56 
 
 The income of many institutions may be added to the 
 income of individuals to form a total or aggregate income, 
 but it is better not to attempt to add something con- 
 ceived to be the income of States and their territorial 
 subdivisions ...... 156-60 
 
 Persons with property can for a time exert a power of 
 demand in excess of that given by their income, if they 
 choose to part with their property and spend the pro- 
 ceeds, but the total so spent is not very large. The 
 power to demand given by income is often transferred by 
 means of gifts and allowances, but it may then be re- 
 garded as exercised by deputy. Subject to these modifi- 
 cations, the power to demand is distributed approximately 
 in proportion to income. .... 160-62
 
 xviii CONTENrS 
 
 CHAPTER IX 
 
 PAGES 
 
 The Classification of Incomes . . . 163-72 
 
 The eighteenth-century English classification of in- 
 comes into wages, profits, and rent was appropriate to 
 the time and place. Adam Smith endeavoured to give 
 precision to it by identifying wages with income derived 
 from labour, profits with income derived from capital, 
 and rent with income derived from land . . 163-9 
 
 He and his successors shirked the difficulty arising 
 from the fact that his " undertaker " gets his profits both 
 from labour and from capital, but in recent years the 
 classification has been made fourfold instead of threefold 
 by the division of the old " profits " into " interest " of 
 the capitalist and earnings of the entrepreneur, while the 
 distinction between interest (in the new sense) and rent 
 has been made much less marked by Marshall's concep- 
 tion of " quasi-rent " ..... 169-71 
 
 The way is now open for a twofold division into 
 income derived from property and income derived from 
 labour ....... 17 1-2 
 
 CHAPTER X 
 
 The Division of Income between Owners and 
 
 Workers ..... 173-81 
 
 An inquiry into the division of income is only an 
 inquiry into the relative magnitude of different incomes 
 or classes of income ..... 173-4 
 
 That the average owner should be in receipt of a 
 higher income in proportion to that of the average worker 
 is not a necessary result of property as a whole receiving 
 a larger proportion of the aggregate income . . 174-5 
 
 The problem is one of aggregate, not of unit, values, 
 so that changes in total quantity have to be taken into 
 account as well as changes in the value of units. The 
 effect of relative changes in the supply of the two things
 
 CONTENTS xix 
 
 PAGES 
 
 depends on the elasticities of the demand for them. 
 Changes in the elasticities of demand may arise from in- 
 crease or decrease of income, mutation of fashion or 
 taste, and from inventions and discoveries . . I75~9 
 
 In the past it is probable that property's share has 
 increased relatively to that of labour . . . 1 80-81 
 
 CHAPTER XI 
 Incomes from Ownership of Property. . 182-7 
 
 The first and by far the most powerful cause of in- 
 equality of incomes derived from property is the fact that 
 persons receive unequal amounts by bequest and inherit- 
 ance. Law and custom sometimes encourage and some- 
 times discourage dispersion of property on the death of 
 its owner ...... 182-5 
 
 The second cause of the inequality of property is in- 
 equality of savings, chiefly due to the inequality of in- 
 comes from which the savings have to be made, and 
 partly to the varying magnitude of the claims of depen- 
 dents ....... 185-7 
 
 The third cause is the fortuitous alterations which take 
 place in the value of property once acquired . . 187 
 
 CHAPTER XII 
 Incomes from Work . . . 188-208 
 
 Difference in income received from work is not all a 
 question of value, since the quantity of work done is a factor. 
 The quantity varies from individual to individual with industry 
 and ability ....... 18S-9 
 
 The income derived from different occupations by persons 
 of average industry and ability working at them depends on 
 the value of the work done. Labour does not create value. 
 We might expect competition to arrange the comparative 
 number of persons in the various occupations so that the
 
 XX CONTENTS 
 
 PAGES 
 
 outputs would be of the precise value which would yield 
 the same remuneration for the average person in every 
 different occupation ...... 189-91 
 
 But we could see that — 
 
 (1) There would always be deviations from this level, 
 some of which might be of long duration . . 191-3 
 
 (2) Occupations offering large prizes to persons of excep- 
 tional success would yield less than the others to the 
 average person ..... 193-5 
 
 (3) Disagreeable occupations would be better paid than 
 agreeable ones . . . . .195 
 
 (4) Irregular employments would be better paid for the 
 periods during which work is actually carried on, and 
 also, if uncertainty was a deterrent, on the whole . 195-6 
 
 (5) Occupations for which expensive training or long 
 postponement of earnings is necessary would bring in 
 higher incomes during working life . . . 196-7 
 
 If this were a true picture, we could say that not 
 the earnings but the whole advantageousness of all 
 occupations was equal. But it is not a true picture, 
 because even if proper sums for original cost of train- 
 ing, etc., are deducted from earnings, a large balance 
 of advantageousness remains in favour of the trades 
 which require expensive training and long postpone- 
 ment of earnings. This comes about because the 
 rearing of children is not a matter of business, but 
 is left to the family, charity, the Church, and the 
 State . ..... .197-201 
 
 Hence differences in earnings from labour are much 
 more largely hereditary than they would be if they de- 
 pended only upon the inheritance of natural qualities 202 
 
 There is considerable difterence in the remuneration 
 of the two sexes owing to their having different 
 qualities and the field for employment of women being 
 for various reasons smaller than that for the employ- 
 ment of men ...... 202 -7 
 
 Heredity and sex are the twi) greatest causes of in- 
 equality of income ..... 207-8
 
 CONTENTS xxi 
 
 CHAPTER XIII 
 
 PAGES 
 
 The Relation between Individual Income ~" 
 AND Individual Wealth , . .209-23 
 
 We often accept income as a rough standard of the wealth 
 of " independent " persons living at the same time and place. 
 But— 
 
 (1) Income does not cover all material benefits, some 
 being received in consequence of the income-receiver 
 doing work for himself and using his own property . 209-10 
 
 (2) Income is not all devoted to the benefit of its receiver, 
 as he generally spends a portion of it in satisfying 
 family or other " claims " upon him and another por- 
 tion in promoting non-economic ends . . 210-12 
 
 (3) Income for any period includes saving during that 
 period, and savings do not directly satisfy wants like 
 spendings, so that wealth for the period is measured 
 
 by the spendings rather than by the whole income . 212-13 
 
 (4) Different persons having different wants, a given in- 
 come may go much farther in promoting one person's 
 wealth than it goes in promoting another's . .214-15 
 
 (5) Different persons having different capacity for manag- 
 ing income, one person will " get more out of" a given 
 income than another . • . . . 215-16 
 
 (6) Incomes are obtained under very different condi- 
 tions ....... 216-17 
 
 (7) The utility of additional income diminishes as the 
 income grows ..... 217-20 
 
 Probably on the whole, the seven facts together 
 somewhat alleviate inequality, owing chiefly to the 
 very powerful influence of the seventh . . 220-21 
 
 For comparisons of the wealth of persons or groups 
 of persons living at different times or under different 
 conditions of climate, etc., at the same time, income is 
 a less useful measure than for comparisons of the 
 wealth of individuals and groups living at the same 
 time and place, and it is less and less useful as the 
 times are more distant and the places more unlike . 221-23
 
 xxii CONTENTS 
 
 CHAPTER XIV 
 
 PAGES 
 
 The Wealth of Nations .... 224-74 
 
 The wealth of a nation was at one time regarded as its 
 aggregate riches : modern discussion assumes that it is 
 greater or less according as the average or typical member 
 of the nation has more or less. It takes the members of 
 the nation to be the inhabitants of an area, and the area 
 discussed is usually a customs area, not necessarily the 
 territory of a sovereign State, but this is accidental 
 rather than fundamental .... 224-28 
 
 It was long commonly thought that the great thing 
 necessary for national wealth was the acquisition and 
 retention of a stock of bullion, and that proper regula- 
 tions were necessary to secure this end. The earliest 
 plan was to make laws allowing bullion to come into 
 the country, but forbidding its being carried out. Later 
 it was argued that all that was wanted for the acquisi- 
 tion and retention of bullion was a " favourable balance 
 of trade " . . . . . 228-29 
 
 This was true subject to proper allowances being made 
 for (x) cost of carriage, (2) payments for other services, 
 (3) payments for the use of property, (4) investments, 
 and (5) various non-commercial payments . . 229-35 
 
 If exact figures had been available for imports and 
 exports, and also for the necessary allowances, fears 
 would have been removed in most countries. As no such 
 figures were available, each nation thought itself in 
 danger of losing its money unless it made proper regula- 
 tions encouraging exports and discouraging imports . 236-37 
 
 When eventually these regulations were seen to be 
 perfectly futile for the purpose for which they were in- 
 tended, a great system of prohibitions, duties, and 
 bounties had grown up, and the doctrine of " protection" 
 was invented in the interest of the parties who would be 
 hurt by the abandonment of the system . . 237 
 
 Popular support of Protection arises chiefly from the 
 belief that it gives employment, but this belief is 
 founded on fallacious rea.soning . . . 2^8-42
 
 CONTENTS xxiii 
 
 I'AGES 
 
 More enlightened protectionists argue that Protection 
 will cause a better selection of industries by the protected 
 country, which is unlikely .... 242-47 
 
 Protection is sometimes supported on the ground that 
 it enables a country to tax people living outside it : this 
 is sometimes possible, but seldom worth doing. . 247-53 
 
 The effects of fiscal policy are not likely to appear in 
 the form of perceptible differences in the condition of 
 the working-classes of different countries . . 253-55 
 
 To discover the causes of differences in the wealth of 
 nations we should begin by considering the differences 
 in the wealth of small groups inhabiting very small 
 areas ....... 255-57 
 
 Then in the wealth of larger groups, such as the inhabi- 
 tants of English counties .... 257-66 
 Applying what is thus learnt to nations, we find that the 
 comparative wealth of nations depends upon — 
 
 (i) The natural and acquired qualities of the people . 266-69 
 
 (2) Their occupations ..... 269-71 
 
 (3) The value of the property which they own inside and 
 outside their country . .... 271-72 
 
 (4) The degree in which their country is " new " . 272-74
 
 WEALTH 
 
 CHAPTER I 
 
 THE SUBJECT-MATTER OF ECONOMICS 
 
 There is no reason for not accepting the time- 
 honoured identification of the subject-matter 
 of economics with " wealth." At any rate, I 
 intend to accept it in the present work, and 
 consequently I shall treat the question " What 
 is wealth?" as exactly the same question as 
 " What is it most convenient to take as the 
 subject-matter of economics?" Most con- 
 venient, I say, because economics is a depart- 
 ment of science, and therefore the question 
 what should be included in it is a question of 
 the most convenient delimitation of the different 
 departments of science. 
 
 To such a question the practice of writers 
 and oral teachers usually furnishes a better 
 answer than their preliminary search for a 
 definition which they hope will fit the matter 
 of their investigations. I proceed, therefore, 
 to ask what is, in fact, the usual subject-matter 
 of books and lectures on economics. 
 
 It is, in the first place, undoubtedly some- 
 thing possessed or enjoyed by human beings. 
 
 2 »
 
 2 THE SUBJECT-MATTER OF ECONOMICS 
 
 It is true that when economics first began to 
 stand out as a separate department of science, 
 the economists stepped straight into contro- 
 versies about national weakh, and it did not 
 occur to them to ask themselves definitely 
 whether they had to do with any other body 
 than "the nation." So when Steuart, in 1767, 
 called his large work An Inquiry into the 
 Principles of Political (Economy, the term 
 " political " indicated that he intended to discuss 
 national wealth. Adam Smith, ten years later, 
 probably imagining himself to be precluded 
 from giving his book the same title as Steuart's, 
 used An Inquiry into the Nature and Causes of 
 the Wealth of Nations as synonymous. In the 
 more general parts of his treatise, however, he 
 often substitutes " the society " for " the 
 nation," and it is clear that he intended his 
 work to cover more than a literal interpretation 
 of the title would include. Later writers have 
 often used the word " community " in the same 
 way as Adam Smith used " society," and have 
 spoken of " the wealth of the community " 
 when they massed into one body all the human 
 beings with whom they were dealing. 
 
 All economists have considered the wealth 
 of classes and individuals within tlie community 
 as well as that of the whole community, so 
 that it may be said that neither the use of the 
 term " political " in " political economy " nor 
 the use of the term " nation " are to be taken 
 as intended to confine the science to the wealth 
 of nations. The subject-matter of political 
 economy or economics has always been the 
 wealth of human beings generally. 
 
 Originally " wealth " in ordinary English 
 was the name of a state or condition of human
 
 CONCRETE THINGS 3 
 
 beings such as is suggested by the prayer for 
 the King in the Book of Common Prayer, 
 " Grant him in health and weaUh long to live." 
 The suffix th indicates a state or condition, so 
 that " wealth " indicated the state or condition 
 of being well, or as we should say in modern 
 English, prosperous, just as " health " indicated 
 the state of being healed or free from disease. 
 But in course of time the word came to be 
 applied to money and other concrete things, 
 command over which made a person live in 
 wealth. In the eighteenth century some 
 writers found it necessary to protest against the 
 view that national policy should be directed 
 towards the aim of securing a perpetual 
 increase of the gold and silver within the 
 national territory. In doing so they very 
 naturally said that wealth did not consist 
 entirely of gold and silver, but also of certain 
 other concrete things, such as horses and cattle^ 
 houses and orchards. This led them to lose 
 sight of the older meaning of wealth as a 
 state or condition of human beings, and to 
 regard it rather as certain material possessions 
 of human beings. 
 
 Most of the statements which an economist 
 is likely to make relate to quantities : he deals 
 with increases and decreases. It is impossible 
 to make statements about increases and 
 decreases of the wealth of human beings if 
 their wealth is supposed to consist merely of 
 certain concrete objects without reference to 
 time. Propositions about increases of tables, 
 chairs, or loaves, which at first sight appear 
 intelligible enough, are as meaningless as pro- 
 positions about the increase of raindrops with- 
 out reference to time would at once appear to
 
 4 THE SUBJECT-MATTER OF ECONOMICS 
 
 us. It is quite true that we do not usually, 
 find bare statements that tables, chairs, or 
 loaves have increased unintelligible, but that is 
 because from the context or by some other 
 means we have gathered that the statement 
 refers to these things, not in the abstract, but 
 in some definite relation to time. We are led to 
 think of the tables and chairs in the world or 
 some part of the world at some one instant 
 of time, or of the loaves produced in the 
 world or some part of it in some particular 
 length of time, such as a week or a year. 
 
 But till quite lately the searchers for a formal 
 definition of " wealth " overlooked this point, 
 and great confusion resulted from the over- 
 sight. The more primitive the economy of a 
 people, the more likely are they to have regard 
 to their possessions at a point of time rather 
 than to what they can expect to receive as 
 time passes. The poorer a person is, the more 
 likely is he to think of what he has at the 
 moment and the less of his receipts in the 
 past or his prospect of receipts in the future. 
 The question " How much a year have you? " 
 or even "How much a week?" is not one 
 which occurs to primitive man or even at 
 the present time to a man of the lowest 
 class or to a child of any class in the most 
 " advanced " countries. To them the question 
 is "How much have you got?" Hence it is 
 not surprising that the collection of objects 
 which a man of the seventeenth or eighteenth 
 century would usually have in his mind when 
 he talked of increases or decreases of wealth 
 would be the collection of things in existence 
 at a point of time rather than the amount 
 coming in or being created per annum or per
 
 ANNUAL PRODUCE 5 
 
 diem. Nor is it surprising that in cultivated 
 society the conception of a periodical receipt 
 should have subsequently forced its way in and 
 overpowered the conception of a realized 
 amount. 
 
 It is, however, perhaps rather surprising that 
 the transition horn one idea to the other should 
 have taken place without economists noticing 
 the change. An explanation which is at least 
 plausible may be given. Adam Smith greatly 
 facilitated the transition by first calling his 
 book An Inquiry into the Nature and Causes 
 of the Wealth of Nations, and then deliberately 
 defining the wealth of a nation as its " annual 
 produce," or " the necessaries or conveniencies 
 of life which it annually consumes." But he 
 did not notice the difference between the wealth 
 of a nation defined in this way and the con- 
 ception of it as a number of things possessed 
 at a point of time, because he was engrossed 
 with the desire to protest against the cruder 
 conception of it as the amount of gold and 
 silver possessed. Thus instead of saying that 
 the wealth of a nation is not the land^ cattle, 
 machinery, and other things possessed by it at 
 a point of time, but rather the annual produce 
 of the land and labour of the people, he says 
 it is not gold and silver^ but the annual produce. 
 Later writers for a long time followed him 
 in making the same antithesis, and were thus 
 led, like him, into overlooking the really 
 important part of the change which was being 
 made. 
 
 Whatever the explanation may be, there is 
 no doubt of the fact that economists did fail 
 to indicate clearly in their definitions of wealth 
 whether the wealth of persons and peoples,
 
 6 THE SUBJECT-MATTER OF ECONOMICS 
 
 which alone could be meant when quantitative 
 statements were made about " wealth," was the 
 collection of things possessed by them at a 
 point of time or the collection produced by 
 them, or somehow obtained by them, within a 
 length of time. But in their practice they 
 usually followed Adam Smith. Dealing, like 
 him, with the "production" and "distribu- 
 tion " of wealth, they were obliged to keep 
 length of time in their minds : the production 
 of wealth was greater or less according as 
 more or less was produced per annum, and the 
 distribution of wealth, as he and they conceived 
 it, was the distribution of the annual produce. 
 Thus, in spite of the absence of definitions 
 indicating the fact, the " wealth " with which 
 economists generally intended to deal when they 
 made quantitative statements concerning it was 
 the wealth periodically produced or coming in, 
 and we can now proceed to inquire of what 
 this was supposed to consist. 
 
 The English statisticians of the latter part 
 of the seventeenth century regarded the annual 
 produce of the country with the eyes of a 
 farmer. They thought of the raw produce of a 
 farm, and regarded this as forming the sub- 
 sistence of the whole of the people. The 
 French economistes, or physiocrats, the 
 followers of Quesnay, had the same agri- 
 cultural standpoint, and made the doctrine more 
 definite by expressly denying the quality of 
 productivity to all labour not employed im- 
 mediately on the land, x-ldam Smith made a 
 change in the right direction by including in 
 " productive " labour not only the labour 
 employed immediately on the land, but also all 
 other labour which improved material objects,
 
 NET ANNUAL PRODUCE 7 
 
 and thus, as he said, did not perish in the very 
 instant of its performance. Probably he would 
 not have halted here if it had not happened 
 that he mixed up the question of productive 
 and unproductive labour with an inquiry into 
 the accumulation of capital, and was thus 
 insensibly led to ask himself what labour 
 produces capital instead of what labour pro- 
 duces "produce." J. B. Say saw the weak- 
 ness of his position, and extended the notion 
 of productive labour to cover " non -material 
 products." From his time, in spite of J. S. 
 Mill, who here, as often, tried to furbish up the 
 obsolete, the annual produce was generally 
 regarded as consisting of " services " as well 
 as " commodities." 
 
 The annual produce was sometimes for 
 greater accuracy called the " net produce," 
 because it was seen that care must be taken 
 to avoid double or triple reckoning of the 
 same thing, which would occur if, for example, 
 iron ore, pig iron, and iron pokers were all 
 added together. The annual produce, or more 
 precisely, the annual net produce, consequently 
 came to be regarded as consisting only of 
 those commodities and services which actually 
 reach the consumer, plus those commodities 
 which were added to the existing stock of 
 commodities and minus those which were 
 deducted from the existing stock. The con- 
 sumer here was of course the final consumer, 
 who consumes for his own satisfaction and not 
 in order to secure some further result ; for 
 example, the consumer of wheat was the person 
 who ate it in whatever form, not the miller or 
 the baker. 
 
 Now there are no means by which we can
 
 8 THE SUBJECT-MATTER OF ECONOMICS 
 
 actually distinguish net produce from gross pro- 
 duce in this way if we approach the subject 
 from the side of the producer. A few commo- 
 dities, such as loaves of bread, may be sup- 
 posed without material inaccuracy to belong 
 entirely to net produce. But many commodities 
 are used both for immediate satisfaction and 
 for further production, and there is no way, 
 from the producer's side, of distinguishing 
 which parts are used in one way and which in 
 the other. For example, of lubricating oil, 
 the quantity used in a cotton-spinning factory 
 will be a means towards the ^production of 
 another commodity, cotton cloth : the quantity 
 used in running a motor-car for pleasure will 
 fall into net produce. Again, gas is sent out 
 from the same gasworks to persons who use 
 some of their supply for driving a gas-engine 
 to make something which they sell, and some 
 to light their own dinner table. Another 
 great difficulty arises from the fact that 
 when the stock of existing things which 
 are used by man is, as continually happens, 
 depleted by the subtraction of some things and 
 increased by the accession of other things, 
 there is no way of marking out the gross 
 additions into two parts, the net additions and 
 the remainder. Suppose the stock of ships is 
 diminished by the sinking or breaking up of 
 three hundred small sailing ships and increased 
 by the addition of fifty large steamers : it 
 would be misleading to say simply that the 
 number of ships was reduced by two hundred 
 and fifty, while on the other hand, any calcula- 
 tion as to the relative carrying capacity of 
 sailing ships and steamers and a consequent 
 reduction of the two to some common measure
 
 INCOME 9 
 
 involves all sorts of assumptions and 
 conjectures. 
 
 A perception, not always very distinct, of 
 these difficulties has gradually led to the 
 substitution of " income " for " produce " or 
 " net produce." One of Marshall's suggestions 
 for the definition of economics at the beginning 
 of the earlier editions of his great work was 
 how man " gets his income, and how he uses 
 it." Here we approach the subject from a 
 dififerent side. Instead of starting from the 
 land and labour and trying to trace the product 
 through its various stages, excluding double 
 reckonings as we go, we look in the first place 
 at the valuation of the net results which we get 
 by considering individuals' money -incomes. 
 
 But money -income does not always include 
 everything which we should regard as belong- 
 ing to the net produce. Nearly all farmers con- 
 sume part of their own produce, most wives 
 perform domestic duties of a kind which add 
 to the material welfare of themselves and their 
 families, and so on. Observing this, economists 
 have been led to ^dd to the actual money - 
 income a money-valuation of all economic ser- 
 vices and commodities which are not accounted 
 for in the money -income. This plan encounters 
 two difficulties. How are we to decide what is 
 economic, and how are we to value ? Are the 
 services of a mother to her child economic, and 
 are they to be appraised at the same money- 
 value as those of a wet-nurse? 
 
 Supposing these difficulties to be surmounted, 
 we find ourselves dealing with a sum of money 
 supposed to represent the commodities and ser- 
 vices of an economic character which are 
 enjoyed, plus those commodities which form
 
 lo THE SUBJECT-MATTER OF ECONOMICS 
 
 the net addition to the stock of useful things. 
 But quantitative statements about this sum of 
 money are not satisfying by themselves. If we 
 say the income of the community has increased, 
 we do not want to be met with the retort " The 
 income valued in money may have gone up, 
 but that is only due to a fall in the value of 
 gold. The increased sum of money at which 
 you value the income means no more and no 
 better commodities and services than before." 
 Consequently we are driven to " go behind" 
 the valuation by inquiring into the purchasing 
 power of money, and so the adoption of the 
 money-estimate of income does not in the least 
 relieve us from the necessity of considering 
 the "real" income. The inquirer who has 
 been told that income consists of commodities 
 and services, and that it rises and falls with the 
 quantity of those commodities and services, still 
 wants to know how that quantity is to be 
 measured. 
 
 Where commodities and services of different 
 kinds are concerned, there is clearly no possi- 
 bility of comparing the quantities intelligibly 
 by weight, bulk, or number. We might say 
 that a collection of things consisting of one 
 loaf of bread, one pound of beef, one pint 
 of beer, and one railway ticket is equal to 
 half of a collection of things consisting of two 
 similar loaves of bread, two similar pounds of 
 beef, two similar pints of beer, and two similar 
 railway tickets. But we cannot make any state- 
 ment about the relative quantities included in 
 two collections one of which consists, as before, 
 of one loaf, one pound of beef, one pint of 
 beer, and one railway ticket, and the other 
 collection of three loaves, half a pound of beef,
 
 MEASURED BY VALUE ii 
 
 and two railway tickets. At first sight of the 
 problem we may think we can, but a moment's 
 reflection makes us see that the comparison we 
 then have in our minds is one of values, not of 
 quantities. 
 
 If we drop quantities and compare values, we 
 are satisfied so long as no doubt is raised as to 
 the invariability of our standard. At the same 
 time and place our standard will always " mean 
 the same thing " in regard to the two 
 collections of commodities and services we are 
 considering, but as soon as the places differ, 
 and still more as soon as the times difTer, we 
 begin to question whether the measure of value 
 means the same thing at the two places or 
 times. We then invariably find that it does 
 not. Whatever standard be taken, at the one 
 place or time some commodities or services 
 will be worth more of it, and others less, than 
 at the other place or time : it will even often 
 happen that some commodities or services 
 which are worth little of it at one place or time 
 are wholly unprocurable by the offer of any 
 quantity of it at the other place or time. 
 
 Eventually we find ourselves groping after 
 a measure of the good effect of the commodi- 
 ties and services upon the persons who get 
 them ; we find we really want to know whether 
 a person or body of persons with such and 
 such an " income " in pounds sterling (or con- 
 sisting of such and such commodities and 
 services) is what we usually call as " well off " 
 as another person or body of persons with such 
 and such other income in pounds sterling (or 
 consisting of such and such other commodities 
 and services) at some other place or time. 
 
 Moreover, recent economic analysis has
 
 12 THE SUBJECT-MATTER OF ECONOMICS 
 
 drawn attention to the fact that even where 
 quantity can be measured by weight or bulk, 
 the effect of the enjoyment of these commodi- 
 ties on the persons who enjoy them cannot be 
 regarded as proportionate to the quantity. Six 
 loaves of bread consumed per day, it is pointed 
 out, will not make a man six times better off 
 than one per day. Even £6,000 a year to be 
 spent as he pleases will not make a man six 
 times as well off as if he had only £1,000 a 
 year. With £6,000 a year he will not consume 
 six loaves instead of one : by introducing 
 variety he can retard the fall of utility, but he 
 cannot altogether prevent it. With the larger 
 income he must spend some of his pounds 
 sterling on more trivial satisfactions than would 
 be obtained by the least important pounds 
 spent out of the £1,000 a year. 
 
 In the last forty years it has consequently 
 been the practice of economic teachers to deal 
 more and more with the ultimate results of the 
 possession, use, and consumption of commodi- 
 ties and services, regarding these commodities 
 and services as the means to an end rather 
 than an end in themselves. So, instead of 
 having our attention directed entirely to out- 
 ward objects and particular actions, we find 
 ourselves considering " utility " or " satis- 
 faction." Nor is this all. The democratization 
 of literature and political science which has 
 taken place since the earlier part of the 
 eighteenth century has led to the practice of 
 bringing into account the pain and irksome toil 
 involved in the creation of positive utility or 
 satisfaction. Most economic writers before 
 Adam Smith, and some after him, regarded the 
 interests of the " nation " in some way which
 
 UTILITY 13 
 
 enabled them to exclude the interests of the 
 " working classes," as we call them. Most of 
 the pain and irksome toil of production fall on 
 this portion of the people, sio that exclusion of 
 the working classes from the nation led to a 
 neglect of all consideration of the pain and 
 irksome toil involved in procuring " wealth " 
 for the nation. Whether the working classes 
 should labour for ten hours or for sixteen 
 was a question to be determined solely by- 
 discovering which number of hours produced 
 the greater amount of commodities. The idea 
 of deliberately sacrificing positive utility or 
 satisfaction in order to have greater leisure was 
 scarcely thought of. If he advocated it at all, 
 an economist would regard himself as 
 deliberately suggesting an economic sacrifice 
 in order to secure a non-economic but greater 
 good. Most recent economists would unhesita- 
 tingly reject this view, and regard the economic 
 condition of a people who had a certain amount 
 of positive satisfactions and worked ten hours 
 a day as superior to that of a people who had 
 the same satisfactions of a positive kind but 
 worked sixteen hours to obtain them. 
 
 Thus the subject-matter of economics has 
 become utility or satisfaction minus disutility 
 or dissatisfaction, so that if we retain " wealth " 
 as its compendious description, we must take 
 " wealth " as having reverted to its old meaning 
 of a particular state or condition of human 
 beings. 
 
 What that state or condition exactly is, how- 
 ever, it is not very easy to say. It is com- 
 pounded of satisfactions and dissatisfactions, 
 but these are by no means exclusively 
 economic : there are plenty of them which no
 
 14 THE SUBJECT-MATTER OF ECONOMICS 
 
 one in his senses and with any regard to the 
 ordinary usages of language would call eco- 
 nomic, and which no one with any regard to 
 the convenient delimitation of sciences would 
 attempt to treat in a work on economics. 
 
 Till recently most economists, if asked to 
 distinguish between satisfactions of an economic 
 and uneconomic character, would have said that 
 the economic could be bought and sold, and 
 also said or implied that the non-economic 
 could not be bought and sold. There are, 
 however, several difficulties to be overcome 
 before this can be accepted as furnishing a 
 criterion for distinguishing what is actually 
 treated in economic works from what is not. 
 On the one hand, it seems to exclude from 
 economics many things which are actually 
 included by every economist, or would be 
 included by him if he happened to come 
 across them. That the satisfaction which some 
 hundreds of thousands of people enjoy every 
 week from the use of Hyde Park is an economic 
 one no economist would think of denying, but 
 it seems impossible to describe that satisfaction 
 as even potentially exchangeable or subject to 
 purchase and sale. Again, if it were discovered 
 that Mars was inhabited by people like us, and 
 that the Martians found satisfaction in food, 
 clothes, and shelter just as we do, no economist 
 would be prevented from comparing the eco- 
 nomic condition of the ^Martians with our own 
 by the further discovery that the Martians had 
 not established a system of private property 
 nor practised exchange. Yet in that case could 
 it reasonably be said that the satisfactions of 
 being fed, clothed, and sheltered were saleable 
 in Mars ? And iif not, would the fact of similar
 
 ECONOMIC GOODS 15 
 
 things being saleable on the earth be sufficient 
 to justify us in regarding them as " potentially 
 saleable" in Mars? On the other hand, the 
 criterion of buying and selling brings many 
 things into economics which are not commonly 
 treated there and which it does not seem con- 
 venient to treat there. A large trade has 
 existed since (and no doubt before) history 
 began in supplying certain satisfactions of a 
 sensual character which are never regarded as 
 economic goods. Indulgences to commit what 
 would otherwise be regarded as offences against 
 religion or morality have been sold, sometimes 
 openly and almost at all times under some 
 thin disguise : nobody has regarded these as 
 economic goods. 
 
 The economists who have distinguished the 
 sphere of economics by the aid of this test seem 
 after all to have treated of just the same sub- 
 jects as are described as economic in the every- 
 day conversation of educated people. In such 
 conversation the term has no necessary refer- 
 ence to buying and selling, nor to the 
 potentiality of being bought and sold. We 
 talk of " economic questions," " economic 
 interests," and " the economic point of view." 
 \Vc separate economic questions from religious 
 questions, from literary questions, from histori- 
 cal questions, and from hundreds of other ques- 
 tions. We inquire whether in some particular 
 case the economic interests of some persons 
 are opposed to their political or their religious 
 interests. We regard some things as desirable 
 from an economic point of view which for 
 some non-economic reasons we reject as on the 
 whole undesirable. 
 
 In these and similar phrases the term
 
 i6 THE SUBJECT-MATTER OF ECONOMICS 
 
 economic conveys to our mind an impression 
 about which we have so httle doubt that we 
 find it difficult to define in the same way and 
 for the same reason as we find it difficult to 
 explain what we mean by the terms " blue " 
 or " red." Confronted suddenly by the word 
 " blue," a weather optimist thinks of the sky ; 
 some of us think of the block marked " blue " 
 in the box of paints with which we dabbled 
 when we were children ; others of our first or 
 last blue frock. Confronted by the word 
 " economic," one man may think first of coins, 
 another of figures in bank-books, another of 
 crops growing in the field and cattle browsing 
 in the meadow, and another of the morning 
 crowd going to its work in some great city. 
 None of them will come at all creditably 
 through a cross-examination on any definition 
 which they may construct either on the spur of 
 the moment or after considerable reflection. 
 But if one example after another were put 
 before them all, they would be found to agree, 
 at any rate very nearly, as to what things were 
 to be included and what excluded from the list 
 of things economic. 
 
 They would agree, for instance, that the 
 question " Was Mahommed the Prophet of 
 God?" was not an economic one, and that the 
 prohibition of pork as human food was of 
 economic interest. They would agree that 
 "Did Bacon write Shakespeare?" was not an 
 economic question, and that the satisfaction 
 which believers in the cryptogram would feel 
 if it were universally accepted that Bacon did 
 write Shakespeare would not be an economic 
 satisfaction, while on the other hand they would 
 agree that the controversy would have an eco-
 
 MATERIAL WELFARE 17 
 
 nomic side if copyright were perpetual and 
 the descendants of Shakespeare and Bacon were 
 disputing the ownership of the plays. 
 
 If their examination were continued, and 
 more and more examples adduced, they would 
 soon begin to say that there is no " hard and 
 fast line " between economic and non-economic 
 things, 'but that the one shades gradually into 
 the other, as blue neckties shade into green, so 
 that just as there are some ties which some 
 persons call green while others call them blue, 
 although every one is agreed that the sky (in 
 fine weather) is blue and the grass green, so 
 there are some things which some persons call 
 economic and others non-economic, although 
 every one is agreed that the satisfaction of 
 hunger is economic and that the satisfaction 
 which a Tibetan fanatic feels when he has 
 himself immured for life in the dark is non- 
 economic. 
 
 For ordinary purposes economic things can 
 best be described as economic, just as blue 
 things can best be described as blue. But if 
 we must have a second-best description for 
 the benefit of those who doubt whether they 
 know what is meant by the term economic, I 
 think we must fall back on " having to do 
 with the more material side of human happi- 
 ness," or more shortly, " having to do with 
 material welfare." 
 
 The exact phrase used does not really matter 
 very much, since we must face, and face boldly, 
 the fact that there is no precise line between 
 economic and non-economic satisfactions, and 
 therefore the province of economics cannot be 
 marked out by a row of posts or a fence like 
 a political territory or a landed property. We 
 
 3
 
 i8 THE SUBJECT-MATTER OF ECONOMICS 
 
 can proceed from the undoubtedly economic 
 at one end of the scale to the undoubtedly 
 non-economic at the other end without tinding 
 anywhere a fence to climb or a ditch to cross. 
 Beginning with the satisfaction of hunger and 
 thirst as the most material, we can arrange 
 other satisfactions roughly in order, till at last 
 we arrive at the most purely non -material, such 
 as that felt by a martyr dying of starvation 
 rather than abjure his God. We shall never be 
 able to say that 99 per cent, of such a martyr's 
 welfare was non-material and due to religious 
 fervour and the remaining i per cent, was 
 material and due to the sustaining effects of 
 the food he ate a week before. We shall never 
 be able to say of any man that 50 per cent, of 
 his welfare came from food, clothing, shelter, 
 pictures, and concerts, 25 per cent, from the 
 love of his wife, 15 per cent, from his support 
 of his Church, and 10 per cent, from his 
 pride in his position as president of the local 
 party caucus. But we can quite legitimately 
 and usefully consider what will increase or 
 diminish the more material side of his happi- 
 ness, or shortly, his material welfare or wealth, 
 and it is quite convenient to have a separate 
 department of science, called economics, to deal 
 with the causes of the material welfare or wealth 
 of human beings, considered both as a whole, 
 and as individuals, and also in groups.
 
 CHAPTER II 
 
 THE FUNDAMENTAL CONDITIONS OF WEALTH 
 FOR ISOLATED MAN AND FOR SOCIETY 
 
 Most of economics deals with man living in 
 society, but it is best to begin with the simplest 
 possible cases. I shall therefore disregard the 
 sneers which have sometimes been directed by 
 sciolists against " the Crusoe economy," and 
 consider for a moment the conditions on which 
 the material welfare or wealth of isolated man 
 depends. 
 
 Our Isolated Man must necessarily be some- 
 what of an abstraction. Adam, as described 
 in Genesis, was too much surrounded by super- 
 natural influences to be a useful type for our 
 purpose, and if we fell back on evolutionary 
 theories, we should, I suppose, trace the human 
 race back not to an isolated man, or even to 
 an isolated pair — an Adam with an Eve — but 
 to something more like a society of chim- 
 panzees. Robinson Crusoe is not quite satis- 
 factory, because he started on his career of 
 isolation with a stock of knowledge acquired 
 in societary existence, to say nothing of the 
 important tools and other things which he saved 
 from the wreck. Moreover, his efforts during 
 his isolation were frequently directed towards a 
 return to the societary existence from which he 
 
 19
 
 20 FUNDAMENTAL CONDITIONS 
 
 had accidentally become divorced, so that he 
 did not always act as a completely isolated man 
 would have done. In order to study profitably 
 the conditions on which the material welfare of 
 Isolated Man really depend, we can best pro- 
 ceed by imagining our Crusoe as having been 
 always the sole human inhabitant of the globe, 
 putting behind us any inquisitiveness as to how 
 he got there and as to the probable duration 
 of his life. We may also suppose that he 
 has by some means or other become located in 
 the most suitable situation for Isolated Man. 
 
 In these circumstances the wealth of the 
 Isolated Man will depend first on his original 
 qualities, secondly on the extent to which he 
 has improved his powers and his material 
 surroundings in the past, thirdly on the 
 judgment which he exercises in the use of his 
 actual powers and surroundings, and fourthly on 
 his deliberate choice between wealth and other 
 welfare . 
 
 I . The proposition that the original or 
 natural qualities of the Man are one of the 
 conditions on which his material welfare 
 depends needs little elaboration. If strong in 
 body and mind in proportion to his physical 
 needs, he wiJl obviously be able to satisfy those 
 needs more easily and better. The only mis- 
 take likely to be made is one which is not of 
 any very great practical importance, namely, the 
 omission from consideration of the magnitude 
 of physical needs. We are apt to regard the 
 stronger man as the superior engine for the 
 production of material welfare, without much 
 thought for his greater requirements in the 
 matter of food, clothing, and shelter. But we 
 cannot reasonably suppose that a large man
 
 MAN'S WORK IN THE PAST 21 
 
 gets greater satisfaction from his large meal, 
 his large suit of clothes, and his large bed than 
 the smaller man gets from his smaller meal, 
 clothes, and bed. The most favourable condi- 
 tion, therefore, is not simply the greatest 
 strength, but the greatest strength in proportion 
 to physical requirements. 
 
 2. When we start from any particular point 
 of time and consider the material welfare of 
 the man for the ensuing period, it is clear that 
 much depends on what he has done in the past. 
 
 {a) Unless he has abandoned himself to 
 some sort of vice which has enfeebled him, he 
 will almost necessarily have improved his 
 powers. The frequent repetition of different 
 forms of manual exertion will have made him 
 more expert with his hands and body. He can 
 scarcely live without observing, and can 
 scarcely forget all that he observes, so that 
 his knowledge can scarcely fail to increase, and 
 this increase of knowledge means an increase 
 of power to gain many, at any rate, of the 
 ends which he is likely to put before himself. 
 But over and above this merely incidental kind 
 of improvement, the man may have deliberately 
 set himself to improve his manual or mental 
 dexterity and to increase his stock of useful 
 knowledge. At one stage of his development, 
 for example, he may have trained his mind to 
 calculate distances and his hand to act on the 
 knowledge by shooting at targets when no 
 game presented itself, or he may have 
 deliberately experimented with different kinds 
 of ore with the intention of increasing his 
 knowledge of metals and their properties. The 
 longer he lives, then, the more expert and the 
 more well-informed he ts likely to become,
 
 22 FUNDAMENTAL CONDITIONS 
 
 (b) In addition to improving himself, our 
 Isolated Man may also have improved his sur- 
 roundings, that is to say, he may have made 
 them more suitable for his own purposes. The 
 outer crust of the earth itself may have had its 
 qualities altered by him in such a way as to 
 become either better or worse from his point 
 of view. He may have cultivated the soil in 
 such a way as to destroy many of its useful 
 properties, or by careful management he may 
 have made it more and more suitable for 
 cultivation in the future. In taking out of the 
 earth such things as stone, minerals, or clay, it 
 is true, he cannot expect to leave the land as 
 good as he found it, as he can when he takes 
 away crop after crop of vegetable or animal 
 produce. But while somewhat worsening the 
 land, he may all the same be improving his 
 surroundings as a whole. The stone or clay 
 which he takes out of the land will certainly 
 be not less but more useful to him when he has, 
 for example, fashioned them into the walls of a 
 house which he wants, than they were in their 
 raw, unworked state. It is surely better to 
 have a finished axe -head than the mere iron ore 
 necessary to make such an axe-head. 
 
 There is no simple means by which we can 
 measure the extent or amount of improvement 
 which the Man may have effected in his outward 
 surroundings. The utility of the changes which 
 have been effected is frequently increased or 
 diminished, or altogether destroyed, by altera- 
 tions in the circumstances of the Man. When, 
 for example, he has made a tool, some change 
 in his knowledge may easily make it more 
 useful to him than it was when he made it, 
 while some other change in his knowledge may
 
 MAN'S WORK IN THE PAST 23 
 
 cause him to lay it aside as utterly useless. He 
 has, let us say, with great labour dug a number 
 of pitfalls in which to catch wild animals, and 
 these require elaborate re-roofing each time 
 they have come into action. Then he discovers 
 some simpler kind of trap, which can be re-set 
 time after time with no appreciable labour : 
 such an invention will entirely destroy the 
 usefulness of the old pitfalls, and the man will 
 quite rightly, quite economically, allow them 
 to go to ruin. Before the invention of the 
 superior trap the pitfalls were useful objects 
 or " improvements " ; after it they are only 
 troublesome holes in the ground. Even in the 
 absence of such changes in knowledge and 
 other circumstances, it is not possible to reckon 
 up the amount of improvements as a whole and 
 make definite quantitative statements about it, 
 such as that it has increased by 30 per cent, in 
 some particular period of time : we cannot 
 make such statements, because we have no 
 means of adding together different kinds of 
 improvements and comparing their aggregate 
 magnitude with that of some other group. 
 How, for example, should we add together a 
 row of apple-trees and a plough, and compare 
 the magnitude of the result with that of the sum 
 of improvement represented by a ditch plus 
 a barn-door ? Even when we have to consider 
 precisely similar objects, their number will not 
 afford us any precise guide for estimating the 
 magnitude of the improvement in the man's 
 material surroundings which they actually 
 represent. It will be better, no doubt, for the 
 Man to have two precisely similar spades than 
 one only, but he certainly will not think two are 
 twice as good as one — and he will be quite right.
 
 24 FUNDAMENTAL CONDITIONS 
 
 3. The Man's judgment in making use of 
 his powers and surroundings is clearly of great 
 importance. 
 
 To make use of them at all some effort 
 is necessary. However great his powers, 
 and however excellent his surroundings, they 
 will not even feed the Isolated Man unless he 
 exerts himself to some extent. Exertion should 
 not be lightly pronounced agreeable or dis- 
 agreeable in itself. Some kinds of exertion 
 are probably always disagreeable to every one 
 who is obliged, in order to attain his ends, to 
 undergo them. But most kinds of exertion 
 are pleasurable when not carried too far, and 
 disagreeable only when carried beyond that 
 point. We get into the way of regarding all 
 the exertion for which we are paid by other 
 people as disagreeable, because we want the 
 pay, and the exertion necessary to obtain it 
 presents itself to us as an obstacle, and an 
 obstacle is necessarily unpleasant and something 
 to be diminished if _possible. But if we were 
 prisoners without any chance of earning any- 
 thing, we should welcome our present employ- 
 ments as most agreeable relaxation from the 
 ennui of doing nothing. On the other hand, 
 there is no doubt that all kinds of exertion 
 become unpleasant if carried on for too long 
 a time at once. The most passionate devotee 
 of football or even golf does not wish to 
 "play," as we call it, for eighteen hours a day 
 and three hundred and sixty -five days in the 
 year. To " play " too long becomes a 
 " labour." This is true, no matter how diversi- 
 fied the exertion may be ; every one requires 
 a certain amount of absolute repose in the 
 diurnal round. Hence the Isolated Man would
 
 MAN'S JUDGMENT 25 
 
 be quite justified in regarding exertion as a 
 thing to be reduced wherever possible. He 
 could always have as much as he wanted of it, 
 taken as a whole, and therefore he might as well 
 have as little as he could in getting each par- 
 ticular satisfaction. The first use of judgment 
 is thus to keep effort as small as possible in 
 proportion to any given result. 
 
 But this is not all. The Man would also have 
 to seek a certain balance between efifort and 
 satisfaction in regard to each particular sort 
 of satisfaction, and in regard to the whole taken 
 together. He would have to arrange his 
 activity and repose so that it might yield the 
 maximum of satisfaction after allowing for any 
 unpleasantnesses involved in the exertion itself 
 or its incidental accompaniments. If he had 
 to do this starting from a tabula rasa, it would 
 be extraordinarily difficult. But, in fact, habit 
 would help him ; he would never have to start 
 absolutely fresh, so to speak, and decide all 
 at once to give so many hours to securing 
 animal food, so many to each class of vegetable 
 food, so many to making clothes, and so on. 
 What he would have to do would be merely 
 to decide whether it would give him more 
 satisfaction to make some small reduction in 
 the time and labour given to one mode of 
 production and divert the time and labour to 
 some other line of production, or, as another 
 choice, to knock off the small amount of labour 
 and give the time to repose. Of course even 
 this might be a difficult question. If it were a 
 choice between two different lines of production, 
 the Man would have to weigh not only the 
 satisfactions obtained, but the agreeableness or 
 disagreeableness of the different kinds of labour
 
 26 FUNDAMENTAL CONDITIONS 
 
 involved. If it were a choice between the 
 usual exertion and result on the one hand, and 
 on the other hand slightly less exertion and 
 result together with slightly more repose, he 
 would still have to estimate three quantities — • 
 the satisfaction foregone, the labour remitted, 
 and the repose secured. 
 
 Consequently, much depends on the accuracy 
 of the Man's judgment as to the regulation 
 and distribution of his effort. We have no 
 right to assume, as we sometimes do, that his 
 judgment is certainly infallible. In practical 
 life we never think of doing so. We are 
 always prepared to say that one of our friends 
 overworks himself and should be content with 
 a somewhat smaller income, and that another 
 misdistributes his energies, giving too much 
 of his resources to secure what we consider a 
 disproportionately large amount of some par- 
 ticular satisfaction. 
 
 This would be true, even if there were no 
 decisions to be made as to the distribution of 
 effort between immediate and more distant 
 ends. The necessity of making such decisions 
 introduces a further complication. Not only has 
 the Man to decide how much to work and how 
 to distribute his labour between various kinds 
 of satisfactions, but also to decide how far he 
 is to sacrifice the present to the future or 
 the future to the present. ' In ordinary circum- 
 stances there are three great choices open to 
 him, and two of them may be adopted to a 
 greater or less degree, as he chooses. He may 
 arrange his work and consumption so that at 
 
 ' It is convenient to talk of '' the present " as opposed to " the 
 future," but it must be remembered that "the present" means 
 notliini^ more than tiic near as opposed to the distant future.
 
 MAN'S PROVIDENCE 27 
 
 the end of the period under consideration, the 
 week or the year or whatever length of time 
 we find it convenient to take, his position with 
 regard to the future is just the same as at the 
 beginning of the period, or so that it is more 
 or less better, or finally, so that it is more or 
 less worse. Any one of the three courses may 
 be the judicious one, according to the circum- 
 stances of the period. If the period is one 
 of stress, during which the Man finds it very 
 difficult merely to kee-p himself alive, if, for 
 example, he is ill, he will be quite justified in 
 allowing his position with regard to the future 
 to deteriorate ; he will be right not to trouble 
 for the moment about increasing his stores of 
 knowledge and improving his material sur- 
 roundings : he will be justified in reducing his 
 stores of consumable articles, and even in allow- 
 ing his tools, his house, and his other efiects to 
 fall into some disrepair. On the other hand, 
 when his circumstances are very favourable, 
 when he has no difficulty in making ends meet, 
 he will be a fool if he does not devote some 
 time and labour to improving his position, 
 either by increasing his powers or improving 
 his material surroundings. He should not only 
 try to provide for unfortunate contingencies, 
 but also to secure that even in ordinary times 
 his life will be easier in the future. Why? 
 Because in the circumstances described the 
 future gain will be greater than the present 
 sacrifice. As his circumstances for the moment 
 are favourable, he will not lose very much at 
 the present by devoting a portion of his labour 
 to fhe future instead of the present, and it is 
 certain that he will know some way of expend- 
 ing labour which will be of permanent benefit
 
 28 FUNDAMENTAL CONDITIONS 
 
 to him. He knows, for example, that if he 
 can give ten hours to some investigation into 
 the habits of some animal or the location of 
 some plant, the knowledge will be as useful to 
 him in the future as an extra hour per week of 
 average labour would be. Or it may be that 
 he knows that ten hours spent on the con- 
 struction of some tool or other improvement 
 of material surroundings will be as useful as 
 an extra hour per week of average labour, of 
 course after allowing for any labour that may 
 be necessary to mend, and when necessary to 
 replace the tool or other improvement. That 
 is to say, ten hours labour now will bring in 
 as much as fifty -two hours per annum in 
 perpetuity. The Man's circumstances being 
 favourable for the moment, he would be foolish 
 not to grasp at the larger return, although if 
 he were extremely pinched for the moment, so 
 that every minute devoted to satisfying present 
 needs was very important, he would be quite 
 right to go on " living from hand to mouth " 
 and not to attempt to make the improvement 
 in his future condition. 
 
 Of course only a limited amount of the Man's 
 time should be devoted to the future, even when 
 it is desirable that he should so devote some 
 part of it. There are two reasons for limita- 
 tion. In the first place, the more labour so 
 devoted the less (in proportion to the amount 
 of labour) is the advantage in the future, 
 and secondly, the more labour so devoted 
 the greater (in proportion to the amount of 
 labour) is the loss in the present. For example, 
 the Man may know one way of spending ten 
 hours labour which will bring in a return, so 
 to speak, of an hour a week or fifty -two hours
 
 MAN'S PROVIDENCE 29 
 
 per annum, but when he comes to think of a 
 second way he may not be able to find another 
 which brings in a return of more than perhaps 
 half an hour per week — i.e., twenty -six hours 
 per annum, while the third way may only bring 
 five hours, and so on. On the other side, also, 
 he has to remember that while taking ten hours 
 off his labour for immediate needs may involve 
 no very severe privation, to take off a second 
 ten hours will be a much more serious matter, 
 and the deduction of a third might involve the 
 loss of some absolute necessaries of life. 
 Clearly the Man must stop somewhere, and the 
 decision where to stop requires the exercise 
 of a nice judgment. The Man will be likely 
 to make a mistake, even if he can foresee all 
 the future quite accurately. In fact, he will 
 not be always right about the future, and 
 consequently we must not expect that his 
 decisions on this subject will approach any- 
 where near to infallibility. 
 
 It must be noticed that we have considered 
 the Man's material welfare as a whole, begin- 
 ning, it is true, at some arbitrarily chosen point, 
 but without any further limitation. We have 
 supposed the problem to be to maximize the 
 Man's material welfare over all subsequent time. 
 If we wanted to compare his welfare at one 
 period with his welfare at some later period, 
 say his welfare in 1890 with his welfare in 
 1 9 10, we should have to regard the extent to 
 which he thought it desirable to work for the 
 future instead of for immediate results as one 
 of the conditions on which his material welfare 
 for the particular period depended. Given all 
 other conditions, it is clear that the Man will 
 be better or worse off for the moment according
 
 30 FUNDAMENTAL CONDITIONS 
 
 as he devotes more or less of his time and 
 labour to present gratifications and less or more 
 to improving his position with regard to the 
 future . 
 
 4. We have so far assumed that the Man 
 will desire to make his material welfare as 
 great as possible, but this is not quite certain. 
 He may deliberately sacrifice some portion of 
 material welfare in order to secure some satis- 
 faction which he regards as of a higher 
 order. J. S. Mill in his earlier days and 
 Bagehot thirty or forty years later thought 
 that political economy must assume an 
 imaginary being, often called the " Economic 
 Man," who had no desire to do anything except 
 pursue wealth. There is no need for making 
 any such unlikely hypothesis except, perhaps, 
 for simplicity at the very beginning of our 
 exposition. It is c[uite easy to suppose that 
 our Isolated Man may sometimes deliberately 
 prefer to do things which do not increase his 
 material welfare. He may, for example, think 
 it desirable to endeavour to secure happiness 
 after death by propitiating some idol or other 
 divinity by scourging himself or burning the 
 best of his animals upon an altar. The more 
 he chooses to act in ways like this, the less, 
 other things being equal, will be his material 
 welfare or wealth. 
 
 The conditions which govern the material 
 welfare or wealth of Society — of a number of 
 persons living in contact with each other — are, 
 for the most part, identical with those which 
 would govern the wealth of Isolated Man, 
 though some complications are introduced by 
 association and by the mere fact of numbers.
 
 SOCIETY'S WORK IN THE PAST 31 
 
 1 . The original qualities of the race are 
 obviously just as important to Society as the 
 original qualities of the Man to Isolated Man. 
 If the world had been peopled with a race 
 of men with only one arm or with no eyes, we 
 may quite confidently say that their material 
 welfare would not have been as great as ours, 
 unless the disadvantage was counterbalanced 
 by some advantage which we do not possess. 
 It is also true of Man in Society, as we saw 
 it was of the Isolated Man, that the most 
 favourable condition is not simply the greatest 
 strength, but the greatest strengfh in propor- 
 tion to physical requirements. It seems at first 
 sight quite certain that we should not be as 
 well off as we are if we were as small as Swift's 
 Liliputians. But we begin to see that the 
 question is not quite so simple as we supposed, 
 if we ask ourselves whether it is quite certain 
 that we should be much better off if we were as 
 big as the Brobdingnagians. With the strength 
 of a Brobdingnagian we should presumably 
 acquire a Brobdingnagian appetite, and so be 
 no better oft than before, unless our numbers 
 were reduced, for that might make an important 
 difference. 
 
 2. Secondly, if we start from any particular 
 point of time and consider the wealth of Society 
 for the ensuing period, it is clear that the 
 wealth of that period depends on what has 
 been done by men in the past. 
 
 (a) The powers of the people alive at the 
 time must necessarily have undergone great 
 change since their infancy, not owing only to 
 mere " growing up," but also owing to prac- 
 tice of the various arts and to deliberate educa- 
 tion or drawing out of original powers. The
 
 32 FUNDAMENTAL CONDITIONS 
 
 conditions of Society may clearly be much 
 better in this respect at one time than at 
 another. No doubt the inhabitants of Europe 
 before the establishment of the Roman Empire 
 were better educated and trained for the work 
 they had to do than we are for that work, and 
 the example suggests that it is difficult to set 
 up any absolute standard of education good 
 for all times and places. But given certain 
 conditions, no one can doubt that it is possible 
 for the people to be better or worse trained 
 for those conditions, and that the difference 
 will affect their material welfare. 
 
 More important still than the difference in 
 skill due to education or training are the differ- 
 ences resulting from the varying quantity of 
 the knowledge of which the people may be in 
 possession. When we look round and ask our- 
 selves what are the main causes of the improve- 
 ment which has taken place in the material 
 condition of the civilized world, we cannot fail 
 to put among the chief of them the increase 
 of knowledge. We are able to use the forces 
 of nature so much more effectively than our 
 remote ancestors_, not because we are naturally 
 cleverer nor because we are better educated 
 than they, but because each generation has 
 acquired new knowledge, and has transmitted 
 it to posterity at first by word of mouth and 
 afterwards by means of written and printed 
 symbols, so that the sum of accumulated know- 
 ledge has been perpetually increasing. 
 
 (b) We saw that the material condition of 
 our Isolated Man would depend largely at any 
 one time on what he had done in previous 
 periods to improve his surroundings. It is 
 equally true that the material condition of
 
 SOCIETY'S WORK IN THE PAST 33 
 
 Society must depend largely on what has been 
 done in the past by men in altering the 
 arrangement of matter on the face of the 
 globe. Next to the increase of knowledge 
 the improvement (from man's point of view) 
 of his material surroundings is the greatest 
 and most obvious cause of his progress in 
 material welfare. The face of the earth has 
 been adapted by him to his purposes in many 
 ways. The Suez Canal has practically altered 
 the geographical situation of whole continents, 
 and the Panama Canal will do the same. But 
 these are in reality but small things compared 
 with the immense network of roads and railways 
 which covers the civilized and is beginning to 
 penetrate the uncivilized parts of the globe. 
 That network, again, is but a trifle compared 
 with the adaptation of millions of square miles — 
 in fact, the greater part of the land surface 
 of the planet — to agricultural purposes. Then 
 there is the enormous stock of houses and other 
 buildings in which people live and work and 
 store things which will not bear exposure to 
 the weather. Household furniture, tools and 
 machinery of all kinds, including vehicles and 
 ships, form another mass of metal, wood, 
 and other materials originally extracted from 
 the ground and now fashioned to suit man's 
 purposes. And lastly, there is the stock of 
 materials and food which has been raised from 
 the ground and which it is necessary to keep 
 for the supply of sudden emergencies or to 
 equalize supply over the different seasons. 
 £ach generation of men is heir to all that has 
 been left by its predecessors^ and the legacy 
 seems to be larger at each transmission, not 
 only absolutely but in proportion to the 
 
 4
 
 34 FUNDAMENTAL CONDITIONS 
 
 numbers who inherit it. We must not expect 
 to be able to measure the greatness of the 
 legacy by any numerical standard : we cannot 
 do this any better for Society than for the 
 Isolated Man. The utility of changes in 
 material surroundings can no more be expressed 
 in numbers than the utility of changes in know- 
 ledge. It is useful to have a knowledge of the 
 ways in which steam can be made to serve 
 us ; it is also useful to have a stock of steam- 
 engines and of the things such as factories, 
 ships, and railroads, which are necessary for 
 their working. No one supposes that we can 
 make numerical statements about the utility 
 of the knowledge we use, and no one should 
 suppose that we can do so about the stock 
 of useful objects which we use in connection 
 with that knowledge. If we wish to get some 
 idea of how usieful the stock is, we should 
 endeavour to imagine what would be our con- 
 dition to-morrow if the whole stock were swept 
 away to-night. Let us try to realize what it 
 would be like to have no knives and forks 
 to eat our food with^ no tables to put it on, no 
 rooms to put the tables in, no food ready in 
 the larders, the shops, or the granaries, no 
 sheep, no cattle, but only a few wild pigs, 
 rabbits, and birds, no railways, nor even roads, 
 scarcely any edible vegetables — nothing what- 
 ever except a thickly wooded and very swampy 
 land. 
 
 Of course much that is done in the way of 
 permanent alteration of material surroundings, 
 and is supposed at the time to be a permanent 
 improvement, eventually turns out to have been 
 only temporarily useful, but a heavy balance 
 to the good seems, at any rate in modern times,
 
 SOCIETY'S JUDGMENT 35 
 
 always to remain, and this, together with a 
 perpetual increase in the stock of non- 
 permanent useful objects which are replaced 
 by up-to-date substitutes when they wear out, 
 renders the position of each generation in 
 regard to material surroundings more favour- 
 able than that of the last. 
 
 3. The wealth of Society, like that of the 
 Isolated Man, will obviously depend on the 
 judgment exercised in making use of its powers 
 and surroundings. 
 
 Effort, or labour as it is commonly called, is 
 necessary for the use of these powers and sur- 
 roundings in the case of Society as in that 
 of Isolated Man. There is no more reason for 
 pronouncing effort or labour to be generally 
 a good or an evil in the one case than in the 
 other. But without regarding labour as essen- 
 tially evil. Society, like the Isolated Man^ is 
 justified in desiring to shorten the labour 
 requisite for the attainment of any particular 
 aim, since it is always possible to have enough 
 labour, and labour in excess of a certain 
 quantity is an undoubted evil. Accordingly, 
 Society, like the Isolated Man, in order to make 
 its material welfare or wealth as great as 
 possible, must adopt the easiest methods of 
 attaining its ends, and must regulate the whole 
 of its labour so that it works just up to the 
 point at which the labour and the produce of 
 the labour taken together (the disagreeableness 
 of the labour, if any, being deducted from the 
 agreeableness of the produce) pause the most 
 satisfactory result. Society must at the same 
 time distribute its total labour between the 
 various possible channels in the manner which 
 will bring about the best result, when both
 
 36 FUNDAMENTAL CONDITIONS 
 
 the labour and the produce are taken into 
 account. 
 
 DifficuU as this is for the Isolated Man^ it is 
 ten times more so for Society. The Isolated 
 Man has a single brain to estimate the com- 
 parative advantages of all the different courses ; 
 Society has no common brain, but millions of 
 separate ones. To cast up with any consider- 
 able approach to accuracy the total pleasure 
 and pain resulting from any particular arrange- 
 ment would require knowledge far beyond that 
 which could be possessed by any person or 
 committee served by the most perfect organiza- 
 tion which we can conceive. In practice, of 
 course, Society, like the Isolated Man, has never 
 to start from the beginning and decide how 
 much time or labour shall be given to the 
 production of food, how much to clothes, and 
 so on. Some distribution is in force, and 
 all that has to be decided is whether this dis- 
 tribution shall be slightly altered in one 
 direction or another. But even this is a very 
 difficult matter, in which the probability of 
 mistake is enormous. 
 
 The difficulty of the Isolated Man as to the 
 distribution of effort between immediate and 
 distant ends is also present in the case of 
 Society. The only difference is that it is 
 considerably greater. Isolated Man,, as we have 
 imagined him, with an infinitely long duration 
 of life, would be able to estimate the desira- 
 bility of skimping enjoyments in the present 
 in order to secure more in the future far more 
 correctly than a society consisting of persons 
 with a short duration of life, who have to 
 estimate the desirability of skimping their 
 own enjoyments in order to increase those of
 
 SOCIETY'S PROVIDENCE 37 
 
 their successors. Little as a single man may 
 be able to compare the advantage of, say, 
 10 per cent, less this year for himself compared 
 with I per cent, more in every future year for 
 himself, he can perform that feat more easily 
 and accurately than a number of persons can 
 compare 10 per cent, less this year for them- 
 selves with I per cent, more in every future 
 year for such of themselves as may happen 
 to be alive and the successors of those who 
 are dead. They cannot estimate the strength 
 of the desires of the future persons so well as 
 a man can estimate the strength of his own 
 future desires, and they do not know what 
 changes in numbers there may be. The greater 
 the numbers in the future, the greater, ceteris 
 paribus, the desirability of present saving. Still 
 further difhculty is introduced by the fact that 
 the numbers will be themselves affected by 
 the amount of saving. The more that is saved, 
 the greater the population of the future is 
 likely to be. 
 
 Here, as in regard to the Isolated Man, we 
 must remember that we are thinking of the 
 wealth of Society from some point of time 
 onward, taking immediate and more distant 
 future as a whole. We might, of course, take 
 some particular period of time, such as a year, 
 and ask ourselves on what depends the wealth 
 of Society for such period. In that case we 
 should have to regard wealth as (for the time, 
 of course) reduced by any skimping of present 
 enjoyments for the purpose of increasing 
 future enjoyments, however much the future 
 enjoyments might in the end exceed those lost 
 during the period considered. 
 
 4. Society, just as much as Isolated Man, 
 
 1 oooo£?
 
 38 FUNDAMENTAL CONDITIONS 
 
 may be, and often is, willing to sacrifice a 
 certain amount of wealth in order to secure 
 some other end which it, or at any rate the 
 ruling part of it, thinks preferable. 
 
 In addition, however, to these causes of 
 variation common to Isolated Man and Society, 
 we have to add three others affecting Society 
 alone. 
 
 5. Though the health of Isolated Man and 
 also of the individual members of Society 
 may be regarded as the result of original per- 
 sonal qualities and what has been done in 
 the past to improve or worsen them, yet in the 
 case of Society health seems to require separate 
 classification in so far as it affects the duration 
 of working life. A people will clearly be 
 stronger and more capable of producing goods 
 if a less proportion of the aggregate number 
 of years lived are years of childhood and old 
 age. It would be better for all to die at 
 70 than for half to die at 50 and half at 90 ; 
 it would be better, too, for half to die at 50 and 
 the other half at 90 than for five out of six 
 to die at 15 and the other at 65. 
 
 Moreover, the proportion of persons of work- 
 ing age in a population at any moment is 
 affected not only by this different distribution 
 of lifetime between working and other years 
 caused by differences of mortality, but also by 
 increase and decrease of population. A popula- 
 tion increasing " naturally " — i.e., by excess of 
 births over deaths, must necessarily have, ceteris 
 paribus, a larger proportion of children ; if 
 the increase has been going on steadily for a 
 long time, the weakness from this cause will to 
 some extent be counterbalanced by the smaller 
 proportion of old, infirm people. Similarly a
 
 ORGANIZATION AND NUMBERS 39 
 
 decreasing population will have a larger pro- 
 portion of old people, and if the decrease is 
 continuous, the weakness from this cause rnay 
 be counterbalanced by the smaller proportion 
 of children. 
 
 We must say, then, that Society's wealth 
 partly depends upon the age-composition of the 
 population. 
 
 6. It is also dependent on the advantage 
 taken of the benefits derivable from co- 
 operation, or combination and division of 
 labour. 
 
 7. Finally, it is dependent on the nearness 
 of population to the most suitable magnitude. 
 These last two heads will be dealt with in the 
 two following chapters.
 
 CHAPTER III 
 
 CO-OPERATION, OR COMBINATION AND 
 DIVISION OF LABOUR 
 
 A NUMBER of men living in such circumstances 
 that they can communicate with each other 
 may, if they choose, work together or co- 
 operate. Co-operation, intelHgently directed, 
 enormously increases their aggregate power of 
 producing the effects they desire. 
 
 The advantage of what has sometimes been 
 called " Simple Co-operation " — the kind of co- 
 operation which takes place between a number 
 of men when they unite their forces in doing 
 precisely the same kind of work — scarcely needs 
 detailed exposition. Two isolated men within 
 hail of each other would obviously often be 
 justified in abandoning their isolation in order 
 to assist each other in tasks which were beyond 
 the strength of a single man but within that 
 of two, such as lifting a heavy weight, or 
 which could not be accomplished quickly 
 enough by a single man, such as the getting" in 
 of a crop of grain while the weather holds. 
 Scientific discussion and interest relate ex- 
 clusively to more complicated forms of co- 
 operation, sometimes called " Complex Co- 
 operation," but more usually " Division of 
 
 Labour," in which different kinds of work or 
 
 40
 
 LOCAL CONCENTRATION 41 
 
 labour are allotted to (or " divided " between) 
 several or many different individuals who^ con- 
 sciously or unconsciously, unite their forces for 
 the attainment of some end. 
 
 I . The first of the advantages of division 
 of labour is that it enables man to make the 
 best use of the various qualities possessed by 
 different parts of the surface of the earth. If 
 each man worked entirely by himself, he would 
 be obliged to get everything from a very small 
 area. Even if he wandered about, and managed 
 to avoid coming into fatal collision with other 
 men in the course of his wanderings, he could 
 not cover very much ground, and if he had a 
 home to which he returned every night or 
 even every few days, his range would be so 
 small that he could only reach a small selection 
 of the numerous materials which we consider 
 " necessaries of life." Even those men who 
 were lucky enough to find themselves in what 
 would then be considered the best situations 
 on the globe, where all the barest necessaries 
 of life and a few luxuries could be obtained, 
 would be confined to a very few of the minerals 
 and other things which we dig or quarry from 
 the earth. The situations least suitable for 
 such a social or anti -social state, where the 
 available selection of materials is too small, 
 would be quite uninhabitable. With division 
 of labour, on the other hand, it becomes 
 possible to make full use of a situation which 
 is only good for the production of one or a 
 few articles or services, as the Rand is 
 good for producing gold and Jersey for pro- 
 ducing early potatoes. 
 
 The importance of this is obvious, and it is 
 illustrated by well-known facts in the history
 
 42 CO-OPERATION 
 
 of the world. Peoples which have been con- 
 fined to the products of a small area have 
 always remained in that condition which we 
 call "primitive " or " barbarous " : restricted 
 to a small selection of materials, they have had 
 little opportunity of making mechanical 
 improvements, even if they had the necessary 
 inventive faculty. Civilization started where 
 communication, and consequently co-operation, 
 were easiest, and so far as we can go back in 
 history, the peoples which are now civilized 
 have had a large supply of products brought 
 from distant places. Silver and gold, for 
 example, found only on a few spots, have 
 always been spread over the whole area of 
 civilization. 
 
 We must not think only of the impossibility 
 of obtaining certain products from certain 
 areas. There is a good deal more than that 
 to be considered. There are many degrees of 
 difficulty short of the infinite degree which is 
 literal impossibility. We get coffee from 
 Brazil, tea from Ceylon, and bananas from 
 Teneriffe or Jamaica, not because it is abso- 
 lutely impossible to grow these things in 
 England, but because it is much more difficult 
 to grow them here where the soil and climate 
 are not so suitable. Soils and climates differ 
 in such a way that the wants of mankind as 
 a whole can obviously be best satisfied by a 
 certain concentration not merely of the indus- 
 tries which can only be carried on in particular 
 places, but also of a great many others for 
 which the circumstances of some places are 
 more favourable than those of others. What 
 is required may, perhaps, be easier grasped if 
 we confine our thought for the moment to the
 
 LOCAL CONCENTRATION 43 
 
 area of a single farm which includes several 
 soils and aspects. In such a case the cultivator 
 will consider these different soils and aspects, 
 and distribute the land between different 
 products in the way he thinks will be best on 
 the whole, taking everything into account. It 
 would be obviously the act of a madman to 
 insist on growing a little of everything on 
 each acre, or to cut the farm up into sections 
 for wheat, meadow, potatoes, and so on with 
 no regard to anything except facility of trans- 
 port to the homestead. Mankind at lar^e is 
 in much the same position : it will find it 
 advantageous to concentrate each of the great 
 majority of industries to some extent on par- 
 ticular areas, although this course involves more 
 labour of transport. The chief difficulty which 
 we encounter in extending our view from the 
 single farm to the world arises from the fact 
 that in dealing with the single farm we usually 
 accept the position of the homestead, and 
 consequently also the destination of the pro- 
 duce, as settled once for all by historical cir- 
 cumstances. When we consider the world at 
 large, on the other hand, we have to allow for 
 the fact that the location of mankind is not 
 fixed. Consequently the position of the con- 
 sumers cannot be taken as given ; the question 
 of the concentration of particular kinds of pro- 
 duction in particular areas is inextricably inter- 
 twined with the question of the distribution of 
 population. To attack the problem in its most 
 abstract form, we should suppose ourselves a 
 benevolent being with the Earth uninhabited 
 before us and its whole population in our hand 
 ready to be planted where we please on its 
 surface and to do what we order. How
 
 44 CO-OPERATION 
 
 should we then best arrange the people and 
 the industries ? The task would certainly be 
 a puzzling one, but with omniscience we could 
 solve it exactly, and the solution would 
 obviously involve a considerable concentration 
 of industries and of population on particular 
 areas. It would probably be seldom, if ever, 
 desirable to concentrate the whole production 
 of any particular commodity in a single district, 
 since the disadvantage of having to transport 
 the product to every place where for any reason 
 it was desirable people should live would 
 seldom be overbalanced by the superior quali- 
 ties of any one district : for example, it might 
 be desirable to plant a certain amount of cotton 
 manufacture in South Carolina or Bombay, 
 although neither of those places were quite 
 so suitable for the actual production, con- 
 sidered apart from transport, as Lancashire. 
 So concentration would usually be only con- 
 siderable — certainly not unlimited. 
 
 We must be very cautious about accepting 
 any short and taking phrase for a summary 
 description of the advantage resulting from 
 the local concentration of industries. To say, 
 for instance, that it " enables everything to 
 be done in the place best fitted for the pur- 
 pose " is not satisfactory, since it often happens 
 that one place is the best fitted for carrying on 
 two, or even more than two, difTerent industries. 
 Then, as there is not room for more than one, 
 the others must be placed not in the best, but 
 in the second or even third, fourth, fifth, or 
 sixth best place. Industries must be arranged 
 in what is the best way on the whole, taking 
 into consideration all of them and also the 
 amenities enjoyed by the consumer so far as
 
 LOCAL CONCENTRATION 45 
 
 these are to be considered separately from the 
 industries. This last proviso, concerning 
 amenities, is necessary in order to prevent 
 such things as the discomfort of living in a 
 bad climate from being overlooked. A con- 
 centration of industries which was extremely 
 good so far as the mere product of the in- 
 dustries was concerned would be a very bad 
 one if it compelled a large part of the people 
 of the world to live on the Antarctic continent. 
 If we adhere to the phrase adopted at the 
 beginning of this section, and say that co- 
 operation enables man to make the best use 
 of the various qualities possessed by different 
 parts of the earth's surface, we seem to be on 
 fairly safe ground. 
 
 In practice, of course, the question is never 
 presented as a whole. The past course of 
 the world's development has resulted in a 
 certain distribution of people and industries 
 over the face of the earth, and it is obviously 
 undesirable to make, or rather to attempt to 
 make, any very enormous change in it suddenly, 
 even if we think we know that a wholly different 
 arrangement would be best if we were to start 
 with a tabula rasa. We are actually more in 
 the position of the farmer we mentioned just 
 now, who comes into possession of a farm 
 already provided with a homestead in a par- 
 ticular spot, and already divided into fields, 
 eaqh of which has had certain qualities given 
 to it by the past labour of man, so that it is 
 more appropriate for some purposes and less 
 appropriate for others than it would have been 
 if left in its natural state. Such a cultivator 
 has not to consider the very difficult questions 
 of what would be the best position for the
 
 46 CO-OPERATION 
 
 homestead and what would be the best distribu- 
 tion of the whole area of the farm between 
 different kinds of cultivation if he could, as he 
 would say, " start the whole thing fresh/' but 
 only the much easier questions of whether it 
 would pay him to take down and remove the 
 homestead to another situation and alter the 
 acquired qualities of all or some of the fields, 
 as, for instance, by ploughing up the pasture 
 •and converting the meadows to arable cultiva- 
 tion, or by removing some of the hedges or 
 walls in order to redistribute the area on new 
 principles. In the same way, if we take the 
 world at large at any particular moment, we 
 find people already settled in certain propor- 
 tions over its area, with their homes and work- 
 places already built, and the land, or most of it, 
 already adapted by the past labour of mankind 
 to various uses. We find, too, that the popula- 
 tion ot the globe, consists of various races, for 
 the most part concentrated on particular conti- 
 nents and in particular countries, and that these 
 races are of very various powers or in very 
 various stages of development. It would 
 obviously be impossible, and undesirable if it 
 were possible, to make any great, sudden re- 
 distribution of these people, their homes, and 
 their industries. All that mankind has to do 
 is to change things very gradually in the right 
 direction. It was, for example, never neces- 
 sary to remove the iron-workers of Sussex or 
 the woollen-workers of Wiltshire to Yorkshire : 
 the redistribution was quietly accomplished by 
 the rise and growth of these occupations in 
 Yorkshire, coupled with the dying out of the 
 iron-workers in Sussex and the absence of 
 increase amonsr the woollen -workers of Wilts.
 
 PERSONAL DIFFERENCES UTILISED 47 
 
 The names " territorial division of labour " 
 and " localisation of industry " have sometimes 
 been applied to co-operation which involves 
 the concentration or, as perhaps it would be 
 safer to say, the unequal distribution of in- 
 dustries on the face of the globe. 
 
 2. The second great advantage of division 
 of labour is that it enables labour to be so dis- 
 tributed between different persons that their 
 original or natural qualities may be best 
 utilised. According to the old distich, " x\dam 
 delved and Eve span," but this is a fourteenth 
 century anachronism. Modern research rather 
 suggests the probability of Adam having been 
 a thorough " gentleman " of sporting pro- 
 clivities, while Eve did any heavy work which 
 had to be done. There is not much reason 
 for believing that primitive man arranged co- 
 operation in the most satisfactory way so far 
 as this advantage is concerned ; the strength of 
 the strong was apt to be utilised not in carry- 
 ing the heaviest burdens, but in forcing them 
 on the backs of the weaker. Nevertheless, 
 at any rate in times of stress, the advantage 
 of distributing the whole of the work to be 
 done among the old men, the young men, the 
 women, and the children in such a way as to 
 make the best use of their respective powers 
 must have been apparent even to the most 
 primitive barbarians. A very little considera- 
 tion is necessary to make us see that this rough 
 division can be improved by taking into 
 account the various natural qualities of the 
 different persons in each of the four classes. 
 In each class we find great and little strength 
 and stature, great and little mental ability. 
 Examining still more minutely, we find that
 
 48 CO-OPERATION 
 
 some have the particular strength of mind or 
 body appropriate for some particular kinds of 
 work, while others have the strength required 
 for other kinds of work. Obviously it will be 
 better to divide the whole of the work to be 
 done between all the workers concerned in 
 such a way that the work requiring great 
 strength is given to the strong, work requiring 
 dexterity of mind to the clever, and so on, as 
 far as possible. The proviso " as far as 
 possible " is necessary because, just as it is 
 not true to say everything must be done 
 in the place best fitted for it^ so it is not true 
 to say everything must be done by the person 
 best fitted for it. Often the person best fitted 
 for one kind of work will also be the best 
 fitted for another kind of work or for several 
 other kinds : he must then be allotted the 
 labour which it is best he should perform when 
 the special capabilities of all the workers, in- 
 cluding hiraself, are taken into consideration. 
 Some of the wo,rk will then necessarily be 
 allotted not to the person best fitted for it, 
 but to the second, third, fourth, and fifth best 
 fitted. 
 
 In practice this advantage of division of 
 labour is inextricably mixed up with the third, 
 to which we now proceed. 
 
 3 . The third advantage of division of labour 
 lies in the fact that it enables much greater 
 skill and dexterity of hand and brain to be 
 acquired for each of the various occupations. 
 " Jack of all trades " is proverbially " master 
 of none." A person who had to supply all 
 his own needs would have to do so many things 
 that he could not expect practice to make him 
 perfect at any of them. When difi"erent kinds
 
 DEXTERITY ACQUIRED 49 
 
 of labour are allotted to different persons, so 
 that the whole or greater part of the working 
 time of each is given to one or at any rate a 
 few kinds of labour, each acquires in a high 
 degree that special dexterity required for his 
 particular work which is obtained by practice. 
 Furthermore, it becomes possible to give to 
 each person the perhaps more important kind 
 of skill and dexterity which is to be obtained 
 by education or deliberate training. Human 
 life is far too short to make it worth while 
 to give individuals the elaborate training 
 necessary for more than one of the more diffi- 
 cult employments. To train a man adequately 
 for one of them takes a large slice out of his 
 life. Evidently there is great economy in 
 training each person for at most a very few 
 employments. This is specially remarkable in 
 what is generally called " scientific research." 
 In modern times discoveries of new means of 
 utilizing natural forces are not to any great 
 extent made by accident, but are for the most 
 part the result of investigations which could 
 only be carried on successfully by men who 
 have spent not years, but decades, in being 
 trained and training themselves. 
 
 This advantage is necessaril}^ mixed up with 
 the second, because when once particular quali- 
 ties have been acquired, it does not matter 
 whether they have been acquired by training 
 and practice or are the result of " original " 
 or " natural " characteristics. At any particular 
 moment we find the persons who form the 
 population of the globe endowed by nature 
 or education with certain qualities, and the 
 problem before mankind is to make the best 
 use of these qualities, regardless of their origin, 
 
 5
 
 50 CO-OPERATION 
 
 So it must often happen that persons whose 
 natural or original qualities marked them out 
 for some one occupation can best be retained in 
 some other occupation for which they have as 
 a matter of fact been trained. To secure the 
 fullest advantage of the possibility of dividing 
 labour according to the natural qualities of 
 the workers it is necessary to distribute the 
 required education and training in the best 
 manner. Under any conceivable circumstances 
 this would be a difficult thing to do, even if 
 the future could be exactly foreseen in all 
 its details. But the future cannot be exactly 
 foreseen, and this increases the difficulty of 
 securing even an approximation to a correct 
 distribution of persons between the various 
 occupations in accordance with their natural 
 and acquired characteristics. 
 
 4. The fourth advantage of division of 
 labour is that it greatly facilitates the acquisi- 
 tion and retention of the sum of knowledge 
 which is transmissible from one generation to 
 another. This is quite distinct from the advan- 
 tage of skill and dexterity just discussed. 
 Skill and dexterity enable people to use known 
 processes effectively, but knowledge reveals the 
 processes themselves. Without division of 
 labour the inventions and discoveries which 
 have made modern man's power over the forces 
 of nature so much greater than that of his 
 remote ancestors could not have been made, 
 because no man would have had time to 
 specialize sufficiently in the particular lines of 
 study required. When the knowledge has been 
 once acquired, it would often be lost if it were 
 not for the existence of books and instruments 
 which could not be produced without division
 
 TOOLS ECONOMISED 51 
 
 of labour. In other cases the retention of the 
 knowledge in the world is only effected by 
 means of the exertions of a class of educators, 
 which, again, could not exist in the absence 
 of division of labour. 
 
 5 . The fifth advantage of division of labour 
 is that it economises tools and machinery of 
 all kinds, including the buildings in which 
 work is carried on. By this we mean that it 
 makes a given amount of machinery " go 
 farther," or be more effective, and so makes 
 it advantageous to mankind to provide itself 
 with machinery which would otherwise be too 
 costly. Every one has experienced diffi- 
 culties from the want of appropriate tools when 
 he has attempted quite simple jobs outside his 
 own trade or profession. " Jack of all trades " 
 is not only unskilful, but also ill -provided with 
 tools. Evidently if every one had to do all 
 kinds of work, it would have to be done for 
 the most part with very much less effective 
 tools and machinery than at present. As things 
 are, these things can be liberally provided, 
 even when costly, because the division of labour 
 allows them to be kept in continuous use, which 
 would be impossible if every one had a com- 
 plete equipment of each.
 
 CHAPTER IV 
 
 POPULATION 
 
 To the Isolated Man in possession of the whole 
 world there could be no question of Population 
 — of too many or too few human beings. If 
 we suppose the world inhabited by large 
 numbers of isolated men, men that is to say 
 who did not co-operate, the question would 
 be present, but in a very simple form. Each 
 man could only be benefited by the existence 
 and consequent actions of the others in an 
 incidental way, as, for example, he would be 
 benefited by their killing off tigers or ^nakes 
 to protect themselves. On the other hand, he 
 would be injured by their occupation of land 
 and catching of beasts which would be useful 
 to him, and the greater their numbers the 
 worse his position would be : obviously, the 
 more numerous the human beings, the less land 
 there would be for each, so that each man would 
 have a smaller command of space and materials 
 for agriculture and other industry. It would 
 seem probable that this disadvantage of large 
 numbers would much more than counterbalance 
 its incidental advantages in all ordinary 
 circumstances. 
 
 The existence of co-operation modifies the 
 situation very greatly without making any
 
 NOT ENOUGH LAND 53 
 
 fundamental alteration. The advantage of 
 having a number of neighbours becomes more 
 than a matter of freedom from attack by wild 
 beasts killed by those neighbours entirely for 
 their own purposes. Co-operation being estab- 
 lished, people enjoy the advantages of it, which 
 we have already described, and the more people 
 there are the greater can be the advantages 
 derived from it. But there must always be 
 a point at which the advantages are just 
 counterbalanced, and beyond which they are 
 more than counterbalanced, by the disadvantage 
 of less space and materials per man. The 
 disadvantage of putting " too many " people 
 on a given space of ground has been observed 
 from the very earliest times. " Abram," we 
 are told, " was very rich in cattle . . . and 
 Lot also, which went with Abram, had flocks 
 and herds and tents, and the land was not able 
 to bear them, that they might dwell together 
 . . . and they separated themselves the one 
 from the other." If people had imagined they 
 could live in unlimited numbers on any given 
 area they would have squeezed themselves all 
 into a fertile field just outside the Garden of 
 Eden, or on the slope of Ararat, or wherever 
 the original home of the human race may have 
 been, instead of spreading all over the globe. 
 If it is thus obviously possible to have over- 
 population on a portion of the earth's surface, 
 it must also be possible to have it on the earth 
 as a whole, which is only made up of its several 
 parts . 
 
 Put in this way the theory of population 
 seems to be little more than a very obvious 
 generalization which scarcely admits of dis- 
 cussion. But it has a rather complicated
 
 54 POPULATION 
 
 history, without some knowledge of which it 
 is difficult to understand the form which modern 
 discussion of the subject usually takes in 
 economic works. 
 
 We need not go back very far. The 
 ancient Greek philosophers regarded popula- 
 tion from a point of view which was quite 
 different from that of the modern eco- 
 nomist. They were interested in what are 
 called political rather than economic ques- 
 tions, and their politics were the politics of 
 small city states. So they inquired how many 
 people could be properly governed in a city 
 state, but not how many should live on a 
 given space of land in order to bring about 
 the best economic results. The population of 
 any considerable territories known to them 
 probably did not increase perceptibly enough to 
 make them ask whether it should ever stop, and 
 if so, when. In the Middle Ages, too, through- 
 out Europe population did not increase fast 
 enough to make people think about the .ques- 
 tion whether it was desirable that it should 
 go on increasing indefinitely. What we find 
 is very frequent complaints of depopulation 
 couched in such a form as to imply that no one 
 could possibly imagine depopulation to be a 
 good thing. In the seventeenth century growth 
 of population was visible in England, and 
 persons interested in the colonization of Virginia 
 tried to show that it would be much better if 
 large numbers of people were shipped across 
 the Atlantic, but their arguments did not lead 
 to the emergence of any general theory. In 
 the eighteenth century the great wars led each 
 nation to desire the largest possible population 
 without thought for the economic consequences.
 
 POSSIBILITIES OF MULTIPLICATION 55 
 
 As one who wrote towards the close of that 
 century observes, " Population ! Population ! 
 Population at all events ! " was the universal 
 cry throughout Europe. 
 
 The history of the population theory, in fact, 
 only goes back to the middle of the eighteenth 
 century, when its origin is to be found in the 
 controversy which then took place between 
 certain scholars about the population of the 
 world, or rather the " populousness of ancient 
 nations." Some writers contended that the 
 number of people was much greater in ancient 
 than in modern times. Others, among whom 
 Hume was pre-eminent, took the opposite view. 
 It was only natural that some of the disputants 
 should, in the course of discussion, hit on the 
 plan of enforcing some argument by showing 
 how rapidly population would increase if human 
 fecundity had full scope and mortality were 
 normal. Robert Wallace did this in 1753 with 
 the object of showing that there was no dififi- 
 culty in supposing that the population had 
 increased so much between the Deluge and 
 the time of Alexander the Great as to be greater 
 at the end of that period than it actually was in 
 the eighteenth century. He constructed a table 
 showing that if we suppose six children to a 
 marriage and a mortality which destroys two 
 of them before they Have time to become 
 fathers and mothers, the total population will 
 increase in 1,233 years from two persons to 
 over four hundred and twelve milliards 
 (412,316,860,416). Such a table makes it 
 very obvious that, as Wallace says, " there 
 has never been such a number of inhabitants 
 on the earth at any one point of time, as might 
 have been easily raised by the prolific virtue
 
 56 POPULATION 
 
 of mankind." It also leads to the inquiry 
 " What are the circumstances which have 
 repressed the growth of population?" and to 
 the further inquiry " Can these repressive 
 influences be removed? " 
 
 Some of the circumstances, Wallace decided, 
 were physical, and independent of the volition 
 of man. Others were due to the errors and 
 vices of mankind, and might be largely 
 removed by better government. But they could 
 not be altogether removed even by a perfect 
 government . 
 
 " Under a perfect government," he says, 
 " the inconveniencies of having a family would 
 be so entirely removed, children would be 
 so well taken care of, and everything become 
 so favourable to populousness, that though some 
 sickly seasons or dreadful plagues in particular 
 climates might cut off multitudes, yet in 
 general mankind would increase so prodigiously 
 that the earth would at last be overstocked, 
 and become unable to support its numerous 
 inhabitants." 
 
 Even if " some extraordinary method of 
 supporting " the people were discovered, the 
 inevitable would only be postponed, since soon 
 " there would not even be sufficient room for 
 containing their bodies upon the surface of 
 the earth." It is " certain that limits are set 
 to the fertility of the earth, and that its bulk, 
 so far as is hitherto known, hath continued 
 always the same, and probably could not be 
 much altered without making considerable 
 changes in the solar system." Therefore " the 
 greatest admirers of such fanciful schemes must 
 foresee the fatal period when they would come 
 to an end " in a " catastrophe." Barbarous
 
 MALTHUS 57 
 
 and unnatural regulations would have to be 
 introduced, and mankind would never agree 
 about them, but would fall to fighting over 
 them. 
 
 In his Essay on the Principle of Population, 
 1798, Malthus borrowed this argument from 
 Wallace to use it against the Utopian anarchism 
 of William Godwin. Population, or " the 
 principle of population," as he sometimes ex- 
 pressed it, must, he thought, be kept in check, 
 and all checks resolved themselves into vice or 
 misery, so that no Utopia could be jDossible. 
 But he was not content, with Wallace^ to 
 suppose there must at last be a catastrophe. 
 He thought that " the difficulty, so far from 
 being remote, would be imminent and imme- 
 diate." He thought so because he was imposed 
 upon by a misleading mathematical jingle 
 which he had invented. "Population," he said, 
 " when unchecked, increases in a geometrical 
 ratio. Subsistence increases only in arith- 
 metical ratio." His one example of an increase 
 in geometrical ratio was doubling every twenty - 
 five years, and his one example of an arith- 
 metical ratio was increasing by an amount equal 
 to the original amount every twenty-five years. 
 If these two series, i, 2, 4, 8 . . . and i, 
 2, 3, 4, 5 . . . are placed side by side, it is 
 obvious that after the second term the first 
 series increases much more rapidly than the 
 second series, and Malthus inferred that there 
 must consequently be " a strong and constantly 
 operating check on population from the diffi- 
 culty of subsistence." For the doubling of 
 population in twenty-five years he relied on 
 the experience of North America, and here he 
 was on firm ground, since whether the period
 
 58 POPULATION 
 
 he gives is longer, as lie supposed, or shorter 
 than the reahty, there is no doubt that an 
 " unchecked " population would double itself 
 in some short number of years. But Tor the 
 " arithmetical ratio " of the increase of sub- 
 sistence — for his assertion that the subsistence 
 could only be made to increase by an amount 
 equal to the original amount every twenty -five 
 years he had no warrant at all. He relied 
 merely on a nebulous supposition. Turning 
 his eyes away from his North American 
 example, where, unless, which there was no 
 reason to believe, the existing people were 
 worse fed than their much less numerous 
 ancestors, subsistence must have increased in 
 the same geometrical ratio as the population, 
 he asked his readers to " take any spot of earth, 
 this island, for instance, and see in what ratio 
 the subsistence it affords can be supposed to 
 increase." 
 
 " If," he says, " I allow that by the best 
 possible policy, by breaking up more land, and 
 by great encouragements to agriculture, the 
 produce of this island may be doubled in the 
 first twenty-five years, I think it will be allow- 
 ing as much as any person can well demand. 
 
 " In the next twenty-five years it is im- 
 possible to suppose that the produce could be 
 quadrupled. It would be contrary to all our 
 knowledge of the qualities of land. The very 
 utmost that we can conceive is that the increase 
 in the second twenty-five years might equal 
 the original produce. Let us, then, take this 
 for our rule, though certainly far beyond the 
 truth, and allow that by great exertion the 
 whole produce of the island might be increased 
 every twenty -five years by a quantity of sub-
 
 MALT H us 59 
 
 sistence equal to what it at present produces. 
 The most enthusiastic speculator cannot sup- 
 pose a greater increase than this. In a few 
 centuries it would make every acre of land 
 in the island like a garden. Yet this ratio of 
 increase is evidently arithmetical. It may be 
 fairly said, therefore, that the means of sub- 
 sistence increase in an arithmetical ratio." 
 
 It is doubtful if " enthusiastic speculators " 
 would have admitted that the produce of Great 
 Britain could not possibly be quadrupled in 
 fifty years from 1798, but whether or no, 
 Malthus does not prove his case, since it is 
 clear that produce had doubled and quadrupled 
 within the periods supposed in the North 
 American colonies : if this ever happened any- 
 where, it must be wrong to lay down as a 
 general proposition that the means of subsist- 
 ence can only increase by equal amounts every 
 twenty -five years. Moreover, even if we con- 
 fine the proposition, as we may suppose Malthus 
 unconsciously did in his own mind, to countries 
 already as thickly peopled as Great Britain 
 was in 1798, he resembles the candidate in 
 geometry, who claimed that if he had not 
 exactly proved the proposition set before him, 
 he had at least made it appear lijghly probable. 
 It might seem highly probable to reasonable 
 persons that the produce of Great Britain could 
 not be quadrupled in fifty years, and certain 
 that it could not go on being doubled every 
 twenty -five years thereafter. They might even 
 be tolerably sure that it could not be increased 
 every twenty -five years for the next century by 
 more than an amount equal to the produce in 
 1798, and certain, though Malthus does not sug- 
 gest this rather obvious reflection, that it could
 
 6o POPULATION 
 
 not go on indefinitely increasing, even by equal 
 amounts every twenty -five years. But some 
 one might ask, "Why not? With every 
 mouth God sends a pair of hands, as the pro- 
 verb says, so why should not the increased 
 number of people be able to grow a propor- 
 tionately increased amount of produce? Or 
 even more, seeing that they would be able to 
 draw greater advantage from division of 
 labour?" Malthus' argument gives no answer 
 to these questions except what is obscurely 
 implied in "it would be contrary to all our 
 knowledge of the qualities of land." Common 
 knowledge of the "properties of land" tells 
 us that it would be impossible to get an infinite 
 amount of produce from any limited area, even 
 if we could increase the amount of labour 
 expended on that area indefinitely. It also 
 tells us, which is more important for practical 
 purposes, that the amount of additional produce 
 which can be got by equal additional amounts 
 of labour expended on the limited area will 
 begin to diminish before, and often, per- 
 haps we might say generally, long before the 
 point is reached at which additional labour 
 would bring in no additional return at all. The 
 truth was well expressed in a criticism which 
 Turgot wrote upon an obscure essay sent in 
 for a prize offered by the Royal Agricultural 
 Society of Limoges about 1768. He says: — 
 " Seed thrown on a soil naturally fertile but 
 totally unprepared would be expenditure almost 
 entirely wasted. If the ground were once 
 tilled the produce would be greater ; tilling it 
 a second and a third time might not double and 
 triple but quadruple or decuple the produce, 
 which will thus augment in a much larger
 
 MALTHUS 6i 
 
 proportion than the expenditure, and that up to 
 a certain point, at which the produce will be as 
 great as possible compared with the expendi- 
 ture. Past this point, if the expenditure be 
 still increased, the produce will still increase, 
 but less and less, and always less and less, until 
 the fecundity of the earth being exhausted, 
 and art unable to do anything further, an 
 addition to the expenditure will add nothing 
 whatever to the produce." 
 
 The statement, of course, applies to some 
 or any one given time, so that it excludes the 
 consideration of the changes in man's know- 
 ledge and other circumstances which will from 
 time to time alter the position of the " certain 
 point, at which the produce will be as great 
 as possible compa,red with the expenditure," 
 and also the position of the ultimate point at 
 which the fecundity of the earth is exhausted 
 and art unable to do anything further, so that 
 " an addition to the expenditure will add 
 nothing whatever to the produce." In fact, 
 the knowledge and circumstances of mankind 
 are continually changing, and very often, 
 probably in the majority of cases, the change 
 is of such a nature as to shift the points in the 
 direction which is favourable to the productive- 
 ness of additional labour. Hence common 
 knowledge of the properties of land, while it 
 does tell us that population cannot, at any one 
 time, be greater than a certain size without 
 causing the returns to industry to be less than 
 they might be, certainly does not tell us that 
 population cannot double itself in twenty-five 
 years, treble in fifty, and quadruple in seventy- 
 five, nor even that it cannot double every 
 twenty-five, quadruple in fifty, and octuple in
 
 62 POPULATION 
 
 seventy -five years without causing any diminu- 
 tion of returns. The most we can say is that 
 such rapid progress is unhkely to go on long, 
 and certain not to go on for ever. 
 
 Malthus himself never attempted to bring his 
 theory of population into close relationship with 
 the law of production laid down in the passage 
 just quoted from Turgot. Though the law 
 must have been latent in the mind of every 
 prudent farmer with sufificient means to over- 
 cultivate if he v/ished to do so, and though it 
 was, as we see, clearly stated by Turgot in 
 1768, its history does not really begin till 
 1 8 14. At that time much discussion took place 
 in England about the new duties on the im- 
 portation of corn which were supposed to be 
 required in order to keep the price of corn up 
 to what was considered a remunerative figure. 
 Moderate men thought this would be about 
 80s. the quarter for wheat_, but most agri- 
 culturists seem to have demanded a good deal 
 more. The dispute led people to give some 
 attention to the cost of cultivating the new 
 land which had recently been taken into cultiva- 
 tion in consequence of the high prices which 
 were brought about by bad seasons and in- 
 creasing population, little or no importation 
 being possible during the war. All authorities 
 agreed that the cultivation of the new land 
 was highly expensive. The high protectionists 
 thought this a great argument in their favour, 
 since, if the prices fell, the new land could not 
 be kept in cultivation, and then, they said, less 
 corn would be produced and its price would 
 rise again. To this Malthus, Ricardo, and a 
 much less well known but excellent writer^ Sir 
 Edward West, all replied in effect that the
 
 DIMINISHING RETURNS 63 
 
 recent rise of price was the result of the new 
 land being worse than the old, and that if some 
 corn were imported, cultivation could be con- 
 fined to better land on which the cost of pro- 
 duction and the price would be lower, so that 
 the effect of allowing importation would be to 
 lower rather than to raise the price. 
 
 To explain their thesis both Ricardo and 
 West wrote brief imaginary histories of the 
 progress of cultivation, illustrated with 
 numerical examples, in which they supposed 
 the most fertile and best-situated land to be 
 taken into cultivation first and then the less 
 and less good in regular succession as popula- 
 tion increased and required larger and larger 
 supplies. They recognized that the larger sup- 
 plies could also be obtained by employing more 
 labour on the old land, but whether they were 
 obtained by labour on the new land or by addi- 
 tional labour on the old or, as would happen in 
 practice, partly by one method and partly by 
 the other, the returns to a given amount of 
 agricultural industry would be diminished. 
 West says : — 
 
 " The . . . principle ... is that each 
 equal additional quantity of work bestowed upon 
 agriculture yields an actually diminished return, 
 and, of course, if each equal additional quantity 
 of work yields an actually diminished return, 
 the whole of the work bestowed on agriculture 
 . . . yields an actually diminished propor- 
 tionate return. Whereas it is obvious that an 
 equal quantity of work will always fabricate 
 the same quantity of manufacturers." 
 
 This " principle " of West's received the 
 rather unfortunate title of " the law of 
 diminishing returns in agriculture," The
 
 64 POPULATION 
 
 diminution of returns, it was seen, might be 
 prevented from actually taking place by what 
 were called " improvements," that is to say, 
 inventions and the introduction of better 
 methods, but it was supposed that the efifect 
 of these changes was merely temporary, and 
 could not prevail in the long run against the 
 general principle, so that diminishing returns 
 was the general rule throughout history. This 
 is so contrary to the results of direct observa- 
 tion that it seems dif^cult to believe that it 
 could ever have been accepted, but it was 
 supported by the erroneous theory of profits 
 generally held at the time, which led 
 people to suppose that the historical fall in 
 the general rate of interest which had taken 
 place was a proof of diminution of returns. 
 
 The doctrine of 1814 that growth of popula- 
 tion produces a " tendency," in the sense of a 
 general drift only temporarily interrupted by 
 " improvements," towards a diminution of the 
 returns to a given amount of industry expended 
 in agriculture was not a " law " at all, but a 
 hasty and erroneous generalization founded 
 on observations made in an exceptional period 
 of English history. When the memory of that 
 gloomy period began to fade away, writers 
 began to point out that, as a matter of fact, 
 in spite of the great increase of population, 
 the returns to agricultural industry had, in the 
 general course of history, increased enormously. 
 One of them says : — 
 
 " In 1389, in securing the crop of corn from 
 200 acres, there were cm])loycd 250 reapers 
 and thatchers on one day and 200 on another. 
 On another day in the same year 212 were 
 hired for one day to cut and tie up 13 acres of
 
 TENDENCY TO DIMINISHING RETURNS 65 
 
 wheat and i acre of oats . At that time 1 2 
 bushels to an acre were considered an average 
 crop, so that 2 1 2 persons were employed to 
 harvest 168 bushels of grain, an operation 
 which could be accomplished with ease in our 
 time by half a dozen persons." 
 
 Statistics of this kind are difficult to obtain, 
 and not always trustworthy, but no reasonable 
 person can have any doubt that the productive- 
 ness of agricultural industry has enormously 
 increased. The population of the civilized 
 world is much better fed, and yet has to spend 
 far less a proportion of the whole of its labour 
 on the acquisition of food. If agricultural 
 returns diminished, and yet the people con- 
 tinued to be equally well fed, a larger and ever 
 larger proportion of the world's labour would 
 clearly have to be expended in producing food. 
 
 When no longer able to ignore the historical 
 increase of returns to agriculture, those who 
 were determined to take a gloomy view of the 
 effects of growth of population shifted their 
 ground by saying that they did not mean that 
 it caused a tendency to diminution of returns 
 in the sense of a general drift, subject only to 
 temporary interruptions, towards diminution of 
 returns, but that it tended to diminish returns 
 in the sense of causing the returns to be less 
 than they otherwise would be. The growth of 
 population, it was supposed, always tended to 
 diminish agricultural returns, although " im- 
 provements " or, as J. S. Mill said, "the pro- 
 gress of civilization," had in the course of 
 history more than counteracted this force, so 
 that though returns had actually increased, they 
 would have been still greater if population 
 had not increased. 
 
 6
 
 66 POPULATION 
 
 This is clearly untrue if it is applied to the 
 whole history of mankind. It would be absurd 
 to contend that the productiveness of agri- 
 cultural industry would be greater now than it 
 actually is if the population of the world had 
 remained at two, or whatever other small figure 
 we suppose it to have started from. The 
 " improvements " which have taken place would 
 certainly not have been discovered and intro- 
 duced if the population had remained so small. 
 But if the doctrine is applied, as Mill seems 
 to have meant to apply it, only to fairly recent 
 times, it does not appear to be possible either 
 to prove or disprove it. Mill coolly assumed 
 that all the improvements which have been 
 made would have been made just the same if 
 the population had not grown. We cannot 
 assume that, and we have no means of finding 
 out exactly what would have been the position 
 in that respect in Mill's time if the population 
 of the world had remained at the same figure 
 as it had reached in 1800, nor what would be 
 the position now if the population had become 
 stationary at the figure it had attained when 
 Mill wrote in 1848 and which he considered 
 great enough. 
 
 Of course the question of the desirability 
 or undesirability of increase of population 
 cannot be settled entirely by its effect on the 
 returns to agricultural industry. Man does not 
 live by bread alone, but requires all sorts of 
 other commodities. The law of diminishing 
 returns was put forward as applicable only to 
 agriculture and other " extractive industries," 
 such as mining, which were regarded as 
 directly dependent on the fertility of the soil. 
 In other industry, especially manufacturing
 
 AGRICULTURE AND MANUFACTURE 67 
 
 industry, it was supposed that division of labour 
 led to increasing returns when larger quantities 
 of produce were raised by increasing numbers 
 of workers. 
 
 Thus it had to be admitted that an increase 
 of population, while tending to diminish returns 
 from agricultural industry, at the same time 
 tended to increase returns from manufacturing 
 industry, so that a balance had to be struck 
 between the effect of the two tendencies : the 
 returns to all kinds of industry taken together 
 would only diminish when the diminution in 
 agriculture was great enough to outweigh the 
 increase in manufactures. It seems difficult 
 to believe that any one could have supposed 
 that this was ordinarily the case, but the theory 
 of profits already ' referred to required those 
 who held it to think that a diminution of 
 returns, at any rate in all the industry which 
 produces things for the labouring classes, was 
 proved by the historical fall of the rate of 
 interest, and the practice of identifying wages 
 with food which prevailed in the earlier part 
 of the nineteenth century led to the weight 
 of agriculture being grossly overestimated. 
 Consequently it was held that increase of 
 population tended to diminish the returns to all 
 kinds of industry taken as a whole, and the 
 gloomier writers pf the time believed that it 
 had actually done so. 
 
 What is .wanted now is to throw aside the 
 sharp distinction which was drawn in 18 14 
 between agriculture and manufactures. Turgot's 
 law is just as true of manufactures as of agri- 
 culture.f/' At any given time (or if the reader 
 prefers, circumstances remaining unchanged) in- 
 crease of labour up to a certain point is attended
 
 68 POPULATION 
 
 by increasing proportionate returns (called for 
 short increasing returns) and beyond that point 
 furthen increase of labour is attended by 
 diminishing proportionate returns (called for 
 short diminishing returns). Mankind cannot 
 produce an unlimited amount of calico any 
 more than an unlimited amount of wheat. It 
 would be impossible to produce more than a 
 certain amount, however many persons were 
 engaged upon the production : and long before 
 that amount was reached, the amount of addi- 
 tional calico which could be produced by each 
 unit of additional labour would begin to 
 diminish, '''^t any given time, or, which comes 
 to the same thing, knowledge and circumstances 
 remaining the samey]/there is what may be 
 called a point of maximum return, when the 
 amount of labour is such that both ,an increase 
 and a decrease in it would diminish propor- 
 tionate returns. It is a crude and barbarous 
 idea of agriculture which represents it as almost 
 entirely dependent upon original fertility of soil 
 and footpounds of human muscular energy, and 
 as scarcely affected at all by the world-wide 
 co-operation of mankind which provides it with 
 appropriate tools and suitable seed, and com- 
 bines the products of different regions so as 
 to make them wholesome or palatable to the 
 consumer. The most we can say in contrasting 
 agriculture and manufacture is that the advan- 
 tages of producing a large aggregate quantity 
 and therefore the advantages of a large popula- 
 tion to produce and consume the large quantity 
 are more obvious in manufacture than in agri- 
 culture. If we measure returns from the 
 starting point of nil suggested by the historical 
 progress of population and assumed by Malthus,
 
 POINT OF MAXIMUM RETURN 69 
 
 West, and Ricardo in 1 8 1 4, we can say that in 
 both agriculture and manufacture returns in- 
 crease up to a certain point, and beyond that 
 point they decrease. If we start from what 
 I have called the point of maximum return, we 
 can say of manufacture as well as of agriculture 
 that returns diminish as we move in either 
 direction from that point. 
 
 If we suppose all difficulties about the 
 measurement of the returns to all industries 
 taken together to be somehow overcome, we 
 can see that at any given time, or knowledge 
 and circumstances remaining the same, just as 
 there is a point of maximum return in each 
 industry, so there must be in all industries 
 taken together. / If population is not largeA 
 enough to bring all industry up to this point, \ 
 returns will be less than they might be, and 
 the remedy is increase of population ; if, on 
 the other hand, population is so great that the 
 point has been passed, returns are again .less 
 than they might be, and the remedy is decrease ( 
 of population.;! 
 
 It is very important not to fall into the error 
 of supposing that the point of maximum return 
 remains permanently fixed, either for particular 
 industries or for industry taken as a whole. 
 The position of the point is perpetually being 
 altered by the progress of knowledge and other 
 changes. The discovery of the principle of 
 rotation of crops and the invention of steam 
 locomotion on rails, coupled with the provision 
 of the requisite appliances, not only made in- 
 crease of population possible without diminution 
 of returns and consequent deterioration of 
 wealth, but also made or tended to make that 
 increase desirable. These changes shifted the
 
 70 POPULATION 
 
 point of maximum return, pushing it farther 
 along in the direction favourable to large 
 population. Hence it is quite possible that 
 the world was over-populated in some past age 
 when there was not a tithe of the present 
 number of people on the globe, and that ^11 
 the same it is not over -populated now. In the 
 meantime the point of maximum return may 
 have been shifted. 
 
 The course which the development of theory 
 on this subject has taken has led to the use 
 of a great deal of very unsatisfactory phrase- 
 ology which ought to be discarded once and 
 for all. Writers have said that " the law of 
 diminishing returns had not come into opera- 
 tion," when they only meant that returns had 
 not begun to diminish, and they have spoken 
 of the law " undergoing a temporary super- 
 session " when they meant only that returns 
 had left off diminishing for a time. They 
 have talked of " commodities which obey the 
 law of diminishing returns " when they meant 
 commodities the supply of which could not at 
 the moment be increased without a diminution 
 of returns, and of " commodities which obey 
 the law of increasing returns " when they meant 
 commodities of which some increase of supply 
 would be at the moment accompanied by in- 
 creased returns. They have even imagined an 
 intermediate class " obeying the law of constant 
 returns." All these expressions involve mis- 
 use of the term " law." A scientific law should 
 be true at all times and places, and should not 
 be liable to " temporary supersessions " or 
 failures to come into operation, nor capable 
 of being suddenly replaced by a contrary law. 
 No one says that the law of gravity had not
 
 NON-PROPORTIONAL RETURNS 71 
 
 come into operation in regard to Newton's 
 apple until it broke from its stalk, nor that the 
 law would have undergone temporary super- 
 session if Newton had caught the apple as it 
 fell. Nor do we say that a falling balloon 
 is " subject to the law of gravity," but a rising 
 balloon is " subject to another law, that of 
 rising bodies," while a balloon which remains 
 at the same level is " subject to the law of 
 constant height." 
 
 If we take the point of maximum return as 
 the starting-point, we can say that returns 
 diminish in either direction, and that all com- 
 modities or industries are always and every- 
 where subject to this " law of diminishing 
 returns." It is possible, however, that the 
 misleading associations of the term make it 
 desirable to adopt the suggestion of M. Gide 
 by abandoning the term " diminishing returns " 
 in favour of the neutral phrase, " non-propor- 
 tional returns."
 
 CHAPTER V 
 
 THE SOCIAL ORDER 
 
 We have seen how the material welfare or 
 wealth of Isolated Man must depend on his 
 original qualities, on the improvements he has 
 effected in them and in his outward environ- 
 ment, and on his judgment and will in using his 
 powers and environment. We have further seen 
 that the wealth of Society depends on the same 
 factors, and, in addition, on the completeness 
 of co-operation and on the closeness of popu- 
 lation to the point at which it should be in order 
 to give the best results. In order that the posi- 
 tion of Society may be good in respect of all 
 these conditions, it is necessary that Society 
 should be well organized — that it should have 
 suitable machinery for securing that the 
 original powers of the people shall be great, 
 that they and their surroundings shall be suffi- 
 ciently improved, that co-operation shall be 
 properly developed, that population shall 
 approximate to the appropriate size, and that 
 proper decisions shall be arrived at with regard 
 to the amount and direction of the labour of 
 the people. 
 
 Some would have us believe that there is at 
 present no organization at all. They use hard 
 words, such as " scramble for wealth," " sui- 
 
 72
 
 NO CHAOS 73 
 
 cidal competition," " exploitation," " profit - 
 hunting," and say that the present state of 
 things is " chaotic." Now whatever our 
 present state may be, however unsatisfactory it 
 is, it is certainly not chaotic. If it were really 
 chaotic, every one who goes to his daily work 
 to-morrow must be a fool, since he would be 
 just as likely to get his daily bread if he stayed 
 at home or went elsewhere to amuse himself. 
 The very fact that we know as well as we do 
 that certain results will almost certainly follow 
 upon a certain course of action shows that we 
 are not living in chaos. Our system may be 
 a bad system, but it is a system of some sort : 
 it is not chaos. If a man holds a book too 
 close to his nose, he cannot read it, and so it 
 is with the world of industry. If we look at 
 it from too close a standpoint we can only see 
 a blur. Gladstone complained that Bonamy 
 Price proposed to legislate for Ireland as if 
 he were legislating for the inhabitants of 
 Jupiter or Saturn, and this has given rise to 
 the saying that " Gladstone banished political 
 economy to Saturn." Let us adopt the sugges- 
 tion conveyed in Gladstone's metaphor and 
 imagine a committee of the Economics Section 
 of the Saturnian Association for the Advance- 
 ment of Science reporting on what they had 
 been able to see of affairs on our planet through 
 a gigantic telescope big enough for them to see 
 human beings moving on its face. Would 
 they be likely to report that poor Mundus 
 seemed quite chaotic ? Would they report that 
 every one was scrambling for himself to the dis- 
 advantage lof every one else in such a way that 
 the 'general good seemed entirely neglected ? 
 Would they say that all the land in the most
 
 74 THE SOCIAL ORDER 
 
 convenient situations was lying idle, that 
 nobody had a roof over his head, and that every 
 one was running about aimlessly or sitting idle 
 in imminent danger of starvation ? They might 
 report something of this kind if they could 
 carry on a conversation with certain people 
 here and believed all they were told, but cer- 
 tainly not if they judged by their own 
 observation. 
 
 They would be much more likely to report 
 that they had seen a very orderly people co- 
 operating on the whole with a wonderful 
 absence of friction — that they had seen them 
 come out of their homes in the morning in 
 successive batches and wend their way by all 
 sorts of means of locomotion to innumerable 
 different kinds of work, all of which seemed 
 to fit somehow into each other so that as a 
 whole the vast population seemed to get fed, 
 and clothed, and sheltered. They would not, of 
 course, vouch for the perfection of the arrange- 
 ments. They would see that there were occa- 
 sional irregularities and hitches. They might 
 see now and then too many vehicles in one 
 street, too many passengers trying to travel by 
 one train or tramcar. They might even see 
 along our English country roads the melancholy 
 spectacle of men tramping in both directions 
 evidently in search of the same kind of work. 
 They might be able to see that some had too 
 much — more than they seemed to know how to 
 dispose of without hurting themselves and 
 others — while some evidently had too little for 
 healthy and happy existence. But in spite of 
 these defects, they would report, I think, that 
 on the whole the machinery, whatever its exact 
 nature, seemed to do its work fairly effectively.
 
 SOME ORGANIZATION 75 
 
 And if we can imagine them able to go back 
 five hundred or a thousand years, we can feel 
 tolerably sure that they would report still more 
 favourably, since they would then see that 
 enormous improvement had taken place and 
 would discover no appearance of any change 
 which would suggest that the existing system 
 is not the outcome of an orderly development 
 of the institutions of the past. 
 
 I insist so strongly on the fact that our 
 existing machinery does work, not with any 
 idea of contending that all is for the best in 
 the best of all possible worlds, but because I 
 think that in order to get any proper hold of 
 economics it is necessary to begin by consider- 
 ing, not the defects of the machinery, but the 
 main principles involved in its construction and 
 working. We are apt to begin with the defects 
 because it is they that strike our eye and often 
 excite our sympathy. Seven per cent, of un- 
 employed are much more likely to make us 
 start thinking about economics than the other 
 ninety -three who are in employment. The 
 emaciated corpse of a single person starved 
 to death naturally makes more impression on 
 our minds than the comfortable bodies of a 
 hundred thousand sufficiently fed citizens. But 
 if we want thoroughly to understand the reason 
 why work and food do not quite " go round," 
 we should begin by endeavouring to discover 
 what, after all, certainly does not explain itself 
 — why they go as far round as they do. If we 
 grant that there is an organization, the next 
 question is, " What is it? " It is certainly not 
 merely " the State." In modern times we 
 become so accustomed to all institutions being 
 defined and modified from time to time by the
 
 76 THE SOCIAL ORDER 
 
 States within the jurisdiction of which they 
 exist, that we are apt to regard them all as 
 springing from the State and dependent upon 
 its existence for their origin and development. 
 But this is wrong. There are economic institu- 
 tions which are older than the State, at any 
 rate in the sense in which we use the word at 
 the present day, and there are others which 
 have come into being and developed under the 
 ban rather than under the patronage of the 
 State. Moreover, some of them cover the 
 whole world, or at the least far wider areas 
 than any State of the present or past. In deal- 
 ing with the most important of the institutions 
 on which our existing economic organization 
 is based, it is most convenient to take the 
 State as the third, the Family and Property 
 being the first and second. 
 
 We are sometimes inclined to talk as if the 
 Family had been entirely superseded by the 
 Individual in modern economic organization. 
 This is a complete mistake, arising from forget- 
 fulness of the fact that at least one-third of the 
 population of the globe consists not of indivi- 
 duals in the sense of independent adults, but of 
 children regarded by older people as too young 
 to be allowed to do what they like. It is true 
 that the work actually done by children is not 
 of much importance. The world would not 
 suffer much in the next twelve months if 
 all child -labour were entirely cut off for that 
 period. But the children themselves are of 
 paramount importance because it is from them 
 only that the adults can be recruited, and for 
 the most of mankind childhood is the period 
 during which it is settled whether the person 
 shall be industrious or idle and what he shall
 
 THE FAMILY 77 
 
 work at so far as he does work. By far the 
 greater number of men and women have 
 acquired the habit of industry because they 
 were persuaded or driven to work by influences 
 brought to bear on them by the Family when 
 they were still children. These influences, of 
 course, are multifarious ; some are typified by 
 the kiss of the mother, some by the stick of 
 the father ; some consist in the gibes of elder 
 brothers and sisters, some in the appealing 
 cries of hungry younger ones. Taken all to- 
 gether, these family influences are so powerful 
 that modern States find it necessary to make 
 many regulations and employ many inspectors 
 to prevent children from being overworked. 
 How uniformly the habit of industry, once 
 acquired in childhood, remains with the adult, 
 is shown by the frequency with which we find 
 ourselves attributing idleness in adults to the 
 accidental absence of the normal family influ- 
 ences. Within the Family, too, as a rule, is 
 made the decision which governs the allotment 
 of the person to some one profession or occu- 
 pation. Every grown man or woman is doubt- 
 less legally free to choose his or her occupation 
 and to change it as often as he or she pleases, 
 but legal freedom is generally not of much 
 use after childhood is over. This might not 
 make much difference if the parents always 
 chose (for the child just as the child would 
 choose if it had experience before the choice 
 took place. But that hypothesis is far from 
 being a true one : the distribution of persons 
 between the various occupations is influenced in 
 the most important manner by the fact that 
 parents often cannot, and often will not when 
 they can, choose for their child the occupation
 
 78 THE SOCIAL ORDER 
 
 which he would choose for himself if he were 
 perfectly well-informed and capable of making 
 the selection which seemed to him best in his 
 own interests. 
 
 To say that the Family regulates population 
 looks at first more like a physiological truism 
 than an economic proposition. But it is not 
 to be denied that the economic solidarity of the 
 family has an important influence on the 
 number of births and the number of persons 
 who survive childhood. What, however, the 
 precise influence is, and how it works, is at 
 present so obscure that it seems useless to 
 attempt to elucidate it in a work like the 
 present. 
 
 We now proceed to the second of our three 
 great economic institutions, Property. I do 
 not say Individual Property, because a great 
 deal of property is the property of groups of 
 persons — groups of more or less magnitude 
 from Nations downwards. I might say 
 Separate Property, but that might mislead, as 
 it is sometimes confused with individual pro- 
 perty, and it is doubtful if there is much force 
 in the word " separate," since if Mankind held 
 everything jointly the idea of property would 
 scarcely be needed. 
 
 However far we try to carry our minds back, 
 we can scarcely imagine a time when individual 
 property in movable things was unknown. The 
 very first beginnings of some sort of orderly 
 society involve a recognition of the " right " 
 of a person to retain the share of booty or 
 produce which has been allotted to him either 
 by mere circumstance or by some authoritative 
 decision. As soon as weapons and tools begin
 
 PROPERTY 79 
 
 to be used, it is inevitable that one person will 
 be in the habit of using one and another person 
 in the habit of using another weapon or tool, 
 that each will resent any one else using what 
 he has come to call " his " weapon or " his " 
 tool, and that disinterested spectators will sym- 
 pathize with him. We can see this exemplified 
 in any nursery at the present time, and we can 
 conjecture from the example of the nursery 
 that the public sympathy and consequent 
 general recognition of the " right " comes from 
 a respect for custom, that is, from man's proper 
 dislike for seeing things changed without good 
 reason. The children can scarcely have been 
 infected with the adults' ideas of property, since 
 to the adults the whole of the things concerned 
 appear to belong to the parent. 
 
 The same feeling must have arisen with 
 regard to dwelling-places as soon as man began 
 to have any, and to pay some respect to order. 
 A person who had secured a comfortable cave 
 or lair under a bush for even a single night 
 would be more annoyed if on returning the next 
 night he found it fully occupied by some one 
 else than if he had found another cave so 
 occupied. If he had held it undisturbed for 
 many nights, he would be still more incensed, 
 and if any general respect for custom had 
 grown up, he would be sure of the sympa'thy 
 of the disinterested. It would of course make 
 no difference whether the occupation was by an 
 individual or by a family or larger group. 
 Sy.mpathy would be felt with the dispossessed 
 group just as much as with the dispossessed 
 individual. 
 
 The idea of property in Land does not ,appear 
 to come quite so early. Primitive mankind
 
 8o THE SOCIAL ORDER 
 
 was in much the same relation to the Land that 
 mankind at present is in relation to the Sea. 
 The men were few, the land was big ; the 
 number of men using the land was not large 
 enough to make them any appreciable incon- 
 venience to one another. But when numbers 
 grew, each group of human beings living 
 together and in communication with each other 
 began to feel itself menaced by and therefore 
 to resent the appearance of strangers in 
 the district over which they were accustomed 
 to roam, and which they had accustomed 
 themselves to call " their " hunting grounds. 
 In regard to land, however, there was much 
 less possibility of sympathy from disinterested 
 persons than in regard to movables. The dis- 
 pute involved two whole groups, one of which 
 was interested in making, and the other in 
 resisting the invasion. Opinion outside these 
 two groups would be distant (having regard to 
 the facilities of communication) and probably 
 ill-informed, especially if languages differed. 
 Moreover, the causes of dispute were not so 
 simple in themselves. There is not likely to be 
 much difficulty in ordinary cases in deciding 
 who is the person usually in the habit of carry- 
 ing a particular bow or spear or of occupying a 
 particular cave or house. But there may easily 
 be great difficulty in deciding whether one or 
 another group is the one which usually hunts in 
 some particular valley or on some particular 
 mountain side. Quarrels were frequent, and 
 could only be settled by a trial of forces 
 between the two interested groups. If the 
 victory of one side was decisive, it often led to 
 some sort of incorporation of the vanquished 
 which led to the amalgamation of the two
 
 PROPERTY 8i 
 
 territories into one, so that now a larger terri- 
 tory would be held under one authority against 
 all invaders. When two territories were amal- 
 gamated into one, it would not necessarily or 
 probably follow that the whole territory would 
 be one property : much more often the old 
 line, or a more accurately defined line, of 
 demarcation would be preserved, or in some 
 cases it would even happen that entirely new 
 divisions of the territory might be made for its 
 convenient use by several groups, each under 
 a subordinate authority or in some way united 
 together and divided from the rest. The land 
 held by each of these groups is " theirs " in a 
 somewhat different sense from that in which the 
 land of all the groups now under one authority 
 is " theirs." It is their property, while the 
 whole land is their country or territory. 
 
 It was long before the difference between 
 property in land and territory was grasped : it 
 is scarcely grasped at the present time in many 
 minds when acquisition of territory by a 
 sovereign state is in question. But in practice 
 the distinction has been recognized ever since 
 conquest or other acquisition of territory ceased 
 to carry with it the entire dispossession of the 
 proprietors of the land annexed. 
 
 ■While the territories of small groups, de- 
 fended only by force of arms against external 
 aggression, were thus being transformed into 
 their collective property, recognized by the 
 governing authority of the larger territory of 
 which they now formed a part, the idea of 
 property in land was gaining strength in 
 another direction owing to changes within the 
 areas occupied by the small groups. The site 
 of a house with some small curtilage must 
 
 7
 
 82 THE SOCIAL ORDER 
 
 necessarily be subject to the same ideas as the 
 house itself so far as the " right " to undisturbed 
 occupation is concerned. It is practically diffi- 
 cult to differentiate the house and its site. So 
 people early began to regard the homesteads 
 as " theirs " and to be supported by the 
 authority of the group in maintaining their 
 position not only against outsiders but even 
 against other members of the same group. But 
 at first there could be no similar ideas with 
 regard to the rest of the land of the group ; 
 land being plentiful and men few, a single 
 person or family would not be likely to claim 
 a particular stretch of land as land which it 
 had occupied, and which, therefore, should not 
 be touched by others. In search of game every 
 man would desire to roam over the whole of 
 the land wherever the quarry happened to take 
 him. So, too, pastoral people would turn out 
 their flocks and herds with the idea that they 
 should all be able to go where they would in 
 search of pasture. Even arable cultivation 
 could be carried on in common by groups 
 consisting of a moderate number of persons 
 without any very difficult problems of organiza- 
 tion being encountered. As time went on, 
 however, it was found practically convenient 
 to allow permanent occupation of plots of land 
 for arable purposes by individuals and their 
 heirs, and eventually even the pasture was 
 divided up with the small exceptions which 
 we see in the " commons " of the present day.' 
 The institution of property, whether indi- 
 
 ' It is as yet impossible to sum up the history of property in 
 land except in a vague and tentative fashion. How easily much 
 that was recently accepted may be attacked can be seen in 
 Mr. Jan St. Lewinski's Origin of Property, 1913.
 
 PROPERTY 83 
 
 vidual or " group -al " promoted material 
 welfare both by preventing destructive actions 
 and by making it the interest of people to 
 perform productive actions. If we can imagine 
 men existing and living in contiguity without 
 property, we can see that without property the 
 pursuit of individual self-interest and even the 
 pursuit by groups of individuals of their joint 
 interest must lead to destruction rather than 
 production. Self-interest and the interest of 
 the group would lead the individual or group 
 to take the easiest means of satisfying their 
 desires. They would simply take whatever they 
 wanted wherever they found it, just when they 
 wanted it. To take it beforehand would be of 
 no use, since, proprietary rights being sup- 
 posed non-existent, some one else might take 
 it away again. The only way of making sure 
 of anything would be to secure and consume 
 it before any one else. Such a system or 
 absence of system could only work tolerably 
 where men were few, nature's useful products 
 very abundant, and man's wants confined to 
 game, fish, and a few other things requiring no 
 preparation before use. In other circumstances 
 it is clear that the endeavour of each person 
 or each group to satisfy his or its desires in the 
 shortest possible way must lead to disastrous 
 results. 'If the game is not enormously plentiful 
 it will be disastrously reduced and probably 
 eventually exterminated by wasteful killing, 
 especially in the breeding season. Unless the 
 vegetable products which man wants are in 
 enormous abundance, the desire of every man 
 to make sure of them will lead to their being 
 plucked before they are quite ripe, as is the 
 case in the present day in our own country with
 
 84 THE SOCIAL ORDER 
 
 blackberries growing by the roadside in the 
 neighbourhood of towns. No one will make 
 any provision for the future or prepare any 
 materials for use or construct any tool or other 
 appliance unless he can be quite sure of con- 
 cealing his proceedings and his product from 
 the eyes of his neighbours. 
 
 Property being established, persons and 
 groups find it to their interest to undertake all 
 sorts of productive operations which would not 
 be worth while if they could be interfered with 
 by others. The proprietors of land (whether 
 individuals or groups) can regulate the use 
 of it so that as little waste as possible shall 
 take place. 
 
 At first sight, perhaps, property appears as 
 rather a separating than a uniting force : it 
 seems to set up separate interest and thus to 
 divide the people. But as a matter of fact it 
 unites them by compelling and facilitating their 
 co-operation. It compels it, at any rate where 
 there are any persons without enormous 
 stretches of landed property, because small 
 patches of land do not contain all the requisites 
 of existence, and so if a person has only a 
 small patch he must obtain some things from 
 other people. If he has no land at all, it is 
 still more obviously necessary that he should 
 make terms with others in order to satisfy his 
 needs. Property facilitates co-operation by 
 making it depend upon innumerable separate 
 agreements between individuals and groups of 
 individuals instead of on decisions arrived at 
 by Society at large, acting through some kind 
 of world-wide authority. I say a world-wide 
 authority because we must not forget that co- 
 operation is at present world-wide. It is by
 
 PROPERTY 85 
 
 no means to be regarded as a merely national 
 affair. An immense amount of co-operation 
 is carried on between the inhabitants of 
 different countries with different sovereign 
 governments. The nature of this co-operation 
 is to be discovered chiefly in the returns of the 
 various custom-houses, which reveal the kinds 
 and quantities of goods imported and exported. 
 We find that the people of England co-operate 
 with the people of every other country in the 
 world. The people of England somehow 
 manage to agree with these other peoples so 
 that a long list of exports is produced by the 
 people of England for the use and consumption 
 of the other peoples, who, in return, produce 
 for the people of England the long list of 
 imports. The co-operation by means of mere 
 immediate exchange of goods for goods is 
 evidently enormous, and often includes absolute 
 necessaries of life, so that in its absence some 
 of the countries would cease to be inhabited. 
 Moreover, this simple immediate exchange of 
 goods for goods is no longer the only kind of 
 co-operation between the inhabitants of dif- 
 ferent countries. It now often happens that 
 the inhabitants of one country lend things to 
 the inhabitants of another country, taking in 
 return periodical payments in the produce of 
 the second country. This loan of goods is as 
 much entitled to be called co-operation as the 
 immediate exchange of goods. Further, much 
 co-operation between the inhabitants of 
 different countries now takes place in the form 
 of supervision or direction by persons residing 
 in one country of productive operations carried 
 on in another. 
 
 The whole of this co-operation is dependent
 
 86 THE SOCIAL ORDER 
 
 on the existence of the institution of property 
 in the various countries concerned. Property 
 is by no means exactly the same in all its 
 qualities and incidents all over the globe. 
 Different ideas prevail in different countries 
 and are embodied in the laws and customs 
 which are enforced by the various governments. 
 But there is sufficient similarity to make it 
 possible for " business to be carried on " with- 
 out unpleasant surprises being too frequent. 
 
 The State in its earliest manifestations 
 appears, like the Family, as a group of per- 
 sons : it was, in fact, scarcely more than a 
 somewhat wider Family. Relics of this may 
 still be found in the fact that parentage still 
 often confers citizenship, wherever the child 
 may happen to be born, and in the fact that 
 States claim the allegiance of their " subjects " 
 or " citizens " even when the persons have left 
 the country in which the State is established. 
 But except for such relics the modern State 
 is completely territorialized. We have already 
 noticed the common origin of the ideas of 
 territory and property in land. The two ideas 
 begin to become distinct as soon as groups of 
 persons are united under one authority in such 
 a way that they have a common government 
 without common land. It is only then that a 
 distinction is necessary between " land " 
 belonging to a group of persons and " terri- 
 tory " belonging to a wider group containing 
 within it various groups owning different 
 parcels of land. The wider group and the 
 authority which governs it then become in- 
 separably connected with the territory, and 
 instead of " tribes," " peoples," or even " na-
 
 THE STATE 87 
 
 tions," " countries," represented by " govern- 
 ments " or " States " are spoken of as taking 
 the initiative in all sorts of ways. 
 
 Before we try to unravel the part played by 
 these countries or States in economic organi- 
 zation, it will be well to insist on the fact that 
 they are very numerous. It is very misleading 
 to talk as if there was only one State in the 
 world, and so to identify the State and Society. 
 When we speak of " the Family," we do not 
 mean to imply that there is only one family in 
 the world : just so, when we speak of " the 
 State " we need not imply that there is only 
 one State in the world. Even little Europe 
 is divided between about twenty sovereign 
 States. There is no common authority to settle 
 disputes between them, and they are not always 
 capable of setting up a special authority to 
 decide a particular dispute when it arises, and 
 if they do manage to do this, there is nothing 
 to prevent the decision of the special authority 
 being disregarded, though it must be granted 
 that such repudiation seldom takes place. Dis- 
 putes are consequently often settled, or rather 
 attempts are made to settle disputes, by 
 violence, and destructive wars take place which 
 certainly serve no useful purpose in the general 
 economic organization of Society. Moreover, 
 the possibility of war leads to the permanent 
 establishment of military and naval forces 
 during peace. Since wars have become less 
 frequent and shorter in duration, the cost of 
 maintaining these forces in time of peace has 
 come to exceed enormously the cost of war 
 itself. This is a very serious imperfection in 
 the present organization of Society which 
 should not be ignored. We should regard it
 
 88 THE SOCIAL ORDER 
 
 as a very serious imperfection in the organiz- 
 ation of a " country " if it had no poHce, so 
 that each person had to go about armed to the 
 teeth and to fortify his house against burglars 
 and other malefactors. The present condition 
 of things as between different States is precisely 
 similar, and should be regarded in the same 
 way. 
 
 Even apart from actual war and preparations 
 for war the policy of States is often anti -social. 
 General opinion holds in each country that the 
 policy of the state should be " national," that 
 is, should be directed towards the " good of 
 the country " without regard to the good of 
 " the foreigner " except in a very strictly 
 limited sense which only excludes what are 
 regarded as " barbarous " actions. It is, for 
 example, no longer thought right to eat the 
 foreigner, or even to reduce him to slavery, 
 and States which insist on carrying national 
 policy to such lengths sooner or later find 
 themselves suppressed by some other State or 
 combination of States. But to " tax the 
 foreigner " for purposes which cannot possibly 
 do him any good, and to prevent foreigners 
 from peaceably settling in the country when 
 they want to improve their condition, are con- 
 sidered perfectly legitimate objects of national 
 policy, although they may be and are often 
 admitted to be contrary to the good of the 
 world at large. No one, so far as I know^ 
 has ever contended that the pursuit of self- 
 interest by individual States tends invariably 
 to the common good of the whole. 
 
 On the other hand, it is clear that the indi- 
 vidual self-interest of separate States does lead 
 to a considerable and valuable amount of co-
 
 THE STATE 89 
 
 operation between them, and that this amount 
 is continually increasing. Common interest has 
 led them to agree to extradite offenders against 
 each others laws, to arrange for the world-wide 
 transmission of letters and messages, to adopt 
 joint systems for the encouragement of litera- 
 ture and invention. 
 
 Inside each country the position of the State 
 is less equivocal. When not in the hands of 
 a mere faction, its influence is always intended 
 to be directed in favour of the organization 
 which is best for the " people " or the 
 " country " as a whole, and though it is often 
 far from clear who the " people " are and what 
 the " good of the country " means, there is 
 no doubt that on the whole, in spite of mis- 
 takes and misapprehensions, the modern State 
 plays a most important part in economic 
 organization. 
 
 In the first place the existence of the State 
 and the order enforced by it makes it possible 
 for property to play the part in organiza- 
 tion which we have already dealt with. We 
 can perhaps conceive a state of things where 
 the co-operation carried on under the influence 
 of the institution of property might exist 
 without any organized authority or government. 
 The whole people might have so much respect 
 for each other's rights, as established by 
 custom, that no one would ever require to be 
 restrained from invading the rights of another, 
 even if that other was weaker than himself. 
 But we do not suppose that such a state of 
 things has ever been realized in the past nor 
 that it is likely to be realized in the near future, 
 and if we are right in this, it is clear that the 
 State has been necessary in the past and is
 
 90 THE SOCIAL ORDER 
 
 likely to continue to be so in the immediate 
 future. Further, even in a society of perfectly 
 just men it would be desirable to have some 
 common authority to make changes when 
 necessary. Otherwise progress would be ex- 
 ceedingly slow, since it would have to be 
 imperceptible. If fast enough to be perceptible, 
 it would seem to violate custom and would, 
 therefore, be tabooed, in the absence of 
 machinery for discussing reasons and passing 
 judgment on them. 
 
 In the eighteenth century there grew up a 
 school of thinkers who said to the governments 
 of the time, " Lalssez faire,'" or " Let alone." 
 The more philosophical among them were 
 influenced by the cult of Nature prevalent at 
 the time, thinking that'certain institutions were 
 Natural and therefore good, while others were 
 artificial and bad. They wanted the institu- 
 tions which they thought natural let alone and 
 the others abolished. The practical men (from 
 whom the phrase itself is said to have come) 
 wanted certain institutions which they regarded 
 as harmful abolished, and did not trouble them- 
 selves to think of the others. The philosophers' 
 ideas about Nature are now recognized as 
 erroneous, their natural institutions being 
 nothing but slight modifications of those lof 
 their own time. To the practical men, the 
 precept " Lalssez faire " never really meant 
 " Leave everything alone," nor even " Leave 
 all natural things alone," but simply " Leave 
 alone certain things which I think ought to 
 be left alone." The practical men got their 
 way to a considerable extent, especially in 
 England, and therefore it has become the 
 fashion to speak of " the triumph of Laisser
 
 THE STATE 91 
 
 faire'' of the " Lalsser faire period," and even 
 of the supposed subsequent " Fall of Laisser 
 faire." But there never was and never can be 
 a State which practises laisser faire. The very 
 establishment of a State negatives a policy of 
 complete " Let alone." In primitive times the 
 demand upon the authority which represents 
 the rudimentary State is constantly for the en- 
 forcement of " good old customs." When the 
 State complies with the demand, it is not letting 
 alone, but taking an active part in the enforce- 
 ment of these customs, which might otherwise 
 fall into disuse owing to violation by interested 
 parties. Moreover, the enforcement of these 
 customs, coupled, as it usually is, with neglect 
 to enforce other old customs, involves a dis- 
 crimination which is favourable to progress. 
 It is only the customs which are felt to be 
 good which are enforced, while the others are 
 left to be violated by those who find it to their 
 interest to violate them. Enforcement of good 
 customs necessitates precise definition, and a 
 good deal of amendment is possible and prob- 
 able in the process. Consequently there was 
 really a large amount of " State interference 
 even in periods when the State seemed to do 
 nothing except reinforce the people's respect 
 for custom. 
 
 The general enforcement of law and order 
 and the facilitation of necessary or desirable 
 changes in that law and order, though perhaps 
 the most vital, is by no means the only impor- 
 tant function of the State in economic 
 organization. Separate property in land has 
 never completely covered the face of any con- 
 siderable country. A network of narrow strips 
 forming the means of communication is always
 
 92 THE SOCIAL ORDER 
 
 found outside the limits of ordinary private 
 property, either free to the use of all -comers 
 or available to all on payment of some toll 
 or due prescribed or limited in some way or 
 other by the State. Without this reservation 
 from private property any considerable amount 
 of communication would appear to be impos- 
 sible. A single proprietor of a large parcel 
 of land usually finds it to his interest to provide 
 roads and sometimes more elaborate means of 
 communication within the area, and it is 
 obvious that a number of different proprietors 
 would often do well to co-operate for the same 
 purpose. On a very small scale, of course, 
 they often do, but the difficulties of " volun- 
 tary " co-operation on a large scale are 
 enormous. The single proprietor who makes 
 a road entirely for his own benefit gets the 
 whole of that benefit and, provided the benefit 
 exceeds the cost, the amount of the benefit need 
 not be accurately known or estimated. If, on 
 the other hand a number of proprietors co- 
 operate in making a road, and adopt, as would 
 seem natural, the principle that the cost must 
 be apportioned between them in proportions 
 determined by the relative benefits they indi- 
 vidually obtain, the total of these benefits must 
 be precisely estimated in order to allow the 
 apportionment to be made. If the arrange- 
 ment is that the cost shall be recovered from 
 the persons using the means of communication 
 in proportion to the use they make of it, as 
 usually happens when railways and canals are 
 made, difficulties arise about the charges which 
 should be made for different uses, e.g., should 
 a man who sends a ton of gold over the means 
 of communication pay only as much as one
 
 THE STATE 93 
 
 who sends a ton of coal ? Further, if this 
 plan is adopted, the owners whose land is taken 
 for the purpose of constructing the means of 
 communication must be paid for it, and the 
 question arises how much they should be paid. 
 If each is allowed to stand out for as much as 
 he can get, the means of communication will 
 never be made, since each will try to get more 
 at the expense of the others. If this difficulty 
 is overcome by some arrangement about the 
 apportionment of the total price, and the 
 highest possible price is obtained for the pro- 
 perty taken as a whole, the cost of transport is 
 likely to be raised to an undesirably high 
 pitch. For example, if there were a range of 
 hills with only one pass through them dividing 
 two parts of a country which it was desirable 
 to connect by a railway or canal, and the 
 owners of the land in the pass were allowed 
 to exact the highest possible price for the 
 monopoly of transit through it, the cost of 
 transit and transport would be higher than it 
 would if there were no range of hills, or if 
 there were many passes through them, and 
 there seems to be no good reason for the 
 difference. 
 
 Hence provision of the means of communica- 
 tion has always been very largely in the hands 
 of the State. The State resolves the difficulties 
 not always precisely in the best conceivable 
 manner, but in a rough and ready fashion which 
 is vastly better than leaving them alone. It 
 apportions cost according to some arbitrary 
 standard which very roughly corresponds with 
 benefit received, modified often by some con- 
 sideration of ability to pay : it prescribes rates 
 and charges, or at least maximum rates and
 
 94 THE SOCIAL ORDER 
 
 charges, for particular uses of the means of 
 communication ; and when it takes the land 
 required, or when it authorizes enterprising 
 persons to take the land, it never adopts the 
 principle that the full competitive price is to 
 be given, but only " compensation," based on 
 the value of the land for purposes other than 
 that of being used for the new or improved 
 means of communication. 
 
 In modern times a number of other things 
 have grown up which resemble the means of 
 communication in being spread over large areas 
 in thin lines. Water, instead of being obtained 
 from a well in each curtilage, or being carried 
 a long distance in buckets from some natural 
 source, is supplied through large pipes or an 
 open aqueduct from some river or lake, natural 
 or artificial, to service-reservoirs in the neigh- 
 bourhood of a town, and from these it is dis- 
 pensed by a ramification of smaller pipes into 
 every house. House drainage is carried out 
 in a very similar way. The provision of gas 
 and electric light is also very similar. The 
 provision of telegraphic and telephonic com- 
 munication requires the laying of a network 
 of wires all over the face of the world. Very 
 often the most convenient plan is to place these 
 waterpipes and gaspipes and wires along the 
 already existing roads or railways, but it is 
 constantly necessary to acquire private pro- 
 perty for some part of the work. These things 
 are very similar to roads, railways, and canals 
 in many of their characteristics, and they are 
 dealt with much in the same way. 
 
 In providing or actively helping to provide 
 these engineering works required by the pro- 
 gress of invention and the thicker population
 
 THE STATE 95 
 
 in modern times the State may be said to be 
 arranging for a necessary supplement to the 
 organization based on separate property. In 
 other important functions it appears rather as 
 supplementing the organization of the family. 
 We can conceive a state of things where 
 children were always sufficiently trained and 
 educated by their parents, and where the sick, 
 aged, and infirm were always properly taken 
 care of by the members of the family who 
 were strong and well. But the actual does not 
 come up to the ideal. Owing to many obvious 
 causes, the family does not always perfectly 
 fulfil its functions in these respects. At first 
 individual almsgiving or " charity " attempts 
 to supply the deficiency with very unsatisfactory 
 results. Crowds of lusty beggars wander from 
 one religious house to another or terrify the 
 lonely housewife by the roadside. Little 
 children are maimed in order to excite compas- 
 sion for their mutilators. Some kind of organi- 
 zation covering the whole territory and armed 
 with certain disciplinary powers becomes 
 obviously necessary, and is supplied by the 
 State ; badly as it works in its earlier forms 
 it is never worse than the chaos which preceded 
 it, and as time goes on it is gradually 
 improved.
 
 CHAPTER VI 
 
 THE CONTROLLING POWER OF DEMAND 
 
 Isolated Man's activity would be governed 
 directly by his wants : he would endeavour 
 to produce just those things which he thought 
 would best satisfy those wants. The same may 
 be said of any society when it proceeds by 
 way of authoritative direction to its members : 
 when it says, for example, " Thou shalt repair 
 the highway, giving three days' labour each 
 year," it is endeavouring to satisfy its desire 
 for good roads. Of course a vast quantity 
 of the labour of mankind is still called forth 
 and regulated directly by the wants of those 
 who perform it. Taking the world as a whole, 
 and not thinking merely of the north-western 
 corner of the Eastern Hemisphere and the 
 thinly peopled continents of America and 
 Australia which have been colonized in recent 
 centuries, we see that individual families still 
 very largely provide their own individual food- 
 suppiy by their own labour devoted directly to 
 the purpose, and even in western Europe and 
 its colonies quite a considerable proportion of 
 the whole of the labour expended is that of 
 women and girls engaged in household and 
 nursing service which satisfies directly the wants 
 of themselves and those to whom they are 
 
 y6
 
 MONEY 97 
 
 bound by affection or conventional family ties. 
 A certain, though much smaller, amount of 
 labour is compulsory labour ordered by terri- 
 torial societies with a view of satisfying 
 societary wants directly, and another, probably 
 larger, portion is expended voluntarily by well- 
 disposed persons with the view of benefiting 
 societies directly. 
 
 The same observations may be made about 
 the use of the material instruments of pro- 
 duction and enjoyment. Isolated Man, of 
 course, would use them to satisfy his wants 
 directly, and as things are, many of them are 
 used directly to satisfy the wants of their 
 owners, whether their owners are individuals or 
 societies : a man may use his own spade to 
 dig in his own ground, and may live in his own 
 freehold house, and a society may enjoy its own 
 club-house or its park. But under existing 
 institutions in the parts of the world where this 
 book is likely to be read, people work and 
 allow their property to be used chiefly, not to 
 satisfy their own wants directly, or because 
 society orders them, but in order to get 
 money. 
 
 Of course no one wants money for its own 
 sake : we want it because we can get the 
 things and services which we want by paying 
 it away again. Money is but the " medium 
 of exchange " between the things or services 
 which we give and the things or services which 
 we ultimately get. Originally, we may sup- 
 pose, all kinds of goods were " bartered " for 
 one another directly, but at a very ancient date 
 it became customary for the particular kind 
 of goods accepted as money to appear on one 
 side of every exchange, so that, for example,
 
 98 DEMAND 
 
 instead of exclianging corn directly for armour, 
 a man would " sell " corn for money and 
 " buy " armour with the money. Barter is 
 clumsy, because it is only easy when one 
 man happens to meet another who has what he 
 wants, and neither of the two think the other 
 is making too good a bargain if the things 
 are exchanged. Common sense early sug- 
 gested the desirability of the one party offering 
 the other some third commodity which could 
 subsequently be exchanged for what the other 
 party wanted. Particular commodities soon 
 became pre-eminent for this purpose, and now 
 two or three have entirely superseded all others. 
 A commodity so used is called a " currency," 
 because it " runs " or passes easily from hand 
 to hand. Many different kinds of things have 
 been used at different times and places, but 
 what we call the " precious " metals, gold and 
 silver, with some assistance from " token- 
 coins " made of other metal, and from pieces of 
 paper on which are written or printed promises 
 to pay sums of gold or silver, are now the 
 only important currency. In very early times 
 it was found convenient to use metal which 
 had been stamped in some way so as to indi- 
 cate its fineness, and soon pieces of particular 
 weight were stamped so as to save the taker 
 the trouble of weighing as well as of assay- 
 ing. The Romans called the stamped metal 
 " moneta," after the temple in which the 
 stamping happened to take place, and we have 
 the word in our " money," but when we think 
 of the pieces of metal separately we call them 
 " coins." 
 
 We want money because the possession of 
 money enables us to buy " valuable " things
 
 WAYS OF GETTING MONEY 99 
 
 and services, and so it is in the first place in 
 order to get money that people produce valuable 
 things or perform valuable services. 
 
 The ways of securing money in exchange 
 for valuable commodities and services in 
 modern civilization are innumerable, but it is 
 well to review briefly the chief types. 
 
 The simplest of all, and probably the oldest, 
 is that in which one person sells finished com- 
 modities to the " consumer," which means here 
 the person who proposes to use them for his 
 own direct benefit or that of his family and 
 friends. 
 
 Another equally simple but much more 
 modern method is that of working for " wages " 
 under the direction of the " consumer " of the 
 service rendered, as, for example, persons 
 usually do in " domestic service." I call it a 
 modern method because in ancient condi- 
 tions we do not find one person voluntarily 
 engaging to put himself under the direction of 
 another man and work for him in exchange 
 for pay. If one man in such conditions works 
 for another it is because he must : the relation- 
 ship between the two is of master and servant 
 in the old sense of the words, in which the 
 master is one who commands and the servant 
 one who has to serve whether he likes it or 
 not. Nowadays the words are not much used, 
 and where they are they have lost their old 
 force. People work voluntarily for their 
 "employers" because their employers offer 
 them inducements to do so : they enter into 
 contracts of service of their own free will, the 
 contracts are for short periods, and the penalty 
 for breaking them is generally trifling. 
 
 A third method appears when land, things
 
 100 DEMAND 
 
 affixed to land, or movable objects are lent for 
 a payment agreed on. So far as ordinary 
 movable objects are concerned, this method 
 is doubtless of high antiquity. We can imagine 
 that in very primitive conditions one man would 
 say to another, " You can have my boat to-day, 
 if you will give me ten fish," or it might be 
 " if you will give me half the fish you catch," 
 and the substitution of money for fish in pay- 
 ment is a mere detail. 
 
 We can imagine it soon becoming convenient 
 on some occasions to lend sums of money with 
 which the borrower would purchase what he 
 wanted ; instead of borrowing a boat and pay- 
 ing ten pieces of silver a month for its " hire," 
 the would-be fisherman might borrow a 
 hundred pieces, buy a boat with them^ and 
 pay five pieces a month for " interest " (at 
 60 per cent, per annum) on the money. The 
 loan of money diff'ers a little from the loan 
 of a boat, because the lender of the boat 
 receives back the same boat, older and the 
 worse for wear, while the lender of money 
 receives back a hundred pieces of silver just 
 as good as those he lent, and therefore we 
 should expect the " hire " to be somewhat more 
 than the " interest," but we should expect the two 
 methods to yield in the end the same net return 
 to the lender and to cost the borrower the same 
 net amount. Though they are so nearly alike, 
 however, a widespread prejudice used to con- 
 demn the lending of money for interest, 
 apparently because the fundamental similarity 
 of the two methods was not seen, and it was 
 consequently supposed to be more uncharitable 
 to charge for the loan of " barren " money 
 than for the loan of a boat or anything else
 
 WAYS OF GETTING MONEY loi 
 
 which could more easily be seen to be "pro- 
 ductive." It was long before the requirements 
 of business overcame this prejudice in any part 
 of the world, and it is still widely prevalent. 
 
 The lending of land by the owner to persons 
 who wish to cultivate it in exchange for a 
 payment voluntarily agreed upon is quite 
 modern. The periodical payments by culti- 
 vating tenants which we call " rent " did not 
 spring up as the result of voluntary contracts 
 between free men. Some men were lords, and 
 others were " their men." The men at first 
 served, and in later times paid rent to the 
 lords, not because the " landlords," as we call 
 them, " owned " the land and none could be 
 got on better terms, but because they were the 
 lords' men and owed the lords services which 
 they were not free to refuse. It is only when 
 the cultivators become free to leave the land 
 and go elsewhere that we find the relation 
 between landlord and tenant coming to 
 resemble the relation between lenders and 
 borrowers of other kinds of property. 
 
 In process of time, as population has in- 
 creased and commerce extended, intermediaries 
 have appeared between the ultimate " con- 
 sumer " of commodities and services on the 
 one side and the persons whose labour or 
 property is used to produce the commodities 
 and services on the other side. Particular 
 persons devote themselves to undertaking the 
 business of causing the commodities and ser- 
 vices which they think the consumers will pay 
 for to be produced. They " employ " people 
 to make the commodities or perform the ser- 
 vices at " wages " agreed upon, and sell the 
 commodities and services to the consumers for
 
 102 DEMAND 
 
 what they can get, taking the difference between 
 their expenses and their receipts as their own 
 " profit " or gain on the transaction. Their 
 expenses often inchide payments to the owners 
 of land, money, and other things which they 
 have borrowed for the purposes of their busi- 
 ness, but it is usual for them to have some 
 property of their own with which to start the 
 business, even if they borrow largely. With- 
 out such property they obviously cannot 
 " undertake the risk " of the business in any 
 real sense : they may start the business and 
 carry it on, but it is at the risk of some other 
 person or persons and not at their own risk, 
 since, if the business turns out a failure, it will 
 be these other persons who will suffer. 
 
 When he thought of this property necessary 
 for starting a business as a number of different 
 things, such as cattle and agricultural imple- 
 ments for a farmer, tools and wood for a 
 carpenter, ships for an old-fashioned merchant, 
 the Englishman called it the " stock " or 
 " stock-in-trade " of the person undertaking 
 the business, and if he was asked what his 
 stock was, he replied with an enumeration of 
 its various constituent parts. In simple condi- 
 tions this is all that is required. But as soon 
 as the stocks of different persons and even 
 of the same person at different times begin to 
 show great variation in kind, a money valua- 
 tion of the stock is desirable for comparisons 
 between one person's stock and that of another 
 and even between the same person's stock at 
 different times. This is particularly obvious 
 when people club stocks together for the pur- 
 pose of carrying on a business on a " joint 
 stock." When they do that, they arc compelled
 
 CAPITAL 103 
 
 to devise some means of distinguishing the 
 different " shares " held in the business by the 
 different partners. Even if the shares are 
 brought in originally in ships or merchandise, it 
 is necessary to value these things before it is 
 possible to say that, for example, the two small 
 ships brought in by A make his share one-third 
 of the whole, while B, who contributed one 
 much larger ship, is to own the other two- 
 thirds. But ordinarily the original stock of 
 the partnership or company will be bought 
 in the first place with money contributed by 
 the partners or members, and here it is still 
 more obviously the simplest course to credit 
 each partner or member with a sum of money 
 in the stock of the partnership or company, and 
 it becomes convenient on many occasions to call 
 the total of the sums so contributed " the 
 stock " of the partners or the company. It 
 seems that before this practice was established 
 in England, book-keeping on the Continent 
 had introduced the foreign forms of the word 
 " capital " to indicate the sums of money con- 
 tributed by each partner or member and the 
 total of these sums. The extension of the 
 use of the term to England was assisted by the 
 fact that the total sum was the principal or 
 capital stock of the partnership or company, 
 the head or chief fund with which it started, 
 in contrast with minor stocks or sub-divisions 
 of stock for particular purposes and any other 
 funds, such as those which would eventually 
 constitute profits. Whatever doubt there may 
 be as to the early history of the term, it is 
 certain that before the end of the seventeenth 
 century it was in common use as the name of the 
 original stock of companies considered as a sum
 
 I04 DEMAND 
 
 of money, and that gains were calculated as per- 
 centages on it and profits were divided among 
 the members in proportion to their shares 
 in it. Individual business men adopted the 
 term, and applied it to their own businesses, 
 saying that their business had such and such 
 a capital invested in it and that they were 
 making such and such a percentage on that 
 capital. 
 
 The present organization of industry is some- 
 times described as capitalistic, and the term 
 is quite properly applied, if all that is meant 
 by it is that in our part of the world the greater 
 part of industry and property is immediately 
 controlled by persons and institutions whose 
 object is to make a profit on their capital. In 
 Western Europe and America it is certain that 
 the majority of workers work as they are 
 directed to work by persons and bodies of 
 persons who employ them in order to make 
 a profit by getting more than they pay for 
 all expenses, and who reckon the profit as a 
 percentage on their capital. The greater part 
 of the property is also in the hands of such 
 persons and institutions. But we are not to 
 conclude from this that these persons and 
 institutions exercise any really spontaneous 
 control over mankind and the useful things 
 upon the face of the earth. They are only 
 intermediaries between the consumer on the 
 one side and the persons whose work and 
 property is necessary for production on the 
 other. They can only get their profits in 
 consequence of a careful attention to value 
 which compels them to agree on the one side 
 with the consumer with means, and on the other 
 with the workers whom they employ and the
 
 DESIRE TO DO WHAT PAYS 105 
 
 owners whose property they use. Their profit 
 is dependent on the price the consumer with 
 means will give, and on the prices at which 
 they can obtain the things and services neces- 
 sary for the production. If the consumers for 
 any reason choose to place a lower value on 
 some commodity or service which is being 
 produced by " capitalistic " methods, the 
 profits fall ofif, and all or some of the persons, 
 firms, or companies engaged in the trade are 
 compelled, or at the least find it better, to reduce 
 their output. And the same thing happens 
 if, on the other hand, the value of some of the 
 necessary elements of the production rises : 
 profits are reduced until the amount produced 
 is cut down, so that a rise in its price takes 
 place. 
 
 Thus every one, including the capitalist, is 
 governed by the desire of being able to produce 
 commodities and services of high value. A 
 man capable of several different kinds of work 
 of equal pleasantness will take up that which 
 " pays " him best. If he is well disposed 
 towards his children and able to train them for 
 several such different kinds of work, he will 
 train them for that kind which will "pay" 
 best after allowing for the cost. If he has 
 property, he will devote it to the purpose which 
 will " pay " best. Whether he works for a 
 person who consumes for his own satisfaction 
 what he produces, or for a person or firm or 
 company which sells what he makes to the 
 final consumer and wants to secure a profit, 
 matters not. 
 
 If there were no correspondence between the 
 production of what is valuable and the pro-
 
 io6 DEMAND 
 
 duction of what is useful, this seeking after 
 the production of what is valuable could not 
 be expected to have good results for Society 
 as a whole. Now for ages past people have 
 been in the habit of contrasting value and 
 usefulness, or^ which is exactly the same thing, 
 utility. The stock examples used to be water 
 and diamonds. Water, it was said, is of very 
 great use, but has no value, while diamonds 
 are very valuable, but of very little use. The 
 proposition was accepted too lightly. Clearly 
 a great deal depends on circumstances. A 
 lady in a ballroom who did not happen to be 
 very thirsty would probably pronounce dia- 
 monds a great deal more useful than water. 
 The easy acceptance of the doctrine seems to 
 come from the belief that the world could 
 get on much better without diamonds than 
 without water : yet people will give more for 
 a quarter-ounce diamond than for millions of 
 tons of water. Usefulness is taken to be the 
 quality which satisfies our more elementary and 
 corporal needs, and there is no doubt that the 
 word is constantly used in that sense in ordinary 
 conversation. But economists have been in- 
 clined to give to usefulness, or at any rate 
 to " utility," a somewhat different meaning, 
 by making it signify capacity to satisfy any- 
 one's desires, so that it would be wrong 
 (using the word in their sense) to say that dia- 
 monds, or even a poisonous drug which some 
 people were ready to buy because it was pleasant 
 for the moment though it was pernicious 
 in the end, had no utility. If utility be taken 
 in this sense, the contrast between it and value 
 seems much less marked. We are no longer 
 inclined to say that diamonds have little or
 
 VALUE AND UTILITY 107 
 
 no utility, since we have to admit that they 
 satisfy a want — the desire for ornament — which 
 is distinctly economic. But iwe still feel that 
 there is a considerable contrast between value 
 and utility when we reflect that a deficient 
 harvest will sometimes bring in a greater 
 aggregate price than a normal one. According 
 to the often quoted estimate of Gregory King, 
 a deficiency of 10 per cent, in the harvest of 
 wheat would raise the price of the bushel by 
 30 per cent., so that the small harvest would 
 sell in the aggregate for 17 per cent, more 
 than the normal one. Surely, we may say, 
 a 90 per cent, harvest cannot satisfy wants 
 better, and thus have greater utility than 
 a 100 per cent, one, so here is a plain contrast 
 between value and utility ? But when we 
 remind ourselves that the value with which 
 we commonly deal is the value of some 
 small unit of the commodity in question 
 and not the value of the whole of the 
 commodity in the world at the moment or 
 of the whole produced in a year, we begin 
 to doubt the contrast again. A bushel of 
 wheat is more valuable when the harvest is 
 small than when it is big. Is it not also of 
 greater utility ? At the first blush we may feel 
 inclined to answer in the negative, because 
 it supports life just as much and no more. 
 But is there no difi'erence ? When wheat is 
 plentiful some will be used to feed cattle or 
 pigs : it has even, it is said, sometimes been 
 used for fuel, just as fish when caught in 
 abnormal quantities have sometimes been used 
 as manure. So the uses of the wheat, the kinds 
 of wants satisfied by it, are not quite the same 
 when it is plentiful as when it is scarce ; some
 
 io8 DEMAND 
 
 of it goes to satisfy less important wants when 
 it is plentiful. And even if the kinds of wants 
 satisfied were the same — if, for example, wheat 
 was never used for anything except the food 
 of man, could we truly say that the utility of 
 a bushel, its effectiveness in satisfying man's 
 want, was quite the same when bushels were 
 very plentiful as when they were very scarce ? 
 When they were very scarce, people, or at any 
 rate some people, would have to stop eating 
 earlier than they would in times of plenty. 
 They could say without misusing language. 
 
 In these hard times every bushel is so useful." 
 It would certainly be justifiable to say that 
 when the harvest is small, every additional 
 bushel is of greater utility than when it is 
 large . 
 
 This train of thought suggested the use of a 
 new term, " final utility," or " marginal 
 utility," to indicate the utility of additions 
 to the supply of a commodity available at any 
 moment, or what comes to the same thing, the 
 utility of any particular portion of the supply 
 considered as something which may be sub- 
 tracted. Jevons in a classical passage put it 
 thus : — 
 
 "We must now carefully discriminate between 
 the total utility arising from any commodity and 
 the utiHty attaching to any particular portion 
 of it. Thus the total utility of the food we 
 eat consists in maintaining life, and may be 
 considered as infinitely great ; but if we were 
 to subtract a tenth part from what we eat 
 daily, our loss would be but slight. We should 
 certainly not lose a tenth part of fhe whole 
 utility of food to us. It might be doubtful 
 whether we should suffer any harm at all.
 
 VALUE AND UTILITY 109 
 
 " Let us imagine the whole quantity of food 
 which a person consumes on an average during 
 twenty-four hours to be divided into ten equal 
 parts. If his food be reduced by the last part, 
 he will suffer but little ; if a second tenth part 
 be deficient, he will feel the want distinctly ; 
 the subtraction of the third tenth part will be 
 decidedly injurious ; with every subsequent 
 subtraction of a tenth part his sufferings 
 will be more and more serious, until at length 
 he will be on the verge of starvation. Now, if 
 we call each of the tenth parts an increment, 
 the meaning of these facts is that each in- 
 crement of food is less necessary, or possesses 
 less utility, than the previous one." 
 
 The utility of the small unit supposed to 
 be added to or taken away from the whole 
 supply of the commodity was called the " final 
 utility " of the commodity, because it may be 
 supposed to be that of the final or last unit. 
 But the word " last," if not the word " final," 
 often suggests the idea of last added in point 
 of time, and this is misleading. The bushel 
 garnered late in October is not the final bushel 
 in Jevons's sense any more than those got in 
 on the first of August. For this and perhaps 
 other reasons, his term " final " has been 
 dropped in favour of " marginal,", and writers 
 talk of " the marginal utility of wheat " when 
 they are thinking of the utility which would be 
 gained by the addition of a single bushel, or 
 (which is the same thing) the utility which 
 would be lost by the subtraction of a single 
 bushel. Sometimes it is said that the marginal 
 utility of wheat is the utility of the marginal 
 bushel, but this is apt to mislead by making 
 the reader imagine that there is some particular
 
 no DEMAND 
 
 bushel which he must pick out as the marginal 
 bushel. Sometimes, no doubt, after the whole 
 of a particular quantity of a commodity has 
 been used, we can say that some particular 
 part of it was used for the least important 
 purpose. If, for example, we have only a small 
 quantity of water per day, we will drink it 
 all ; a little more, and we will use some for 
 cooking ; more still, and we will wash our 
 hands ; still more, and we will wash our face 
 and neck ; yet more, and we will have a bath 
 or -wash the doorsteps ; and if this does not 
 exhaust the supply, we may even water the 
 garden or the dusty road. We may then say 
 the water was used in that order and that the 
 gallons expended on the road were the marginal 
 gallons. But usually even this much is not 
 possible. Every ounce of bread we eat, for 
 example, is as marginal as any other : we 
 cannot pick one out as the one which we 
 should have dispensed with as the least useful, 
 supposing our supply had been reduced by that 
 amount. 
 
 Between marginal utility and value there is 
 no contrast whatever. The less there is avail- 
 able of any commodity the higher its value, 
 and also the higher its marginal utility : with 
 increase of quantity both fall together. But 
 we should not jump to the conclusion that 
 " value depends on marginal utility." If two 
 cisterns are connected, the water in both will 
 maintain the same level, but that does not make 
 us say that the level in the second cistern 
 " depends upon " the level in the first. This 
 would obviously be no more true than that 
 the level in the first cistern was dependent on 
 the level in the second. Just in the same
 
 VALUE AND WANTS m 
 
 way, it is no more true that value depends 
 on marginal utility than that marginal utility 
 depends on value. It is true that if a commo- 
 dity has a high marginal utility it will have a 
 high value, but it is also true that if it has 
 a high value it will have a high marginal 
 utility. The two qualities go together and 
 are jointly the result of a multitude of causes 
 which it is hopeless to expect to summarize in 
 one short phrase, unless it is something like 
 " the magnitude of the supply of the commodity 
 and the demand for it," which conveys nothing 
 to the mind without lengthy and elaborate 
 explanations of the terms used. 
 
 The importance of the conception of mar- 
 ginal utility is not to be looked for in any 
 compendious formula professing to sum up 
 the causes of variations in value, but in the 
 light which it throws on the connection between 
 wants and their satisfaction under a system 
 in which production is regulated by changes of 
 value. Before the idea of marginal utility 
 was conceived, the fact of some connection 
 was known, but its basis was not clearly seen. 
 We can now see that it rests on the psycho- 
 logical fact that a person wants additions to 
 the quantity of any commodity or service sup- 
 plied to him less and less as the quantity 
 supplied increases. 
 
 How does all this affect the question of the 
 beneficence of the control which, as we have 
 seen, is exercised by value ? 
 
 So long as we have to do with only a single 
 person we may say that the coincidence between 
 control by utility and control by value is com- 
 plete. A single person, acting with proper
 
 112 DEMAND 
 
 judgment, distributes his expenditure between 
 various commodities and services in such a way 
 as to satisfy all his various wants, taken as a 
 whole, as well as he can considering his aggre- 
 gate means. If he finds that a shilling sub- 
 tracted from his expenditure on beer or tobacco 
 will cause a loss of satisfaction less than the 
 gain of satisfaction which he will get by spend- 
 ing a shilling more on tea or newspapers, he 
 will make the transfer. So it is sometimes 
 said that he arranges his expenditure in such 
 a manner that " the last shilling " or " the 
 marginal shilling " will bring in equal satis- 
 faction in every line of his expenditure ; but 
 as this rather suggests that we can pick out 
 some particular shilling in each line as the 
 " last " or " marginal " shilling, it is better to 
 say that he arranges his expenditure so that 
 no shilling could be better expended by being 
 transferred from any line to some other line. 
 If the supply in any one line becomes greater, 
 he will reconsider the distribution of his means 
 with the result that he will give less per unit 
 than before for the commodity in question, be- 
 cause, now that it is more plentiful, a little more 
 or less of it makes less difference to him. In 
 short, he will give more or less for the unit 
 of a commodity according as he more or less 
 wants his command over the commodity 
 increased, or what comes to the same thing, 
 not decreased. This means that, so far as his 
 power goes, value will regulate production in 
 the manner which will cause the greatest 
 amount of utility, since there will be great 
 encouragement to produce more where more 
 is much desired and vice versa. 
 
 The same thing is true where we have to deal
 
 VALUE AND WANTS 113 
 
 with a number of persons with equal means and 
 equal wants, so that if the community con- 
 sisted of such persons, we could say that there 
 was complete harmony between value and utility 
 and that the variations of value caused produc- 
 tion to be directed into precisely those channels 
 which would be best for satisfying economic 
 wants. 
 
 So, too, this harmony would exist where 
 wants were unequal, if means were distributed 
 unequally but exactly in proportion to wants. 
 Then, too, expenditure would be so arranged 
 that no shilling could be better expended by 
 being transferred from one line to another, and 
 there would be great encouragement to pro- 
 duce more just where more was most wanted 
 and little encouragement to produce more 
 where more was least wanted. 
 
 But in the world which we know wants are 
 not equal, means are not equal, and means 
 are not distributed in proportion to the un- 
 equal wants. Some persons with very great 
 wants have little or no means and other persons 
 with comparatively small wants have very great 
 means. The wants of those who have small 
 means do not count for so much in settling 
 values as the wants of those who have large 
 means. Consequently the fact that two things 
 are of equal value does not prove that addi- 
 tional supplies of each would satisfy the world 
 equally. A gallon of milk and a gallon of 
 petrol may be of approximately the same value 
 without its being true that a million gallons of 
 petrol added to the petrol supply would satisfy 
 mankind just as much as a million gallons 
 added to the milk supply. In actual fact the 
 additional milk would for the most part go to 
 
 9
 
 114 DEMAND 
 
 satisfy the wants of a class with less means 
 than the class which would consume most of 
 the petrol, and it would therefore satisfy more 
 urgent wants, as, on the average, the wants of 
 those with small means are less completely 
 satisfied than the wants of those with large 
 means. 
 
 It is, therefore, not true that when people 
 work, or allow their property to be used, in 
 order to obtain money from other persons, 
 they are governed by men's wants in the same 
 sense and as completely as when they work or 
 use their property for their own direct benefit 
 or that of their family or friends. They are 
 really governed only by the wants of those 
 who have ability to pay. To use the short 
 expression which is found useful in common 
 life, they are governed by " demand." 
 
 The word " demand " implies a want on the 
 part of the person demanding, and therefore 
 at first sight the effort to satisfy demand looks 
 identical with the effort to satisfy wants : no 
 one will demand a thing unless he wants it. 
 But the word also implies a power and a 
 willingness — of course often enough a very 
 reluctant willingness, but still a willingness — 
 to give something in exchange. I may want 
 a motor-car in the sense that I would gladly 
 accept one from any philanthropisit who would 
 pay both the first cost and the expenses ^of 
 running and garaging, but if there is no such 
 philanthropist and 1 have not the slightest 
 intention of purchasing a car with my own 
 money, my want plays no part whatever in 
 the "demand" for cars. This is simple 
 enough, but it is far from covering the whole 
 of the ground. The people of the world are
 
 ELASTICITY OF DEMAND 115 
 
 not divided into those who are willing to give 
 an unlimited amount for an unlimited number 
 of cars, and those who will not give anything 
 at all for a single car, however small its original 
 and working cost. The actual state of things 
 is that at one price a certain number of cars 
 will be sold, at a higher price fewer will be 
 sold, and at a lower price more will be sold. 
 
 With this in our minds let us ask ourselves 
 what we mean by the demand for cars. It 
 seems to be the want for cars coupled with the 
 willingness (of course largely dependent on 
 ability) to pay more or less for them. So 
 when we talk of " satisfying demand," all that 
 we mean is supplying people who want and 
 will pay. 
 
 Accuracy of thought and expression about 
 demand and its effects can be assisted by the 
 use of the technical terms " elastic " and " in- 
 elastic " or " rigid," applied to two different 
 qualities of demand by most economists at, the 
 present time. The demand for a commodity is 
 said to be elastic when a small fall of price 
 would cause the amount sold to increase by a 
 large percentage. This use of the term was 
 probably suggested by the Budget speeches 
 of Chancellors of the Exchequer in the second 
 half of the nineteenth century : when they had 
 reduced the duty on some article and then 
 found the revenue nearly as large as or larger 
 than before, they used to congratulate them- 
 selves on " the elasticity of the revenue " from 
 this article, the idea being of course that the 
 consumption was repressed by the duty, and, 
 when the weight of the duty was lessened, rose 
 up like a lump of some elastic substance which 
 has been squeezed down. If a small fall of
 
 ii6 DEMAND 
 
 price will cause the amount sold to increase by 
 a large percentage, it is probable that a small 
 rise of price will cause it to decrease by a 
 large percentage, and so the demand is equally 
 said to be elastic if this is the change actually 
 observed. Contrariwise, if the fall in price 
 will only cause a small increase in the 
 quantity sold, and if the increase in price 
 will only cause a small decrease in the 
 quantity sold, the demand is usually said to be 
 " inelastic." Cases are sometimes imagined 
 rather than actually found, where an alteration 
 of price would cause no difference in the 
 amount sold, and the demand is then said to be 
 "absolutely inelastic" or "quite rigid." 
 
 It is of course a commonplace that traders 
 are governed by demand. If a commodity is 
 not demanded at all, they soon cease to offer it. 
 If they find that there is, or think that there is 
 going to be a " greater demand," meaning by 
 that phrase used in this connection that it will 
 be possible to sell more at the existing prices 
 per week or per annum, they will offer more, 
 provided they can get more at the same cost as 
 before. If their business pays them under the 
 existing circumstances, it will pay them, or at 
 any rate some of them, to enlarge their business 
 provided prices and costs remain the same. 
 This very simple case only occurs by way of a 
 rare coincidence. In a usual way the cost of 
 producing a unit of the commodity will either 
 rise or fall in consequence of an enlargement 
 of the quantity produced. Then the elasticity 
 of the demand comes into play. 
 
 If the cost rises with enlargement of the 
 quantity produced, " increased demand must 
 be checked by a rise of price." This means
 
 ELASTICITY OF DEMAND 117 
 
 that there will not be as much sold as could 
 be sold if the old price had been charged : 
 exactly how much more than before will be 
 sold, and what exactly the rise of price will be, 
 and exactly how much more than before will 
 be sold depends upon the elasticity of demand 
 and the rate at which the cost rises with in- 
 creased production. If the demand (after the 
 change described as an increase of demand) 
 is very elastic, and the rate at which cost rises 
 with increased production is high, the increase 
 of demand will be so " sharply checked by the 
 rise of price " that the increase of quantity pro- 
 duced and sold will be small. If, on the other 
 hand, the demand is not highly elastic but 
 inclining towards rigidity, and the rate at which 
 cost rises with increased production is low, the 
 increase of demand will not be sharply checked, 
 and nearly as much will be produced and 
 sold as if the price had remained stationary. 
 
 In the contrary case, where increased pro- 
 duction lowers the cost of the commodity per 
 unit, the " increase of demand " will not be 
 checked by a rise of price, but will be " stimu- 
 lated by a fall of price." More being called 
 for at the old price, those who sell to the 
 demanders will each try to enlarge their 
 business, and others will enter the trade, and 
 they will together eventually offer more than 
 can be sold at the old price : prices fall and 
 more is sold. Exactly how much more, and 
 exactly at what price, depends upon the elasti- 
 city of demand and the rate at which increased 
 production lowers cost. If demand is very 
 elastic, and the rate at which increased produc- 
 tion lowers cost is high, the additional quantity 
 will be enormous, and the reduction of price
 
 ii8 DEMAND 
 
 great. If, on the other hand, the demand is 
 not highly elastic, and the rate at which 
 increased production lowers cost is low, the 
 increase of quantity sold will be small. 
 
 Of course changes in prices do not all 
 originate in changes in the minds or the means 
 of consumers. They may also arise from 
 changes in the conditions of supply. Climatic 
 or other natural phenomena may treat a 
 particular kind of production more or less 
 kindly ; improved methods may be discovered 
 which make production easier ; more or fewer 
 persons may be, for innumerable reasons, 
 obtainable at higher or lower wages for parti- 
 cular kinds of work : more or less land and 
 other instruments of production suitable for par- 
 ticular purposes may be available. But how far 
 such changes affect the amount offered on the 
 market will always depend on the elasticity of 
 demand. The Isolated Man would be influ- 
 enced in settling the distribution of his time 
 between various classes of work by the causes 
 which make different kinds of products easier 
 or more difficult to procure, but this would not 
 prevent us from saying that the distribution of 
 his time was governed by his wants. In the 
 same way, the fact that the amount of different 
 commodities produced in a society like ours 
 is affected by the conditions of supply need 
 not prevent us from saying that in such a 
 society production is governed by demand. 
 
 We must not forget that a considerable por- 
 tion of demand is furnished not by individuals 
 but by institutions, private and public. When 
 these institutions are supported by the voluntary 
 contributions of living persons their demand 
 does not amount to more than that of indivi-
 
 DEMAND OF THE STATE 119 
 
 duals in combination, and needs no special 
 remark. But many institutions are able to 
 demand not in consequence of the continued 
 action of living persons who can control them 
 by cutting off their subscriptions if they are 
 dissatisfied, but in consequence of dispositions 
 made by persons no longer living. When these 
 dispositions become very flagrantly obnoxious 
 to the common weal, or to the sentiment, 
 religious or moral, of the time, they are inter- 
 fered with by the State in the territory of which 
 they happen to operate, but in spite of this 
 ultimate check, a considerable amount of money 
 is always being spent under the trusts created 
 by deceased persons in ways in which it would 
 not be spent if it was either the property 
 of living individuals or of the State. 
 
 The States themselves with their subdivisions 
 exercise a large power of demand. According 
 to democratic theory they should exercise it as 
 directed by the people, but the people are very 
 variously defined by franchise and registration 
 laws, and their power to direct their government 
 is in fact seldom very effective, so that State 
 action is not actually, even in the most demo- 
 cratic countries, merely the joint action of a 
 number of people living on a certain territory.
 
 CHAPTER VII 
 
 THE CONTROL OF PROVISION FOR THE 
 
 FUTURE 
 
 In the preceding chapter, in order to prevent 
 the main argument being obscured by detail, 
 I have ignored the fact that demand may be 
 either for commodities and services which are 
 wanted at once for immediate ends or for things 
 which are wanted because they will improve 
 people's position in the future. 
 
 'We have seen that our supposititious Isolated 
 Man would have to be constantly deciding 
 between action which gives immediate results 
 and action which improves his position in the 
 more distant future, and that his decision would 
 be governed by rough estimates of the urgency 
 of present as compared with future wants and of 
 the technical advantages to be obtained in the 
 long run by adopting methods which require 
 efYort to be put forth long before fruition 
 instead of " hand-to-mouth " methods. We 
 have seen, too, that Society has also by some 
 means or other to make the same decision. 
 
 Now Society as a whole certainly has neither 
 mind nor machinery for making and carrying 
 out such a decision on a straightforward esti- 
 mate of the comparative urgency of present 
 and future wants and the comparative technical
 
 MOTIVES FOR IMPROVEMENT 121 
 
 advantage of the different methods of produc- 
 tion. The decision is made for it by individuals 
 and by public and private institutions, inclu- 
 ding the territorial states and their subdivisions, 
 in consequence of impulses derived from 
 various motives. We see that while the bulk 
 of the effort of Society is devoted to serving 
 immediate ends, and in preventing the personal 
 and the outward equipment of mankind from 
 deteriorating, a considerable amount of effort 
 is devoted to the improvement of this personal 
 and outward equipment. We find that each 
 generation teaches the next not only as much as 
 it was taught itself but something more, so that 
 each generation becomes better equipped with 
 knowledge ; we find that each generation 
 leaves the material surroundings of mankind 
 not only as good as it found them, but some- 
 what better, so that each generation is better 
 equipped with tools and has easier access to 
 raw material. We have to ,ask ourselves 
 "Why? " 
 
 A certain considerable amount of the effort 
 devoted to the increase of knowledge is due to 
 a desire for the credit and renown gained by 
 remarkable discovery, to the wish to benefit 
 mankind or that part of it which belongs to a 
 particular race or country, and to the natural 
 itch to discover things which affects every 
 healthy -minded person from his earliest child- 
 hood. A portion of the effort devoted to the 
 improvement of material surroundings is due 
 to the desire of individuals that they or their 
 families shall enjoy the advantage of those very 
 improvements in the future. I have, for 
 example, constantly to decide whether to go 
 on with books and papers in confusion or to
 
 122 PROVISION FOR THE FUTURE 
 
 devote time at once to putting them in order 
 so as to save time in the future and the long 
 run. Many things will affect my mind in 
 making the decision. A change in the extent 
 of my knowledge may do so : I may become 
 acquainted with the invention of the card cata- 
 logue, and that may make it more worth while 
 to catalogue the items : the weather may be 
 very good, which will make it less worth while 
 to give up leisure time at the present. So, too, 
 every one who does his own gardening is con- 
 stantly having to decide whether some little 
 permanent improvement is worth while or not. 
 Wherever large numbers of people live to a 
 considerable extent upon the produce of their 
 own and their family's exertions in agriculture, 
 these direct decisions amount in all to some- 
 thing of considerable importance. Where a 
 state exacts compulsory labour from its subjects, 
 as was the custom with regard to road-making 
 even in Europe till quite recent times, it rests 
 with the State to decide how much of this 
 labour shall be devoted to immediate and how 
 much to distant ends : the State can direct per- 
 manent improvements to be made or abstain 
 from doing so. 
 
 But at present in our part of the world these 
 cases are exceptional. As a rule when we see 
 people producing things for storage, or building 
 additional houses and factories, or improving 
 land, or doing anything else which we believe 
 likely to improve the position of mankind in 
 the future rather than to satisfy its immediate 
 wants, we do not think they are actuated by 
 fear of the State, nor by the expectation that 
 they or their families will themselves use the 
 things they are producing, nor by philanthropy
 
 SAVING 123 
 
 or patriotism. We know that they do this 
 particular work simply because it pays them 
 to do it. Demand governs the distribution of 
 effort between the production of goods for the 
 present and goods for the future just as it 
 governs the distribution of effort between 
 different kinds of goods for the present. If 
 demand varies in one direction, a larger pro- 
 portion of the whole effort of Society will be 
 devoted to present goods and vice versa. What 
 is true of labour is also true of the devotion of 
 property to different kinds of purposes. If 
 demand varies in favour of present goods, there 
 will be more parks and fewer brickfields, more 
 yachts and excursion steamers and fewer tramp 
 steamers carrying iron ore and other materials 
 for future constructions. At any one time there 
 is a particular distribution of resources between 
 nearer and more distant ends which is governed 
 by demand, and what we want to know is what 
 will cause the demand to be varied so as to vary 
 this distribution. 
 
 The principal immediate cause is variation 
 in the proportions between what we colloquially 
 call " saving " and " spending." 
 
 The term saving is ordinarily applied exclu- 
 sively to money. We speak of " saving 
 money" and "saving £100 a year." The 
 money thus spoken of as " saved " might have 
 been spent on current satisfactions and enjoy- 
 ments, but has instead been reserved, with the 
 effect of improving the outlook of the saver for 
 the future. A person may have saved simply 
 with the view of postponing the spending till 
 some future period, when a given sum of money 
 will, as he reckons, give him, or possibly his 
 widow or children, something more worth
 
 124 PROVISION FOR THE FUTURE 
 
 having than what he can buy for himself or 
 his wife and children at the present moment. 
 Saving of this kind takes place in primitive 
 conditions when a man puts away coin in a 
 stocking or in a hole in his thatch in order that 
 he may bring it out again to spend when he is 
 old or sick and consequently unable to work ; 
 under more modern conditions it appears when 
 people deposit money in savings banks or pay 
 life-insurance premiums not because the savings 
 banks pay a small interest or because interest 
 accumulates on the insurance premiums, but 
 simply because they think it well to make pro- 
 vision for times when they or their families will 
 be more benefited by the expenditure of the 
 money than they would be if the money were 
 spent at once in addition to what is actually 
 being spent upon them'. It is thus true that a 
 certain amount of saving takes place which is 
 not caused by the existence of interest, and 
 some economists have pronounced that a little 
 saving might still take place even if the rate of 
 interest sank to zero. But it must be borne in 
 mind that such saving is only intended to be 
 temporary : the savers intend what they save 
 to be spent again, and that at no very remote 
 date, and if their intention is not frustrated by 
 accident, all that they save will be spent within 
 a very moderate period of years, eighty or so 
 at the outside, and usually much less. Conse- 
 quently no very considerable accumulation 
 could take place if there were no other motive 
 for saving than the desire to " provide for a 
 rainy day " by collecting a store of money 
 which should be spent on the occurrence of the 
 " rainy day.' 
 
 The most powerful motive for saving is
 
 SAVING TO GET INTEREST 125 
 
 supplied at present by the interest, profit, or 
 rent which can be obtained by it. People who 
 are primarily induced to save by the desire 
 to provide for a rainy day are encouraged to 
 persist in their resolve and induced to increase 
 their savings by the fact that they can get 
 interest so long as the capital remains intact, 
 and others are induced to save in the first place 
 because they see that it would be pleasing to 
 receive interest, profit, or rent while retaining 
 the power of spending the savings if they 
 choose at any moment to give up the interest, 
 profit, or rent. " Interest " is obtained when 
 the " money saved " is lent out on condition 
 of the borrower paying periodically a sum 
 called the " interest," and usually calculated as 
 a percentage on the amount lent, which per- 
 centage is spoken of as " the rate of interest," 
 and in modern times is usually calculated per 
 annum rather than per month or per week. 
 " Profit " is spoken of when the money saved 
 is expended on the purchase of commodities 
 and services which are subsequently sold for 
 more than their cost, and thus bring in a profit 
 or gain : this gain, too, is usually calculated 
 as a percentage, but confusion sometimes occurs 
 in consequence of the facts that the amount 
 expended may be regarded as a whole or in 
 parts and that the gain may come in at more 
 or less frequent intervals. For example, it 
 might be said that a secondhand bookseller 
 was making a profit of 60 per cent, when the 
 speaker was thinking simply of the difference 
 between the price at which he bought books 
 and that at which he sold them, and only 20 per 
 cent, when the speaker was thinking of the 
 whole amount the bookseller had put into the
 
 126 PROVISION FOR THE FUTURE 
 
 business and the return upon that amount per 
 annum. " Rent " is obtained when the money- 
 saved is devoted to the purchase of land which 
 is let for periodical payments agreed on 
 between lender and borrower, or, as it is com- 
 monly expressed, between landlord and tenant 
 or owner and lessee ; and it is also in common 
 language said to be obtained when the money 
 saved is spent in constructing or buying a 
 house or some other fixed object which is let 
 for similar periodical payments. It is not, 
 however, the practice to speak of rent in per- 
 centages. Instead of saying the land or the 
 house yields 5 per cent., we say it yields, say, 
 £100 a year. If we want to relate the yield 
 to the money expended, we say it was bought 
 at twenty years' purchase, meaning that the 
 price was equal to twenty times the rent. But 
 this phrase is perhaps becoming old-fashioned, 
 and it is quite possible to say that the land or 
 house yields 5 per cent, on the price paid for 
 it. In any case, it is a question of phraseology, 
 which does not affect the fact that people who 
 acquire property which yields a " rent " are 
 actuated by the same motives as those who use 
 the money they have saved to procure interest 
 or profit. Hence economists have found it 
 convenient to use the term " interest " to cover 
 the whole of the periodical " returns " to 
 savings. 
 
 Of course interest is not always equally 
 powerful in causing savings. Changes are 
 possible which will cause any given rate of 
 interest to become more stimulating or less 
 stimulating to saving in two ways. 
 
 I . A change may take place which will 
 render the potential savers more desirous or
 
 WILLINGNESS TO SAVE 127 
 
 less desirous of providing for the future as com- 
 pared with the present, although their means 
 of doing so and their knowledge of methods 
 remain the same. 
 
 There is little reason to suppose that " provi- 
 dence " is always present in the same degree 
 in the minds of potential savers. Writers and 
 preachers are in the habit of assuming that 
 people usually underestimate future goods as 
 compared with present. There is little ground 
 for the assumption : it is chiefly made by the 
 well-to-do, who do not know what it is to be 
 really pinched in the present. But the fact 
 that the assumption is made, and that people ,are 
 exhorted to be more " provident," while nobody 
 thinks of retorting that a change is impossible, 
 shows that it is generally believed that a change 
 in this respect can take place, and here no 
 doubt the general belief is correct. 
 
 More important, perhaps, than the obscure 
 psychological change suggested by the phrase 
 " increasing providence," are the innumerable 
 circumstances which, without any such change 
 and without any change of means, may lead 
 people to be more or less desirous of attempting 
 to improve the future at the expense of the 
 present. More or less certainty about the future 
 is perhaps the most important of these circum- 
 stances ; we might reasonably expect more to 
 be saved where security prevailed than where 
 the saver ran considerable risk of seeing some- 
 body else enjoy the fruits of his saving. 
 Another important factor is the degree in which 
 wives and children are distributed between the 
 potential savers : a man is more likely to wish 
 to save for his widow and children than for 
 others.
 
 128 PROVISION FOR THE FUTURE 
 
 It is very commonly believed that States can 
 alter the total amount annually accumulated 
 directly and very materially by the choice which 
 they can make between taxes which " are paid 
 out lof " or " fall upon " income and those 
 taxes which are paid out of or fall upon capital. 
 This belief is founded on a misapprehension. 
 Most actual taxes are supposed to be paid out 
 of income, and the stock example of taxes 
 supposed to be paid out of capital is the inherit- 
 ance taxes, or death-duties as it has been the 
 custom to call them in colloquial English ever 
 since Gladstone applied that term to them. 
 Obviously, the immediate payers of such taxes, 
 usually the executors or administrators of the 
 deceased, ordinarily pay them out of the pro- 
 ceeds of a part of the property passing from the 
 dead to the living. The money thus obtained 
 is supplied by the purchasers of the property 
 sold, and its ultimate source is the income of 
 the purchasers, or, at any rate, of some persons 
 somewhere who have income to invest. It is 
 because these persons save that the State is able 
 to get the money, and so it seems clear to the 
 attackers of this kind of taxation that it is paid 
 out of capital, which is to its discredit, inas- 
 much as it is usually regarded as rather dis- 
 creditable for a State, as for an individual, to 
 live on its capital. 
 
 But whether the State takes twenty millions 
 a year from owners of property taken as a 
 whole by taxing each of them a small percen- 
 tage every year, or takes exactly the same sum 
 from them by taxing each of them a much 
 larger percentage every twenty or thirty years, 
 or whenever any one of them dies, can scarcely 
 make any very material dift'erence in the long
 
 ABILITY TO SAVE 129 
 
 run. No one supposes that the small annual 
 percentage must be paid out of capital : why 
 should the larger every -thirty -years or on- 
 occasion-of-death percentage be paid out of 
 capital? The annual tax diminishes the avail- 
 able income left to the owners and available 
 for their spendings or savings, by twenty 
 millions per annum, and the tax levied at 
 certain or uncertain longer intervals does 
 exactly the same. 
 
 Taxation does not work in such a direct 
 crude manner as is supposed. But all the 
 same there is a difference between the effect 
 upon saving of different kinds of taxes. The 
 uncertainty of life may, for example, make 
 death-duties " fall upon capital " more than an 
 equivalent annual tax : as people usually think 
 they will live longer than they do, they may^ 
 as a rule, underestimate the nearness of the 
 payment, and consequently spend more and save 
 less than they would under an annual tax. 
 Again, all taxation of property, whether capital 
 or income is the standard of the tax, as com- 
 pared with taxation of labour -income, must 
 somewhat discourage saving. And even in the 
 taxation of commodities, it is possible to dis- 
 criminate against or in favour of the saving 
 person : taxation of tobacco and whisky is more 
 likely to hit the spendthrift and thus to be 
 paid out of income than taxation of carpets or 
 bricks. 
 
 2. A change of means may take place which 
 will make it easier to save. Any one can see 
 that the offer of a given rate of interest will 
 induce rich people — -people whose unsatisfied 
 wants of the moment are not urgent — to save 
 larger absolute quantities of money than poor 
 
 10
 
 I30 PROVISION FOR THE FUTURE 
 
 people. It is a commonplace that the savings 
 of the numerous poor are a trifle compared to 
 those of the small section of society which is 
 rich. This is not because the poor are more 
 " improvident " than the rich, but because they 
 cannot afford to save so much. It would be a 
 physical impossibility for them to save so 
 much : they have not got the income. 
 
 It may be more difficult to see that a given 
 rate of interest will not only induce the rich to 
 save more absolutely, but will also induce them 
 to save more in proportion to their spendings 
 than the poor. But take two men of similar 
 disposition and, so far as possible, of similar 
 circumstances {e.g., give them the same 
 number of children) the one with £ioo a year 
 and the other with £100,000, and consider how 
 they will be influenced by an offer of 5 per 
 cent, for all savings. If either of them saves in 
 any year one-tenth of his income, he will find 
 the income of himself and his heirs increased 
 in all future years by one-twentieth of one- 
 tenth, that is, by \ per cent. Cutting off 
 10 per cent, of the " spendings " of this year, 
 then, will in each case increase the income of 
 all future years by ^ per cent., and at first sight 
 it seems as if 5 per cent, interest should induce 
 the two men to save equal proportions of their 
 incomes. But this first impression is erroneous. 
 The advantage of the additional \ per cent, of 
 income is really more to the rich man in pro- 
 portion to the 10 per cent, of "spendings" 
 forgone than it is to the poor man. It may 
 be difficult to see this if we take a small saving 
 like one-tenth, but if we enlarge the propor- 
 tion to one-half, the truth becomes obvious. 
 If a man had £50 per annum and a family to
 
 INFLUENCE OF RATE OF INTEREST 131 
 
 bring up, we should think him a kinatic if he 
 insisted on saving £25 per annum : we cer- 
 tainly should not pass that judgment on a 
 man with £5,000 per annum who saved £2,500 
 per annum. The fact is, that the utility of 
 additional income declines less rapidly as 
 incomes get bigger : or, which will seem 
 perhaps more convincing, though it is the same 
 thing, the utility of each pound of income rises 
 more rapidly as the income decreases. Conse- 
 quently any given rate of interest will stimulate 
 saving more when people are rich than when 
 they are poor. 
 
 But, given certain conditions of desire to 
 provide for the future and of ability to save, 
 the higher the rate of interest the greater the 
 saving. This has been questioned on the 
 ground that there are some people who are 
 determined to save an amount which will bring 
 in a certain income, and if the rate of interest 
 is low, these people will save more than if it is 
 high. The existence of such people may be 
 doubted, and even if a few such exist, they 
 cannot make much difiference. If strong cases 
 of difference in the rate of interest be taken, 
 it will be obvious that their determination, 
 however obstinate, will be of no avail. At 
 5 per cent, a man need only save £150 per 
 annum for thirty years in order to get an 
 income of £500 per annum in perpetuity be- 
 ginning with the thirty-first year. But if the 
 rate of interest fell to 2^ per cent., then in 
 order to secure that income he would have 
 to save no less than £455 per annum, which, if 
 his income was a small one, would certainly 
 break his determination. Taking all potential 
 savers together, there can be no reasonable
 
 132 PROVISION FOR THE FUTURE 
 
 doubt that the higher the rate of interest, other 
 things being equal, the greater the savings. 
 
 What then determines the rate of interest ? 
 
 In approaching this question the first thing 
 to do is to disabuse our minds of the confusion 
 engendered by the too literal acceptance of 
 the colloquial phrase, " it will not pay," applied 
 to proposed investments. Of course it is true 
 that some proposed investments will not pay in 
 the literal sense of the words : they will bring 
 in no return at all, and the money invested in 
 them will be wholly lost. " It will not pay " 
 often means only "it is not worth while to 
 make this investment since there are others 
 open which will give a better return." At any 
 given moment every one knows that there is 
 some rate of interest which is the lowest that 
 need be taken, and investments which yield 
 less than this as well as those which yield 
 nothing at all are said not to pay. Between 
 the investments which " pay " the current rate 
 and those which would pay nothing at all, 
 there is always an immense number known 
 which would pay something between the current 
 rate and nil. The whole of the known methods 
 of applying savings to the acquisition of new 
 stores and instruments of production, such as 
 machinery for producing cotton goods, or 
 instruments of direct enjoyment, such as 
 theatres and houses, should be supposed 
 arranged in order of profitableness, so that we 
 see some over the profitable level of the 
 moment, 4 per cent, or whatever it may be, 
 and others at lower levels, 3 per cent., 2 per 
 cent., I per cent., o per cent., and downwards 
 if we like into the minus region. When this 
 is done, we can see that the more savings there
 
 INFLUENCE OF QUANTITY OF SAYINGS 133 
 
 are to invest, the lower is the current rate — the 
 rate which is regarded as making an invest- 
 ment " pay " — likely to fall. To be convinced 
 of this we need only suppose the amount 
 coming forward week by week for investment 
 to be doubled. Will not many investments 
 then be made which no one will now look at 
 because they "will not pay"? W^ill not all 
 existing property yielding fixed sums per 
 annum rise in capital -value, or number of 
 years' purchase, so that the rate of interest 
 obtained by any fresh investor in them will be 
 reduced ? Will not every owner of property 
 which does not yield fixed sums, but is subject 
 to the competition of property newly created 
 out of savings, complain that profits are not 
 what they used to be ? 
 
 The degree in which the rate of interest will 
 be affected by a given quantity of savings will 
 depend upon the magnitude of the field of em- 
 ployment at each rate, just as the number of 
 inches by which a quart of water will raise the 
 level of water in a basin will depend upon the 
 contour of the sides of the basin ; there may 
 be a small field between 4 and 3 per cent., a 
 larger one between 3 and 2, and a much larger 
 between 2 and i, in which case the rate would 
 fall less and less rapidly with given additions 
 to the amount saved : or there may be just the 
 reverse, in which case the rate would fall more 
 and more rapidly : or there may be a large 
 field between 4 and 3, a small one between 
 3 and 2, and a large one between 2 and i, in 
 which case the rate would first fall slowly, then 
 fast, and then again slowly. 
 
 This would be an end of the matter if all 
 other changes except increase in savings could
 
 134 PROVISION FOR THE FUTURE 
 
 be neglected. But there are several other 
 important factors. 
 
 Firstly^ an increase in the numbers of the 
 people works in the opposite direction to 
 saving. The more people there are, the greater 
 the value of any given instruments, whether of 
 production or, like houses, of direct enjoyment, 
 in proportion to given products of labour 
 requiring less saving. It is easy to see that 
 if the population of the Earth were suddenly 
 doubled by an immigration from Mars unac- 
 companied by any importation of capital or 
 fresh knowledge, the rate of interest would 
 rise enormously, owing to the urgency of the 
 increased population's demand for all kinds of 
 instruments. The unoccupied field of invest- 
 ment would completely alter, and instead of 
 investments at 4 per cent, being " profitable," 
 perhaps 20 per cent, would be commonly ex- 
 pected and obtained. The gradual increase of 
 population which usually goes on in the world 
 has, of course, exactly the same tendency, 
 though its effect is not so striking. 
 
 Secondly, knowledge is continually growing, 
 and additions to* knowledge often affect the 
 relative advantage of producing by methods 
 which involve much storage of consumable 
 goods and much provision of instruments com- 
 pared with the advantage of producing by 
 methods which require little or no stores and 
 instruments. The stock example of an addi- 
 tion to knowledge of this kind is the invention 
 of steam locomotion on iron rails. This pro- 
 vided an enormous extension of the field of 
 investment by showing people a way of invest- 
 ing a large quantity of savings in constructing 
 new le\el roads by means of cuttings, em-
 
 INFLUENCE OF INVENTIONS 135 
 
 bankments, tunnels, and viaducts, which was 
 before unknown, and therefore not adopted, 
 although more profitable than other investments 
 which were actually made. This new method 
 being once pointed out, new savings of course 
 went into railway construction instead of being 
 put into other investments yielding less. It is 
 sometimes assumed that all additions to know- 
 ledge are like this invention, and thus all tend 
 to raise the rate of interest. But this is a 
 complete mistake. While some inventions 
 increase the comparative advantage of working 
 with stores and expensive instruments, other 
 inventions diminish it. Any one can see that if 
 instead of steam railways, the " wishing 
 carpets " of children's tales had been actually 
 " invented," so that all that was required to 
 transport persons and goods was a few yards 
 of inexpensive textile fabric, the field for the 
 investment of savings would have been reduced 
 instead of being enlarged, and investment 
 would have been driven further down in the 
 scale of profitableness : it would have been un- 
 necessary to build railways or to improve the 
 existing machinery of transport. There are, 
 of course, no wishing carpets, and we are apt 
 to think that invention in practice always takes 
 the form of the discovery of means which 
 require more elaborate machinery. This is, 
 however, only because the inventions of which 
 we are reminded are those which are called to 
 mind by the presence of the elaborate 
 machinery required to utilize them : the others, 
 which have simplified processes and led to 
 the disappearance of elaborate — or, as we 
 ungratefully say, clumsy — machinery leave no 
 visible trace and are soon forgotten. Yet they
 
 136 PROVISION FOR THE FUTURE 
 
 are obviously of great importance — for all we 
 know of even greater importance than the other 
 kind of invention. 
 
 The question now arises how well Society is 
 served by the aggregate decision about saving 
 arrived at by individuals and institutions. 
 
 At first sight it may appear as if this decision 
 should be perfectly satisfactory. Every indi- 
 vidual who saves does so just up to that point 
 at which the rate of interest he gets makes it in 
 his opinion^ which is probably as good an 
 arbiter as could be found, just worth his while. 
 Why does A save £100 a year and B only £50? 
 Because A thinks the future advantage which he 
 expects to get by reserving each pound out- 
 weighs the present advantage of spending each 
 pound up to a total of £100 ; beyond that he 
 does not go, because he reckons that it is not 
 worth while to pinch himself in the present for 
 the advantage obtainable in the future. B cal- 
 culates in exactly the same way, but owing to 
 some difference in his character, needs, or 
 means, the point at which he finds it desirable 
 to stop is reached at £50 instead of at £100. 
 Each of them stops at the margin where the 
 advantage of further saving is just equal to 
 the advantage of further expenditure on im- 
 mediate wants. Having this in mind we may 
 say that here is another case of correspondence 
 between value and marginal utility, since the 
 rate of interest may be said to indicate the 
 value of saving as compared with spending, 
 since " 5 per cent." means that £100 down 
 and £5 per annum are of equal value. But it 
 must be remembered that the correspondence 
 of marginal utility and value is only true of 
 single persons or of persons exactly similar in
 
 IMPERFECTION OF CONTROL 137 
 
 circumstances and tastes. In fact, of course, the 
 tastes and circumstances of different persons 
 differ enormously. If we suppose each single 
 person to have perfect judgment, we are justi- 
 fied in saying that each person will be induced 
 by rises and falls of the rate of interest to regu- 
 late his saving so as to get the greatest possible 
 good out of his means : he will save just up 
 to the point where future advantage equals 
 present loss, and no further. But as things 
 are, it is not justifiable to say that Society 
 saves just up to that point and no further, even 
 if we suppose that taken all together the 
 potential savers have perfect judgment. The 
 different means of the dift'erent persons make it 
 unjustifiable. Obviously a society with institu- 
 tions like our own would save quite different 
 amounts if there were a very few enormously 
 rich people and the bulk of the population was 
 poor, than if means were more equally distri- 
 buted. It is true that such a distribution of 
 means would not result in too much saving 
 under the actual conditions : that is to say, it 
 would not be advisable to tell the rich to 
 squander their means in riotous living. It is 
 better that the multimillionaires should go on 
 providing the world with new ships, factories, 
 houses, and such -like things than that they 
 should give more thirty -thousand pound ban- 
 quets. But it is true that such a distribution 
 would result in more being saved than would 
 be saved under more satisfactory conditions, 
 in which what was taken oft" the annual amount 
 saved went, say, to buy more milk for half -fed 
 children. Here again then we find that there is 
 a connection between value and utility and a 
 conditional though imperfect harmony.
 
 138 PROVISION FOR THE FUTURE 
 
 Variation of the proportion between saving 
 and " spending," though probably the principal, 
 is hot the only important cause of variation 
 in the distribution of effort between the satis- 
 faction of present needs and the improvement 
 of the future position of Society. People are 
 only said to " save " where the acquisition of 
 property is possible. But much effort is ex- 
 pended which tends to improve the condition of 
 mankind in the future but does not involve the 
 acquisition of property by individuals or by 
 private or public institutions. A large por- 
 tion of the effort spent on additions to the 
 field of knowledge comes under this head. 
 States have, it is true, tried to create in patents 
 and copyrights a kind of property which would 
 play the same part here that ordinary property 
 in material things plays in regard to additions 
 to useful material things. But neither patents 
 nor copyrights go or can go very far in the 
 promotion of additions to useful knowledge, 
 even if made world-wide. Most useful investi- 
 gation in this direction is carried on not in 
 response to commercial demand, but from the 
 motives suggested near the beginning of this 
 chapter (p. 121). There is no reason to suppose 
 any perfect harmony here. It is probable that 
 much more effort might well be expended in the 
 direction of increasing knowledge. If more 
 was so expended, less would, of course, be left 
 either for savings in the ordinary sense or for 
 the satisfaction of the needs of the present, or 
 perhaps for both purposes, but the advantage 
 obtained from the greater knowledge would 
 more than counterbalance this loss in the long 
 run.
 
 CHAPTER VIII 
 
 CONTINUOUS POWER TO DEMAND, OR 
 INCOME 
 
 In order that any person or institution may be 
 able to control production continuously by 
 means of demand, it is necessary that he or it 
 should have a continuous supply of money to 
 spend. 
 
 Such a continuous supply is provided, not 
 perhaps exclusively but at any rate principally, 
 by " income," in the sense in which that word 
 is ordinarily used. It is important for this and 
 other reasons to have a thorough understand- 
 ing of that sense. 
 
 Etymology does not help us much. " In- 
 come " is doubtless something coming in, but 
 what ? And what exactly do we mean by 
 " coming in " ? I suppose that the unsophisti- 
 cated person, if there is one in this day of 
 schoolmasters and newspapers, will say that 
 what comes in is money. This is nearly but 
 not quite true. We say that a man's income is 
 £ioo or £i,ooo, as the case may be, but the 
 statement is not intended to convey more than 
 that the incomes are reckoned at that value, 
 just as when we say that a person " inherited 
 a million " we may be perfectly well aware 
 that what he actually inherited was not a million 
 
 139
 
 143 INCOME 
 
 pounds in gold, notes, or any other form of 
 currency, but lands, houses, shares in com- 
 panies, and other things which were valued at 
 a million pounds. In fact, however, in our 
 own and similar countries where " income " 
 and equivalent words are used, the greater part 
 of most men's income in the ordinary sense 
 of the word does consist of money, not 
 necessarily coins put into their hands, but either 
 coin or some kind of written or printed order 
 which enables them to receive coin if they 
 want it. But in addition to this " money- 
 income," there are some other incomings 
 which are often, at any rate, valued in money 
 and added, as a sum of money, to the money - 
 income, to make up the whole income. 
 
 One of these things is the advantage which a 
 man gets frgm living in a house of his own 
 instead of in one for which he has to pay rent. 
 It is usual to add to such a man's money- 
 income a sum of money equal to the net amount 
 which could be obtained by letting the house 
 to a tenant. It is common, too, though not 
 so common, to add to the money -income of a 
 farmer an estimate of the money -value of that 
 part of the produce of the farm which he 
 and his family consume. 
 
 On the other hand, we seldom or never add 
 to a man's money-income an estimate of the 
 money-value of the good he gets from his own 
 furniture or clothes, and, still less would we 
 think of adding an estimate of the money- 
 value of the various services which he and 
 his wife and daughters render directly to 
 themselves. 
 
 Why this apparently " illogical " distinction? 
 
 The question can only be answered by the
 
 INCOME RECEIVED IN KIND 141 
 
 help of a consideration of the purpose for 
 which we want the statement of income. If 
 asked why we include the annual value of a man's 
 dwelling-house in his income if he happens 
 to own it, we should probably say at the first 
 blush, " Because it would be misleading to say 
 that a man lessened his income if he sold 
 stock and bought the house which he had 
 previously been renting and continued to live 
 in it, and to say that he increased his 
 income again when he went out of it into 
 another and let it for a rent which he had to 
 spend in paying the rent of his new dwelling." 
 The suggestion which we should obscurely 
 imply in the word " misleading " is that we use 
 calculations of income for the purpose of com- 
 paring the spending power of one individual 
 man with that of others, or his spending power 
 at one time with that which he possesses at 
 some other time. It would be wrong, for 
 example, not to include the house owned by 
 its inhabitant in an estimate of his power to 
 pay income-tax, since if it was omitted, people 
 of really equal means would be unequally taxed, 
 and a premium would be put upon the owning 
 of houses by their inhabitants. Similarly when 
 we think it desirable to include in the income 
 of a farmer an estimate of the money -value 
 of the produce of the farm which he and his 
 family consume, we really do it because we 
 have in view some comparison between the 
 spending power of farmers and that of other 
 classes who have no such goods coming in ; 
 or between the powers of different classes of 
 farmers, some of whom have a greater and 
 some a less value of such goods coming in 
 reckoned in proportion to their strictly money-
 
 142 INCOME 
 
 income. If no such comparison is in con- 
 templation — for example, if comparison is 
 being made between a number of farmers 
 carrying on the same kind of agriculture in 
 similar circumstances, so that the proportion 
 between their money -incomes and these other 
 goods is uniform throughout — we should not 
 think of troubling to include the other goods. 
 
 We have not been in the habit of including 
 the " annual value " of furniture and clothes 
 owned by the person who uses them in esti- 
 mates of his income in the same way as we 
 usually include the annual value of the house 
 owned by the person who lives in it, although 
 it is of precisely the same character. Partly, 
 no doubt, this is because it is less important, 
 being probably under half the value of the 
 house at an average. But there are also two 
 other and better reasons. In the first place, 
 until recently at any rate, nearly every one who 
 has had the use of furniture and clothing of a 
 value great enough in proportion to his money - 
 income to be worth considering, has owned that 
 furniture and clothing, and the value of such 
 things owned by each person has varied 
 roughly with his income. Secondly, it is diffi- 
 cult to make any accurate estimates of the 
 annual value of these things, so that estimates 
 of incomes which included them would be really 
 less informing than estimates which expressly 
 omitted them. 
 
 The same principles apply to the inclusion 
 or non-inclusion of an estimate for the value 
 of board and lodging received as part of their 
 remuneration by domestic servants and others 
 in exchange for services rendered to their 
 employers. If we want to use income for the
 
 INCOME RECEIVED IN KIND 143 
 
 purpose of comparing the economic position 
 of such persons with that of another class which 
 does not receive board and lodging, we must, 
 of course, brave the difficulties of estimation : 
 but in instituting a comparison between the 
 cook's place at Mrs. Smith's and at Mrs. 
 Brown's, we should prefer to hear from those 
 ladies that Mrs. Smith paid £25 and Mrs. 
 Brown £30, rather than that Mrs. Smith esti- 
 mated the total income of her cook at £50 and 
 Mrs. Brown that of hers at £54. 
 
 If asked why we never attempt to include 
 in incomes estimates of the value of the ser- 
 vices gratuitously rendered by men and women 
 — we should, perhaps, drop the conventional 
 order and say women and men here — to them- 
 selves and their families, we should probably 
 at once reply " Because they are invaluable," 
 and this is as good an answer as can be given. 
 It is not practically possible to value the 
 domestic services of a wife and mother to her 
 husband and children : they are not practically 
 interchangeable with hired services in the same 
 way that eggs produced in one farmer's yard 
 are interchangeable with eggs produced in 
 another farmer's yard. 
 
 The conclusion is that the term income as 
 commonly used includes in addition to money- 
 income an estimate of the money-value of in- 
 comings of such other commodities and services 
 as are ordinarily bought and sold and can 
 consequently be valued with substantial 
 accuracy . 
 
 On the other hand, a great deal of money 
 received is clearly not included in the common 
 conception of income, in which it is dis- 
 tinguished from mere " receipts."
 
 144 INCOME 
 
 We do not include in income the money 
 which a man gets by robbery or theft, whether 
 he gets it by taking money itself or by taking 
 other things and selling them for money. 
 Little importance need be attached to this fact. 
 It seems to be chiefly due to the illegality of 
 robbery and theft. Naturally a man will feel 
 indisposed to enter in his income-tax return 
 " From the trade or profession of burglar 
 carried on by me in London, £i,ooo," and 
 he is not bound by law to do so ; if the law 
 catches him, it will not take gd. in the pound 
 from him nor even is. 2d., but the whole 20s., 
 and restore it to the rightful owners. Gains 
 which are on the face of them illicit escape 
 inclusion in income because those who make 
 them never declare them and other people do 
 not know of them. But when the illegality of 
 the gain can be concealed, it constantly happens 
 that illegal gains do appear in income, and 
 nobody thinks of rejecting them from the 
 category of income. If a baker sells his 
 customers bread 10 per cent, short in weight, 
 it will come to much the same thing as if he 
 sold them full weight at the same nominal price 
 per pound and afterwards went round to their 
 houses and stole money to the amount of one- 
 ninth of their bread bills. But the short-weight 
 gains would be treated as income by income- 
 tax authorities and every one else, while the 
 gains by stealing would be excluded. There 
 is, of course, no doubt that a vast mass of 
 income is obtained in unlawful ways, so that 
 we need not attach much importance to the 
 fact that gains which are obviously unlawful 
 when described by particular designations do 
 not appear, at any rate under those heads, in
 
 INHERITANCES EXCLUDED 145 
 
 published accounts. Doubtless in the private 
 mental records of the burglar and the pick- 
 pocket, whether the word income is actually 
 used or not, no fine-drawn distinction between 
 the proceeds of legitimate and illegitimate 
 " industry " is attempted. 
 
 No one thinks of including what he inherits 
 or receives by bequest in a statement of his 
 income. The reason for this seems to be that 
 the word " in -come " does not suggest anything 
 coming in casually once for all, but some con- 
 tinuous receipt which can be conceived as 
 a rate per annum, although no doubt often a 
 fluctuating rate. If a man who received a 
 legacy of £2,000 last year was asked why 
 neither he nor any one else included it in his 
 income for last year, he would probably reply 
 " Because it was a windfall which cannot be 
 expected to recur. My income fluctuates 
 between £800 and £1,200 a year in an 
 ordinary way. Why should I say it was 
 £3,000 last year when I got a legacy of 
 £2,000 in addition to what every one calls my 
 income in the other years ? Would it not be 
 very misleading?" It certainly would be mis- 
 leading to any one who took the £3,000 as an 
 indication of the man's ability to pay taxes 
 or subscriptions to charities and football clubs 
 year by year. Why not, then, some one may 
 ask, strike an average, throwing legacies into 
 the total and averaging out to get a fair annual 
 sum? Obviously because an average of that 
 kind would be of no use unless it extended over 
 the whole of a man's life, and little use then. 
 What is useful is something which will be a 
 guide for the immediate future, and this is 
 provided by the ordinary method of reckoning, 
 
 ji
 
 146 INCOME 
 
 excluding legacies, and would not be provided 
 by any conceivable method of including them. 
 That the kernel of the matter is to be found 
 in the " windfall " nature of legacies is shown 
 by the fact that if it were known that a par- 
 ticular person's cousins would die regularly, 
 one every year, and would each leave him 
 £1,000, and that their number was infinite or 
 even simply sufficient to last his lifetime, we 
 might, indeed, still hesitate to call this regular 
 £1,000 a year " income," because we should 
 be influenced by the general rule in our mind 
 that legacies are not income, but we should 
 feel no difficulty in deciding that the pro- 
 fessional legatee would be " justified in treat- 
 ing the £1,000 a year as income." 
 
 Gifts from the living are excluded from 
 calculations of income just like bequests from 
 the dead. Some gifts are casual, like legacies, 
 and would be excluded for the same reason, if 
 there were no other. But very often this 
 reason does not apply : the receipts of most 
 beggars are probably as steady as the receipts 
 of large classes of workers, and the greater 
 part of money received by way of gift is re- 
 ceived in allowances and pensions of a regular 
 character which can be depended on at least 
 as much as most incomes derived from labour. 
 Here we seem to be influenced by the feeling 
 that " double reckonings " are misleading. We 
 should be inclined to say, for example, that it 
 would be misleading to treat the income of a 
 family as increased by the father giving his 
 daughter an allowance of £20 per annum, and 
 if we say the daughter has an income of £20 
 we must do so, unless we treat the father's 
 income as reduced by the same amount, which
 
 REGULAR RECEIPTS 147 
 
 we do not think of doing. If the father wants 
 to reduce his income by £20 in order to get 
 a better abatement of income-tax or for any 
 other reason, he must hand over to his 
 daughter property yielding £20 per annum 
 or secure the income to her in some legal way. 
 So long as he does not do that, he has the 
 ultimate control, and therefore we regard him 
 as the income-receiver. 
 
 Even when we come to the undoubted sources 
 of income, the possession of property and the 
 performance of labour, we find that a large 
 amount of money received is by common con- 
 sent excluded from the category of income. 
 
 Let us deal with these two sources separately, 
 beginning with property. In the first place, in 
 order to be regarded as income receipts from 
 property must come in regularly : not necessarily 
 always exactly at the same rate, nor even with- 
 out occasional intermissions, but regularly 
 enough to be looked on rather as we look on the 
 flow of a river. The flow may now be great and 
 now small : it may even dry up for a week or 
 two at a time once or oftener every year, but 
 still there is the idea of a flow at some rate or 
 other over a reasonable period. So if a man 
 makes a regular business of buying land and 
 selling it again, whether he divides or amalga- 
 mates the lots which he buys or leaves them 
 alone, and whether he does anything to the 
 land or not, we should reckon any profits which 
 he made as income, just as we should reckon the 
 profits of a picture-dealer. But if a private 
 person bought a piece of land and let it to a 
 farmer or lived in a house upon it for twenty 
 years, and then sold it at a profit, we should 
 not include that profit in a statement of his
 
 148 INCOME 
 
 income : we should regard it, like a legacy, 
 as a windfall. 
 
 Secondly, the more or less steady flow from 
 the possession of property in order to be called 
 income must ordinarily be of the nature of 
 profit, that is to say, it must not include such 
 part of total receipts as are necessary in order 
 to pay necessary expenses, including the main- 
 tenance of the property unimpaired. A boot 
 retailer who sold boots for no more than just 
 sufficient to pay back what they cost, including 
 the expense of keeping up the shop and all 
 other necessary outlay, might carry on a big 
 business and receive quite regularly week by 
 week a very large sum, but none of it would 
 be income : the income which such traders 
 obtain is the surplus over the expenses neces- 
 sary for carrying on the business and maintain- 
 ing the capital intact. Even the rent of lands 
 and houses is not all income, inasmuch as the 
 contracts between landlord and tenant do not 
 usually bind the tenant to pay everything neces- 
 sary for maintaining the land and house in 
 an unimpaired condition. An owner must then 
 pay out a certain portion of his rent for repairs 
 and renewals under penalty of seeing his rents 
 diminish in the future, and this portion is 
 deducted from his rent before we declare his 
 income. 
 
 While there is a universal acceptance, in 
 regard to most kinds of property, of the 
 principle that income is only what is left after 
 all expenses, including the expense of main- 
 taining the property unimpaired, have been 
 allowed for, it must be admitted that no very 
 precise interpretation of " the expense of 
 maintaining the property unimpaired " has been
 
 REGULAR RECEIPTS 149 
 
 agreed upon. It cannot well be taken to mean 
 that so much must be annually set aside that, 
 no matter what happens, the property will con- 
 tinue to yield the same amount in the inter- 
 minable future as it yields at present after the 
 necessary deduction has been made. As we 
 cannot foresee the future with any accuracy, 
 this would be justly felt to be an absurdly 
 high ideal of permanence to aim at. It would 
 seem silly to say that the English agricultural 
 landlords' incomes in the first seventy years 
 of last century were really much smaller than 
 they were reckoned to be, since the landlords 
 ought to have been laying aside large portions 
 of tTieir rents, so as to secure after 1870 in- 
 comes equal to the amounts properly regarded 
 as income before the depreciation which set 
 in at that date. 
 
 " Maintenance of the property unimpaired " 
 is, in fact, interpreted in different senses in 
 regard to different kinds of property. If the 
 property can be maintained so that it goes 
 on consisting of the same physical constituents 
 without their being the worse for time or wear, 
 this kind of maintenance is regarded as suffi- 
 cient. But the case is a rare one, some kinds 
 of land being the only important example. It 
 is much more common for the actual con- 
 stituents of the property to change in character. 
 A Lancashire mill may still be on the same 
 site as when the business was started a century 
 ago, and may still belong to the same family 
 or company, and may have continuous accounts 
 covering the whole period, but scarcely any- 
 thing in it will much resemble the plant with 
 which it started. When the things concerned 
 have altered in this way, how are we to decide
 
 I50 INCOME 
 
 whether the property has been maintained 
 intact, increased, or diminished ? 
 
 The usual practice in a great many situa- 
 tions is to decide by a money-valuation of 
 assets, and the property is assumed to be un- 
 impaired if the various items of which it 
 consists, taken as a whole, retain the same 
 market value. Such a method of reckoning, 
 for example, is usually supposed sufficient for 
 ordinary agriculture : the farmer's stock, " live 
 and dead," is valued at the beginning and 
 the end of the year, and the difference between 
 the two valuations, if a gain, is regarded as 
 part of his income, and, if a loss, is subtracted 
 from his gross receipts, before his " true " 
 income is declared. 
 
 But this method is clearly quite inappropriate 
 when the plant of the business is fixed to the 
 ground and specialized to the particular kind 
 of trade carried on. We cannot tear up the 
 half -worn -out rails of a tramway or pull down 
 the walls of a dock and sell them in the nearest 
 market with the ease and absence of loss with 
 which a farmer can drive his cattle and sheep 
 to the next market town and dispose of them 
 among his neighbours. In such cases it is 
 usual to lay aside annually sums which are 
 expected to accumulate during the lifetime of 
 perishable plant sufficiently to provide for the 
 replacement of that plant. The sums thus paid 
 into a '" depreciation fund " arc deducted from 
 the gross receipts of the business before the 
 income of the owners is declared. Whenever 
 it is not, as a matter of fact, probable that 
 plant will be replaced by plant of the same 
 value, either owing to change of methods or 
 change of prices, differences of opinion are
 
 REGULAR RECEIPTS 151 
 
 likely to arise, even among fairly good financial 
 authorities and experts in the particular busi- 
 ness, about what the payments to depreciation 
 ought to be. These differences lead to con- 
 siderable differences in the calculation of in- 
 come from property, and prevent it being a 
 matter of simple arithmetic as we are apt to 
 suppose it. 
 
 Moreover, the principle of non-impairment, 
 though, as has been said above, it is accepted 
 ordinarily or with regard to most kinds of 
 property, is not applied to every kind of 
 property without exception. If a person sells 
 land and buildings he does not dream of 
 regarding the whole proceeds less incidental 
 expenses as income, and the fact that the land 
 contained minerals would make no difference. 
 But if he hires men to dig out the mineral, 
 and sells it ton by ton, he and every one else 
 ordinarily regards the difference between his 
 receipts and the whole expense of working the 
 mine as income : so, too, if, instead of work- 
 ing the mine himself, he allows others to dig 
 out the mineral on condition of paying him a 
 royalty of so much a ton, the whole of the 
 royalty, less any incidental expenses of getting 
 it, is regarded as income. In neither case is 
 it usual to say that " he has to provide for 
 the depreciation of the mine " out of what he 
 gets before his income is declared. The reason 
 why provision for depreciation is not expected 
 here is doubtless to be looked for in the fact 
 that, in the past at any rate, men's knowledge 
 of what is below the ground has been so small 
 that no one has usually formed definite esti- 
 mates of the total amount of available mineral 
 to be found in any particular property, and
 
 152 INCOME 
 
 the rate of working has been slow, so that 
 there has been a natural inclination to regard 
 each mine as "practically inexhaustible," and 
 the output accordingly as a permanent flow. 
 The quicker the rate at which the valuable 
 matter can be removed, the more likely is the 
 owner to shrink from regarding the payments 
 he receives for it as income. If, for example, 
 instead of being mineral deep down below the 
 surface, accessible only by narrow shafts 
 equipped with lifting apparatus and by long, 
 low tunnels, the valuable matter is some surface 
 deposit which can be easily removed in a few 
 months, he will regard its sale in the same way 
 as he would regard the sale of acres of land. It 
 seems, therefore, that the apparent exception of 
 income from mines from the rule of non-impair- 
 ment of property is the consequence of the diffi- 
 culty of reckoning impairment and its supposed 
 insignificance rather than the result of the 
 application of a principle different from that 
 applied to ordinary incomes. 
 
 There is more ground for supposing the 
 application of a different principle to life- 
 annuities when received by the person on whose 
 life they depend. The right to such an annuity 
 is property, and it is a property which depre- 
 ciates as the annuitant grows older, but the 
 annuitant does not regard the income he re- 
 ceives from the annuity as less than the annuity 
 by an amount sufficient to provide for the 
 depreciation, so that a fund may be provided 
 great enough to furnish the same income (thus 
 calculated) after his decease as before. He 
 always regards the whole of the annuity as 
 income, though '* only a life income." The 
 fact is that there are two sorts of permanence,
 
 NET EARNINGS 153 
 
 one of which we indicate when we say " it 
 will last for ever," and the other when we 
 say " it will last my time," and the secured 
 life-income, though it has not the first kind 
 of permanence, possesses the second. It should 
 be noticed, too, that the need of providing 
 for depreciation of property does not present 
 itself to the annuitant, inasmuch as he is not 
 in the habit of reckoning the value of the 
 annuity among his assets. If he bought the 
 annuity with a lump sum, he did not think of 
 the purchase as an ordinary " investment," but 
 rather as a "sinking of capital." If he bought 
 it by small payments spread over many 
 years, he regarded those payments not as pur- 
 chasing him a property of so much capital, 
 but as simply buying him the annuity. And 
 if the annuity was given him, he never reckoned 
 it as such and such a capital sum, but regarded 
 himself simply as a person who would from that 
 time forward receive the specified annuity till 
 death. 
 
 Coming now to the incomes contained in 
 salaries, wages, and other receipts connected 
 with the performance of labour rather than the 
 ownership of property, we find that the deduc- 
 tions commonly made from gross receipts 
 before income is declared are here of much less 
 importance. . Ordinarily, indeed, they are so 
 small that in practice they are disregarded. 
 But we admit that in strict accuracy they ought 
 to be made. We are always willing to 
 deduct the cost of providing any materials 
 which are " found " by the worker out of 
 what are called his wages or his salary. We 
 will allow, too, for the cost of replacing any 
 tools which he has to provide and interest on
 
 154 INCOME 
 
 their original cost. We admit, in short, that 
 all expense to which the worker is put by the 
 conditions of his work in the present must be 
 deducted, although we may often have great 
 difficulty in saying whether some particular ex- 
 pense like that of living in a highly -rented 
 locality, or of paying railway or tram fares in 
 order to avoid doing so, is expense caused 
 specially by the work or by the worker's own 
 tastes and desires. 
 
 But though we allow for continuing expenses 
 in the present, we seldom think of allowing 
 anything for the original expenses of training 
 the worker for his particular occupation. 
 Hundreds, and often thousands, of pounds may 
 be spent on the training of a person for an 
 occupation, but the very first time he earns 
 a sovereign, that sovereign is treated by every 
 one as his income, and the moment he earns 
 £i6i in a year the income-tax collector is 
 entitled to collect ninepence from him. So far 
 as the ordinary conception of income goes, all 
 this expense is treated as non-existent in 
 reckoning the incomes of the earners. Neither 
 interest nor sinking fund is allowed for. There 
 is, however, in reality nothing surprising in 
 this fact. Workers are not brought up on 
 commercial principles, like horses, with a view 
 to the profits of owners. They are brought 
 up and trained by their parents, by charities, 
 and by the State, and it is only in rare instances 
 that they are asked to repay any part of the 
 cost. Consequently the cost is not looked upon 
 by those persons and institutions which defray 
 it as an investment but as an outlay which will 
 bring them in no money return. Moreover, 
 it is often almost impossible to disentangle
 
 DEFINITION 155 
 
 the special expense from other expense which 
 would have been incurred whether the work was 
 to be taken up or not. We can realize the diffi- 
 culty when we reflect that the most expensive 
 education is often given to those who are 
 scarcely expected to earn anything, either 
 because they are too rich or too defective. 
 
 The degree of permanence which we expect 
 from an individual's income earned by labour 
 is even less than that which we attribute to 
 a life -annuity. A life -annuity is expected to 
 last as long as life, a labour income only as 
 long as working life, which cannot be longer 
 and may be much shorter than life itself. We 
 do not deduct from wages or salaries an amount 
 for the depreciation of the worker before we 
 declare his income. 
 
 Consequently, if we disregard the exceptional 
 cases, which, taken as a whole, are really of 
 little magnitude compared with the general 
 mass, we may say that the income of an indi- 
 vidual, as commonly reckoned, is equal to the 
 flow of money, usually expressed as so much 
 a week or a year, which, without any assistance 
 from gifts, inheritances, or recognized robbery 
 and theft, and without diminishing the property 
 he has already obtained by any method, he 
 can have taken away from him by robbery 
 or taxation and can voluntarily spend in gifts, 
 in purchases of commodities and services 
 (whether taxed or not) from which he expects 
 no monetary return, in acquiring additional pro- 
 perty which he expects to yield him an income 
 in the future, and also in purchasing commodi- 
 ties and services from which he expects an 
 income because they increase his earning capa- 
 city by improving his talents and knowledge.
 
 156 INCOME 
 
 In addition to individuals some institutions 
 are commonly regarded as possessing incomes. 
 We do not and need not regard ordinary com- 
 mercial companies as having incomes in 
 addition to the incomes of their members. Nor 
 do we or need we regard the amounts received 
 by institutions in gifts or legacies as income 
 to them any more than we regard similar 
 receipts as income to individual recipients. But 
 the net yield of any non-commercial institu- 
 tion's endowments clearly comes under the 
 ordinary conception of income : it is an 
 income from property just as much as if it 
 belonged to an individual owner. If a 
 hospital or a school, for example, possesses 
 land or consols, the income is perfectly genuine 
 income. It may be spent on nursing the sick 
 or on teaching the young, but it will not 
 be reckoned as part of the income of those 
 persons, and so there is no " double reckoning " 
 in treating it as income of the institution. 
 
 The position of the States and their sub- 
 divisions in regard to income is much more 
 equivocal. 
 
 When a State or a local authority possesses 
 ordinary income -yielding property, such as Suez 
 Canal shares or land let to individuals for a 
 rent, there seems at first sight no reason to 
 refuse the application of the name income to 
 its receipts. On the other hand, we usually 
 shrink from regarding receipts from taxes as 
 income of the State which collects them. We 
 make this distinction between the yield of 
 property and the yield of taxes because we 
 think there will be " double reckoning " if we 
 include taxes in income, and not if we only 
 include the yield of property. We think we
 
 TAXES 157 
 
 have already reckoned the yield of the taxes 
 in the incomes of the people who pay them, 
 while we have not reckoned the yield from the 
 property in any one's income. 
 
 But neither of these beliefs are quite so 
 easily justified as we at first imagine. It is no 
 doubt true that we should have double reckon- 
 ing if we first reckoned individuals' incomes 
 in the ordinary way without deduction for taxes, 
 and then reckoned the gross or net yield of the 
 income-tax as income to the State. When we 
 say that a man has £1,000 a year, we mean 
 that he has that sum gross, before his income- 
 tax has been paid (either directly by himself 
 or by way of deduction), and it would be 
 clearly double reckoning to say that the State 
 had the amount as income as well as he. But 
 the income-tax has a character of its own, and 
 the argument which applies to it does not seem 
 to apply at all to the yield of ordinary taxes on 
 commodities, such as that on tobacco or tea. 
 Such taxes do not appear in an individual's 
 accounts as charges to be paid out of his 
 income, because they are wrapped up in the 
 higher prices which he has to pay for the 
 commodities which they make dearer. This 
 involves a real difference : when a man pays 
 income-tax he does it because he must^ and 
 not because he gets something worth paying 
 for, but when he buys a shillingsworth of 
 tobacco he does actually get something which 
 he reckons worth at least a shilling. If the 
 State gets lod. net out of the shilling, it seems 
 really less confusing to regard the man and the 
 State as having between them is. lod. of 
 money -income to spend than to say that there 
 is only is. of income, all belonging to the
 
 158 INCOME 
 
 individual, from whom the State exacts lod., 
 leaving him with only 2d. The man really has 
 IS. to spend. The millions raised by the 
 tobacco duty might be raised, as they are in 
 France, by a State monopoly of tobacco : if 
 the yield of the tobacco tax is not income 
 in the United Kingdom, the amount raised by 
 the tobacco monopoly in France cannot be 
 income ; but if the monopoly were the result 
 of private commercial arrangements, should we 
 consider the profits won by the monopolists 
 in consequence of the existence of their 
 monopoly as not properly income because it 
 was got out of the prices charged to the con- 
 sumers ? Do we ever apply that principle, say, 
 to the profits of the Standard (3il Company ? 
 This suggests that we might possibly make 
 a distinction between direct taxes not paid in 
 prices and indirect taxes paid in prices, and 
 confine the doctrine that taxes are reckoned 
 in individuals' incomes to the first class. But 
 there is no way out of the difficulty by that 
 method. It would be very confusing to say 
 that the yield of the income-tax and of the in- 
 habited house duty are not income in addition 
 to the incomes of the taxpayers, but that if ;a. 
 tax were laid on the building of houses, and was, 
 therefore, paid in the first place by the builders 
 of houses, but ultimately by the users of houses 
 in higher rents and purchase-prices, the yield 
 of this tax would be additional income. What 
 difference can it make whether I pay for a 
 house £100 a year rent and £3 15s. house 
 duty or £103^ 15s. rent and no duty? It 
 would seem absurd to say that in the first case 
 I spend income amounting to £103 i 5s. and the 
 State takes £3 15s. of it, but in the second
 
 STATE PROPERTY 159 
 
 case I spend £103 15s. of income and the 
 State has, in addition, "£3 15s. of income. 
 
 The second behef — the doctrine that we need 
 not fear double reckoning when the State has 
 ordinary receipts from ordinary property — also 
 appears less plausible on examination. When 
 a territorial authority is in the enjoyment of 
 such receipts, the presumption is that they will 
 be spent in some way which will relieve the 
 territory from taxation, and this will make the 
 territory a more desirable one in which to live 
 or carry on business. That, again, must tend 
 to raise the value of land within it, and so to 
 raise the income of landowners. In the case 
 of a considerable territory such as the United 
 Kingdom owning a small block of property 
 like the Suez Canal shares, any such effect is 
 likely to be so inappreciable that most persons 
 will be inclined to deny its existence. But no 
 one will doubt that Mr. Carnegie might endow 
 any small town with property enough to cause 
 a very perceptible rise in the value of the land 
 inside it, and it is said that rents in a certain 
 small parish in an old town are actually per- 
 ceptibly higher than in the neighbouring 
 parishes in consequence of the number of per- 
 sons attracted by the charitable endowments 
 belonging to the parish. It is only common 
 sense to recognize that any property of which 
 the ownership is attached to a particular 
 territory must raise the value of that territory 
 if the yield from the property is spent in 
 making the territory attractive. 
 
 It seems best to avoid the necessity of 
 solving these puzzles. To avoid it we need 
 only refrain from the attempt to build up an 
 aggregate income including incomes of states
 
 i6o INCOME 
 
 and all non -commercial institutions as well as 
 incomes of individuals. This need cause us 
 no regret, since the whole importance of the 
 conception of income is to be found in con- 
 nection with individual property. The con- 
 ception is useful as an aid in the comparison 
 of the wealth of individuals, and in a less 
 degree of groups of individuals, so far as their 
 wealth is connected with separate property : 
 it is of no use so far as common property is 
 concerned, nor where there is no property. 
 
 Returning, then, to our consideration of indi- 
 viduals' income, we may observe that the 
 amount of which people are actually robbed 
 is not, under modern civilized conditions, of 
 any great magnitude ; and the amount of which 
 people are deprived by taxation, though of 
 greater magnitude, does not make much differ- 
 ence as between one person and another, in 
 consequence of the natural tendency of 
 governments to tax the richest persons most and 
 the prevalent belief that taxation ought to be 
 according to ability to pay. Consequently the 
 amounts of income which people have left 
 them to spend (or save) as they like are 
 approximately proportionate to their whole 
 incomes. 
 
 Now, certainly an individual with property 
 may for a time put forth a demand and conse- 
 quently exercise a control over production in 
 excess of what his spendable income alone 
 entitles him to, if he chooses to part with 
 property he already possesses. Smith saves, 
 and with his savings buys land, or a house, or 
 consols from Jones, who then can do what he 
 likes with the proceeds, either investing them 
 so as to bring in income or spending them on
 
 ALLOWANCES i6i 
 
 commodities and .services which will bring in 
 no income. If he invests, he it is, and not 
 Smith, who immediately determines what kind 
 of addition to property shall be made, but of 
 course he is governed in his decision by his 
 opinion of what demand will be in the future. 
 If he merely " spends," however, he, so to 
 speak, cancels Smith's savings, and his own 
 tastes will decide what shall be produced. So 
 that every one who has property, and can find 
 savers to buy it, may both divert Society from 
 providing for the future and decide what kind 
 of present goods shall be produced. A very 
 large number of persons act in this manner 
 by " spending " legacies which they have re- 
 ceived from richer or more provident relatives. 
 But the magnitude of the property so dealt with 
 is not very considerable, so that the total 
 demand coming from reduction of individuals' 
 property is also small in proportion to the 
 whole. In spite of the flagrant examples 
 which occasionally strike the eye in the news- 
 papers, it is quite unusual for well-to-do people 
 to spend much more than their incomes. 
 
 It is also true that income-receivers often 
 hand over portions of their incomes to others 
 to spend, and that then these others exercise 
 the power of demand and control over pro- 
 duction. If, for example, a father makes his 
 daughter an allowance of £20 per annum to 
 do what she likes with, power to that extent 
 is transferred to her. But this is of little im- 
 portance : the power is only delegated, and 
 is withdrawn by the giver as soon as he dis- 
 approves of the way in which it is exercised. 
 It is a matter of the merest detail. 
 
 We may say, then, that individuals' power 
 12
 
 i62 INCOME 
 
 of demand and consequent control over the 
 economic activity of Society is distributed and 
 exercised approximately in proportion to the 
 comparative magnitude of their incomes. 
 
 The next important question is what settles 
 who has a large and who a small income 
 or none at all, or, as it is usually expressed, 
 what settles the distribution of income ? But 
 this question has been so much obscured by 
 the traditional classification of incomes under 
 several heads that it is desirable first to 
 devote a chapter to the consideration of the 
 classification of incomes.
 
 CHAPTER IX . 
 
 THE CLASSIFICATION OF INCOMES 
 
 The classification of incomes which is found 
 most convenient for purposes of economic 
 exposition naturally does not remain always 
 the same. It changes with changing social 
 conditions. That which was convenient in 
 England in the eighteenth century would not 
 have been very enlightening in India at that 
 time, and is not very suitable for English use 
 in the twentieth century. But tradition con- 
 nected with it still plays such a large part in 
 forming the thought of the present time that it 
 would be useless to ignore it. 
 
 It was a threefold classification into wages, 
 profits, and rent, which corresponded very well 
 with the productive organization of the time 
 and place. In the country the labourers were 
 a fairly well-defined class receiving wages and 
 nothing else, the landlords another fairly well- 
 defined class receiving rent and nothing else, 
 and the farmers another such class making 
 profits and having no other income. In the 
 towns, it is true, the profit -makers in the shape 
 of merchants and manufacturers often owned 
 the land on which shops, counting-houses, and 
 factories were built, but this was regarded as 
 a small matter which did not suffice to turn
 
 164 CLASSIFICATION OF INCOMES 
 
 them into " landlords," as the rental value of 
 their premises would be generally trifling in 
 proportion to their gains as " monied men." 
 Land in towns was practically ignored : the 
 " labourers " in towns were in just the same 
 position as in the country, so that the classifi- 
 cation of income into wages, profits, and rent 
 seemed to fit the national classification of per- 
 sons quite satisfactorily. Moreover, it seemed 
 to be suitable for explaining the organization 
 of production prevalent in England at the time. 
 In the country the produce belonged to the 
 farmer, and he looked to it to recoup him for 
 what he spent in wages and rent, which were 
 regarded as constituting together practically the 
 whole of his expenses. Merchants and manu- 
 facturers certainly had to purchase materials 
 and goods, but what they laid out in this way 
 might be treated as ultimately replacing what 
 had been spent in wages and rent by some 
 farmer or manufacturer who produced the 
 materials or goods in question. The threefold 
 classification was introduced into economics by 
 Adam Smith, and it seems probable that he hit 
 upon the idea while attempting to analyse prices 
 into their component parts. " Market price," 
 or the fluctuations of price in the market, 
 depended, he thought, on supply and demand, 
 but " natural price," or price in the long run, 
 depended on how much wages, profits, and 
 rent had to be paid in order to secure the 
 commodity. By what may perhaps be called 
 a mere accident, he was led to convert this 
 theory of prices into a classification of income. 
 While he was thinking out his theory of prices 
 in Scotland, there flourished in France a little 
 school of economic and political theorists who
 
 ADAM SMITH'S CLASSIFICATION 165 
 
 were called at the time the Economistes, but 
 who were subsequently, in order that confusion 
 might be avoided, christened " Physiocrats " 
 in consequence of their belief in the rule of 
 Nature. The- school was the product of a re- 
 action from Colbertism, which had tried to 
 bring prosperity to France by favouring manu- 
 factures and commerce. Its principal tenet was 
 that agriculture, or at any rate the earth, was 
 the source of all wealth, and its great revela- 
 tion, regarded with amazing veneration by the 
 elect, was the Tableau Economique or Econo- 
 mical Table, in which its founder, Quesnay, 
 tried to show by a number of zigzag lines how 
 the produce of the earth was " distributed," 
 as he called it, throughout society. On making 
 acquaintance with this scheme, and seeing the 
 immense importance which the physiocrats 
 attached to the " distribution " which it was 
 supposed to portray, Adam Smith seems to have 
 resolved to treat his own analysis of prices into 
 wages, profits, and rent, as also a classification 
 of incomes. He said that just as the price of 
 any particular commodity resolves itself into 
 one, two, or all three of the three component 
 parts, wages, profit, and rent, so the price of 
 all the commodities which compose the whole 
 produce " must resolve itself into the same 
 three parts, and be parcelled out among 
 difterent inhabitants of the country, either as 
 the wages of their labour, the profits of their 
 stock, or the rent of their land. The whole of 
 what is annually either collected or produced 
 by the labour of every society, or what comes to 
 the same thing, the whole price of it, is in this 
 manner originally distributed among some of its 
 different members. Wages, profit, and rent are
 
 i66 CLASSIFICATION OF INCOMES 
 
 the three original sources of all revenue as 
 well as of all exchangeable value." 
 
 The three terms, wages, profit, and rent, 
 seem to have been used in the ordinary con- 
 versation and literature of Adam Smith's time 
 very much as they are at present. Wages 
 meant what was paid to persons for their work 
 when they were paid at a rate agreed on before 
 the commencement of the work, and when they 
 worked more or less under the supervision of 
 the employer ; rent meant the periodical pay- 
 ments made to the " landlord " by a tenant of 
 land and anything afhxed to and let with the 
 land, S(Uch as hedges and ditches and houses ; 
 profit meant any net gain arrived at by deduct- 
 ing expense incurred from gross receipts. 
 Roughly speaking, no doubt, it could be said 
 that labourers lived on their wages, landlords 
 on their rents, and farmers, merchants, and 
 manufacturers on their profits. But certainly 
 the three words, as ordinarily used, have 
 always included some receipts which lie outside 
 income and do not include the whole of those 
 which lie inside it. The contracts under which 
 the great bulk of rent is paid do not secure the 
 landlord " a clear annual rent without any de- 
 duction whatever " : he has usually to expend 
 an appreciable proportion of his rent in keeping 
 the property in a rent -yielding condition, so 
 that the income derived from the property is 
 appreciably less than the rent. The wage- 
 earner likewise has often to pay out of his 
 wages some necessary expense of the work 
 which he does, as when he provides his own 
 tools. On the other hand, the three terms do 
 not together cover the whole of income, as 
 there are many other receipts of which the
 
 ADAM SMITH'S CLASSIFICATION 167 
 
 whole or part forms or contributes to the 
 income of those who receive them. There are, 
 for example, salaries received by workers of a 
 higher class than those who are said to receive 
 wages, fees received by others who are less 
 subject to supervision by their employers than 
 wage-earners and receivers of salaries, as well 
 as fines, dues, royalties, and other payments 
 received by owners of property. In the passage 
 quoted Adam Smith ignores all these discrepan- 
 cies : he alleges explicitly that the three cate- 
 gories taken together include the whole of 
 income, and he implies that they include 
 nothing else. What he was really doing, with- 
 out clear comprehension of the fact, was 
 defining labour, stock, and land so that together 
 they would include all sources of income, and 
 defining wages for his purposes as income 
 derived from labour, profits as income derived 
 from stock, and rent as income derived from 
 land. 
 
 He admits in subsequent paragraphs that 
 " common language " does not always agree 
 with his definitions : a man cultivating his 
 own land, he says, will call the whole of his 
 gain " profit " without allowing anything for 
 rent ; a tenant farmer who supervises the work 
 of the farm and even assists with his own hands 
 will call all that is left to him after paying 
 working expenses and keeping up the stock 
 " profit " without allowing anything to himself 
 as the wages of his labour ; an independent 
 artisan who makes things for his customers 
 instead of working under a master will also 
 call his gains " profit " without making any 
 allowance for wages ; and finally, a working 
 gardener who owns his own garden is " com-
 
 i68 CLASSIFICATION OF INCOMES 
 
 monly considered " as receiving the " earn- 
 ings " (not, be it noticed, the " wages ") " of 
 his labour," nothing being taken off and attri- 
 buted to him as the profit of his stock or the 
 rent of his land. But these observations did 
 not suggest to his mind any doubt about the 
 convenience of his definitions. He merely 
 infers that " common language " is wrong, and 
 that it " confounds " the different sorts of 
 income. " When," he says, " those three 
 different sorts of revenue belong to different 
 persons, they are readily distinguished, but 
 when they belong to the same they are some- 
 times confounded with one another, at least in 
 common language." 
 
 The weak point of this exposition is that it 
 gives no example of cases in which " those 
 three different sorts of revenue belong to 
 different persons." In fact, it is extremely difff- 
 cult to find one. The large class of tenant 
 farmers, on Adam Smith's own showing in the 
 passage just quoted, receive " wages " in his 
 sense of income from labour, as well as profits 
 or income from stock, and in a later chapter he 
 tells his readers that the greater part of the 
 gains of a retail shopkeeper may easily be 
 " real wages." Wholesale merchants and 
 manufacturers he seems to have regarded as 
 receiving no appreciable amount as " the wages 
 of a particular sort of labour, the labour of 
 inspection and direction," but, all the same, 
 he seems to have supposed that about half 
 their gains were due to some undefined exercise 
 of activity, since he quotes with approval the 
 common estimate that a fair profit is double 
 the rate of interest. This estimate suggests 
 at once the (|uestion why the income derived
 
 PROFITS 169 
 
 from the ownership of stock should be coupled 
 up with the income derived from the owner's 
 exertions by the whole being called " profits 
 of stock " or of capital. Why not admit that 
 the wholesale merchant and the manufacturer 
 as well as the retailer and the farmer earn by 
 their labour all that they get over and above 
 ordinary interest on their capital ? 
 
 For nearly a century after Adam Smith 
 wrote, economists were prevented from taking 
 this step by theories of wages which required 
 them to believe that wages in the ordinary 
 sense (agreed payments for labour executed 
 more or less under the supervision of the em- 
 ployer) were regulated by principles entirely 
 different from those which regulate other 
 earnings of labour, in regard to which there is 
 no contract of service. Though they formally 
 defined " wages " as if the term were 
 synonymous with income derived from labour, 
 they always had in their minds wages in the 
 ordinary sense, and the theories which they 
 framed respecting wages could not be stretched 
 to include the earnings of the labour of a 
 person working on his own account. But when 
 these theories crumbled away, the practice 
 changed, and instead of " confounding," as 
 Adam Smith might have said, the income which 
 the owner of capital derives from his activity 
 and that which he derives from his property in 
 the common denomination of " profits of 
 capital," economists began almost with one 
 accord to call the income derived from capital 
 " interest," and to treat the other portion of 
 the owner's gains as belonging to labour's 
 share, though they have not as yet agreed by 
 what special name to call it. The Americans
 
 I70 CLASSIFICATION OF INCOMES 
 
 usually call it " profits " simply, but English 
 writers have hesitated about making so great 
 a break with economic tradition, and have 
 sometimes left the category nameless, and 
 sometimes called it " earnings of management." 
 This last course is inconvenient, because it 
 mixes up the gains in question, obtained by 
 persons working on their own account, with 
 the incomes of persons engaged in management 
 but paid by salaries or wages. 
 
 By this division of Adam Smith's " profits of 
 stock " into two shares, one for the active 
 operations of the " undertaker of the work," 
 as he was called in Smith's time, and one (to 
 be called " interest ") for the passive owner- 
 ship of the property, a clear line was drawn 
 between income from labour and income from 
 property. But another question still remained, 
 namely, how to distinguish " interest," the 
 share of " capital," from " rent," the share of 
 land. Adam Smith himself seems never to have 
 felt any need for careful distinction between 
 land and what he called " stock." To him land 
 was land and stock was valuable property other 
 than land : land brought in a rent, and the part 
 of " stock " which he regarded as " capital " 
 brought in a profit, and it did not occur to him 
 that any one would have or make any difficulty 
 about the matter. But even he admits that 
 " the rent of land " may sometimes partly (and 
 conceivably in some exceptional cases wholly) 
 consist of " reasonable profit or interest " on 
 capital expended on the improvement of the 
 land. If we once admit that rent can owe its 
 origin to the expenditure of capital in this 
 way, we must admit that " land " can be 
 increased in value by human labour expended
 
 QUASI-RENTS 171 
 
 upon it, and the sharp distinction between land, 
 given by Nature, and capital, the accumulated 
 product of past labour, is hopelessly blurred. 
 Ricardo made a slight attempt to enforce purity 
 of doctrine by declaring early in his Principles 
 that he would apply the word rent only to what 
 was paid for the " original " powers of the 
 land, but he soon explicitly abandoned this 
 proposal and drew a line between permanent 
 and perishable improvements, classing the 
 income from permanent improvements as rent 
 of land and the income from " buildings and 
 other perishable improvements " as profits of 
 capital, or interest, as later writers would call it. 
 This second plan of Ricardo's was generally 
 followed until the last decade of the nineteenth 
 century. Then it was perceived that the dis- 
 tinction he favoured was not one of principle 
 but only of degree ; improvements are not 
 divided into two kinds, one " permanent " and 
 the other " perishable," but may be better 
 described as all more or less permanent or 
 more or less perishable. Marshall brought the 
 fact into greater relief by devising the term 
 " quasi -rent " for the income derived from the 
 ownership of appliances for production made 
 by man, though he does not actually use it in 
 place of the usual term " interest " for the 
 income obtained from capital regarded as a 
 .share in distribution. Since that time it has 
 been possible for the economist to give atten- 
 tion to the division between earnings of labour 
 as a whole on the one side and the income 
 derived from property, whether rent, quasi-rent, 
 interest, or anything else, taken as a whole on 
 the other side. This I propose to do in the 
 next chapter.
 
 172 CLASSIFICATION OF INCOMES 
 
 Some reader may perhaps object to the divi- 
 sion of all income into income from labour 
 and income from property on the ground that 
 income is sometimes obtained from personal 
 qualities without labour. The Siamese Twins 
 and General Tom Thumb, he will say, got their 
 incomes not because they laboured, but because 
 they had certain rare peculiarities which made 
 people ready to pay to look at them. It is 
 doubtful, however, if there are any personal 
 qualities which can be exploited without some 
 amount of labour. Even the Fat Woman in a 
 travelling show, who might be taken as the 
 type of pure passivity, has to give up her time, 
 and must find being stared at and commented 
 upon quite an appreciable exertion. It seems 
 unnecessary to split hairs over the question. 
 If any one thinks it an improvement to substi- 
 tute " income from labour and personal quali- 
 ties " for " income from labour," he is quite 
 at liberty to do so. The change might make 
 an important difference if there were any 
 suggestion that workers get income because 
 labour is meritorious, but there is no such 
 suggestion in the present work.
 
 CHAPTER X 
 
 THE DIVISION OF INCOME BETWEEN OWNERS 
 AND WORKERS 
 
 The use of the term " division of income " in 
 the heading of this chapter is not to be taken 
 as implying that there is in reality some great 
 common income which is divided up into 
 shares. There is, no doubt, a conception of 
 the total income of all the inhabitants of the 
 country, and perhaps even of the total income 
 of all the people of the whole world. But this 
 total is not a consistent whole which has to be 
 divided between participants like a loaf which 
 is cut into slices with a knife. It is a total 
 more like the total of all the grains of wheat 
 produced in a year. We can think of that 
 total and talk of it as being divided or dis- 
 tributed between the consumers, without sup- 
 posing that all the grains are ever brought 
 together in a single barn or elevator and then 
 parcelled out. This is what we have to do 
 with income. We must recognize that the 
 total is nothing but the sum of innumerable 
 separate incomes of individuals and institutions, 
 and a sum which cannot be expressed in any 
 measure giving the bulk, weight, or number 
 of the things or " satisfactions " of which the 
 incomes consist, but only in figures which indi- 
 
 173
 
 174 OWNERS AND WORKERS 
 
 cate the number of sovereigns or dollars or 
 some such standard of value which is arrived 
 at as the aggregate value of all the incomes, 
 each being made up of the value of its different 
 parts valued separately. An inquiry into the divi- 
 sion or distribution of this total is really nothing 
 more than an inquiry into the comparative 
 magnitude of the different " shares." It often 
 happens that the " share " of a participant is 
 increased by something which makes no differ- 
 ence at all to the other participants, or at all 
 events no appreciable difference. In such 
 a case it may still be a convenient fiction to 
 suppose the addition thrown first into a common 
 heap and then taken out again as an addition 
 to the fortunate person's share, but we should 
 never lose sight of the fact that it is only 
 a fiction. The various incomes are to a large 
 extent independent of each other. I only use 
 the phrase " the division of income between 
 owners and workers " because of the clumsiness 
 of the alternative " the magnitude of the whole 
 income falling to owners compared with that 
 falling to workers," with all the cumbrous 
 phrases which would have to be brought in 
 along with it to indicate changes in the com- 
 parative magnitude. 
 
 I have spoken of " owners and workers " 
 rather than " property and labour " because it 
 is desirable to draw attention at once to the fact 
 that the number of persons who own property 
 and the number of persons who work may 
 undergo a relative change which may cause 
 the average owner to receive a less income in 
 comparison with the average worker, although 
 the proportion of the total income falling to 
 the share of property has increased — and, of
 
 PROPERTY AND LABOUR i75 
 
 course, vice versa, a change of relative numbers 
 in the opposite direction may improve the 
 position of the average owner compared with 
 the position of the average worker, although 
 the proportion of the total income going 
 to the share of property has diminished. For 
 example, if the total income has been lOO 
 (million pounds, or milliard pounds, or what- 
 ever unit the reader likes to select), and 
 property has been receiving 30 and labour 70 
 of this amount, and then property's proportion 
 rises to 35 and labour's falls to 65, the average 
 owner, instead of being better off in comparison 
 with the average worker, will be worse off, if 
 at the same time the number of the owners has 
 increased by 50 per cent, while the number of 
 workers has remained stationary ; each worker 
 will, it is true, be getting a slightly diminished 
 proportion of the whole income, but the propor- 
 tion received by each owner (on the average) 
 will have been diminished still more. This is 
 immensely important, since it means that the 
 division between labour and property does not 
 by itself settle the relative position of the 
 owners and the workers. The individual 
 workers may be better off in comparison with 
 the individual owners when they are receiving 
 in the aggregate a less proportion of the total. 
 
 With this preliminary caution we can proceed 
 to ask what determines the division between 
 property and labour in the aggregate, or, in 
 other words, what changes we should expect 
 to alter the division in one direction or the 
 other . 
 
 We have to do with the aggregate annual 
 value of all the property on the one side and 
 the aggregate annual value of all the work on
 
 176 OWNERS AND WORKERS 
 
 the other side. Those aggregate values are 
 of course made up of the value of the units 
 joined with the number or amount of the units 
 in each. Consequently we must not suppose 
 that the division between property and labour 
 is as simple a matter as any ordinary bargain, 
 and is " all a question of value " in the 
 ordinary sense. In ordinary questions of value 
 we have only to think of the values of units — 
 the value of a horse, the value of coal per ton, 
 of wheat per bushel. But in our present dis- 
 cussion we have to consider the annual value of 
 all the property and of all the work. When 
 we compare the value of pig-iron and of gold 
 in the ordinary way, we have no hesitation in 
 saying that, other things being equal, an in- 
 crease in the annual output of pig-iron will 
 reduce its value in gold, and so we may be 
 tempted to say that an increase of labour will, 
 other things equal, reduce the value of labour 
 as compared with that of capital. That would 
 be true in a sense, but not in the sense appro- 
 priate to our present question. What we liave 
 to do is to consider the value of all the labour 
 compared with that of all the property, and 
 consequently we have to remember that while 
 the increase in the aggregate quantity of labour 
 has tended to reduce the value of a unit of 
 labour (however defined), it has at the same 
 time increased the number of units, and this 
 increase in the number of units may, it is true_, 
 have fallen short of counterbalancing the fall 
 in the value of the unit, but it may also, on 
 the other hand, have more than counterbalanced 
 it : fifteen articles at tenpence each are worth 
 more in the aggregate than twelve at a shilling 
 each.
 
 PROPORTIONS 177 
 
 In the first place, then, let us suppose that 
 a change takes place in the relative amounts 
 of property and of work available without any 
 change in the elasticity of demand for different 
 things. Suppose, for example, that in a situa- 
 tion where property has been receiving 30:0 
 and labour 700, the number of workers is sud- 
 denly raised from 20,000,000 to 22,000,00. 
 We may be sure that the additional 2,000,000 
 workers will cause some depreciation of labour 
 as compared with property — that is, the value 
 of an hour's labour will be less compared with 
 the rent of a particular acre, the hire of a par- 
 ticular machine or house. But we cannot tell 
 whether this depreciation of the unit will be 
 sufficient to sweep away the direct effect of 
 the increase of 10 per cent, in the quantity 
 or number of units. That depends on the 
 elasticity of demand for work and property. 
 Property will certainly get a larger share, in 
 the sense of absolute aggregate amount ; the 
 average proprietor, too, will find his position 
 improved compared with the average worker. 
 But all this is quite compatible with a rise of 
 property's share only from 300 to 312, and of 
 labour's from 700 to 763, which would mean 
 that the percentages indicating the division 
 between property and labour had altered from 
 30 and 70 to approximately 29 and 71, labour 
 thus getting a larger proportion than before. 
 On the other hand, of course, with a different 
 elasticity of demand, property's share might 
 rise to 330, and labour's only to 745, thus 
 slightly changing the proportions to the dis- 
 advantage of labour ; it is even conceivable 
 that the depreciation of the unit of labour miight 
 be great enough to more than counterbalance 
 
 13
 
 178 OWNERS AND WORKERS 
 
 the 10 per cent, increase of quantity, so that 
 property might get 400 and labour only 675, 
 a smaller absolute amount as well as a much 
 smaller proportion. 
 
 So far we have supposed alterations in the 
 amount of labour compared with the amount of 
 property, the conditions of demand being un- 
 altered. Now let us reverse the supposition, 
 and imagine the quantities stationary while 
 changes in demand take place. The quantities 
 remaining the same, if for any reason people 
 with power to demand choose to direct more of 
 their power towards the purchase of work and 
 less towards the hiring of property, the aggre- 
 gate value of work done in the year or the 
 week, or whatever period is regarded as the 
 most convenient to reckon in, will rise, com- 
 pared with the aggregate annual or weekly value 
 of the property ; and, of course, vice versa, 
 if more demand is directed towards property 
 the aggregate annual value of the property 
 will rise, compared with that of work. The 
 first change will mean that labour will get a 
 larger proportion than before, and the second 
 that it will get a smaller. 
 
 It is perhaps a little difficult to give actual 
 examples of changes in either direction, 
 but the following suggestions may be offered. 
 (i ) Increase of income is often a cause of 
 change of demand as between different com- 
 modities and services, and it may, on the whole, 
 perhaps make people inclined to spend a larger 
 proportion of their income upon the use of 
 land, houses, vehicles, pictures, and such things, 
 and a less proportion in ways which tend to 
 raise the value of work as compared with 
 property. But the case is far from strong.
 
 PROPORTIONS 179 
 
 (2) Changes of taste or fashion are probably 
 more important in practice. It is easy to 
 conceive changes of this kind which would 
 make a considerable difference. We might, 
 for example, become so convinced of the 
 desirability of living in fresh air that we 
 abandoned the use of houses : the abandon- 
 ment of houses would lead necessarily to the 
 abandonment of such furniture as could not be 
 waterproofed, and the income set free from 
 the maintenance of these things would no doubt 
 largely go to pay for the doctoring and mas- 
 saging rendered necessary by the increase of 
 rheumatism. Thus the change, would be 
 decidedly favourable to labour's share. Some- 
 thing of the kind has actually happened, though 
 of course on a much smaller scale. At one 
 time a rich man's taste for display was chiefly 
 satisfied by the employment of large numbers 
 of retainers ; later this fashion largely dis- 
 appeared, and lovers of display began to prefer 
 palaces, pictures, and jewels. If Mr. Pierpont 
 Morgan, instead of collecting art treasures, had 
 chosen to spend his income like Warwick the 
 King-maker, labour's proportion of the whole 
 income would have been a little larger than it 
 was. (3) Lastly, inventions of machinery and 
 discoveries of new and better methods, without 
 altering the ultimate consumers' tastes, cause 
 changes in the relative demand for instruments 
 and for labour. One invention shows how 
 labour can be economized by the use of some 
 elaborate machine, and thus tends to depreciate 
 labour compared with the use of machinery 
 and property in general ; another discovery 
 shows how to dispense with machinery, and 
 thereby tends to cause labour to have a higher
 
 i8o OWNERS AND WORKERS 
 
 value in proportion to the annual value of 
 property. 
 
 It is natural to ask what has been the net 
 result of these causes in the past. Have they 
 actually resulted in property receiving a larger 
 or a smaller proportion of the whole income ? 
 If we knew what had happened in the past we 
 might have some guide for our expectations 
 for the future. 
 
 Such statistics as are available suggest that 
 the proportion has been nearly stationary for 
 inhabitants of the United Kingdom during the 
 last half -century. But this does not take us 
 very far. The inhabitants of the United 
 Kingdom are a special class which may not 
 be typical of the whole world in this respect. 
 Moreover, the period is too short to be of much 
 weight. Looking at the matter with a long 
 sweep of vision back to the earliest age in 
 which we can regard property as existing at 
 all, we can scarcely doubt that property's pro- 
 portion has increased. In ordinary seasons 
 labour brought in sufficient return to maintain 
 the workers somehow, though no doubt not in 
 a very luxurious manner ; it is difficult to 
 believe that on the top of this there was a 40 or 
 50 per cent, surplus for owners of property. 
 The property was small ; the land was there, 
 but only slightly improved ; the houses of the 
 mass of the people were hastily -built huts, 
 which have mouldered and blown away without 
 leaving so much as a slight elevation of the 
 soil on their sites ; the means of communica- 
 tion were grass tracks, over which every man 
 travelled on foot or on horseback ; machinery 
 for making goods scarcely existed. It is im- 
 possible to believe that the owners of such
 
 PROPORTIONS AND PERSONS i8i 
 
 property as existed received as large a pro- 
 portion of the whole income as they do to-day. 
 While it is thus probable that the proportion 
 falling to property has increased, it is possible 
 that the position of the average individual 
 worker has improved in comparison with that 
 of the average individual owner of property. 
 Though there is no doubt a greater space than 
 ever between the average worker and the richest 
 man in the world, the increase in the absolute 
 amount of the income derived from property has 
 been so widely spread that it is quite possible 
 that the increase per head is not so large in 
 proportion to previous income as the increase 
 in earnings per head has been. In this cal- 
 culation we are thinking of workers and owners 
 as such, so that a single person may appear 
 in it both as worker and as owner. If we drop 
 this abstraction and ask ourselves what is likely 
 to be the effect of a growth in the proportion 
 falling to property, we find much depends upon 
 the diffusion of this proportion. If a few 
 individuals get the whole increase, this will 
 be more unsatisfactory than if the increase is 
 widely spread.
 
 CHAPTER XI 
 
 INCOMES FROM OWNERSHIP OF PROPERTY 
 
 Why do some people have property from which 
 the owner can draw a large income without 
 appreciable exertion on his own part, while 
 other people have less such property, and many 
 none at all ? Here the principal cause clearly 
 is the fact that all persons do not receive equal 
 amounts of property by way of inheritance and 
 bequest. Some receive enormous amounts and 
 others small amounts, while the great majority 
 receive nothing at all. Thinking of particular 
 individuals we regard this as a matter of luck. 
 It has always been thought simply lucky to 
 be " born with a silver spoon in your mouth." 
 The heir of a large property is " fortunate," 
 and sometimes his property is even called his 
 " fortune." But it is not chance which causes 
 greater inequality from this cause to prevail 
 at one time or place than at another. One set 
 of conditions will produce more inequality than 
 another. 
 
 Where there is not much property, there 
 cannot be much inequality of inheritance. 
 Consequently, under primitive conditions the 
 inequality from this cause is unimportant. 
 Each generation then receives little from its 
 predecessor, and the inequalities which arise 
 from unequal inheritances are small compared
 
 UNEQUAL INHERITANCES 183 
 
 with the inequahties which arise from the same 
 cause when generation after generation has 
 accumulated property in the shape of improved 
 land, buildings, and instruments of all kinds. 
 Hence, (even in our own time we can see la 
 difference between what we call the " old " and 
 the " new " countries. The inequality which 
 arises from unequal inheritance is much more 
 marked in Europe than in North and South 
 America or Australia. The American, H. R. 
 Seager, said in 1 904 : " So long as a fair degree 
 of equality of economic opportunity is pre- 
 served, the influences which make for the disin- 
 tegration of large accumulations of wealth are 
 likely to predominate, and the very rich men 
 of each generation are likely to be those who 
 have acquired the greater part of their fortunes 
 during their own lifetimes. This has been the 
 case in the United States up to the present time, 
 and there is nothing in the practice of paying 
 interest and rent for the use of property fairly 
 acquired that threatens to make it less the case 
 in the future." But in his 1913 edition he 
 decided to omit this passage. As the United 
 States ceases to be a " new " country, more and 
 more property will be inherited in proportion 
 to that which is acquired in the lifetime of a 
 generation, and there will consequently be more 
 scope for inequality of inheritance. Already 
 the Astor and the Vanderbilt families show that 
 the process of assimilation of American to 
 European conditions has made considerable 
 progress. America may be free from inequali- 
 ties arising from grants of land made by 
 William the Conqueror, but it is just as easy to 
 be the lucky inheritor of a farm which becomes 
 part of the site of a great city there as in
 
 i84 INCOMES FROM OWNERSHIPS 
 
 England. The Astor inheritance in America 
 has the same source as the Grosvenor inherit- 
 ance in England, and the Vanderbilt and 
 Morgan millions are no more likely to " disin- 
 tegrate " than those of the Rothschilds. We 
 may take it that mere continuance of prosperity 
 is likely to increase the inequality of incomes 
 resulting from inequality of inheritance. 
 
 But variations of law and custom exercise an 
 influence, and may exercise greater influence 
 in the future. Primogeniture, strictly carried 
 out, and applicable to the only important kind 
 of property, no doubt kept the inequality 
 greater than it would have been under a system 
 of equal division between children. In our 
 own time primogeniture plays but a small part : 
 property as a whole is generally divided nearly 
 equally between a man's children by his will, 
 except when the eldest has a title, and, there- 
 fore, it is supposed, some state to support. The 
 restrictions on freedom of disposition between 
 the testator's children and others which prevail 
 in many European countries probably exercise 
 but little real influence, and merely compel 
 what would almost always be done voluntarily. 
 More important is the state of opinion about 
 marriages between one class and another, 
 which, in modern civilization, practically means 
 between persons belonging to rich and persons 
 belonging to poor families. If there is much 
 intermarriage between the children of the rich 
 and the children of the poor, there will clearly 
 be a more equal distribution of inherited pro- 
 perty than if the children of the rich marry 
 none but their own class. Another most impor- 
 tant factor is the relative number of surviving 
 children among rich and poor. If every
 
 UNEQUAL SAVINGS 185 
 
 millionaire had twenty children, there would 
 be much more " disintegration " of great for- 
 tunes than if he had only one or two. So far 
 this subject has been very little discussed, and 
 very little is known about it. J. S. Mill alone 
 of the older writers thought it worthy of consi- 
 deration, and not much has been added since 
 his time. 
 
 Along with differences of inco^me arising 
 from unequal inheritances and bequests we must 
 place differences arising from unequal gifts 
 frcm the living to the living — gifts inter vivos 
 as it is commonly expressed. Gifts are not, 
 as we have seen, themselves regarded as 
 income, but when property has once been 
 handed over from one person to another, so 
 that the giver has no longer any control over 
 it, then the income which the property yields 
 is of course income to the person who receives 
 the gift. Such gifts of property are not made 
 to any great extent. People who wish to give 
 usually prefer to retain the ownership of the 
 property and give away the income from time 
 to time, so that they can if they please at any 
 moment revise their donation. But transfers 
 of the property are considerably encouraged 
 by the heavy taxes levied on inheritances in 
 recent times. They are made chiefly to per- 
 sons who would have received the property 
 by way of bequest or inheritance a little later, 
 and are consequently subject to just the same 
 influences as inheritances, and the reasons for 
 their inequality are the same. 
 
 The second great cause of inequality of 
 income from property is inequality of saving. 
 Some save much, others save little, and others 
 nothing at all. If those who had little pro-
 
 i86 INCOMES FROM OWNERSHIPS 
 
 perty s,aved much, and those who had much 
 saved nothing, or exercised negative saving 
 by spending more than their incomes, inequality 
 of saving would, of course, not be a cause of 
 inequality, but rather a cause tending to greater 
 equality. But as a matter of fact it is the rich 
 who save most, both in absolute amount and 
 in proportion to their incomes, so that saving 
 does not mitigate inequality arising from other 
 causes, but aggravates it. The amount of a 
 man's savings depends upon his power and his 
 will to save. His power depends upon the 
 magnitude of his income less any claims on 
 it which have to be met whether he likes it or 
 not, and upon the length of the time during 
 which he has commanded the income. We 
 do not expect to find that a young person with 
 a small income to start with has saved much, 
 especially if his mother has made him con- 
 tribute a good deal to the support of the family. 
 We do expect a man who started with a good 
 income a long time ago and who had no great 
 claims upon him to have saved a great deal if 
 we know that he desired to save. If inequality 
 in the desire to save were arranged sO' that 
 those who had the least power to save had 
 the most desire to do so, this might, of course, 
 counteract to an appreciable extent the results 
 of unequal power to save. But there is no 
 reason for supposing any such providential dis- 
 tribution of desire to save, and therefore on 
 the whole we must regard saving as actually 
 operating to increase rather than decrease 
 inequality of incomes. 
 
 It must be remembered, too, that the educa- 
 tion and training of children is a quasi -invest- 
 ment which competes with saving in the
 
 UNEQUAL LUCK 187 
 
 ordinary sense of the word. As there is no 
 object in spending more than a particular 
 limited amount in this direction, it follows that 
 cost of training will absorb a larger propor- 
 tion of potential savings in the case of parents 
 with moderate means than in that of very- 
 wealthy parents, thus leaving a less proportion 
 for savings in the ordinary sense. 
 
 The third great cause of inequality of income 
 from property is the fact that the income 
 derived from particular property is liable to 
 change from all sorts of causes which are 
 beyond human foresight. If all property came 
 to its possessors by inheritance, it is not clear 
 that this liability to unforeseen appreciation and 
 depreciation would increase inequality : if a 
 number of persons are given unequal amounts 
 by chance, and then some other chance dis- 
 turbs these amounts, there is no reason for 
 supposing that the second distribution will be 
 more unequal than the first. But as a large 
 amount of property is obtained by savings from 
 earnings, and earnings are not altogether a 
 matter of chance, but are largely subject to 
 certain obvious rules, it follows that chance 
 changes in the income derived from particular 
 property do aggravate inequality. Two men 
 earn equal amounts because they are of about 
 equal ability and industry and work at the same 
 trade : they save equal amounts, and invest 
 with what good authorities would consider 
 equal judgment, but the investment of the one 
 turns out fortunate and that of the other unfor- 
 tunate. The one becomes rich and the other 
 remains poor.
 
 CHAPTER XII 
 
 INCOMES FROM WORK 
 
 Why do some people receive large incomes 
 in consequence of their performance of labour, 
 others only small incomes, and others none 
 at all? 
 
 This is not, as is sometimes erroneously 
 said, all a question of value. Earnings differ 
 not only because of differences in the value of 
 a definite amount of service rendered by the 
 worker, but also because of differences in the 
 amount of the service rendered. It is obvious 
 enough to all of us in private life that the 
 comparative earnings of different individuals 
 depend very largely on the comparative 
 amount of labour which they perform. One 
 man works hard, is " industrious " as we 
 say, and earns a good annual income in conse- 
 quence, another is lazy, rather enjoys being 
 out of a job, and consequently earns very little. 
 The only reason why this very important fact 
 is often ignored in economic treatises is that 
 it is so obvious that it does not occur to writers 
 as worthy of mention. But it is not so obvious 
 that the old do not find it constantly necessary 
 to insist on it in their exhortations to the 
 young. At one period they even thought it 
 well to present boys with pocket-handkerchiefs
 
 INEQUALITY BETWEEN OCCUPATIONS 189 
 
 on which the career of the industrious appren- 
 tice to the loftiest commercial position was 
 depicted in lurid prints. 
 
 Differences of individual output of service 
 may of course arise from other causes than 
 differences of " industry." Individuals differ 
 largely in the physical and mental qualities 
 given them by nature, and we expect the more 
 capable to earn more in each occupation than 
 the less capable, where the more capable and 
 the less capable are equal in " industry." Here 
 again the only reason for overlooking the truth 
 is its extreme obviousness. 
 
 But besides these differences between indi- 
 viduals following the same occupation, we find 
 differences between whole classes of individuals 
 following different occupations. There are 
 low paid occupations and high paid occupa- 
 tions — or, at any rate, better paid occupations. 
 The difference here cannot be entirely attri- 
 buted to differences of " industry " and natural 
 endowments. Some few of the worst paid 
 occupations are, indeed, largely filled up by 
 lazy persons of small natural ability, and pos- 
 sibly some of the best paid are largely filled 
 up by persons of more than the average 
 industry and natural endowments. But there 
 is little reason for supposing that these proposi- 
 tions can be applied to all the poorly paid and 
 all the better paid occupations. Most of them 
 are filled by very ordinary persons. Moreover, 
 even if the propositions did apply, that would 
 not account for the difference of remuneration. 
 Even if road-sweeping were paid by the piece 
 in strict proportion to the amount of service 
 rendered, the most industrious and able man 
 in the world could not earn £250 per annum
 
 I90 INCOMES FROM WORK 
 
 by it. There is clearly something more at 
 the bottom of the differences of earnings as 
 between one occupation and another. The 
 value of the work of an average person is less 
 in some occupations than in others. But why? 
 
 In endeavouring to answer this question it 
 will be well to clear away at the outset a deeply 
 rooted misconception about the creative power 
 of labour. It has been supposed by many 
 people during the last two hundred years at 
 least that labour creates value, or gives value 
 to the things on which it is expended. This 
 is an entire mistake. Labour certainly per- 
 forms valuable services and produces or creates 
 valuable things, but it is not because labour 
 is expended upon these services and things 
 that they are valuable. The proposition should 
 be reversed : it is because it is known that the 
 services and things will be valuable that labour 
 is expended in producing them. This is quite 
 obvious when we reflect that no amount of 
 labour expended on a thing which is not wanted 
 by any one will make it valuable, and that if 
 the labour employed in producing some valu- 
 able service or thing is increased with the effect 
 of causing more of the service or thing to 
 be forthcoming, its value will fall. In fact, it 
 would be truer to say that labour destroys 
 value than that it creates it : every minute of 
 labour given to the production of anything 
 tends to reduce the value of such things by 
 increasing their quantity. Labour then is 
 generally remunerated, not because it creates 
 value, but because it is generally devoted to 
 the creation of services and things which are 
 valuable. 
 
 Bearing this in mind, we can still see some
 
 INEQUALITY DUE TO CHANGES 191 
 
 foundation for the assumption, often made, 
 consciously or unconsciously, that in the 
 absence of reasons to the contrary we should 
 expect all kinds of labour to receive equal 
 remuneration. We should expect it, not 
 because labour creates value, and therefore the 
 product of equal quantities of labour should be 
 of equal value, but because we should expect 
 people to sort themselves out between the 
 different kinds of labour in such a way that the 
 services rendered by an hour of labour of each 
 different kind would be equal in value. We 
 should expect that as soon as any one kind of 
 labour appeared to be better paid than another, 
 people would crowd into the better paid occu- 
 pation till the increase of the service offered 
 brought down the remuneration to the general 
 level. Freedom to choose and change an 
 occupation would maintain one level through- 
 out all occupations. 
 
 In fact, of course, this single level is not 
 found to exist. 
 
 In the first place it is obvious that there must 
 be frequent temporary departures from any such 
 level in consequence of the abrupt and unex- 
 pected changes which take place in demand and 
 in the knowledge of methods and the possession 
 of means of production. Owing to all kinds of 
 reasons the demand for any particular product 
 is subject to considerable variations which no 
 man can be expected to foresee or, at any rate, 
 which the large number of persons concerned 
 certainly do not as a matter of fact foresee. 
 New methods of production are constantly 
 being discovered which diminish or increase 
 suddenly the demand for particular products of 
 labour, though the demand for the ultimate
 
 192 INCOMES FROM WORK 
 
 result remains the same : for example, the 
 invention of petrol -driven cars diminished the 
 demand for persons capable of driving and 
 taking care of horses, though it did not 
 diminish the demand for the service of carry- 
 ing passengers by road. Climatic variations 
 constantly lead to a shortage or a superabun- 
 dance of particular products, with the result 
 of diminishing or increasing the demand for 
 the services of particular classes of workers. 
 All these changes, however, would not create 
 any permanent differences between different 
 occupations. It is a matter of luck whether 
 one occupation or another is affected by them, 
 and so in the long run we should expect sub- 
 stantial equality between all the various 
 occupations so far as these causes were 
 concerned. 
 
 Some changes, nevertheless, are " always 
 going on " : they are not, like those just dis- 
 cussed, beyond human foresight. Such is the 
 change which, throughout modern history, has 
 caused agricultural labour to be a declining 
 proportion of the whole of industry. So far, 
 the returns to agricultural industry have steadily 
 increased, and as Adam Smith remarks, " the 
 desire of food is limited in every man by the 
 narrow capacity of the human stomach." Con- 
 sequently, the fact that it has become easier 
 to produce food for the number of human 
 beings which has actually existed at any 
 moment has led to a smaller proportion of 
 human effort being required for the production 
 of food. Isolated Man in such conditions 
 would have found some of his time set free 
 from the production of food, and would have 
 been able to devote the time saved either to
 
 INEQUALITY DUE TO MISJUDGMENT 193 
 
 increased leisure or to larger production of 
 other things. Associated men find that a 
 smaller proportion of their number suffices to 
 feed the whole. Agriculture, therefore, offers 
 a less expanding field of employment than other 
 occupations taken as a whole. Though this 
 phenomenon can scarcely be described as 
 beyond human foresight like an earthquake or 
 an abnormal drought, it is a thing which, down 
 at any rate to the present or very recent times, 
 individuals could scarcely be expected to 
 provide for by any action. Agricultural workers 
 have thus been at a steady continuing disad- 
 vantfage compared with workers in general : 
 the conditions under which they live having 
 been more favourable for the bringing up of 
 children than those of many other workers, 
 there has always been an over -supply of young 
 persons available for agriculture. Many of 
 them have, of course, been kept out of agricul- 
 ture, and have supplied would-be reformers 
 with the themie of " the exodus from the 
 country to the towns," but their extrusion has 
 been an effort which has been inevitably 
 depressing to country labour. 
 
 Secondly, it is probable, we can scarcely say 
 more, that the persons following certain occu- 
 paiions are worse off than others owing to a 
 permanent tendency on the part of ordinary 
 mankind to miscalculate chances. Adam Smith 
 thought that people generally overrate their 
 chances of exceptional good luck in such a way 
 that they overcrowd the occupations which offer 
 a few very high prizes. He says very justly : 
 " That the chance of gain is naturally over- 
 valued, we may learn from the universal success 
 of lotteries. The world neither saw, nor ever 
 
 14
 
 194 INCOMES FROM WORK 
 
 will see, a perfectly fair lottery, or one in which 
 the whole gain compensated the whole loss ; 
 because the undertaker could make nothing by 
 it. In the state lotteries the tickets are really 
 not worth the price which is paid by the 
 original subscribers, and yet commonly sell in 
 the market for 20, 30, and sometimes 40 per 
 cent, advance. The vain hope of gaining some 
 of the great prizes is the sole cause of this 
 demand. The soberest people scarce look upon 
 it as a folly to pay a small sum for the chance 
 of gaining ten or twenty thousand pounds ; 
 though they know that even that small sum is 
 perhaps 20 or 30 per cent, more than the 
 chance is worth. In a lottery in which no 
 prize exceeded twenty pounds, though in other 
 respects it approached much nearer to a per- 
 fectly fair one than the common state lotteries, 
 there would not be the 'same demand for tickets. 
 In order to have a better chance for some of 
 the great prizes, some people purchase several 
 tickets, and others small shares in a still greater 
 number. There is not, however, a more certain 
 proposition in mathematics, than that the more 
 tickets you adventure upon, the more likely 
 you are to be a loser. Adventure upon all the 
 tickets in the lottery, and you lose for certain ; 
 and the greater the number of your tickets, 
 the nearer you approach to this certainty." 
 
 In the choice of a profession, as he 
 recognizes, not only overestimation of luck but 
 also overestimation of their own ability makes 
 young people over-inclined to think themselves 
 suitable for the Bar and other professions where 
 high ability meets with a very high remunera- 
 tion. Hence, owing to this cause taken by 
 itself, such professions tend to be overcrowded,
 
 INEQUALITY DUE TO IRREGULARITY 195 
 
 and therefore worse remunerated than others, 
 though of course other causes may overcome 
 this tendency and render them actually better 
 remunerated . 
 
 Thirdly, we must notice that pecuniary re- 
 muneration is not the only thing which people 
 with free choice between occupations think it 
 worth while to consider. They are guided 
 also by their estimate of the agreeableness or 
 disagreeableness of the work to be done and 
 the various conditions accompanying it. If 
 all kinds of work were equally remunerated, 
 there would be no supply to the most disagree- 
 able : every one would of course choose the 
 most agreeable. The natural tendency to 
 choose the agreeable and avoid the disagreeable 
 in fact keeps down the pecuniary remuneration 
 of the agreeable by increasing the supply of 
 labour, and keeps up the pecuniary remunera- 
 tion of the disagreeable by diminishing the 
 supply of labour. In occupations of what we 
 call " the same class," this effect is very 
 obvious. For example, while successful author- 
 ship in a few fields of literature is certainly 
 highly paid, respectable average authorship 
 receives what would be considered an almost 
 incredibly low wage if the remuneration is 
 worked out per hour of all the effort expended. 
 
 Fourthly, remuneration per hour is not the 
 only thing to be considered in the choice of an 
 occupation even when the choice is simply 
 between occupations in which each hour's 
 labour may be reckoned of equal agreeable- 
 ness. People have to think also of the number 
 of hours of labour which can be put in during 
 a period of some considerable duration, such 
 as a year. If we found an occupation which
 
 196 INCOMES FROM WORK 
 
 could not, owing to climatic or other reasons, 
 be carried on for certain months in the year, 
 during which it was impossible for those 
 employed in it to find other equally well-paid 
 employment, we should expect the supply of 
 that kind of labour to be small enough to raise 
 its remuneration per hour somewhat above that 
 of other occupations of the same class in which 
 employment was more continuous throughout 
 the year. We should not necessarily expect 
 the excess to be just and only just sufficient 
 to bring out an equal average for the whole 
 year, since on the one hand the holiday might 
 be regarded as a certain advantage, or on the 
 other hand Adam Smith might be right in 
 supposing that the anxieties of the workless 
 period would be more deterrent than the possi- 
 bility of using it as a holiday would be 
 attractive. 
 
 Fifthly, we must remember that we reckon 
 remuneration per hour as " net " in the sense 
 that we allow for any continuing present ex- 
 penses, such as the upkeep of tools supplied by 
 the worker, but that we do not allow anything 
 for the expenses of original education or train- 
 ing required by the worker in order to fit 
 him for his particular occupation. Now this 
 varies enormously between different occu- 
 pations, and we should consequently expect very 
 great differences of remuneration, calculated 
 in the ordinary way without taking account 
 of this particular cost. We should expect, for 
 example, that well -trained dentists would be 
 better paid than well-trained navvies. The 
 navvy would probably begin to earn something 
 at fourteen or fifteen years of age, while the 
 dentist could scarcely begin before twenty-five,
 
 COMPENSATIONS FOR INEQUALITY 197 
 
 so that there is a great difference in the cost 
 of maintenance accumulated at compound 
 interest when working life begins. On the top 
 of that there is the special cost of training, 
 which would be nil for the navvy and s,ome 
 hundreds of pounds for the dentist. The two 
 amounts would have to be paid off out of earn- 
 ings in about equal periods. If we take the 
 working life of both occupations at thirty years, 
 and the rate of interest at 4 per cent., the 
 dentist ought to earn about £58 a year more 
 than the navvy for every £1,000 by which his 
 original cost of maintenance and training 
 exceeded that of the navvy. 
 
 If this were all, and if we took cost of train- 
 ing as a deduction to be made at its face value, 
 we might say that the differences of income 
 received from labour in different occupations, 
 so far as not accounted for by the miscalcu- 
 lations into which fallible human beings are 
 necessarily liable to fall, were apparent rather 
 than real for the most part, and that so far as 
 they were real they were balanced by differ- 
 ences in non -pecuniary advantages and dis- 
 advantages. Thus there would be nearly a 
 realization of the state of things pictured in 
 Adam Smith's famous passage : — 
 
 " The whole of the advantages and disad- 
 vantages of the different employments of 
 labour . . . must in the same neighbourhood 
 be either perfectly equal or continually tending 
 to equality. If, in the same neighbourhood, 
 there was any employment evidently either 
 more or less advantageous than the rest, so 
 many people would crowd into it in the one 
 case, and so many would desert it in the other, 
 that its advantages would soon return to the
 
 igS INCOMES FROM WORK 
 
 level of other employments. This at least 
 would be the case in a society where things 
 were left to follow their natural course, where 
 there was perfect liberty, and where every man 
 was perfectly free both to choose what occupa- 
 tion he thought proper, and to change it as 
 often as he thought proper. Every man's 
 interest would prompt him to seek the ad- 
 vantageous and to shun the disadvantageous 
 employment." 
 
 We should have to remember, however, that 
 in this method of reckoning we should be 
 understanding " advantageous " and " disad- 
 vantageous " in a somewhat unusual sense 
 which would be likely to mislead unless care- 
 fully explained. We do not usually reckon the 
 advantageousness of an occupation as, so to 
 speak, net, after the deduction of cost of train- 
 ing. Being accustomed to see this cost 
 defrayed, not by the person who takes up the 
 occupation himself, but by his parents or by 
 some charitable institution or by the state, we 
 are not in the habit of regarding it as a dis- 
 advantage of the occupation. It is as a matter 
 of fact no disadvantage to the person who 
 pursues an occupation that some other person 
 or institution had to pay for his training, unless 
 he would have got the money if it had not 
 been so spent. Doubtless where the cost is 
 defrayed by parents this would often be the 
 case, but there is no certainty about it, and we 
 are consequently inclined to overlook the cost 
 of training when we compare the advantages of 
 different occupations. 
 
 Even now we are far from having probed the 
 subject to the bottom. Even if we do reckon 
 expense of training as a disadvantage, differ-
 
 COST OF TRAINING i99 
 
 ences of earnings between different occupations 
 cannot be entirely accounted for by differences 
 of advantages other than earnings. Every one 
 knows that the whole or net advantageous - 
 ness of different employments is highly 
 unequal. If equality prevailed, we should find 
 well-to-do parents in doubt whether to make 
 their sons civil engineers or naval stokers, 
 doctors or road -sweepers. What we do find 
 is a persistent, sometimes almost frantic effort 
 on the part of all well-disposed parents to get 
 their children fitted by training for a " class 
 of employment " as good as or better than they 
 themselves have followed, even if they have to 
 pay the whole cost. They know very well that 
 in the average of cases it " pays " much better 
 in the interest of the child to spend money in 
 this way than to put it into ordinary invest- 
 ments for his benefit. 
 
 It may be asked, " If this is so, why is not 
 money spent in training more young people 
 for the occupations of superior advantageous - 
 ness until the competition reduces this excess 
 of advantageousness to nil?" The answer is 
 that the conditions of human life have not 
 hitherto allowed the spending of money in this 
 way to become an ordinary investment to 
 which savings can be attracted in the ordinary 
 way by the expectation of interest. They have 
 not done so because Society has not thought 
 fit to provide means by which money could 
 be advanced to young people for their training 
 on terms which would make the lenders secure 
 of recovering their money with interest. In 
 order to make them secure it would be neces- 
 sary to legalize contracts under which children 
 and young persons would undertake to repay
 
 200 INCOMES FROM WORK 
 
 money advanced for their education, and it 
 would be necessary to provide machinery for 
 the enforcement of such contracts. There 
 would be great difficulties about this, as such 
 contracts would be of the same nature as the 
 contract under which a man sells himself into 
 slavery, a thing which is regarded as " against 
 public policy," to use the phrase of English 
 law courts. Whether it is possible or impos- 
 sible to provide facilities for commercial invest- 
 ment in the training of human beings, they 
 are not provided at present, and consequently 
 this business has been left to parents, charit- 
 able persons and institutions, the Church and 
 the State, who carry it on now, as always, 
 in rather a haphazard manner. Parents spend 
 money on their children's training and face 
 postponement of the children's beginning to 
 earn because they think it will " pay " 
 from the children's point of view. If there 
 were enough well-disposed parents with 
 adequate means, therefore, the absence of 
 commercial investment would not matter : 
 enough young people would be trained for all 
 occupations, however great the expense of 
 training, to bring all to a common level of 
 total advantageousness. There are, however, 
 in fact not enough well-disposed parents with 
 adequate means, and there is in consequence 
 a permanently insufficient supply of persons 
 trained to the occupations which require expen- 
 sive training, and this short supply keeps the 
 whole advantageousness of those occupations 
 higher than that of the other occupations for 
 which no expensive training or long postpone- 
 ment of earnings is necessary. The insuf- 
 ficiency of well-disposed parents with adequate
 
 CHARITY, CHURCH, AND STATE 201 
 
 means is to some extent counterbalanced by 
 the working of the numerous charitable endow- 
 ments of education which exist in civilized 
 countries : the institutions to which these en- 
 dowments belong act as fosterparents with 
 adequate means. The Churches and the State, 
 too, have done a little in recent times in this 
 direction. But the Churches have never had 
 the economic advancement of their charges 
 primarily in view ; they have taught in order 
 that children might learn to read the Bible, 
 or in order to prevent them falling into the 
 hands of the irreligious or schismatic. The 
 States have taken up education from motives 
 which are complex and dii^cult to analyse, but 
 it may be said quite safely that none of them 
 have ever been moved by a desire to cheapen 
 the products of the " better-class employ- 
 ments " by multiplying the persons qualified 
 to pursue them. Consequently, while the charit- 
 able endowments of universities and upper-class 
 schools have had an important influence in 
 reducing the remuneration and cheapening the 
 products of the better paid employments, the 
 efforts of the Churches and the States have 
 rather resulted in diminishing the remuneration 
 and cheapening the products of the class of 
 labour which requires a smattering of letters, 
 but is scarcely above, if it is at all above the 
 average. Attempts to introduce training for 
 higher paid employment of a manual character 
 usually encounter trade-union opposition. The 
 trade-unionist of a skilled trade is in favour of 
 steps being taken to break down the monopoly 
 of the professional classes, but naturally objects 
 to anything which makes it easier for the 
 lowest class to break into his own circle.
 
 202 INCOMES FROM WORK 
 
 The result is that the remuneration of labour 
 is much more an hereditary matter than it 
 would be if heredity only played its part by 
 bringing infants with different original powers 
 and qualities into being. Surroundings as well 
 as innate qualities are hereditary. There are no 
 absolutely insurmountable barriers preventing 
 those who are born into poor surroundings from 
 forcing their way into the best paid professions 
 if they have exceptional ability and grit, and 
 there is nothing to prevent exceptionally in- 
 capable persons born into good surroundings 
 from falling into the lowest class of workers. 
 But all the same, it is, as every one knows, a 
 great advantage to the ordinary person in the 
 matter of earning his living, to be the child of 
 fairly well-to-do parents, and an enormous dis- 
 advantage to be the child of parents belonging 
 to the poorest class. 
 
 Whether a child is born to parents who are 
 well-to-do or to parents who are poor, it is an 
 economic advantage to be born a boy rather 
 than a girl. It is commonly observed that 
 women's earnings are considerably lower than 
 men's ; it is often said that they do not average 
 more than about half. 
 
 Now if there was only one occupation, and 
 that occupation required heavy muscular exer- 
 tion and none of those qualities in which women 
 excel, we should have no hesitation in explain- 
 ing the difference of earnings by the smaller 
 output of the women. To many men, and 
 perhaps to some women, this appears a suffi- 
 cient explanation of things as they are. They 
 see that in many occupations in which men 
 and women compete the women's output is
 
 INEQUALITY DUE TO SEX 203 
 
 measurably less than the men's, and in regard 
 to others, in which the output cannot be 
 measured by the ounce or the yard, they argue 
 that the very fact that men continue to be 
 employed along with women, although the men 
 earn more money, shows that the men are 
 somehow worth more to the employers than the 
 women, which must mean that at any rate their 
 net produce is greater. This is quite sound 
 as far as it goes, but it by no means cov:ers 
 the whole ground. There are, no doubt, many 
 occupations in which men are superior to 
 women. If the less well-paid women's work 
 came cheaper to the employer than the men's 
 work, women would rapidly, or at the least 
 slowly, drive out men, just as men would drive 
 out women if men's work were the cheaper : 
 the employers who- declined to move would be 
 driven out by those who did. But there are 
 also employments in which women are superior 
 to men — to take an example about which no 
 one has any doubt, we may give as an instance 
 the care of children. In such occupations men 
 do not compete, and if they tried to do so they 
 would get few situations, even if they offered 
 themselves at rates immensely below those at 
 present earned by the women. The reason 
 obviously is that in these occupations the men's 
 output would be much inferior to the women's. 
 Yet here, too, we find women's earnings 
 low as compared with men's. We cannot com- 
 pare them with the non-existent men's earnings 
 in the same occupation ; we must compare 
 them with the earnings of men employed in 
 occupations of the same class, in the sense of 
 occupations which were open to the particular 
 women in question (both men and women being
 
 204 INCOMES FROM WORK 
 
 employed), or which would have been open 
 to their choice if they had been born boys 
 (men only being employed). It would be 
 absurd, for example, to compare the earnings 
 of the average children's nurse with the earn- 
 ings which we might suppose her brother might 
 make as a nurse, and consequently to declare 
 her earnings high. What we must do is to com- 
 pare her earnings with the actual earnings of 
 her brother in his occupation of, say, carting 
 coal, and then we find that her earnings are 
 low — at any rate when hours, loss of freedom, 
 and other considerations are taken into account. 
 Now, it is clearly no use to say that the woman 
 earns less than her brother because she cannot 
 heave as much coal ; we might just as well 
 say that he should earn less than his sister 
 because he cannot wash as much baby. 
 
 The true explanation of the general in- 
 feriority of women's earnings, like every true 
 explanation of any earnings, must combine the 
 consideration of amount of output with the 
 consideration of the value of a unit of output. 
 The real reason why women's earnings are low 
 in occupations in which the ultimate judge, the 
 consumer, finds their output superior to men's, 
 is to be found in the fact of the restricted 
 area of employment olTered by these occupa- 
 tions in comparison with the number of girls 
 choosing them, which of course brings down 
 the value of the output. The value of work 
 being thus depressed in these occupations, not 
 only are men driven out or kept out of them, but 
 many girls find they can do as well for them- 
 selves by going into occupations in which men 
 are superior, although they have to take earnings 
 inferior to those of the men. This, of course.
 
 INEQUALITY DUE TO SEX 205 
 
 throws us back on the question why the area 
 in which women are superior is so restricted. 
 Like women, men are only superior within 
 a certain area, but they have no need to invade 
 the women's field, whereas the women do need 
 to invade theirs. The number of women is 
 certainly appreciably greater than that of men 
 in the " old " countries from which there is 
 migration, but the difference in the world at 
 large, the real inarket, cannot be great enough 
 to make much difference. It seems clear that 
 the field within which women show themselves 
 superior to men must be smaller than that in 
 which men show themselves superior to women. 
 Believers in the generally smaller capacity 
 of women may attribute this, in part at any 
 rate, simply to that smaller capacity. If women 
 are, for productive purposes as a whole, in- 
 ferior editions of men, it is only natural thjat 
 there should be a smaller field of occupa,tion 
 in which they excel, although it includes the 
 very large occupation of motherhood. But 
 even if this be, in part, the explanation, it 
 certainly is not the whole explanation. The 
 pressure of competition in the occupations in 
 which women are superior would be less than 
 it is if it were not for restrictions which prevent 
 women from entering many occup^ations in 
 which they could, if allowed to compete, 
 succeed better than they do at present in 
 occupations in which they are allowed. If 
 these forbidden occupations, of which railway 
 clerical work in this country is a very obvious 
 and important example, were unlocked for 
 women, the women who entered them would be 
 withdrawn partly from the occupations in which 
 women are superior, and partly from the other
 
 2o6 INCOMES FROM WORK 
 
 occupations, while, on the other hand, the 
 men kept out of the formerly reserved 
 occupations would, by their competition in other 
 occupations, tend to lower men's earnings, so 
 that men's and women's earnings would tend 
 to be more equal. 
 
 This enlargement of the field of women's 
 employment is probably the most important 
 of the means by which women's earnings could 
 be raised in comparison with men's. It is 
 obstructed not so much by law as by the inertia 
 of employers and their fear of inconvenience 
 from the active resistance of the men employed 
 at present. It is hindered too by the cry for 
 equal wages for men and women, as the most 
 powerful lever for increasing the opportunities 
 of women is taken away if they are not to do 
 the work cheaper. It has been assisted by the 
 invention of new machinery, such as the tele- 
 phone and the typewriter. If such things had 
 been invented long ago, and owing to the 
 conditions of that time the occupations con- 
 nected with them had been made men's em- 
 ployments, women would probably have still 
 been shut out from them. 
 
 Besides enlargement of the field in which 
 women can be employed, there are two other 
 important ways in which their earnings might 
 be raised. Firstly, the opinion of the con- 
 sumer about the comparative quality of things 
 produced by men and things produced by 
 women might be modified in a direction favour- 
 able to women. At present, for example, many 
 " consumers " of the service of waiting at table 
 appear to regard the service as superior when 
 performed by a waiter, even if the waitress 
 handles an equal number of dishes with equal
 
 INEQUALITY DUE TO SEX 207 
 
 dexterity and dispatch. Opinions — or prejudices 
 —such as these are clearly as capable of being 
 changed as opinions about the beauty of tight 
 or loose skirts, or tall hats and bowlers. A 
 change of opinion or taste might have quite 
 an appreciable effect in increasing the demand 
 for women's labour and raising their earnings. 
 Secondly, women's capacity as compared with 
 that of men might easily be raised, with the 
 effect of increasing their output in the occupa- 
 tions in which they compete with men, as 
 measured not only by taste but by pounds avoir- 
 dupois or cubic yards. Girls as a rule do not 
 have so much spent upon them as boys. If 
 they were better fed and trained, their output 
 would be bigger than it now is in occupations 
 in which they compete with men : their average 
 earnings in such occupations would rise more 
 nearly to that of men, and their improved 
 prospects here would relieve the pressure on 
 the special fields in which women only are em- 
 ployed because they are superior to men. 
 These special fields might even be somewhat 
 increased in area, as the rise in the capacity 
 of women might add to the list. In some 
 occupations women may be just a little inferior 
 to men at present, and a small rise in capacity 
 might make them more than equal. It should 
 be noticed, however, that an increase of 
 women's output, if it was confined to the em- 
 ployments in which women alone are at present 
 employed, might very probably reduce their 
 earnings by cheapening the unit of output more 
 than the amount per head increased. 
 
 The disparity of incomes between the sexes 
 is one of the two most prominent features in
 
 2o8 INCOMES FROM WORK 
 
 the inequality of the distribution of income. 
 The other is the hereditary character of the in- 
 equality. Any one can see that the distribution 
 of income depends largely on the unequal in- 
 heritance of those natural qualities which enable 
 one person to get more than another either by 
 ordinary labour or by better judgment in the 
 management of his property. Careful analysis 
 shows that acquired qualities which have the 
 same effects are also in great measure heredi- 
 tary, owing to the fact that the children of 
 well-to-do parents have much better oppor- 
 tunities of acquiring them than the children of 
 poor parents. On 'the top of this comes the fact 
 that property is mostly acquired by way of 
 inheritance, and that it is easier for a person 
 to acquire more by saving when he has already 
 acquired a great deal by inheritance. The 
 result is that when persons are arranged in a 
 scale of incomes from the highest to the lowest, 
 the receivers of the high incomes are easily 
 seen to be chiefly the children of those of the 
 last generation who received in their time the 
 high incomes of that time, and the receivers 
 of the small incomes to be chiefly the children 
 of those of the last generation who received 
 small incomes. There are no clear-cut classes, 
 no definite boundaries over which no man may 
 step. The able members of the poorest class 
 are constantly rising to the top, and the par- 
 ticularly incompetent members of the richest 
 class are constantly falling to the bottom ; but 
 all the same, among the bulk of mankind there 
 is a continuous hereditary transmission of in- 
 equality of income the importance of which it 
 is foolish to ignore.
 
 CHAPTER XIII 
 
 THE RELATION BETWEEN INDIVIDUAL INCOME 
 AND INDIVIDUAL WEALTH 
 
 For many purposes we are in the habit of 
 accepting incomes as a rough measure of the 
 material welfare or wealth of the persons 
 receiving them. Of course, we remember that 
 a very large proportion of the normal popula- 
 tion — namely, children and others who are not 
 " independent " — obviously enjoy wealth not 
 founded on their own income, since they receive 
 the benefit of some other person's income. 
 But even when we are dealing with " indepen- 
 dent " persons living at the same time and in 
 the same place, we constantly find it necessary 
 to modify the conclusion to which a bare com- 
 parison of figures of income would bring us. 
 
 Firstly, as has already been pointed out 
 (pp. 140-43), income, at any rate as ordinarily 
 understood, does not cover all the material 
 benefits which people get from their own and 
 their family's labour and property. Generally, 
 it may perhaps be said that this is not of great 
 importance, since the uncovered benefits will 
 be approximately proportionate to the incomes, 
 so that their omission will not seriously vitiate 
 a comparison of wealth or material welfare 
 based on income. But often this is not 
 
 1 2 209
 
 2IO INCOME AND WEALTH 
 
 true. It would, for example, be misleading 
 to treat two groups of working families with 
 equal incomes as equally well off if in the one 
 case part of the income was obtained by the 
 mothers going out to work in factories, while in 
 the other case the whole of the income was 
 obtained without that resource, so that the 
 mothers were able to spend their whole time 
 caring for the children and making home-life 
 comfortable. Hasty calculations based on 
 income alone often vitiate comparisons of the 
 wealth of persons living under rural conditions 
 with that of persons living in towns, because 
 the rural people do for themselves many things 
 which have to be paid for out of income in the 
 towns. The fact that incomes are supplemented 
 by unreckoned services performed by the 
 receiver of the income and his family seems 
 on the whole 'to tend towards making inequality 
 of wealth less than inequality of income — to 
 alleviate inequality of income, as we may per- 
 haps say for shortness — since it is the smaller 
 incomes which receive the larger proportionate 
 supplements. To be convinced of this we need 
 only think of the different results of the death 
 of the mother, first in a working-class family, 
 and then in that of a millionaire, while the 
 children are still young. The millionaire father 
 may regret his loss, but it will not be an 
 economic disaster to him, as it is to the poorer 
 father. 
 
 Secondly, comparisons of wealth based on 
 incomes alone are vitiated by the fact that 
 income is not exclusively applied to benefit 
 its receiver. More than a third of an ordinary 
 population consists of children maintained out 
 of the incomes of their parents or other rela-
 
 CLAIMS MET FROM INCOME 211 
 
 tions, and it is not much use to try to evade the 
 difficuhy by reckoning up some very vaguely 
 defined " family income/' 'so that Bill Smith 
 with a wife and five young children and a 
 pound a week becomes merely one-seventh, 
 or some more nicely calculated fraction, of the 
 Smith family with a pound a week. This 
 method only involves us in an inextricable 
 tangle in regard to family incomes, and still 
 leaves us with a great mass of transferred 
 income on our hands. It leaves us with all 
 charitable expenditure on objects which happen 
 to lie outside the definition of the family, all 
 expenditure out of income in payment of taxes, 
 and all expenditure for non -economic ends. 
 It is far better to recognize frankly that a con- 
 siderable portion of income is not employed 
 for the material benefit of the recipient of the 
 income. Some he parts with because he 
 prefers either the material benefit of others 
 or some non-economic gain to his own material 
 benefit ; other portions he parts with because 
 public opinion or the law compels him. It is 
 little use to attempt to distinguish sharply be- 
 tween what he parts with voluntarily and what 
 he parts with involuntarily. He often makes a 
 virtue of necessity, trying, for example, to feel 
 a glow of satisfaction as he parts with his 
 subscription to the local hospital, although he 
 would not give it if he were not afraid the 
 absence of his name might give rise to un- 
 pleasant comment. On the other hand, he 
 often complains of the necessity of paying rates 
 and taxes to defray the cost of things which 
 he would willingly buy if they were sold in 
 shops, like butcher's meat, instead of being 
 provided out of rates and taxes by government.
 
 212 INCOME AND WEALTH 
 
 The fact that recipients of income part with 
 large amounts of it without receiving any 
 material return in their own persons can 
 scarcely be said either to alleviate or to aggra- 
 vate the inequality of income. On the one 
 hand, it may be said that the obligation of 
 parents to maintain their children aggravates 
 the inequality of incomes, inasmuch as it is 
 generally the recipients of the smaller incomes 
 who have the largest families. But on the 
 other hand, the payments out of the incomes of 
 one set of people, not for the benefit of their 
 families, but for the benefit of a different set of 
 people, whether these payments are voluntary 
 or enforced by public opinion or by law, are, on 
 the whole, transfers from the rich to the poor. 
 It is difhcult to see how any judgment about 
 the net result can be arrived at under present 
 conditions, but it seems probable that in future 
 times the transfers of the second class will 
 increase, while the inequality in the size of 
 families is likely to be reduced, so that, on the 
 whole, we shall find here an alleviation of 
 inequality of incomes. 
 
 Thirdly, a person's wealth or material wel- 
 fare, in the usual sense of material welfare 
 enjoyed in some short period of time taken 
 for comparison, is not affected by any portion 
 of income which he saves. If of two men with 
 £ioo a year each the one saves £50 and the 
 other nothing, the one who saves will enjoy 
 less wealth during the time this continues, 
 though he may possibly enjoy more in the 
 course of his whole life than the other. Even 
 if we changed our method of comparison, and 
 tried to compare whole lives instead of con- 
 fining ourselves to a single year or some such
 
 DIFFERENCE OF SAVINGS 213 
 
 period, the different amounts of saving would 
 vitiate comparisons of wealth based on income 
 received, since savings are constantly made 
 from which the saver does not expect to benefit 
 in his own person ; and even if savings were 
 all made for the saver's own benefit, dis- 
 crepancies between whole -life income and 
 whole -life wealth would be occasioned by the 
 uncertainty of the duration of life. Presumably 
 the savers would buy life annuities, and those 
 who lived longest would then get most benefit 
 from their savings. 
 
 As at present practised, there can be little 
 doubt that saving alleviates inequality of 
 incomes to some considerable extent. Well- 
 to-do people save money, invest it, and then die 
 and leave all their property to their poor rela- 
 tions, who straightway sell it (to other saving 
 people) and live for some time upon the pro- 
 ceeds. The wealthiest class of all can scarcely 
 spend the whole of its income in ways which 
 will not be more trouble than they are worth : 
 it is much less trouble to purchase £10,000 
 worth of stock or shares than to maintain a 
 third or fourth country house, and the advan- 
 tage of a third or fourth country house is 
 inconsiderable. So the wealthiest class becomes 
 a kind of automatic saving-machine, which pro- 
 vides new capital for the world because it finds 
 it is less trouble to do so than to spend, the 
 advantage of further spending being very small 
 after some thousands a year have been spent. 
 It is clear that out of the incomes of the rich 
 a much larger proportion, as well as an enor- 
 mously greater amount, is saved than out of the 
 incomes of the poor, and, so far as it goes, this 
 tends to alleviate inequality of income.
 
 214 INCOME AND WEALTH 
 
 Fourthly^ comparisons of wealth based on 
 income alone are vitiated by the fact that the 
 material wants of individuals differ very greatly, 
 owing to original and acquired differences of 
 body and mind, and these differences are often 
 of such a character as. to prevent equal amounts 
 of expenditure yielding the same, or even 
 approximately the same, amounts of material 
 welfare. One man, from his excessive size or 
 some defect of digestion, may require more 
 food, or more expensive food, to keep him in 
 health and strength than another man of 
 smaller size and better digestive organs. 
 Illness at once upsets comparisons based on 
 income : the sick man has to pay for medicine 
 and operations which afford him no active 
 " satisfaction " at all, but only disgust and 
 pain. In real life we are perfectly alive to this. 
 If one man is well and another has to pay £200 
 a year to doctors and nurses, we never dream 
 of supposing that the two men are equally well 
 off, enjoy equal material welfare, merely 
 because they both have £500 a year. The 
 only reason why we are sometimes apt to over- 
 look the matter in theoretical generalizations 
 is that we are then usually dealing with large 
 classes, and we suppose that individual 
 differences may safely be ignored for the 
 moment. But the differences in question are 
 not altogether a matter of individual idiosyn- 
 crasies. They sometimes exist between whole 
 classes. For example, the persons engaged in 
 a particular occupation may very easily be 
 especially liable to some form of sickness which 
 makes the average of sickness higher in that 
 occupation than in others. It may be, too, that 
 some kinds of work actually require for their
 
 DIFFERENCE OF JUDGMENT 215 
 
 efficient performance a greater quantity of food 
 or a better quality of food than is sufficient to 
 give equal " satisfaction " to persons engaged 
 in other kinds of work. 
 
 The fact of inequality of wants is a great 
 aggravation of the inequality of income. If 
 inequality of income corresponded with in- 
 equality of wants, so that those who had the 
 greatest wants had also the greatest incomes, 
 material welfare would be much more equal 
 than incomes. But just the contrary is true : 
 not only is there no correspondence between 
 income and wants, but the rule for the whole 
 working population is rather that when wants 
 are greatest, owing to sickness, childbirth, or 
 infirmity, income is wholly absent. This has 
 been recognized for thousands of years, and 
 well-disposed persons have endeavoured to 
 supply the place of income by charitable gifts, 
 poor laws, and insurance schemes. Children, 
 too, have no income, though their wants are 
 considerable, and without the institution of the 
 family the rest of the economic system could 
 not have preserved the human race. 
 
 Fifthly, even where wants are the same, equal 
 amounts of income may yield different amounts 
 of material welfare, owing to the fact that 
 people are not all equally capable of arranging 
 their expenditure in such a way as to satisfy 
 those wants as completely as possible with the 
 money at their disposal. It is absurd to assume 
 that every one's judgment on the question of 
 what will benefit him most is infallible. 
 Obviously, many people misjudge in a manner 
 which seems amazing to other people at the 
 time, and often to themselves when they think 
 about it after sad experience. They buy too
 
 2i6 INCOME AND WEALTH 
 
 much of one thing, such as intoxicating liquor, 
 tobacco, or motor-cars, and too little of some 
 other things which would have added much 
 more to their material welfare. They live too 
 much for the moment, and spend money to-day 
 which would have produced much more 
 material welfare if it had been reserved till 
 they were out of work or sick. The well- 
 authenticated observation that regular income 
 is considerably better for most people than 
 a somewhat larger but irregular income testifies 
 to the general belief that want of good judg- 
 ment in the distribution of means over time is 
 a very common phenomenon. 
 
 Inequality of judgment in expenditure aggra- 
 vates inequality of income, since the class with 
 the smallest income is likely to be the most 
 ignorant, and therefore to have the worst judg- 
 ment. All close observers of the poorest class 
 know that ignorance of how to use their very 
 small opportunities has much to do with their 
 continuance in poverty. 
 
 Sixthly, the relative wealth of individuals is 
 clearly affected by the conditions under which 
 their incomes are acquired as well as by the 
 magnitude of those incomes. A man who 
 makes £70 a year by easy work in daylight 
 certainly enjoys greater wealth than one who 
 makes the same amount by hard work under- 
 ground for the same number of hours. A man 
 with £1,0.00 a year from investments which 
 give him no trouble is usually better off than 
 one who has to sit in a city office boring over 
 business for sixty hours a week in order to 
 acquire the same amount of income. No doubt 
 the second man would be less happy if he 
 retired and sat on a chair all day, reading the
 
 DIMINISHING UTILITY 217 
 
 newspapers and worrying his wife, but if he 
 had the income from investments he would 
 not be obliged to adopt that mode of life ; 
 he could choose whatever work he liked best 
 and be as active as he pleased. It may be 
 taken as certain that those who have consider- 
 able income from property do not have to sub- 
 mit to so much " disagreeableness of labour " 
 when they earn additional income by working 
 as those who have to depend entirely on their 
 labour. They can afford to pick and choose, 
 and they do so. They need not work so far 
 into the realm of fatigue and boredom, and 
 they do not. 
 
 The inequality of the conditions under which 
 income is obtained is certainly an alleviation of 
 inequality of income when competition makes 
 it work simply as a counterpoise, so that one 
 occupation giving an income of £100 a year 
 is only as good, on the whole, as another but 
 more agreeable one giving £90. The absence 
 of fully effective competition, however, prevents 
 this balance being universal, and, in fact, we 
 find that the worst-paid occupations are also 
 the most disagreeable, they being chosen by 
 large numbers of people for the same reason — 
 inability to choose a better. 
 
 Seventhly, even when equality in all the con- 
 ditions so far dealt with is present, or, what 
 comes to the same thing, when differences in 
 any or all of these conditions are allowed for, an 
 important cause of discrepancy between income 
 and material welfare or wealth is still left in the 
 fact that though the larger an income is the 
 larger is the wealth of the recipient, yet the 
 increase of wealth is not as a rule proportionate 
 to the increase of income. It is useless to
 
 2i8 INCOME AND WEALTH 
 
 discuss what is the case below a certain very 
 low limit of income necessary for mere sub- 
 sistence. When this limit has once been 
 reached, a small absolute addition to income, 
 such as £ I o a year, will give a very large 
 addition to the wealth of the recipient, because 
 it will be spent upon things which make a 
 great difference to him. The next £io will 
 not be of quite so much importance, and so 
 on, till, when we get to the richest man in the 
 world, we find that £ i o more or less per annum 
 is an inappreciable sum to him. The more 
 income a man has, the more it is spent on com- 
 paratively trivial things. So complete has 
 popular perception of the fact become that pro- 
 gressive taxation is often defended by the aid 
 of propositions which imply that, for example, 
 one-tenth taken from Smith with £10,000 a 
 year means less to him than one -tenth taken 
 from Jones with £1,000 a year means to 
 Jones, although Smith's tenth is ten times as 
 big as Jones's tenth, so that we are expected 
 to believe that Smith will " feel " the cutting 
 off of £1,000 less than Jones will " feel " the 
 cutting off of £100. To estimate precisely the 
 acuteness of the feelings of average persons 
 with incomes of different amounts appears to 
 be scarcely possible, but there can be no doubt 
 about the main fact, that material welfare or 
 wealth is not proportionate to income, though 
 it moves in the same direction — more income 
 gives more wealth, but always in a less and 
 less proportion. 
 
 This " diminution in the utility of additional 
 income as income increases," as it is sometimes 
 called, has the important effect of making in- 
 equality of income an evil in itself, or, to put
 
 DIMINISHING UTILITY 219 
 
 it in another way, an evil if we disregard the 
 ultimate effects of inequality upon the future 
 action of the persons concerned. Common 
 opinion fully recognizes this. Whenever we 
 have, without thought of ulterior consequences 
 in the way of encouragement of industry or 
 otherwise, to divide a given amount between 
 two or more persons who have the same wants, 
 we always decide in favour of equal division, 
 if there is enough to keep both or all alive. 
 We may, indeed, allege that our reason for 
 doing so is that it is " fair " or " just," but 
 a very little thought will suffice to show that it 
 is also economical in the sense of making the 
 given amount "go as far as possible." If 
 one gets more than the other, the one that gets 
 most will be given something which will satisfy 
 less urgent wants than some of the wants of the 
 other person which remain unsatisfied, and 
 which might have been satisfied if the division 
 had been equal. It is this which is really 
 involved in our feeling that the unequal division 
 is unfair or unjust. We can see it at once if we 
 take a strong case. Let the two persons be 
 supposed to have no other means of support, 
 and the proposition be made that the whole of 
 what is to be given them be given to only one 
 of the two. The one who gets nothing will 
 clamour for " justice," and the impartial spec- 
 tator will sympathize. But why? Evidently 
 because the total might have been distributed 
 in a way which would have given greater satis- 
 faction on the whole — that is, to both persons 
 taken together. If there was not enough to 
 keep both alive, but only enough for one, it 
 would be found that there was no general 
 agreement about the demands of justice, and
 
 220 INCOME AND WEALTH 
 
 the discussion would turn on the comparative 
 advantage to the persons themselves and others 
 of this or that person's life being saved. The 
 popular belief that " it was never intended," 
 as the pious sometimes say, or that "it is not 
 right, that some should have so much and 
 others so little," has a perfectly sound economic 
 foundation. The popularity of progressive 
 taxation, especially of progressive death duties, 
 is due to perception of the fact that it is 
 economical to levy taxes in a way which 
 reduces inequality of available means. 
 
 Rather paradoxically, perhaps, the diminish- 
 ing utility of additional income, though it 
 makes inequality of income a bad thing in 
 itself, undoubtedly tends to alleviate it in the 
 sense of making the difference of wealth less 
 than the difference of income. If increase of 
 income is accompanied Idj a less than propor- 
 tionate increase of wealth or material welfare, 
 it is clear that a man with ten times the income 
 of his neighbour is not ten times as well off. 
 Every one knows that this is so, and it is one 
 of the most important reasons why the rich, and 
 especially the very rich, are not more envied 
 than they are. The poorer classes would be 
 much more discontented with their lot if they 
 had not a perfectly sound belief that the rich 
 do not get very much out of a great deal of 
 their expenditure. 
 
 I do not feel confident that there is much to 
 be gained by an attempt to sum up the total 
 effect of all the seven causes of discrepancy 
 taken together, but I am inclined to think that, 
 chiefly in consequence of the powerful effect 
 of the seventh, wealth is not on the whole so 
 unequal as income. Possibly we ought to make
 
 PLACE AND TIME 221 
 
 a distinction between different parts of the 
 scale. It may be said with considerable plausi- 
 bility that those persons who have very small 
 incomes or none at all are not so badly off as 
 their want of income would indicate, and those 
 with very great incomes are not so well off as 
 their plenty of income would indicate ; yet 
 there may be an intermediate class among* 
 which variation in the wants of the individual 
 and the claims of his family upon him is so 
 important that differences in wealth become 
 greater than differences in income. But it 
 would be rash to be certain about this. 
 
 So far we have only considered persons 
 living at the same place and time. When the 
 persons whose wealth is to be compared live 
 at different places and times their incomes are 
 still less of a guide to us, since in proportion 
 as the places and times become more and more 
 " different," which is nearly equivalent to more 
 or less distant, the measure of value in which 
 we reckon the magnitude of incomes becomes 
 more and more untrustworthy. The informa- 
 tion that one man has £100 a year and another 
 £200 in our own country and our own time 
 conveys a good deal to us, because we have 
 some rough notion in our minds of what can 
 be procured by the two sums. The information 
 that two men have those incomes in Siam at the 
 present time, or had them in our own country in 
 the reign of Henry II, conveys something to 
 us, because, though we do not know very well 
 how far the sums mentioned would go in Siam 
 or would have gone in England in the time 
 of Henry II, yet we know at any rate that one 
 sum would buy twice as much of the same things
 
 222 INCOME AND WEALTH 
 
 as the other. But if we are told that one has 
 £io;o a year in Siam no,w and another has 
 £20.0 a year in England, or that one had £100 
 a year in England in the time of Henry 11 and 
 another has £200 a year in England now, 
 we cannot even say that the £20:0 a year man 
 will be able to buy twice as much of the same 
 things as the £10:0 a year man. The values 
 of most things reckoned in money will be 
 different. It might conceivably happen that 
 £ 1 0:0 in England would buy all the things that 
 would be bought by a man with £10.0 a year 
 in Siam and leave something over, but such a 
 simple case is vastly improbable. It usually 
 happens that some things are dearer in the one 
 of two places or times and others in the other. 
 Statisticians try to lump everything together 
 by means of what is called an index number, 
 but this does not really help very much, since 
 all men do not want to buy different things 
 in equal proportions. A rich man may think 
 prices have not gone up at all when a poor 
 man, spending a much larger proportion of 
 his income on bread and other provisions, 
 thinks they have risen a great deal. More- 
 over, in comparing different places, and still 
 more in comparing different times, it is not 
 possible to lump everything together, because 
 some of the things present at the one place 
 and time will be wholly absent at the other. 
 We now buy even out of quite small incomes 
 innumerable things which Henry II could not 
 have bought with the whole national revenue. 
 All the same, we need not conclude that com- 
 parisons of income relating to different places 
 and times are wholly useless. Many different 
 places are sufficiently similar to make a com-
 
 PLACE AND TIME 223 
 
 parison of income quite a useful starting-point 
 for a comparison of wealth : we may not find 
 a comparison of the incomes of the inhabitants 
 of Siam and that of the inhabitants of England 
 much use, but a comparison of the same kind 
 between France and Germany or Italy is quite 
 useful. Similarly, a comparison of incomes 
 in the time of Henry II and that of George V 
 may be futile, but a comparison of incomes 
 between the present time and 1900, or even 
 1850, will serve very well, because the kinds 
 of things used have not changed very much 
 in the interval, and we have a general know- 
 ledge of the sort of change which has taken 
 place sufficient to enable us to modify our 
 conclusions where necessary.
 
 CHAPTER XIV 
 
 THE WEALTH OF NATIONS 
 
 When serious discussions about the wealth of 
 such entities as " England," " France/' 
 " Holland," and " Spain " first began to take 
 place, writers usually thought of " the country " 
 rather than of the people of the country. Thus 
 a country of great wealth was supposed to 
 be one in which there were large quantities of 
 the things which were regarded as constituting 
 riches, whether the people of the country were 
 well-off or not. A very thickly peopled country 
 is, of course, likely to have a large aggregate 
 of such things in proportion to its area, and a 
 thinly peopled country only a small quantity. 
 Hence China and India were regarded as enor- 
 mously rich, even when it was admitted that 
 the peoples of those countries were very poor. 
 This kind of comparison is still often made 
 between the " countries " of to-day. We are 
 still inclined to speak of a sparsely peopled 
 country as "a poor country," even if its few 
 inhabitants are very comfortable, unless there 
 is something which suggests the potentiality 
 of larger numbers in the future. 
 
 The more humane spirit of the eighteenth 
 century, however, set up in place of, or perhaps 
 we should only say alongside of, the old com-
 
 THE PEOPLE 225 
 
 parison of " countries " a comparison of 
 " nations " in the sense of the persons of whom 
 the nations are composed. Berkeley asked in 
 1752, in his Querist, "Whether a people can 
 be called poor where the common sort are well 
 fed, clothed, and lodged? " The opening para- 
 graphs of Adam Smith's Inquiry into the Nature 
 and Causes of the Wealth of Nations imply that 
 a " nation " is more or less wealthy according 
 as there is more or less wealth per head for 
 the people of whom the nation consists. But 
 it is noteworthy that Smith seems to have felt 
 that there was something novel in his plan 
 of treating the condition of the people as the 
 important thing. He asks, much like Berkeley, 
 whether an " improvement in the circumstances 
 of the lower ranks of the people is to be 
 regarded as an advantage or as an incon- 
 veniency to the society," and quite patiently 
 points out that these lower ranks make up the 
 greater part of the society, and that " what 
 improves the condition of the greater part can 
 never be regarded as an inconveniency to the 
 whole." 
 
 In our own time no one thinks it necessary 
 to argue the question : every one is used to 
 comparisons of the wealth of nations being 
 based upon estimates of the wealth of the 
 people of whom the nation is taken to consist. 
 
 It is, however, worth while to ask ourselves 
 exactly what people do constitute nations in the 
 economic discussions to which we are accus- 
 tomed. In the first place we may notice that 
 the old tribal significance of the word " nation " 
 has entirely disappeared. We do not attempt 
 to compare the wealth of French and German 
 citizens wherever they may happen to be. 
 
 1 6
 
 226 THE WEALTH OF NATIONS 
 
 What we do compare is the wealth of the in- 
 habitants of France and Germany, whether they 
 are citizens or not, and without making any 
 attempt to include those citizens who are living 
 abroad. This does not appear to raise any 
 really important question. Most citizens living 
 abroad have left their country for good, and, if 
 not themselves about to become citizens of the 
 country they are inhabiting, will at least have 
 children who will be citizens of that country 
 and who will eventually inherit their property, 
 wherever situated. To attempt to distinguish 
 between those who have gone for good and 
 those who will return would be useless. 
 
 Secondly, it is worth while to observe that 
 the countries of which the inhabitants con- 
 stitute the " nations " dealt with are almost 
 invariably countries with independent systems 
 of customs duties. We nearly always in eco- 
 nomic discussions treat the United Kingdom, 
 Canada, Australia, and Jamaica as separate 
 nations : we treated New South Wales and the 
 other Australian colonies as separate nations 
 till they were amalgamated in the Common- 
 wealth, and then straightway abandoned the 
 practice : we never think of treating Massa- 
 chusetts and Texas as separate nations, though 
 they have better claims to be regarded as 
 soveieign States than Jamaica, or even the 
 Canadian Dominion. 
 
 It is easy to explain this identification of 
 nations with groups of persons surrounded by 
 a customs line. The levying of customs, as 
 soon as any proper accounts of the amounts 
 paid are kept, has always necessarily resulted 
 in the collection of statistics of at any rate a 
 part of the trade carried on between the people
 
 A CUSTOMS AREA 227 
 
 inside the boundary and those outside it, and 
 these statistics have always become public. 
 The natural interest which has been felt in 
 them has led to a demand for completeness in 
 them, which has eventually induced all the 
 most civilized nations to publish annual returns 
 which seem to give a very full and accurate 
 account of the amount and value of the whole 
 of the goods passing in either direction across 
 the frontiers, whether taxed or not. The 
 publication of these accounts makes people 
 think of the people inhabiting each of the 
 customs areas as a united whole, trading as a 
 single unit, in a way which they do not follow 
 when they think of the inhabitants of other 
 areas, except occasionally and with a consider- 
 able effort. 
 
 Explanation, however, here as well as else- 
 where, must not be mistaken for justification. 
 There is clearly no scientific foundation for 
 singling out the inhabitants of the areas which 
 happen to be within each customs boundary as 
 worthy of a consideration which the inhabitants 
 of other areas do not receive. There is no good 
 reason for assuming that it was impossible to 
 say anything useful about the wealth or material 
 welfare of the people of Australia before the 
 Commonwealth was inaugurated, and that since 
 that time it has been impossible to say anything 
 useful about the wealth or material welfare 
 of the inhabitants of New South Wales and 
 Victoria. No doubt customs duties do give a 
 certain unity to the inhabitants of the area 
 surrounded by the fiscal barrier, but it is only 
 the same kind of unity as is given by any other 
 common system of taxation, and the fact that it 
 exists affords no reason for neglecting the
 
 228 THE WEALTH OF NATIONS 
 
 general question, " What determines the com- 
 parative wealth of the inhabitants of different 
 territories, whether surrounded by fiscal barriers 
 or not ? " 
 
 We must begin by a discussion of a some- 
 what negative kind in order to get rid of some 
 erroneous notions which have long obscured 
 the question. 
 
 At one time it was thought by almost 
 every one that the great object of national 
 economy should be, as it is of individual 
 economy, the acquisition of money, and the 
 fact that the individual gets his money not to 
 keep, but to part with, either in satisfying imme- 
 diate needs or in increasing his property, was 
 overlooked, so that it was supposed that the 
 wealth of a nation depended on its getting 
 and retaining, or even continually increasing, 
 a stock of gold and silver. It is easy for 
 a person with any modern economic training 
 to see that a number of individuals living 
 together in one territory do not want an un- 
 limited amount of money to keep and not to 
 spend, any more than a single individual does ; 
 and experience has gradually taught us that a 
 sufficiency of money will always be found 
 where a sound currency is established. But 
 even at the present time children and un- 
 instructed adults confound money and wealth, 
 so that we need not be much surprised that 
 even the well educated of past generations did 
 so. Still less need we try to prove that no 
 such confusion existed in their minds. Is it 
 likely that economics is the one science in which 
 no progress has been made ? 
 
 Impressed with the belief that " something
 
 BALANCE OF TRADE 229 
 
 must be done " to secure money, the statesmen 
 of each country at first attempted to turn their 
 country into a kind of beetle-trap for the 
 reception and retention of precious metal. The 
 metals were allowed to come in freely, but laws 
 were made against their being carried out of 
 the realm. Then this method was attacked 
 by people who could not carry on their trade 
 easily without exporting bullion. These said 
 that export of bullion ought to be allowed^ 
 because it would eventually lead to the importa- 
 tion of a larger quantity. All that was neces- 
 sary, according to them, was to watch tlie 
 " balance of trade," as they called it, very care- 
 fully, and regulate the whole trade in such a 
 way as to make sure that a balance of bullion 
 should come in. They called the balance of 
 trade " favourable " when the exports, valued 
 at the frontier, exceeded the imports, also 
 valued at the frontier : for then, they supposed, 
 the balance would be imported in the form 
 of bullion. 
 
 The first thing to notice about this balance 
 of trade doctrine is that it was never true with- 
 out considerable qualification that a " favour- 
 able balance of trade " must mean an equivalent 
 importation of bullion. It is quite possible 
 for a country to have an export of bullion along 
 with a favourable balance of trade, and an 
 import of bullion along with an unfavourable 
 balance. There are disturbing factors, the chief 
 of which may be classified as follows : — 
 
 I . The cost of the carriage of the imported 
 and exported goods across the intervening dis- 
 tance which often separates countries is a dis- 
 turbing factor when the values of imports and 
 exports are both taken on the coast or frontier
 
 230 THE WEALTH OF NATIONS 
 
 of the country considered. If there is no such 
 intervening distance, there will, of course, be 
 no disturbance from this cause. We can 
 imagine Dutch merchants standing on one side 
 of an imaginary line selling to Belgian mer- 
 chants standing on the other side a thousand 
 francs' worth of goods, and then, having got 
 the thousand francs, promptly laying it out in 
 the purchase of a thousand francs' worth of 
 goods from the Belgians. In such a case it 
 is obvious that all that would have happened 
 would be an exchange of Dutch goods worth 
 a thousand francs for a thousand francs' 
 worth of Belgian goods, and imports and ex- 
 ports, valued at the frontier, would appear 
 equal, both in Holland and Belgium. But when 
 there is an intervening distance between the 
 two countries the case is different. In the trade 
 between Portugal and Brazil, for example, 
 Portuguese ships do not carry the Portuguese 
 goods to the middle of the Atlantic and ex- 
 change them there for Brazilian goods brought 
 by Brazilian ships to the same point. If they 
 did, and the values of imports and exports 
 were set down at that point, again the values 
 of imports and exports would exactly balance. 
 The prices of the exports from Portugal would 
 of course be lower on the coast of Portugal 
 than in mid-Atlantic, and lower in mid-Atlantic 
 than on the coast of Brazil, or it would not 
 be worth while to carry them, and for the 
 same reason the exports from Brazil would 
 be lower-priced on the coast of Brazil than 
 in mid-Atlantic, and lower in mid -Atlantic than 
 on the coast of Portugal : so tiiat, for example, 
 wine worth £i in mid-Atlantic might be worth 
 only 19s. on the coast of Portugal and be worth
 
 COST OF CARRIAGE 231 
 
 £1 IS. on arrival in Brazil, while coffee which 
 was worth 19s. when it left Brazil might simi- 
 larly rise to £1 in mid -Atlantic and to £1 is. 
 on arrival in Portugal, 
 
 This would not destroy the equality of values. 
 But what actually happens is that instead of 
 one set of values taken in the middle of the 
 transit of the goods, we have two sets of values, 
 the one calculated on the coast or frontier of 
 the one country, and the other calculated on the 
 coast or frontier of the other country : the 
 Portuguese say they have exported 19s. worth 
 of wine and imported 21s. worth of coffee, 
 while the Brazilians say they have exported 
 19s. worth of coffee and imported 21s. worth 
 of wine. There is clearly no ground for con- 
 cluding from this apparent inequality that 
 either or both countries have lost 2s. in cash, 
 and we must beware of rushing to the opposite 
 and equally fallacious conclusion that each of 
 them has made a "profit" of 2s. The 2s. 
 is nothing more or less than the money value 
 of the labour and property used by each country 
 in carrying away the exports and bringing 
 back the imports . 
 
 The supposition just made of the ships of 
 two countries exchanging goods in mid-ocean 
 is, of course, an extravagant one. It is 
 easier to suppose the ships of each country 
 going right across the intervening distance and 
 yet dividing the whole of the work equally 
 between them. This change of supposition 
 would make no difference whatever : the values 
 of imports and exports would still differ in 
 each country by half the whole cost of the 
 carriage of both imports and exports. But 
 now let us suppose that the Portuguese ships
 
 232 THE WEALTH OF NATIONS 
 
 provisioned in Portugal do the whole of tlie 
 work, carrying the wine all the way to Brazil 
 and bringing back the coffee. Then the 
 Brazilians escape the labour and expense of 
 manning and fitting out a fleet of merchant 
 ships themselves, but naturally have to pay 
 the Portuguese, who now do that work for them. 
 The amount may be imagined as first paid to 
 the Portuguese shipowners in money, just as it 
 would have been paid to the Brazilian ship- 
 owners when they did the work. But as there 
 is no reason for depleting Brazil of cash and 
 filling up Portugal with cash, we may be 
 sure that the money paid will sooner or later 
 filter back to Brazil in exchange for exports 
 to Portugal, so that the result of Portuguese 
 ships and men doing the work is sooner or 
 later to increase the quantity of Brazilian 
 exports and the quantity of imports into 
 Portugal. Consequently, when a country does 
 none of the work of carrying its imports and 
 exports outside its own boundaries, there will 
 be no difference in the values of its imports 
 and exports due to cost of carriage, but when, 
 on the other hand, a country does the whole 
 of the work, then, other things being of course 
 supposed equal, its imports will exceed its 
 exports by the whole of the cost of carriage 
 of both imports and exports. It is this fact 
 which accounts for the general tendency of 
 imports to exceed exports : if the imports into 
 all the countries of the world are calculated in 
 this way and added together, they will exceed 
 the value of all the exports calculated in the 
 same way. 
 
 Sometimes the carrying trade between two 
 countries is not in the hands of either country
 
 INTEREST AND RENT 233 
 
 but in that of a third country. Then both of 
 the first two countries are in the position of 
 Brazil in our last example. Exports will go 
 from them to the third country to pay its 
 denizens for the work done. 
 
 2. Other services besides those involved in 
 carrying goods are often performed for people 
 living in one country by persons who have 
 their home in another country and wish their 
 earnings to be remitted home. This leads to 
 exports from the first country to the second 
 without any corresponding import from the 
 second country to the first. Thus an English- 
 man working in India for the Government or 
 any other body will be likely to transmit part 
 of his earnings to England to support his wife 
 and children there, and that will mean exports 
 from India and imports into the United 
 Kingdom, unbalanced by any corresponding 
 imports into India or exports from the United 
 Kingdom. When he retires from work in India 
 and lives at home on his pension, the effect of 
 the transmission of the pension is the same. 
 
 3 . Persons living in one country often own 
 property in other countries and have the 
 interest, dividends, or rents of that property 
 remitted to them. This leads to unbalanced 
 exports from the country where the property 
 is to the country where the owner is. It is 
 the chief cause of the large excess of imports 
 into the United Kingdom, France, and 
 Germany, countries whose inhabitants own 
 large amounts of property in " new " coun- 
 tries. It is said to account Tor a quite con- 
 siderable amount of imports into Italy, a 
 country which attracts rich people from 
 America and elsewhere for temporary residence.
 
 234 THE WEALTH OF NATIONS 
 
 4. Much of the property yielding income 
 to persons inhabiting other countries than 
 that in which it is situated owes its origin jto 
 what is called " foreign investment," that is, 
 to investment, whether by way of loans, sub- 
 scriptions to issues of new shares and stock, or 
 purchases of property made by persons in other 
 countries than their own. This is another dis- 
 turbin'g factor, which works, of course, in the 
 opposite direction to the third factor. It causes 
 exports from the investing country, which are, 
 no doubt, in time usually more than counter- 
 balanced by the imports resulting from the 
 receipt of income from the property, but which 
 are not immediately balanced at all. The 
 export of capital, as it is usually called, may 
 take place in the form of the actual additions 
 to the valuable property in the country in which 
 the investment takes place, as, for instance, 
 when in consequence of British investment in 
 an Argentine railway a British-built locomo- 
 tive is bought by the railway company. But 
 this is by no means necessary : French investors 
 in the Argentine railway might very probably 
 cause an export of lace or wine, from the 
 sale of which funds would be obtained which 
 would be applied to secure the requirements 
 of the railway company, either in Argentina or 
 somewhere else. 
 
 This disturbing cause is an important cause 
 of violent fluctuations in the trade between the 
 old countries and the new countries. The 
 amount of foreign investment made by the old 
 countries is apt to fluctuate considerably owing 
 to variations in the prevailing estimate of the 
 security of investments in the new countries, 
 and the demand for capital from abroad in
 
 NON-COMMERCIAL PAYMENTS 235 
 
 each particular new country is apt to fluctuate 
 largely with the policy of its government and 
 other local causes. 
 
 Repayment of foreign loans is, of course, 
 merely the same thing as foreign investment, 
 the investment now being, however, in the 
 direction opposite to 'that of the original 
 investment. 
 
 5. There are various payments of a non- 
 commercial character made by people living 
 in one country to people living in another 
 country. The stock case is that of a political 
 tribute paid, not for any services rendered, but 
 simply because the country paying it has at 
 some time or other been conquered by the 
 country to which it is paid. Whether the 
 tribute is a sum of money or an amount of corn, 
 like the Egyptian and Sicilian tributes to Rome, 
 it must lead to unbalanced exports from the 
 tribute -paying country and unbalanced imports 
 into the tribute-receiving country. Political 
 tributes are not of much importance in the 
 modern world. The examples of non-com- 
 mercial international payments which occur to 
 us at the beginning of the twentieth century are 
 rather the remittances made by Irish emigrants 
 to their relations who have remained in 
 Ireland, subscriptions made in this country for 
 sufferers by an Indian famine or a Sicilian 
 earthquake, and such part of the dowries of 
 American heiresses married to Europeans as 
 is (or is popularly supposed to be) actually 
 paid to their European husbands instead of 
 remaining invested in America. ' 
 
 ' Some years ago it was usual to endeavour to prove that an 
 excess of imports of goods did not necessarily mean an exporta- 
 tion of bullion by alleging that the excess was balanced by the
 
 236 THE WEALTH OF NATIONS 
 
 The more intelligent of the early balance 
 of trade theorists were aware that these allow- 
 ances, or rather such of them as were of any 
 appreciable importance in their time, must be 
 made before any inference can be drawn about 
 the country's gain or loss of bullion from 
 statistics of the imports and exports of goods 
 other than bullion, even if those statistics are 
 perfectly accurate. They knew also that they 
 had no means of estimating the exact amount 
 of the allowances which ought to be made, 
 and that their statistics of imports and exports 
 were very inaccurate. Consequently they 
 admitted that exact knowledge of the actual 
 balance of trade as between their own and other 
 countries could not be obtained from the statis- 
 tics which were available, and they were driven 
 to seek indications of a favourable or adverse 
 balance in the state of the " exchanges." 
 These v/ere, however, very difficult to interpret, 
 owing to the multitude of currencies and the 
 bad state of most of the coinages. Modern 
 inquirers in regard to the present would 
 naturally endeavour to solve the question 
 whether the bullion of a country was increasing 
 or decreasing by referring to statistics of its 
 production within the country, if any, and of 
 its importation and exportation. But such 
 statistics were not to be had in the seventeenth 
 century, and the consequence was that any one 
 who wished to terrify his fellow-countrymen 
 with the bogey of losing their money to the 
 
 " invisible exports." This was a clumsy and confusing way 
 of treating the matter. It is tolerable in regard to the first two 
 disturbing factors, since services can be conceived as " invisible 
 exports," but it fails entirely in regard to the other three 
 factors.
 
 PROTECTION 237 
 
 foreigner had a very excellent chance of 
 doing so. 
 
 Intelligent or unintelligent, well or ill- 
 informed, the people of the seventeenth century 
 were unanimous in being anxious about the 
 national stock of precious metals and in think- 
 ing that in order to secure a sufficient stock it 
 was desirable to encourage exports and dis- 
 courage imports of other goods taken as a 
 whole. Hence, besides a comparatively un- 
 important system of bounties to exports, a vast 
 system of intentionally highly restrictive import 
 duties hampered trade inwards across national 
 boundaries. 
 
 For the purpose of acquiring or retaining 
 bullion the whole of this " mercantile system," 
 as Adam Smith called it, was perfectly futile, 
 and this became gradually obvious during the 
 eighteenth century. But when a particular 
 trade in a country had once been " en- 
 couraged " by an export bounty, or when its 
 " discouragement " had been prevented by the 
 imposition of duties upon imported articles 
 competing with it, those who were interested in 
 it were not likely to give up their advantage 
 without protest. They desired to retain it, and 
 their bias naturally led them to believe that it 
 was for the national good that they should do 
 so. The balance of trade doctrine was replaced 
 by the doctrine of " protection," the theory 
 that home industries should be " protected from 
 foreign competition " either by prohibition of 
 competing imjDorts or by "protective " duties.' 
 
 ' A duty which " protects ' and consequently may be described 
 as " protective " is one which puts upon an imported article a 
 charge from which a similar article produced within the country 
 is exempt, and to advocate such duties is (o be a Protectionist
 
 238 
 
 THE WEALTH OF NATIONS 
 
 In the absence of definite argument public 
 sympathy is apt to go with a claim for protec- 
 tion partly because of the common dislike of 
 change, and partly because of a feeling like that 
 which induces juries to give extravagant com- 
 pensation to persons who have had railway or 
 
 or supported of Protection. It should be noticed that not 
 every duty on imported articles is protective, because (i) some 
 import duties are " countervailed " by equivalent duties on home 
 products, as is, for example, the British customs duty on beer, 
 and (2) because some import duties are levied on articles which 
 do not compete with similar things produced within the country : 
 either because they cannot be produced there at all by any 
 amount of expense, or because they cannot be produced there 
 at such an expense as would make it worth any one's while to 
 compete with the imported product even when the imported 
 product is subject to the duty. E.g., the British duty on tea is 
 not protective, because it is not worth any one's while to grow 
 tea here in hot-houses and with made-up soil when the duty is 
 only 5d. per lb., but the duty might be protective if it were 
 raised to 40s. per lb. or if some cheaper method of growing tea 
 here were discovered. It is, of course, the fact of protection, 
 not the intention of the imposers of the duty, whicli matters. 
 When we describe a duty as " protective," we are not to be taken 
 as deciding the often difhcult question whether the duty was 
 originally intended to be protective when it was first put on, 
 perhaps two centuries ago. 
 
 The policy which rejects Protection has for many years 
 commonly been called Free Trade. A F^ree Trade country 
 is one which refuses to impose protective duties, and takes them 
 off if they come into existence by accident. It is sometimes 
 said in a challenging tone that there is not PYee Trade between 
 the United Kingdom and countries which have adopted Pro- 
 tection. Did any one ever say there was? What is said is that 
 the United Kingdom has adopted a FrecTrade policy. Sometimes, 
 too, Protectionists say that the British customs duties on tea and 
 beer are negations of Free Trade. This is merely to quarrel with 
 the established and convenient usage of words, and it would 
 be just as reasonable to refuse to call some Mr. Whitehead by 
 his surname because he had brown hair. Equally senseless, 
 on the other side, is the practice of the newspaper which insists 
 on printing Tariff " Reform " thus with inverted commas because 
 it thinks the word "reform" can only be properly applied to 
 changes which are good.
 
 PROTECTION AND EMPLOYMENT 239 
 
 tramway accidents or have had their property 
 taken for a public purpose, the feeling that it 
 will not hurt the numerous shareholders in a 
 company or the still more numerous ratepayers 
 in a country or town to pay a few pence each 
 as much as it will please the poor sufferer to 
 receive a few hundred or a few thousand 
 pounds. Besides, it is natural to suppose that 
 any industry or trade is a good thing, and 
 therefore that it must be bad to allow an exist- 
 ing one to be diminished and good to increase 
 it or to cause a new one to be set up. The 
 underlying assumption is that the preserved or 
 the added industry will be a clear addition to 
 what would otherwise exist in the country. 
 This assumption that an industry gained by 
 Protection will be a net gain, uncounterbalanced 
 by a loss of some other industry, is usually 
 based merely upon the simple suggestion that 
 if the importation of an article is stopped, there 
 will " obviously " be an addition to the popu- 
 lation of the country of a number of persons 
 equal to that formerly employed in producing 
 the article elsewhere. Suppose, for example, 
 that typewriters are at present made in America 
 and imported into the United Kingdom : it is 
 then obvious, say the supporters of this doc- 
 trine, that if the importation of typewriters 
 into the United Kingdom is stopped, there will 
 have to be a number of persons producing type- 
 writers in the United Kingdom instead of in 
 America, and there is no reason to suppose that 
 there will be any fewer people producing other 
 things, so that the typewriter -makers will be 
 a net addition. The answer very often given 
 to this is, " What will become of the people, 
 perhaps the printers of bibles, whose products
 
 240 THE WEALTH OF NATIONS 
 
 were before exported to pay for the type- 
 writers? " To that the modern Protectionist 
 has a ready answer, " They will continue to 
 print bibles for export, since though American 
 typewriters are no longer required for the 
 British market, the additional population in 
 England will want wheat, tobacco, and other 
 things from America." That opens the way 
 for a reductio ad absurdiim. " Then, I sup- 
 pose, you will proceed to exclude those imports 
 also, in order to add to the British population 
 all the people who produce them, and so on 
 ad infinitum, or at any rate until the whole 
 American population is transferred to the 
 United Kingdom?" But the reductio ad 
 absurdum is seldom a very satisfactory form 
 of exposition. It is better, instead of asking 
 what will become of the bible-makers if the 
 typewriter-makers come to live in England, 
 to challenge at once the implied proposition 
 that keeping imports out of a country is 
 likely to tend to increase its population. 
 It is not in the least likely to increase births 
 or immigration nor to decrease deaths or 
 emigration. If it had any such tendency, that 
 tendency obviously could not be confined to 
 the country of the Protectionist who happens at 
 the moment to be speaking, and we should 
 have the curious result that the population of all 
 countries, and therefore of the world as a whole, 
 could be raised by the abolition of international 
 trade. 
 
 The truth is that the population of a country 
 is likely to be increased by circumstances which 
 make it a better country to live in, and there 
 is no reason to suppose that restrictions on 
 importation generally form such a circum-
 
 PROTECTION AND POPULATION 241 
 
 stance, but rather the contrary. Any argument 
 which goes to prove that every kind of pro- 
 tection everywhere tends to increase the popula- 
 tion of the protected area must be wrong. 
 
 It does not, however, follow that it may 
 not be possible in some circumstances to devise 
 a scheme of particular protection for particular 
 products which might tend to keep the popula- 
 tion of some particular country higher than 
 it otherwise would be. It is clearly possible 
 for a State to pay people to come and live in 
 a country or to continue to live in it by offer- 
 ing them inducements. For example, if the 
 State in the United Kingdom or the Union of 
 South Africa were to appropriate all the mineral 
 property in the country and pay every one who 
 chose to reside in it a small pension from the 
 proceeds, this would be a clear inducement to 
 live in those countries uncounterbalanced by 
 taxation of residents as such. It is, I think, 
 possible that in certain situations a scheme 
 of restrictions on particular imports might be 
 devised which would have, in a roundabout 
 way, the same effect. The scheme would, how- 
 ever, involve a reduction of average income, 
 since it would cause an increase of numbers 
 without a corresponding increase of aggregate 
 income.' The subject is full of difficulties, 
 and it is clear that nothing of this refined 
 character is intended by the protectionist who 
 argues that Protection will increase the industry 
 of the country. 
 
 He will, indeed, very probably deny that 
 he ever thought of increasing the population 
 
 " Unless, in consequence of very peculiar circumstances and 
 extraordinary ingenuity, the whole cost could be thrown on 
 absentee owners of property. 
 
 17
 
 242 TH^ WEALTH OF NATIONS 
 
 at all. He meant, he may explain, only that 
 his scheme would cause the existing popu- 
 lation to be more fully employed by doing away 
 with those great fluctuations of trade which 
 seem to have much to do with the existence 
 of the unemployed. There is some truth in 
 the idea that reduction of foreign trade as a 
 general rule should tend to diminish fluctua- 
 tions in employment : on the whole, the smaller 
 a trading community is, the less likely is it 
 to suffer from such fluctuations, since miscalcu- 
 lations with regard to demand and supply are 
 less likely, and the effects of changes due to 
 invention and alteration of taste are more easily 
 seen and are consequently more easily met. 
 There is no limit to this advantage, so that 
 we should find it greatest when we have 
 reduced the trading community to the smallest 
 possible size, and then it will strike us that 
 Isolated Man possesses the advantage in the 
 highest possible degree : he has never to fear 
 unemployment. But we do not think it worth 
 while to become isolated men in order to be 
 wholly free from unemployment, and there is 
 no reason to think that it is worth while to 
 reduce international trade by a trifling amount 
 in order to secure a trifling reduction in 
 unemployment . 
 
 The whole of the ordinary crude doctrine 
 that Protection gives employment is usually 
 thrown over by the more cultivated Pro- 
 tectionist. He has no expectation of giving 
 employment by cutting down imports, and 
 generally he disclaims any desire to cut down 
 imports. He does not advocate indiscriminate 
 Protection, but a discriminating Protection 
 which will, he thinks, bring about a better
 
 CHOICE OF INDUSTRIES 243 
 
 selection of trades and industries by the people 
 of his country than the selection which their 
 self-interest will induce them to make in the 
 absence of the duties which he proposes. There 
 are two possibilities: (i) the country may 
 specialize in the directions in which self-interest 
 leads in the absence of protective duties, and 
 (2) it may specialize in the directions in which 
 seljf-interest leads when influenced by*the exist- 
 ence of protective duties. Which is likely to 
 be best ? 
 
 In answer to this question it is sometimes 
 said that the principle of laisser faire or letting 
 people do what they want to do " has been 
 abandoned/' or "is dead," and therefore we 
 must not suppose that there is any presumption 
 in favour of a particular territorial specializa- 
 tion being good merely because it is profitable 
 for individuals to adopt it. But this is clearly 
 an error, and a bad error. The whole of 
 civilized society is based on the principle that 
 people should be allowed to do what they like 
 until good reason is shown to the contrary, and 
 this implies a presumption that profitable 
 specialization is good. To justify interference 
 with it some positive argument must be brought 
 forward, showing that it, or the part of it which 
 is attacked, is bad. A bare proof that com- 
 plete laisser faire is bad, impossible, and in- 
 conceivable does not carry with it a corollary 
 that every proposal for preventing people from 
 doing what they want to do is right. 
 
 To examine here all the thousands of positive 
 arguments which have been brought forward 
 in favour of discriminating Protection at 
 different times and in different countries is of 
 course impossible. All that can be done with
 
 244 THE WEALTH OF NATIONS 
 
 advantage is to draw attention to their great 
 variety and inconsistency. In each country 
 at any particular time the arguments accepted 
 by protectionists are just those which appear 
 to show that the particular form of specializa- 
 tion to which the country is at that time 
 tending to devote itself is bad for that country 
 if not for every country. Thus in a country 
 of which the inhabitants, when uninfluenced 
 by protective duties, on balance export agri- 
 cultural products and import manufactured 
 produce, the reigning school of Protectionism 
 is always found asserting that it is obviously 
 ruinous to specialize in this way on agricul- 
 ture ; while in a country of which the inhabi- 
 tants, also uninfluenced by protective duties, 
 on balance export manufactures and import 
 agricultural produce, the assertion is that it is 
 disastrous to specialize on manufactures and 
 " neglect agriculture " or " allow it to fall 
 into decay," since it is obviously necessary 
 for national security and the physique of the 
 people. The fact that arguments in favour of 
 discriminating Protection are found in every 
 country, whatever its circumstances, is sus- 
 picious, the more so when we reflect on the 
 support they get from the self-interest of those 
 sections of the people which would gain by 
 them either for a time or permanently. There 
 is a presumption in favour of people being 
 allowed to do what they wish, but this does 
 not extend to allowing some people to pass 
 legislation to prevent others from doing whal 
 they wish. 
 
 There is, however, one general argument in 
 favour of a particular sort of discriminating 
 Protection whi(~h has obtained such wide accept-
 
 INFANT INDUSTRIES 245 
 
 ance that it is worth while to examine it shortly. 
 This is the argument in favour of " protection 
 to infant industries." It has been said by 
 J. S. Mill and others that an industry may 
 be very suitable for a country and yet unable 
 to start there because imports of the commodity 
 which it produces come in from other countries 
 in which it has become well established, and 
 in such circumstances it may be proper to 
 restrict imports for a time, until the " infant " 
 can stand competition. Economists who would 
 call themselves free-traders have often admitted 
 this as an exception to their general rejection 
 of Protection. Very little, if any, force really 
 resides in it. So far as it goes, it justifies 
 local just as much as national protection to 
 infant industries : an infant industry may find 
 it difficult to establish itself in Yorkshire 
 because the products of that industry come in 
 from Lancashire, or in California because they 
 come in from Massachusetts. Secondly, it is 
 wrong to assume that the mere fact of the 
 advantage of the country from which the pro- 
 duct is exported being an acquired rather than 
 a natural advantage is a reason for endeavour- 
 ing to counteract it. A great deal of territorial 
 division of labour inside national areas now 
 rests only on the acquired characteristics of 
 places and their inhabitants, and nobody thinks 
 any the worse of it for that. For example, 
 if some place in England just as well adapted 
 by nature as Lancashire for the seat of the 
 cotton manufacture were now discovered, no 
 one would think that a good reason for moving 
 that manufacture. There is just as much reason 
 for allowing acquired advantages to count when 
 the question is one of the specialization between
 
 246 THE WEALTH OF NATIONS 
 
 nations. Thirdly, it is doubtful whether the 
 supposed difficulty .of starting an industry* really 
 exists, and whether, if it does. Protection is the 
 best way of reducing it. When a good deal 
 of a thing is imported into a country, it is 
 easier for a home manufacturer to slip in with 
 an article slightly better adapted for use in the 
 country than it is for him to devise the article 
 and " create a market " for it where imports 
 are kept out. If the need of encouragement 
 were clearly proved, it would seem better 
 to give the encouragement by way of bounty 
 or other direct assistance, as this is more likely 
 to be withdrawn when the assistance has done 
 its work or is proved to be useless. 
 
 The most plausible of all general protec- 
 tionist arguments is one which is seldom put 
 forward. This is that it must be a good plan 
 to protect those industries in which labour is 
 best paid, so that the country will specialize 
 in the best paid occupations : products of 
 coarse, rough labour will be imported free, 
 while the products of highly skilled, well 
 paid labour which are imported will be 
 heavily taxed. So the labour of the people 
 of the country will be confined to 
 the highly paid work as much as possible, a 
 highly desirable consummation. Now, no 
 doubt, every well-disposed parent wishes his 
 children to be engaged in well paid occupa- 
 tions, and we may agree that the State should 
 wish the same for the inhabitants of its terri- 
 tory. But would it be reasonable for a parent 
 who had taken no trouble and incurred no 
 expense in the education of his children to 
 assemble them and say, " My sons, on no 
 account employ a dentist or a lawyer. Be
 
 TAXING THE FOREIGNER 247 
 
 your own dentists and lawyers : let Jack attend 
 to your teeth and Tom to your legal business. 
 The work is much better paid than the unskilled 
 work which you usually work at. It is true 
 that you will not get any one outside the family 
 to employ you as dentists or lawyers, as you 
 will be rather unskilful, but you can at any 
 rate keep your own work inside the family." 
 It is clearly better to be a competent rivetter 
 or even a competent jam-maker than a quite 
 incompetent dentist or lawyer, at any rate when 
 the interest of the customer as well as that of 
 the worker is taken into account. A people that 
 is competent to follow the better paid trades 
 is sure to do so : the only way to secure that 
 the people of a particular country shall do the 
 best paid work of the world is to give them 
 the highest intelligence and the best possible 
 special training. 
 
 Considerable support is obtained for Protec- 
 tion in consequence of the existence of a belief 
 that export and import duties afford each 
 country means of taxing all the others, or " tax- 
 ing the foreigner " as it is commonly expressed, 
 this belief being corhbined with a somewhat 
 confused impression of the connection between 
 such duties in general and protective duties in 
 particular. A dispassionate outside observer 
 might suppose that considerations of justice 
 would deter people from discussing the question 
 of the practicability of taxing the foreigner. 
 As I have already remarked, it has long, except 
 in a few isolated parts of the world, been con- 
 sidered wrong to eat the foreigner : almost 
 everywhere it is now thought wrong to reduce 
 him to slavery ; if he is of the same colour, 
 it is even thought wrong to deprive him of his
 
 248 THE WEALTH OF NATIONS 
 
 land or other property. But as yet, scarcely 
 any one is ashamed to say that he would be 
 delighted to tax the foreigner if only he could 
 discover a way of doing it. I suppose the 
 defence of this attitude which would be put 
 forward, if any one thought defence was neces- 
 sary, would be that the foreigner's wicked 
 ag'gressive designs put the country of the 
 speaker to an expense far greater than could 
 be met by anything likely to be got out of him 
 by this method : but the defence is quite in- 
 sufficient, as the readiness to tax the foreigner 
 is found almost as much when the foreigner is 
 obviously unaggressive, and even when he is 
 an ally or even a member, of the same federa- 
 tion flying the same flag in war. 
 
 In considering the practicability of taxing 
 the foreigner by duties on foreign trade, every 
 one must recognize that money cannot be 
 directly collected from people living outside 
 the jurisdiction of the State imposing the 
 duties. The hope is simply that the duties will 
 make the terms of the trade more favourable 
 to the people of the country, or in other words, 
 that they will make the foreigners take less 
 for the goods which are imported into the 
 country and give more for the goods which are 
 exported from it. 
 
 It is easy to conceive circumstances in which 
 a number of persons, small or large, owning 
 the resources of a particular area, may sell their 
 products dearer when they act in combination 
 than when they compete. Suppose these people 
 have a number of springs of some mineral 
 water of highly curative properties which is 
 not found and cannot be manufactured any- 
 where else. If the springs belong to a number
 
 TAXING THE FOREIGNER 249 
 
 of competitors, the whole of the water produced 
 will be sold, say at 6d. a gallon : but the 
 demand may be of such a character that if 
 the price at which the water were offered to 
 the buyers was raised to is. a gallon, three- 
 quarters of the whole could still be sold : it will 
 then pay the owners to combine and raise the 
 price to is., although they have to let 25 per 
 cent, of the water run to waste or drink it them- 
 selves. Now this is just the principle of the 
 plan of " taxing the foreigner " by means of 
 an export duty : instead of assembling all the 
 producers of a particular commodity in a 
 country and persuading them to enter into some 
 complicated agreement for restricting exports, 
 the government of the country takes the simpler 
 and more effectual course of restricting exports 
 by imposing the payment of a duty (propor- 
 tioned to the amount exported) on every one 
 who chooses to export the commodity ; it is 
 hoped that the foreigners will be forced by the 
 reduction of quantity exported to give a higher 
 price per unit. So, for example, if the character 
 of the foreign demand were as just supposed, 
 and the export duty caused a reduction of 
 25 per cent, in the quantity exported, so that 
 the foreigners gave is. a gallon instead of 6d., 
 the " foreigner would be taxed " to the extent 
 of 6d. a gallon. The country as a whole, 
 i.e., the people in their individual and their 
 corporate capacity, would trade on better terms, 
 since it would be better for the owners of the 
 springs and the government together to re- 
 ceive IS. per gallon for 75 than 6d. per gallon 
 for 100 gallons of the water : the total received 
 would be 50 per cent, greater than before, and 
 the people inside the country could, if they
 
 250 THE WEALTH OF NATIONS 
 
 chose, drink the quantity now cut off from the 
 exports.' Thus an export duty may tax the 
 foreigner, and it may be profitable to impose 
 one. 
 
 But the example just given is clearly an 
 exceptional one. Few commodities are like 
 rare natural mineral waters. Take instead the 
 case of a number of persons living together on 
 a certain area and producing potatoes. Would 
 it be likely to pay these persons to combine 
 together and try to raise the price to their 
 outside customers? Clearly not. They would 
 not expect to be able to get a halfpenny a 
 sack more for their potatoes, however much 
 they restricted the quantity they sold. This 
 is what happens with export duties on ordinary 
 commodities : whether they restrict the exports 
 from the particular country little or much, they 
 fail to raise appreciably the price at which the 
 foreigner purchases, because they only touch 
 a trifling fraction of the whole supply to the 
 world outside the country imposing the duty, 
 and this trifling fraction can be made up from 
 some other source without appreciable increase 
 of cost and consequently of price. 
 
 Circumstances, again, are conceivable, 
 though extremely unlikely, in which a number 
 of persons living on an area could buy some 
 commodity cheaper if they acted in combina- 
 tion than if they competed. They might be 
 the only people in the world who wanted that 
 
 ' In order to sell within the country the 25 per cent, cut off 
 the exports, the owners of the sprinj^s will have to sell at less 
 than 6cl. a gallon, and consequently tlie duty required to raise 
 the price to the foreigner by 6d., as supposed in the text, will 
 have to be more than 6d. : how much more, will depend on the 
 elasticity of the home demand.
 
 TAXING THE FOREIGNER 251 
 
 commodity, and it might be one of the 
 numerous commodities which would be cheaper, 
 even in the long run, if less were bought of 
 it. Suppose, then, that tea is such a commo- 
 dity, that the tea-consumers left to their indi- 
 vidual volition would buy 7 lbs. per head per 
 annum at 2s. per pound, and further, that if 
 they resolved to buy only 5 lbs. per head the 
 price would fall to is. 6d. It follows that if 
 they made and carried out this resolution, they 
 might fairly say they had " taxed the 
 foreigner " to the extent of 6d. per pound, 
 and as they would have to spend 6s. 6d. less 
 on tea while only forgoing 2 lbs. in their 
 consumption, they would probably be gainers 
 on the whole transaction. Now this is pre- 
 cisely the principle of the proposal to tax the 
 foreigner by imposing an import duty. The 
 duty is intended to check the demand, and it 
 is supposed that the foreign producers will be 
 obliged by the reduction of demand to sell 
 the reduced quantity at a lower price per unit, 
 being thus " taxed " to the extent of the 
 difference in price, and that the fall of price 
 on the reduced quantity taken will be more 
 than sufficient to counterbalance the privation 
 caused by the reduction of quantity. Suppose, 
 as before, that the commodity is tea, and the 
 consumption 7 lbs. per head when there is no 
 duty, and the price inside the country 2s. A 
 duty of IS. is then put on imports : the 
 price at home rises to 2s. 6d., of which the 
 foreigner only gets is. 6d. in consequence of 
 the reduction of consumption from 7 lbs. to 
 5 lbs. per head. Then the foreigner may 
 be said to be taxed to the extent of 6d. per 
 pound : the tea-consumers have lost 2 lbs.
 
 252 THE WEALTH OF NATIONS 
 
 of tea and only spend is. 6d. less upon tea, so 
 that they are certainly worse off, but as the 
 State gets 5s. out of what they now pay for 
 tea, the change is probably a profitable one to 
 tea-consumers and taxpayers considered as one 
 body. 
 
 The trouble, however, from the point of view 
 of any one who desires to " tax the foreigner " 
 in this way is to find a commodity and condi- 
 tions such as those described. A much more 
 likely result of the shilling tax on tea, even if 
 it were imposed by the country which consumes 
 most tea, would be that the price outside the 
 country would only fall permanently by ^d. a 
 pound, while the price inside the country rose 
 iifd. with a fall of consumption to 5 lbs. per 
 head, in which case the foreigner might still 
 be said to be taxed jd. per pound, but the gain 
 at his expense would probably not be worth 
 making, as it would probably be more than 
 counterbalanced by the disagreeableness to the 
 people of having a particular branch of their 
 consumption so sharply attacked by the tax 
 instead of being allowed to spread the burden 
 of taxation as they pleased. In the usual con- 
 ditions, the imposition of an import duty by 
 any one country will make no appreciable 
 dilYerence to the outside or " world " price of 
 the article taxed, and, of course, in some con- 
 ditions the imposition of such a duty might 
 absolutely raise the world price. 
 
 I have for simplicity taken in the first place 
 an example in which the import duty is not 
 protective. Where it is protective it is no 
 more likely to be beneficial in the manner 
 supposed than when it is not. About one-fifth 
 of the wheat consumed in the United Kingdom
 
 IMPROBABILITY OF GAIN 253 
 
 is grown within the country, because that 
 amount, and no more, can be grown there 
 profitably (or so as " to pay " all the factors 
 concerned more or at least as much as they 
 could get in other employment) at the price 
 which can be obtained. Suppose it pays to 
 produce seven million quarters at 31s., and 
 that it would pay to produce eight at 32s., 
 and so on, till at 80s. a quarter it would pay 
 to produce all demanded at that price and 
 make the country independent of importation. 
 It is evident that if the elasticities of demand 
 inside the country and the conditions of supply 
 outside it were the same for tea and wheat, any 
 given percentage of ad valorem duty would 
 diminish the British importation of wheat more 
 than that of tea, since the home production 
 would increase and to some extent supply the 
 void. The greater reduction of British demand 
 would cause a greater, though probably still 
 almost inappreciable, fall in the outside price, 
 but it must be remembered that the less taken 
 of the commodity, the less the aggregate 
 amount which the foreigner can be said to be 
 " taxed." 
 
 On the whole, it may be said that the possi- 
 bilities of getting anything out of the foreigner 
 by import duties are so small that they are not 
 worth setting against the usual fiscal considera- 
 tions, with regard to the distribution of taxation 
 between different classes of consumers and 
 persons of different wealth. 
 
 The conclusion is that Government manipula- 
 tion of foreign trade, whether in order to give 
 employment, to select the best industries for 
 the country, or to tax the foreigner, is not 
 likely to have good results, however excellent
 
 254 THE WEALTH OF NATIONS 
 
 the legislature of the country ; and we shall 
 feel even less confidence in the probability 
 of good results when we reflect upon the imper- 
 fections and fallibility of the actual legislatures 
 of the difTerent countries of the world. We 
 must beware, however, of exaggerating the evil 
 effects which have actually resulted. A great 
 deal of the trade which is prevented from 
 taking place by Protection is not very 
 important ; it consists of the exchange of com- 
 modities — such as different kinds of thread — in 
 regard to which international localization is 
 advantageous indeed, but not enormously 
 advantageous. When Protection stands in the 
 way of something more important, such as the 
 urbanization of England in the nineteenth cen- 
 tury, it breaks down. Moreover, under 
 modern conditions in which extensive migra- 
 tion and conscious regulation of births are both 
 possible, no State can by erroneous foreign 
 trade policy, whatever jts folly, permanently 
 make the condition of its working -classes — that 
 is, the mass of its population — seriously worse 
 than that of the working -classes of other 
 countries. They leave or refuse to multiply 
 till their condition is brought up by the want 
 of competition to the level prevailing in the 
 other countries. The inquiries which were 
 carried on at the beginning of tlie twentieth 
 century by the British Government and other 
 persons, with the idea of finding out by obser- 
 vation and statistical examination of the condi- 
 tion of the working-classes in England, France, 
 Germany, and the United States which country 
 had the best fiscal policy, were ridiculous in 
 the extreme. The effect of bad fiscal policy 
 in any one of these countries would only be to
 
 A SMALL TERRITORY 255 
 
 make its population and the value of its land 
 somewhat less than they otherwise would be — 
 not, of course, necessarily to make them 
 decline nor even to increase less rapidly than 
 those of the other countries — and this effect 
 could not be proved by statistics. 
 
 The question, " What then does determine 
 the comparative wealth of the inhabitants of 
 different areas?" can best be approached by 
 beginning with the smallest possible example, 
 that in which the territory is so tiny that it is 
 only inhabited by a single family. Let us ask 
 ourselves what determines the material welfare 
 of the inhabitants of some spot, it may be of 
 a few acres or only of a few yards in extent, 
 when those inhabitants consist, say, of a man, 
 his wife, and their young children. Every one 
 will recognize at once that this is a personal 
 matter, dependent on the original qualities of 
 the persons concerned, their energy and in- 
 dustry, the occupations for which training has 
 fitted them, and finally the amount of property 
 which they own. We should not think of 
 attributing differences simply to the fact that 
 one family lived on an infertile area, another on 
 a fertile one, nor to the fact that one lived 
 where there were no minerals at all and the 
 other at the mouth of a coal or gold mine. We 
 should expect such differences in natural sur- 
 roundings to be counterbalanced by differences 
 in the rent the families would have to pay if 
 they did not own the land, and if they did own 
 the land we should regard the resulting differ- 
 ences as the consequence of differences in the 
 amount of property held by them, just as much 
 as if the property they owned was somewhere
 
 256 THE WEALTH OF NATIONS 
 
 else. Nor would ,any one think of attributing 
 the superiority of ,one family over that of 
 another to the one having adopted a superior 
 " fiscal policy." The idea of " fiscal policy 
 in relation to the single family would not be 
 likely to occur to any one. Yet some at least 
 of the id^eas embodied in the fiscal policies of 
 the past and present could conceivably be 
 carried out. The mediaeval maxim that money 
 should on no account be allowed to go out of 
 the country could be carried out if a family 
 refused to buy anything from outside. The 
 later maxim that trade must be so regulated 
 as to bring as much money as possible into 
 the country by ,a " favourable balance " could 
 be carried out much more easily by a family 
 than it ever could be by a State ; all that 
 would be necessary would be for the family to 
 be careful not to spend in purchases as much 
 money as it got by sales, and not to lend out the 
 surplus nor even .deposit it in banks, but put 
 the money in ,a stocking or a hole in the 
 ground. The self-sufficiency ,of the territory, 
 which the advocates ,of one fiscal policy desire 
 so strongly, could ,be obtained in any required 
 degree by abstention from purchases of com- 
 modities and services, .even when it was 
 evidently easier to procure these things by 
 the indirect method of making other things, 
 selling them for tnoney, and then buying what 
 was wanted with the money so obtained. 
 Finally, full employment .could doubtless be 
 secured quite easily ,by simply attempting to 
 produce everything required on the given spot ; 
 the employment might not ■ receive much 
 remuneration, but that is another matter, 
 usually regarded as immaterial by the
 
 EFFICIENCY OF A COUNTY 257 
 
 fiscaliters. All these ideas would seem ridicu- 
 lous to the single family. 
 
 Now let us take as examples the inhabitants 
 of somewhat larger territories, such as English 
 counties. To give a touch of reality we will 
 take two actual counties, Hereford and Durham, 
 but we need not trouble about the precise facts, 
 nor even commit ourselves to any opinion on 
 the question whether the people of Durham or 
 Herefordshire are actually the better off. All 
 we have to do is to consider the main factors 
 on which the answer to that question must 
 depend. 
 
 First among these factors we may mention, 
 as in the case of the single families just above, 
 the different original qualities of the two groups 
 of inhabitants. Inferiority in efficiency is con- 
 stantly given as the explanation of the lower 
 earnings of one large group of persons as 
 compared with another large group carrying 
 on the same kind of work in a different place. 
 It is commonly said, for example, that the 
 superiority of agricultural wages in the North 
 of England is due to the greater efficiency of 
 the workers. If the people of Durham are, 
 on the average, gifted with greater strength 
 of mind or body than the people of Hereford- 
 shire, we should expect them to earn more in 
 the same time and so to be better off. Whether 
 the two groups produce for their own con- 
 sumption or for sale to others outside their 
 territories will make no difference. If for their 
 own consumption, the group producing most 
 will obviously be better off than the other ; 
 if they sell to outsiders, they will have to sell 
 in the world-market and consequently at the 
 same price. 
 
 18
 
 258 THE WEALTH OF NATIONS 
 
 The only difficulty here is to account for the 
 differences in personal qualities. Climate, no 
 doubt, may have some influence. The Durham 
 men, some will say, are superior because they 
 live in a colder and drier part of the country, 
 but there is probably little in this. Others 
 will speak of differences of race, and say the 
 Durham men are taller and stronger in conse- 
 quence of the immigration of Northmen more 
 than a thousand years ago ; this is probably 
 more important, though the assimilation of 
 races by migration and intermarriage inside 
 England has been proceeding for all that time. 
 Possibly, too, the fact that the population of 
 Durham has been increased largely by immi- 
 gration, while Herefordshire has not attracted 
 immigrants nor even retained its natural in- 
 crease, may be supposed to favour the efficiency 
 of the Durham population. It is usually 
 thought that the people who migrate are 
 superior to those who remain at home, and if 
 this is so (it can scarcely be regarded as 
 proved) a population largely consisting of 
 immigrants, and possibly even a population 
 consisting of the nearer descendants of immi- 
 grants, should be superior in quality to one 
 consisting more entirely of natives and the 
 descendants of natives. There is also usually 
 less inbreeding among a population which is 
 gaining by migration, and inbreeding is often 
 considered inimical to efficiency. 
 
 Secondly, as in the case of the single family, 
 we have to think of the different occupations 
 of the inhabitants of the two territories. Here- 
 fordshire is a county inhabited chiefly by agri- 
 culturists and persons whose trade must be 
 carried on in the vicinity of agriculturists.
 
 OCCUPATIONS OF A COUNTY 259 
 
 The only town of any magnitude is the county 
 town, and that is little more than the necessary 
 commercial and legal centre of such an agri- 
 cultural district. But Durham, which has an 
 agricultural population of nearly the same size 
 as Herefordshire, has in addition about two 
 persons engaged in shipbuilding and seven 
 engaged in mining to every one engaged in 
 agriculture. It follows that the comparative 
 material welfare of the inhabitants of Durham 
 and Herefordshire must largely depend on the 
 material advantages of the agricultural occupa- 
 tions compared with those of shipbuilding and 
 mining. If shipbuilders and miners are better 
 off than agriculturists, the people of Durham 
 will be better off than the people of Hereford- 
 shire. Consequently we have to ask ourselves 
 why the inhabitants of some districts submit to 
 belong chiefly to the poorly paid occupations 
 while the inhabitants of other districts manage 
 to adopt the better paid. We may, I suppose, 
 attribute some small part of the phenomenon 
 to differences in efficiency. The less efffcient 
 people are less likely to bring up each new 
 generation to the best paid kinds of work than 
 the more efffcient. But this is a trifling matter 
 compared with the simple fact that it is con- 
 venient for persons carrying on one trade to 
 live and work principally or wholly in some 
 places, and for people carrying on other trades 
 to live and work principally or wholly in other 
 places. It is not because the people of Here- 
 ford are weak, stupid, and wanting in energy 
 that Hereford has not as many miners and ship- 
 builders as Durham, but because it has neither 
 coal nor sea-coast. It is not because the 
 inhabitants of Oxfordshire and Cambridgeshire
 
 26o THE WEALTH OF NATIONS 
 
 have some hereditary cleverness that they 
 happen to contain an extraordinary proportion 
 of well-paid teachers, but because some long- 
 forgotten accident placed the two Universities 
 in the county towns. It is not owing to the 
 enervating nature of the climate of Poplar 
 and West Ham, nor to the inferior character 
 inherited from the particular Anglian families 
 who settled there in the fifth or sixth century 
 that those districts contain a large proportion 
 of the worst-paid class of manual labour, but 
 because the docks are there. The inevitable 
 conclusion is "that geographical features and 
 those incidents which, because we know very 
 little about them, we call historical accidents, 
 play a great part in settling whether people 
 who are well paid for their labour or people 
 who are ill paid live in any given district. 
 
 Thirdly, again as in the case of the single 
 family, the differing amounts of property owned 
 by the inhabitants of different territories is 
 an important factor in determining their com- 
 parative material welfare. The amount owned 
 by the inhabitants is not to be confused with 
 the amount of property apparently situated 
 within the territory.' In Durham there is con- 
 siderably less property liable to local rates 
 under the English law per head of population 
 — about £125 worth (in capital value) against 
 £200 worth per head in Herefordshire. Move- 
 able tangible objects, together with such in- 
 
 ' I say " apparently " situated, because a great deal of pro- 
 perty in modern times cannot be cut up and have its several 
 parts attributed to the different small localities in which as a 
 whole it is situated. At first sight it appears possible to allocate 
 it, but the experience of tiie .American property taxes shows 
 that the possibility is only apparent.
 
 PROPERTY OF A COUNTY 261 
 
 tangible property rights as might be supposed 
 to be somehow connected with the fixed 
 property, are probably more important in 
 Durham than in Herefordshire, and might thus 
 restore the balance. But if we found that the 
 total property thus connected with the two 
 counties worked out to exactly the same value 
 per head of population, should we be justified in 
 assuming equality between the two populations 
 so far as property was concerned ? Certainly 
 not, since the inhabitants of each county own 
 much property outside it, and many persons 
 who are not inhabitants own much property 
 inside it. Equality would only be present if 
 the balance of the two amounts was the same 
 in the two counties. In fact, the balance is 
 probably in favour of the inhabitants of 
 Herefordshire. It is probable that the amount 
 of property held outside Herefordshire by in- 
 habitants of Herefordshire exceeds in value the 
 property within Herefordshire held by people 
 living outside, whereas the contrary is probably 
 true of Durham. Does any one ask why this 
 should be so ? Simply because owners of 
 agricultural properties find it pleasant and con- 
 venient to live on them, while owners of mining 
 and shipbuilding properties do not. Neither 
 a colliery nor a shipyard are pleasant things 
 for a wealthy person to live alongside of, and 
 there is the further fact that the shipyards 
 belong largely to shareholders whose avoca- 
 tions lie elsewhere. There can be no doubt 
 about the importance of this cause of dift'erence 
 whenever small territories are under com- 
 parison. The inhabitants of Mayfair are richer 
 than those of Wapping because a richer class 
 of persons select Mayfair for their residence.
 
 262 THE WEALTH OF NATIONS 
 
 The average wealth of the people of Sussex 
 is increased by the fact that it is a pleasant 
 place of residence and convenient for London 
 work or amusement. The parish of Dornoch 
 must have the wealth of its inhabitants enor- 
 mously increased, and the county of Sutherland 
 must have the wealth of its inhabitants con- 
 siderably increased simply by the fact that Mr. 
 Carnegie chooses to live at Skibo Castle 
 instead of nearer the sources of his riches. 
 
 This is all fairly simple. The only question 
 is whether in the case of territories as large as 
 English counties it is true, as in that of the 
 smallest possible localities, that we should not 
 think of attributing the superiority in material 
 welfare of one whole population over that of 
 another directly to the fact that the one lived 
 on an area which was more fertile or contained 
 a better or more accessible underground store 
 of minerals than the other. What the question 
 comes to in our example is this : Are the 
 natural advantages of Durham over Hereford — 
 its possession of coal and a sea -coast with 
 harbours — entirely appropriated by the owners 
 of property (whether resident in Durham or 
 elsewhere), or is there a certain part which is 
 unappropriated and consequently obtained by 
 the mere propertyless workers ? The question 
 is not to be disposed of by a negation based 
 on the proposition that if there were any such 
 unappropriated item workers would migrate into 
 Durham, with the effect of cheapening work 
 and raising the value of property so that the 
 unappropriated item would become appro- 
 priated. This migration into Durham is pre- 
 cisely what did take place for many years 
 prior to 1881 : so long as it went on it
 
 POLICY OF A COUNTY 263 
 
 showed that Durham was attractive, and the 
 fact that it was attractive was due to there 
 being something unappropriated which the 
 workers managed to get. But as between one 
 Enghsh county and another a very small advan- 
 tage will turn the scale in the matter of migra- 
 tion. Migration such as is required does not 
 mean the rooting up of middle-aged people, 
 but only a slight trend of the annual new 
 recruits to the army of labour in one direction 
 rather than in another. Moreover, though such 
 attractiveness may endure for several genera- 
 tions, it is properly regarded as a " temporary " 
 phenomenon. Durham in recent decades has 
 not quite succeeded in retaining the whole of 
 the " natural increase " of its population. 
 It is perfectly true that in time the immigra- 
 tion into such a district will cause its advantages 
 to the workers to sink to a level with those 
 of other districts. 
 
 If Herefordshire and Durham each had their 
 own customs duties and had adopted different 
 " fiscal policies," the advocates of the Durham 
 policy would contend that the inhabitants of 
 Durham were much better off than those of 
 Herefordshire, and that the superiority of their 
 condition was entirely due to their fiscal policy : 
 the advocates of the Herefordshire policy would 
 contend that the inhabitants of Herefordshire 
 were much better off than those of Durham, 
 and that this was entirely due to the Hereford- 
 shire fiscal policy being superior to that of 
 Durham. The important considerations which 
 we have just dealt with would be ignored 
 altogether unless the difference in material 
 welfare between the two counties was so great 
 that one of the two parties lost all hope of
 
 264 THE WEALTH OF NATIONS 
 
 being able to show that the county which had 
 adopted the pohcy it favoured was, in fact, the 
 better off. In that case this party might begin 
 to point out that there were other things besides 
 fiscal policy to be thought of, but this would 
 be loudly hailed by the second party (and 
 secretly regarded by the first party) as a last 
 and almost desperate resource. As things are, 
 neither county having had the opportunity of 
 adopting any fiscal policy, no one troubles him- 
 self about the facts, and no one is able to 
 contend that the superiority of the one county 
 over the other is due to its greater wisdom 
 in fiscal matters. 
 
 But if statistics of imports into and exports 
 out of each of these counties were collected and 
 made available, it is certain that in each county 
 persons would be found to contend that it would 
 go to ruin unless it carefully regulated its 
 foreign trade by means of customs duties. In 
 the remote past these persons would have con- 
 tended that as money was very useful to the 
 people of the two counties, and there were no 
 gold or silver mines within their boundaries, 
 it was necessary to prevent any gold and silver 
 going out of the county when it had once been 
 got into it. Later, they would have contended 
 that this was a mistake, but that what was really 
 wanted was a careful attention to the balance 
 of trade and such a manipulation of duties 
 and prohibitions as would secure a perpetually 
 favourable balance and consec^ucnt net importa- 
 tion of gold and silver. Later still, when it 
 had been conclusively shown by theory and 
 experience that wherever there is a sound 
 currency there will be a sufficiency of money — 
 that, in other words, if legislators will look
 
 PARTICULARIST ARGUMENTS 265 
 
 after the quality of the currency, the quantity 
 will take care of itself — ^the advocates of the 
 manipulation of external trade would have fallen 
 back on special doctrines made up to suit the 
 circumstances in which they found themselves. 
 In Herefordshire, which exports agricultural 
 produce and imports coal and manufactured 
 articles, they would have contended that agri- 
 cultural counties were always poor, and that 
 the people of Herefordshire should therefore 
 force themselves to become manufacturers or, 
 at any rate, attract manufacturers from other 
 counties by preventing themselves, either by 
 prohibition or by duties, from buying manu- 
 factured articles produced outside the county. 
 In Durham, which imports agricultural pro- 
 duce and exports coal and ships, they would 
 have contended that it was necessary for the 
 physique of tTie people of Durham that they 
 should grow inside the county all the food they 
 required, however numerous they might be, 
 and that their exportation of coal meant that 
 they were living on their capital and providing 
 their shipbuilding competitors with fuel to their 
 own damage. The advocates of manipulation 
 in each county would have shut their eyes to 
 the fact that the advocates in the other were 
 using arguments inconsistent with their own, 
 and their opponents would in all probability 
 have neglected to draw attention to the fact, so 
 that the question at issue would have escaped 
 all discussion on broad lines. While incon- 
 sistent arguments based on the special cir- 
 cumstances of each county were being used 
 in this way, there would also have been some 
 attempt in both counties to prove that if 
 customs duties were imposed upon the importa-
 
 266 THE WEALTH OF NATIONS 
 
 tion of almost any article, an appreciable 
 portion of the duty would be paid by the 
 outside producers, so that the people of each 
 county would gain something at the expense 
 of all the others by imposing import duties, 
 though it might possibly be better for all the 
 counties taken together to agree to refrain from 
 imposing any. In the fortunate absence of 
 statistics of imports and exports, no one in 
 either Herefordshire or Durham seems ever to 
 have thought of advocating a " county policy " 
 which should enrich the people of the county 
 at the expense of outsiders. 
 
 We may now proceed to examine the case 
 of " nations " — groups of persons inhabit- 
 ing areas usually larger than those of the 
 biggest English county and invariably possess- 
 ing independent systems of customs duties. 
 There is no reason for supposing that the cir- 
 cumstances which we found to be the main 
 factors in determining the comparative material 
 welfare of the inhabitants of a couple of English 
 counties are not also the main factors in deter- 
 mining the comparative material welfare of 
 " nations." 
 
 In the first place, there is the difference in 
 the efficiency of the various nations due to 
 difference of racial qualities and to the climate 
 of the territory occupied. Of course, to explain 
 a difference in efficiency as the result of original 
 difference in racial quality does not take us 
 very far. To complete our knowledge we ought 
 to know why races with small efficiency have 
 settled in one place and races with great 
 efficiency in another. But in the present state 
 of knowledge we cannot say much about this. 
 All the earlier wanderings of the different stocks
 
 RACE AND CLIMATE 267 
 
 of mankind are wrapped in obscurity. We 
 know a great deal about the reasons why the 
 present North and South Americans are what 
 they are, but we know very Httle about the 
 reasons why Germany contains Germans, India 
 Indians, and China Chinese. Nor can we say 
 much about the probabihties of the future. All 
 that seems certain is that at present it is 
 becoming more and more dil^cult for one stock 
 to 'destroy another or violently dislodge it from 
 a territory which it has once occupied. There 
 are few stocks now left which are likely to 
 yield place to others with the rapidity and 
 completeness of the Red Indians and the 
 Australian aborigines. It appears likely that 
 there will be a very slow amalgamation of 
 various stocks, and that while this is going on 
 others will decline imperceptibly till nothing 
 is left of them. But meantime we are perfectly 
 justified in treating original differences in racial 
 characteristics as a cause of difference in effi- 
 ciency, and consequently in material welfare. 
 
 Original racial qualities are constantly being 
 modified by migration, and if we take the 
 view that inbreeding is likely to produce 
 inefficiency and " new blood " is likely to 
 produce efficiency, we may suppose that a 
 country into which there is a net immi- 
 gration is more likely to have efficient inhabi- 
 tants than one from which there is a net 
 emigration, since, ceteris paribus, there will be 
 more new blood in it. And if it is true, as often 
 alleged, that emigrants are generally superior 
 to stay-at-homes, the country of immigration 
 will tend to be superior to that of the country 
 of emigration from that cause also. 
 
 The effects of climate are doubtless much
 
 268 THE WEALTH OF NATIONS 
 
 more important in regard to the inhabitants of 
 " national " territories than in regard to those 
 of smaller territories such as English counties. 
 We have no hesitation in attributing any want 
 of efficiency which we find in Italy or India 
 compared with colder and drier countries to 
 the " enervating " character of the climate of 
 a large part of those countries. But it is well 
 to be cautious in this matter. It seems possible 
 to live up to any given standard with less labour 
 (of a given efficiency) in warm than in cold 
 climates. The clothing, the shelter, and the 
 food required are all less in amount. Conse- 
 quently the refusal of the inhabitants of the 
 warm country to work as strenuously as the 
 inhabitants of the cold country may be the result 
 of deliberate and wise choice rather than of 
 incapacity. We must remember, too, that the 
 effects of climate are awkwardly mixed up with 
 those .of original differences of race, since it 
 is doubtless trae that the most energetic races 
 have on the whole been the most successful in 
 securing, not perhaps always " places in the 
 sun," but, at any rate, situations in the 
 surroundings, including climate, which they 
 imagined to be the best. 
 
 Whatever may be the truth with regard to 
 the comparative importance of climate and 
 original racial qualities, it will scarcely be ques- 
 tioned that the difference in efficiency resulting 
 from the differences in these two circumstances 
 is a more important factor in determining the 
 material welfare of nations than in determining 
 that of territorial groups of inhabitants inside 
 the nations. But it is desirable to bear in mind 
 that this is not because the nations are political 
 units or because they have each a customs
 
 OCCUPATIONS OF A NATION 269 
 
 system of their own, but simply because they 
 are bigger. If we had to divide the world into 
 territories which differed in the extent to which 
 the efficiency of their inhabitants was favoured 
 by racial qualities and climate, we should use 
 divisions still bigger than nations and disregard 
 a good many international boundaries. The 
 longest boundary in the world between two 
 nations, that between the United States and 
 Canada, would be disregarded, and so also 
 would many of the intra -European boundaries. 
 Secondly, in regard to^ nations, as in regard 
 to the inhabitants of smaller areas, we have to 
 think of the occupations of the inhabitants. 
 The time when it was possible to suppose each 
 nation providing for practically all its own 
 wants directly is past. Then it was legitimate 
 to assume that the (Occupations of different 
 nations were all the same except in so far 
 as the richer would be able to devote a rather 
 larger proportion of the whole of their labour 
 to producing the less necessary articles. Now 
 the growth of international trade means that the 
 people of one nation produce things largely for 
 other nations as well as for themselves. Each 
 people becomes to some extent specialized, pro- 
 ducing commodities and even services which 
 to a great extent a,re not consumed at home but 
 are sold on the world -market. It follows that 
 the wealth of the inhabitants of a national 
 area is largely affected by the occupations fol- 
 lowed by them. If, from whatever reason, 
 they are predominantly engaged in occupations 
 which are the poorly paid occupations of the 
 world, their wealth will be, so far, less than 
 if they were chiefly employed in the highly 
 paid occupations.
 
 270 THE WEALTH OF NATIONS 
 
 The chief actual difference here arises from 
 the fact that certain countries are more suitable 
 than others for the residence of the well paid 
 commercial class. Just as the wealth of 
 London is swollen by the fact that its geo- 
 graphical position has made it a convenient 
 place in which to carry on the commerce of the 
 world, so, though of course to a less extent, 
 is the wealth of the United Kingdom swollen 
 by the fact that London is in it. A good deal 
 of historical change in the comparative position 
 of different nations is due to the fact that 
 progress in knowledge and the spread of 
 population has altered the relative ad van - 
 tageousness of the different parts of the world. 
 The shores of the Mediterranean at one time 
 had the advantage in this respect : the dis- 
 covery and use of the way round the Cape 
 improved the relative position of this country 
 and the Netherlands : the Suez Canal perhaps 
 worsened it and benefited the European conti- 
 nent : the Panama Canal seems likely to 
 improve the position of the United States. 
 Railways, of course, have immensely benefited 
 inland countries compared with maritime ones. 
 
 Even in manual occupations there is a differ- 
 ence between different nations which causes 
 some to earn less than others with only equal 
 efffciency. It is obvious that in some countries 
 agriculture and other poorly paid manual occu- 
 pations engage a larger proportion of the popu- 
 lation than in others. A country which 
 exported nothing but wheat would have, ceteris 
 paribus, a poorer set of inhabitants than one 
 which exported nothing but mathematical and 
 astronomical instruments. But the range is 
 not very great here, and on the whole we must
 
 PROPERTY OF A NATION 271 
 
 pronounce this cause of difference to be of less 
 importance in regard to nations than in regard 
 to smaller areas, such as English counties. 
 
 Thirdly, we have dift'erences arising from 
 the different amounts of property held by the 
 inhabitants of the different countries. This 
 has long ceased to be almost entirely deter- 
 mined by the number of people in the country 
 and the amount of property within the country. 
 It may happen, as it happened to the Transvaal 
 when it was a separate country, and still 
 happens, though in a less degree, to the Union 
 of South Africa, that an overwhelming pro- 
 portion of the valuable natural resources of 
 the country and of the instruments used in 
 working them belong to people who are not 
 resident in the country : or that some valuable 
 property within the country, though it belongs 
 to the inhabitants, has been provided with bor- 
 rowed money, on which interest has to be paid, 
 as is the case in India and Australia. And on 
 the other hand, the inhabitants of a country 
 often hold property abroad, as happens in the 
 case of the United Kingdom, the inhabitants 
 of which draw more than £2 a head from their 
 property outside the country. Monte Carlo is 
 probably the richest country in the world owing 
 to this cause, but for the larger countries it 
 cannot amount to very much, being only at the 
 extremes two or three pounds to the good and 
 probably not more to the bad. 
 
 It is very important all the same, because it 
 means that the income of the inhabitants of 
 a country is not, as we are apt to think, depen- 
 dent on the value of the things therein. There 
 is no necessary connection between the two. In 
 modern civilization the inhabitants of a country,
 
 272 THE WEALTH OF NATIONS 
 
 as such, do not own the country and all that is 
 therein : they simply own their property where - 
 ever it may happen to be situated : the people 
 who own the country are the proprietors, 
 wherever they may happen to live. 
 
 Fourthly, there may be some temporary but 
 possibly very long-continued difference of earn- 
 ings owing to some countries being " new " 
 and others " old." By a " new " country we 
 seem to mean one which has not been open to 
 settlement from the parts of the world settled 
 earlier for a time long enough to allow migra- 
 tion to fill it as full as the " older " parts. 
 Owing to the somewhat smaller repletion of 
 these territories with human beings, the natural 
 resources are not quite of such high value as 
 they would be if they were situated in long- 
 settled parts. The fertile virgin soil in Alberta 
 is not worth as much to its proprietors as it 
 will be when the distribution of population be- 
 tween the Eastern and Western Hemispheres 
 has been rectified by a few more decades or 
 perhaps centuries of migration westward. 
 Meantime the mere workers who go get a slight 
 advantage over those who stop at home. If 
 they did not there would be no attraction. The 
 attraction is really afforded by the migrants 
 receiving a small share in the value of the 
 natural resources. 
 
 So apart from any superiority in efficiency, 
 such as I suggested exists in a country of 
 immigration, we may expect to find some 
 superiority of earnings in new countries from 
 this cause, just as I showed we might expect 
 it in an English county occupying a position 
 like that of Durham in the decades before 
 1 88 1. As between nations we should expect
 
 NEW COUNTRIES 273 
 
 this to be more important than as between 
 counties, since the migration is less easy. 
 The movement from Europe to America has 
 been going on for centuries and is yet far 
 from complete. 
 
 It is likely that the workers of the new country 
 and their descendants, considered simply as indi- 
 viduals, will benefit by the immigration of new 
 workers, since these workers are always likely 
 to be hewers of wood and drawers of water who 
 produce things cheaply for the already estab- 
 lished inhabitants. To oppose their arrival 
 from the point of view of the intelligent indi- 
 vidual is like opposing the arrival of horses : 
 horses deprive men of some kinds of employ- 
 ment altogether, but raise their remuneration 
 by cheapening products which they consume. 
 If horses worked for wages, the arrival of 
 further contingents would lower the wages of 
 horses, but would do no harm but good to the 
 men workers. In the same way, the arrival of 
 Irish raised the position of previously estab- 
 lished workers in the United States, and the 
 arrival of Italians, Hungarians, and such-like 
 raised the Irish already established there. 
 
 But workers are apt to think of themselves 
 as a class, especially if they have organizations 
 of the nature of trade-unions, which neces- 
 sarily represent a class rather than a number 
 of individuals. Class feeling resents any lower- 
 ing of the per capita income of the class, even 
 when it is merely the result of the introduction 
 of new members who have improved their own 
 position by gaining admittance without worsen- 
 ing the position of the individuals already 
 within the class. Hence it is natural that the 
 workers of new countries, especially when 
 
 19
 
 274 THE WEALTH OF NATIONS 
 
 represented by their organizations, should 
 favour restrictions on immigration. 
 
 The most actually effective of restrictions on 
 immigration are doubtless those which are 
 inspired by race antipathy. They are imposed 
 by people who say, " Which race is to fill up 
 this continent ? Yours or ours ? We say 
 ours." It may be possible that some of these 
 can be defended on the ground that they 
 segregate a race or races which have not as 
 yet at any rate sufficient control over their own 
 multiplication. If any people acts as if its 
 ideal of progress was, in J. S. Mill's picturesque 
 phrase, " a human anthill," it is probably 
 desirable that it should be confined within as 
 narrow limits as possible. It is better that it 
 should learn that overpopulation is an evil, and 
 how to avoid it, in one country or continent, 
 than after extending it all over the world. 
 
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 UNIVERSITY OF CALIFORNIA AT LOS ANGELES 
 
 THE UNIVERSITY LIBRARY 
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 NOV 6 1952 
 
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