THE LIBRARY OF THE UNIVERSITY OF CALIFORNIA LOS ANGELES SCHOOL OF LAW GIFT OF Harold E. Ives r -J^X>C/^V3^U^. Qs\JL~^y{y^ cri c^W^^^ I > " C 7 fo is n u >\ V 3 7 1 X 3> Social Science UeiNBoofes Edited by Richard T. Ely OUTLINES O.F ECONOMICS SOCIAL SCIENCE TEXT-BOOKS Edited by Richard T. Ely OUTLINES OF ECONOMICS By Richard T. Ely, Ph.D., LL.D. Revised and enlarged by the Author and Thomas S. Adams, Ph.D., Max O. Lorenz, Ph.D., Allyn A. Young, Ph.D. OUTLINES OF SOCIOLOGY By Frank W. Blackmar, Ph.D., and John Lewis Gillin, Ph.D. HISTORY OF ECONOMIC THOUGHT (Revised Edi- tion) By Lewis H. Haney, Ph.D. BUSINESS ORGANIZATION AND COMBINATION By Lewis H. Haney, Ph.D. PROBLEMS OF CHILD WELFARE By George B. Mangold, Ph.D. SOCIAL PROBLEMS By Ezra T. Towne, Ph.D. THE NEW AMERICAN GOVERNMENT By James T. Young, Ph.D. COMPARATIVE FREE GOVERNMENT By Jesse Macy, LL.D., and John W. Gannaway, M.A. AMERICAN MUNICIPAL PROGRESS By Charles Zueblin. APPLIED EUGENICS By Paul Popenoe and Roswell S. Johnson, M.S. AGRICULTURAL ECONOMICS By Henry C. Taylor, M.S. Agr., Ph.D. THE LABOR MARKET By Don D. Lescohier, Ph.D. OUTLINES OF ECONOMICS (THIRD REVISED EDITION) BY RICHARD T. ELY PROFESSOR OF POLITICAL ECONOMY IN THE UNIVERSITY OF WISCONSIN THOMAS S. ADAMS PROFESSOR OF POLITICAL ECONOMY IN THE SHEFFIELD SCIENTIFIC SCHOOL OF YALE UNIVERSITY MAX O. LORENZ ASSOCIATE STATISTICIAN, INTERSTATE COMMERCE COMMISSION ALLYN A. YOUNG PROFESSOR OF ECONOMICS AND FINANCE IN* CORNELL UNIVERSITY Neto gorfc THE MACMILLAN COMPANY 1922 All ,'ignts ,trved PRINTED IN THE UNITED STATES OF AMERICA Copyright, 1893, By HUNT & EATON. Copyright, 1908 and 1916, By THE MACMILLAN COMPANY. COPTBIGHT, 1921. By RICHARD T. ELY. First published elsewhere. Reprinted May, 1900; July, October, 1901; August, 1903; July, September, 1904; July, 1905; January, August, 1906; July, 1907; April, 1908 New edition, revised and enlarged, September, October, 1908; January, August, 11,09; December, 1910; August, 1911; June, 1912; May, 1913; January, July, :9t4'. January. September, twice, 191 5 Third edition, revised and enlarged, September, 1916. Reprinted November, 1916. Reprinted with corrections, August, October, 1917. ' .Nr * -' .1' PREFACE The first edition of the Outlines of Economics, written by Professor Ely, was published in 1893. Four persons cooperated in the preparation of a revised and enlarged edition, which appeared in 1908. This was in many respects a new book, although much matter from the earlier edition was incorpo- , rated in it, and although pains were taken to retain the general &- organization and especially the general point of view of the older volume. The present edition does not differ so much from its predecessor as that differed from the first edition, but it is, nevertheless, the result of a more thoroughgoing revision than is usually given to books of this kind. Some minor changes have been made in the order in which the chapters appear ; two chapters have been omitted ; and a chapter on labor legislation has been added. No chapter in the book remains unaltered, and the larger part of Books II and III has been virtually rewritten. While the number of different subjects treated has been slightly reduced, the treat- ment of the more fundamental subjects has been considerably expanded. Each of us has undertaken the revision of a definite portion of the book and, to secure unity, Professor Young has had general editorial supervision of the revision as a whole. Some of the changes are such as are necessary by reason of eight years Of progress in industrial life, in legislation, and in economic thought. Other changes are the outgrowth of the experience gained in eight years' use of the book in university and college courses. Among the many persons to whom we are indebted for helpful criticisms and suggestions are Dr. John Cummings, Professor H. J. Davenport, Dr. C. S. Duncan, Professor L. C. Gray, Professor J. E. Le Rossignol, Professor VI PREFACE W. C. Mitchell, Professor T. W. Page, Professor F. M. Taylor, Mr. Ray S. Trent, and Professor N. A. Weston. The instructors in charge of the course in elementary eco- nomics at the University of Wisconsin have generously cooperated by submitting carefully prepared lists of definite, well-con- sidered, and pointed suggestions for the betterment of the book. We make grateful acknowledgment to Professors T. K. Urdahl, W. I. King, and H. D. Simpson, and to Messrs. Harry Jerome, A. H. Hansen, J. G. McKay, and F. L. Vaughan. THE AUTHORS. September, 1916. CONTENTS BOOK I. INTRODUCTION Preface Chapter I. The Nature and Scope of Economics Diversity of economic study, 3 ; Definition of economics, 4 ; A social science, 5 ; Studies man in process of development, 6 ; Eco- nomic laws, 7; Relation of economics to other sciences, 11 ; Prin- cipal divisions of economics, 15. Chapter II. The Characteristics of the Present Economic System Human and physical conditions of economic activity, 17 ; Private enterprise and state activity, 17; Division of labor and exchange, 19; Economic classes, 21 ; Private property, 21 ; Trade-marks, copy- rights, and patents, 23 ; Inheritance, 24; Contract, 25 ; Vested in- terests, 25; Freedom, 26; Competition and markets, 28; Fair competition, 29; Cooperation, 30; Monopoly, 30; Custom, 31. Chapter III. The Evolution of Economic Society Basis of the economic stages, 33; Direct appropriation, 34; Primitive man, 35; Pastoral stage, 36; Agricultural sta^ , 37; Manorial economy in England, 37; Handicraft stage, 39; Gilds, 39; Domestic system, 40 ; Agricultural changes, 41 ; The mercan- tile system, 42 ; Industrial stage, 44 ; Other classifications, 44. Chapter IV. The Evolution of Economic Society (Continued) Industrial Revolution, 47 ; England in 1760, 47 ; Mechanical in- ventions, 49 ; Agricultural changes, 50 ; Effects of industrial revolu- tion, 51; The factory system, 51; Industrial specialization, 2; Evils of the transition, 52; Competition and laissez-faire, 53 ; Re- action against the passive policy, 54 ; Quality of goods, 55 ; Pro- tection of labor, 55 ; Labor organizations, 57 ; Extension of govern- ment enterprise, 58; Summary, 59. Vlll CONTENTS Chapter V. The Economic Development of the United States Economic stages in American industrial history, 61 ; Sectional- ism, 62 ; Characteristics of the American people, 63 ; Growth of population, 64 ; Slavery and the negro problem, 66 ; Immigration, 68 ; Natural resources, 74 ; Public lands, 75. Chapter VI. The Economic Development of the United States (Continued) Mercantilism in America, 79; English colonial policy, 80; American industries in 1776, 81 ; The Industrial Revolution in America, 81 ; The development of agriculture, 84; Manufactures, 86; Transportation, 00; The labor movement, 93 ; State regula- tion of industry, 96. BOOK II. PRINCIPLES AND PROBLEMS PART I. PRODUCTION AND CONSUMPTION; Chapter VIX Elementary Concepts Motives in economic activity, 103 ; Utility, 105 ; Free and eco- nomic goods, 105 ; Effort and waiting, 106 ; Risk, 106 ; Personal qualities as goods, 107 ; Wealth and income, 108 ; Individual and society, 109 ; Wealth and value, 109 ; Capital and other forms of wealth, no; Capital goods and capital value, no; Social and in- dividual capital, in ; National wealth and national dividend, in. Chapter VIII. Production Production defined, 116; Production of values, 118; Factors of production, 119; Saving and capital formation, 122; Production and sacrifice, 124; Organization of productive factors, 123; The entrepreneur, 1 23 ; Division of labor, 124; Advantages of division of labor, 126 ; Effects upon the worker, 127 ; Territorial division of labor, 128; Productive organization of the American people, 129. Chapter DC. Consumption Consumption defined, 132; Productive and final consumption, 132; Human wants, 133; Law of diminishing utility, 133; Mar- ginal utility, 135 ; Subjective value, 137 ; Economic order of con- sumption, 139 ; Future wants, 140; Consumption and saving, 142 ; Alleged present consumption of future products, 142 ; Luxury, 143 ; Harmful consumption, 144; Statistics of consumption, 144; Con- sumption and sacrifice, 146; Cost of production, expense of produc- tion, and opportunity cost, 148. CONTENTS IX PART II. VALUE AND EXCHANGE Chapter X. Value and Price Meaning and significance of value, 151 ; The market, 153; Ex- change value and subjective value, 155 ; Supply and demand, 156 ; Nature of demand, 156; Elasticity of demand, 159; Nature of supply, 162 ; The determination of price, 164. Chapter XI. Value and Price {Continued) Prices and the expenses of production, 167 ; Normal price, 169 ; Different conditions of supply, 170; Fixed and variable expenses, 174; Joint expenses of production, 179; Surplus of bargaining, 181 ; Non-reproducible goods, 182; Retail prices, 182 ; Public authority and value, 183 ; Imputed value, 184 ; Valuation of production goods, 185 ; Other theories of value, 186. Chapter XII. Monopoly The idea of monopoly, 189; Classification and causes, 193; Social and natural, 195 ; Monopoly price, 200 ; Effect of a tax, 202 ; Relation of demand to monopoly price, 203 ; Class price, 204 ; Monopoly price, high price, 205 ; Monopolies and distribution of wealth, 207 ; Public policy toward monopolies, 208. Chapter XIII. Business Organization The meaning of "business," 212; The nature of business units, 212; The business unit in accounting, 213; The individual entre- preneur, 214; Partnerships, 215; The business corporation, 216; The corporation charter, 217; Lack of uniformity in state laws, 218; Corporation capital and capitalization, 219; Overcapitaliza- tion, 221 ; Form of capitalization, 225 ; Corporation management, 226; Advantages of the corporation, 228; Social aspects of cor- porations, 228; Trusts, 230; Causes of combination, 232; Anti- trust laws, 235 ; Unfair competition, 239 ; Public policy towards industrial combinations, 243; Federal control of Corporations, 245 ; Industrial combinations in other countries, 245. Chapter XIV. Money Metallic money, 248; Coinage, 249; The meaning of "money," 250; The media of evrhiiii , . The monetary standard, 255 ; Seigniorage, 255, Limited coinage. s<; Bimetallism, 260; Bi- metallism in the United States, 263 ; The gold-exchange standard, 269; Government paper money, 271 ; Colonial and Revolutionary bills of credit, 273; The greenbacks, 273; Fiat money, 278. CONTENTS Chatter XV. Credit and Banking Credit transactions, 282; Personal credit, 285; Bank credit, 286 ; Bank notes, 200 ; State banks of ipsue, 200 ; National bank- ing system, 291; The reserve system : jqi; New York money market, 293; Speculation, 295; Independent treasury system, 297 ; The movement of money, 298 ; Inelastic currency, 300 ; In- elastic reserves, 301 ; Absence of centralized control, 303 ; Steps toward reform, 304 ; Federal reserve system, 307 ; SiMe and private banks, 313. Chapter XVI. Other Problems in Money a\X Banking The value of money, 317 ; Quantity of money and \hs values of money, 319; Equation of exchange, 321; Mechanism of general changes in prices, 325; Industrial uses of gold, 327; Expenses 0$ gold production, 328; Increase in gold production, 329; Effects oi changes in prices, 331; Crises, 333; Standard of deferred pay- ments, 336 ; Index numbers, 337. Chapter XVII. International Trade Foreign exchange, 345; Regulation of the gold supply, 350; Balance of trade, 354; Restriction of interpational trade, 358; *dvantages of international trade, 361. Chapter XVIII. Protection and Free Trade The case for protection, 368; Arguments of free traders, 374; General considerations, 380; Conclusions, 381. PART III. DISTRIBUTION Chapter XIX. Distribution as an Economic Problem The problem of distribution, 384; Distribution controlled b.V existing institutions, 386 ; Money incomes, 387 ; Law of diminish- ing productivity, 388 ; Marginal product of labor, 390 ; Marginal products of land and capital, 392; Marginal productivity and the prices of production goods, 398; The meaning of "productivity," 400 ; Social aspects of diminishing productivity, 404. Chapter XX. The Rent of Land Rent defined, 407 ; The services of land, 408 ; Rent under uni- form intensivity of cultivation, 410 ; Rent under actual conditions, 413 ; The different uses of land, 416 ; The capitalization Of rent, 418; Rent and social progress, 419; The unearned increment, 4a* ; Urban lands, 426. %A CONTENTS XI Chapter XXI. The Wages or Labor Wages as the price of labor, 427; Demand for labor, 428; Labor- saving machinery, 430; Supply of labor, 431 ; Growth of popula- tion, 434; Subsistence theory of wages, 437 ; The standard of life and wages, 438 ; Supply of labor in ditierent occupations, 439 ; The wage contract, 442. Chapter XXII. Labor Problems Types of labor organizations, 444; Economic justification of labor organizations, 445 ; Labor organizations and monopoly, 446 ; Methods and policies of labor organizations, 447 ; The closed shop, 448 ; Limitation of output, 449 ; Educational and fraternal activi- ties, 451; The strike, 452 ; Employers' associations, 454; Trade arbitration, 457 ; Voluntary arbitration, 458 ; Compulsory arbitra- tion, 459; Profit sharing, 461; Industrial democracy, 463; Co- operation, 465 ; The future of the union, 469. Chapter XXIII. Labor Legislation Freedom of contract, conspiracy, and injunctions, 472; Child labor laws, 476 ; The labor of women, 479 ; Minimum wage laws, 480 ; Factory acts, 484 ; Employers' liability, 486 ; Philosophy of labor legislation, 488. Chapter XXIV. Interest Interest defined, 493 ; Inadequate explanations, 494 ; How in- terest is possible, 495 ; Why interest is necessary, 496 ; Invest- ment, 499 ; Replacement, 501 ; Shifting of investment, 502 ; Expense and price of capital, 504; Free and specialized capital, 506; Capital and land, 507 ; Capital and consumption goods, 512; Capital and wages, 512; Competitive investment, 513; The flow of money income, 515; The annual product and the social dividend, 517; Sources of investment funds, 523; The interest rate, 521 ; Gross and net interest, 523 ; Usury laws, 524. Chapter XXV. Profits Profits a surplus, 525; Entrepreneur's wage, 526; Pure profits impossible under certain conditions, 527; Sources of pure profits, 528; Marginal productivity and profits, 532; Profits for the in- dustry and profits for the establishment, 533; Good-will, 535! The relation of risks to profits, 536 ; The entrepreneur, 537; Profits and the defense of the competitive system, 538. Xll CONTENTS Chapter XXVI. The Personal Distribution of Wealth Wealth and income, 542 ; Absolute and relative well-being, 542 ; Concentration of wealth and large-scale production, 542 ; Methods of measuring concentration, 543; Statistics of distribution, 544; Causes of poverty and riches, 549; Is greater diffusion possible? 551; Modifying the methods of wealth acquisition, 553. PART IV. SELECTED ECONOMIC PROBLEMS Chapter XXVII. Transportation Economics Scope and significance, 557; Nature of the railway industry, 558; Railway competition, 560; Pooling and consolidation, 561 ; The movement of rates, 563 ; The level of rates, 565 ; Relative rates, 567; Distance, 570; Government ownership, 571 ; Regula- tion, 573; The Interstate Commerce Commission, 574. Chapter XXVIII. Insurance Nature of insurance, 577 ; Origin and development, 578; Forms of insurance organization, 580; Life tables, 581; Reserve, 583; Surplus, 583 ; Endowments, 584 ; Industrial insurance, 585 ; State insurance, 585 ; State regulation, 586 ; Social insurance, 587 ; Workmen's compensation, 588; Sickness insurance, 591; Old-age insurance, 592 ; Unemployment insurance, 592 ; Objections to social insurance, 593. Chapter XXIX. Agricultural Problems Size of farms, 596 ; Ownership and tenancy, 603 ; Farm labor, 606 ; Farm indebtedness and agricultural credit, 609 ; Tenancy vs. encumbered ownership, 615; Marketing of farm products, 618; Speculation, 622. Chapter XXX. Socialism Socialism denned, 627; Distributive justice, 627; Varieties of socialism, 628; Communism, 631; Socialism an extension of existing institutions, 632; The strength of socialism, 632; The weakness of socialism, 634 ; The socialist movement, 636 ; Anar- chism, 638. BOOK III. PUBLIC FINANCE Chapter XXXI. Public Expenditures Natuie and significance of public finance, 643 ; Public and pri- vate expenditures contrasted, 646 ; The proper proportion between the total income of society and public expenditures, 648 ; Economy CONTENTS xiii the total income of society and public expenditures, 648; Economy vs. parsimony, 652; Historical development, 654; Development of public expenditures with respect to regularity and irregularity. 659; Classification of public expenditures, 660. Chapter XXXII. Public Receipts from Loans and Government Ownership Public debts, 666; Public domains, 671; Land policy of the United States, 673 ; Forest lands, 674 ; Mineral lands, 675 ; Success of our land policy, 677 ; Land nationalization and municipalization, 679; Public industries, 682. Chapter XXXIII. Public Receipts: Derivative Revenues, Fees, Special Assessments, and Taxes Definitions, 689; Fees, 690; Special assessments, 692; Taxes, 694; Justice in taxation, 696; Progressive taxation, 699; Direct and indirect taxes, 702 ; The shifting of taxes, 703. Chapter XXXIV. Public Receipts: Federal, State, and Local Taxes Constitutional limitations, 710 ; Use of direct taxes by the federal government, 712; Customs duties, 713; Internal revenue duties, 717; Taxes on transactions, 719; Income taxes, 720; Inheritance taxes, 723; General property tax, 726; Corporation taxes, 731; Business and license taxes, 733; Poll taxes, 734; A balanced revenue system, 735. Appendix A: History of Economic Thought > 74* Appendix B : Suggestions for Students and Teachers . . -754 Index . 7 61 BOOK I INTRODUCTION OUTLINES OF ECONOMICS CHAPTER I THE NATURE AND SCOPE OF ECONOMICS The most striking characteristics of the great field of knowl- edge the Outlines of which we attempt to sketch in the present volume are its rich diversity and spacious amplitude. Start- ing from psychology in its analysis of the human needs which explain or condition wealth, it traverses the entire field of social activities and institutions arising from man's efforts to supply his material needs. It touches on one side the physical sciences, from which it borrows some of its most fundamental prin- ciples ; occupies joint territory at places with politics, ethics, and law, although their respective jurisdictions are in the main distinct ; and forms at once the most fertile and most thoroughly developed province of the broad science of human society. Within its borders, if we may continue to compare the scientific possibilities of economics with the natural resources of an opu- lent territory, opportunity is offered for the exercise of every mental aptitude and every scientific method. The historian's gift is needed to unravel the past and trace the development of the industrial institutions whose present-day problems, in turn, offer indefinite scope for the studies of the more practical student with a taste for administration or business manage- ment. For the legal mind there are the subtle problems of property, inheritance, labor legislation, and corporation con- trol ; for the mathematically inclined, insurance and modern statistics; for students with practical political interests, the tariff, currency reform, and a score of important problems in which economics and politics are inextricably interwoven ; for 3 4 OUTLINES OF ECONOMICS the philanthropic, unemployment, accident insurance, and a number of social problems growing out of the maladjustments of modern industry. Animating the entire subject, blended with the love of truth for truth's sake common to all sciences, is the persistent hope that by systematic study we may eventually abolish the material poverty which deadens and dwarfs the lives of millions of our fellows. Economics is a science, but something more than a science ; a science shot through with the infinite variety of human life, calling not only for systematic, ordered thinking, but for human sympathy, imagination, and in an unusual degree for the saving grace of common sense. To define such a subject adequately in a few sentences is manifestly impossible. It is frequently said that economics treats of man's efforts to earn a living, and this definition is not inaccurate if by " man " we understand " mankind," and if we fully appreciate that the individual's efforts to turn an honest penny's profit receive but little attention in comparison with the community's efforts to feed, clothe, and shelter itself. Satisfaction of social need, and not individual profit, is the objective point of the science. So, similarly, economics has been characterized as the philosophy of human industry; and this description is illuminating provided we interpret " indus- try " broadly enough. Even the old traditional definition, that economics is the science of wealth, is true enough if we clearly understand that there can be no wealth without man, and that the science which deals with wealth, so far from being a " gospel of mammon," necessarily begins and ends in the study of man. As we prefer to define it, however, economics is the science which treats of those social phenomena that are due to the wealth-getting and wealth-using activities of man. Economics treats of Man. The supreme importance of man in the study of wealth has not always been appreciated by those who have expounded the science. Too often they have considered man simply as a producer of wealth, the one " by whom " the necessaries, conveniences, and luxuries of life are created, whereas the infinitely greater truth is that man is the one " for whom " they are all produced. Of course no THE NATURE AND SCOPE OF ECONOMICS one denies this truth, but one might almost as well deny it as to leave it out of account. The result of such neglect is that men devise with great skill rules by which man may be made the best possible manufacturing machine. It sometimes quite escapes the notice of these persons that in making man the best possible manufacturing machine they may make him a very poor sort of a man ; that in teaching him to supply his wants very bountifully they may prevent his developing and correct- ing those same wants. They forget that there are two kinds of poverty one a lack of goods for the higher wants, the other a lack of wants for the higher goods. To become rich in goods while losing at the same time the power to profit by them is unfortunately one of the commonest retrogressions in human experience. We do not mean that the whole problem of human development is the subject of economics, but simply that man- hood, rounded human development, and the equitable organiza- tion of human relationships are the objects of all social sciences, and none must consider its subject so narrowly as to exclude these objects. Another common mistake has been to regard as of chief importance the economic activities of one particular class, especially the employer. Other men were treated simply as " a factor in production." An English writer speaks of dear labor as one of the chief obstacles to England's economic pros- perity. Could anything be more utterly an oversight of general human well-being? Dear labor should be the very goal of England's economic effort, for that means abundant supply of the wants of the great mass of her people ; and the fact that labor is dear, so far from being an obstacle to prosperity, is the very proof and substance of that prosperity. A glance at history indicates that men have made these mistakes not only in theory but in practice. Industries have been developed to majestic proportions while man was sinking into deeper deg- radation; wealth has at times grown at the expense of that human weal in whose service it won its name. Economics treats of Man in Society. This is one of those truisms which only history can make real to us. As we pass 6 OUTLINES OF ECONOMICS from the savage and cannibal, up through all the stages of development, we find an ever-increasing interdependence among men. Man is least dependent when he wants least, cares least, has least, knows least, and is least. With every betterment of condition and character he is more dependent than before, more dependent and yet more free. The beginnings of barter are a confession of mutual need ; the coining of money is a declaration of dependence to all men. We look with pride upon a century of progress, but that progress has consisted in little else than a growth of dependence, an ever-increasing de- parture from that rude kind of literal self-help in which each one does everything for himself. Our fathers drew water, each for himself, in " the moss-covered bucket," while our mothers dipped candles for the evening's light. If one was negligent, the rest did not suffer. Today a network of pipes radiates from a common center to enter a thousand households. An engi- neer makes a blunder at the station, and thousands are in dark- ness or drought. Progress is a passage from independence to dependence, from distrust to confidence, from hostility to amity, from helplessness to helpfulness, while the great law of social solidarity gains ever-increasing importance. Our science, then, is interested primarily in man in his relations to others, and not in man by himself. Moreover, as a science which studies the present in order that it may predict and prepare for the future, and discovering that interdependence is the law of progress, it must not hesitate to shape its principles with refer- ence to a solidarity which shall grow more rather than less, stronger rather than weaker. Economics treats of Man as in Process of Development. Few truths are more easily admitted or more persistently ig- nored than that of change in human life and condition. His- tory makes it real. Man now wanders about by force of necessity and age-long habit, now starves rather than be moved from his home. Land is now free to all, now parceled out with well-nigh absolute right of individual possession. The seem- ingly eternal features of the social structure are gone in a few generations. Nothing so invalidates theories, laws, general THE NATURE AND SCOPE OF ECONOMICS 7 principles, institutions, and enterprises as this great law of change of which we seldom take full account. Take, for in- stance, bequests. Nothing is commoner than for a man to leave a legacy under specified and detailed regulations, binding for all time. One leaves money to endow a religious service in a language which in a few generations no one understands ; another founds a college to teach certain doctrines which in a century no one believes ; and so on indefinitely. These and a thousand other laborious efforts of statesman, warrior, or philosopher quite lose their worth for the future because their authors assumed that the future would be like their present. Even the wages system and the division between capital and labor which seem rooted in the constitution of society are scarcely two centuries old as a general system. One must never forget in the study of economics that the phenomena with which it deals are pervaded by the spirit of life, moving forward or back- ward, progressing or decaying, under those influences which control the rise and fall of social institutions. The science is biological rather than mechanical. The Laws with which Economics Deals. The evolutionary character and complexity of economic phenomena, which ac- count for much of the charm of the subject, endow it also with unusual difficulties. Conclusions true for one generation are invalid in the next. Terms and definitions appropriate to one stage of industry are misleading in a succeeding stage. Gen- eralizations valid for one nation and government are inappli- cable to another. Even those laws or uniformities which the science prizes as the finest product of its research are but state- ments of probabilities declarations of what is most likely to occur for the mass of men in the long run under certain specified circumstances. In no department of knowledge, consequently, is there greater need of temperate statement and of that humility of mind which is the surest safe- guard against bigotry and dogmatism. No system of economics is appli- cable unchanged to all times and all places : the premises of the arguments change; the ingredients of nearly every problem present themselves in different proportions ; and the conditions of almost every question vary from 8 OUTLINES OF ECONOMICS country to country and from generation to generation. The student must not expect rules of thumb by which he can decide offhand the economic prob- lems of the particular city or country district in which he is for the moment interested. No general treatise on economics can authoritatively decide the practical problems of particular times and places; although the econ- omist, before all other students, is forced to deal with practical problems. What such a treatise can do is to point out mistakes of logic common in the current discussions of economic questions, call attention to obscure factors sometimes of great importance which the practical man is likely to overlook, give solutions of typical problems which are likely to arise, and thus afford a training which will assist the student in solving practical problems for himself. The peculiar and distinctive office of the economic scientist, however, is to emphasize the less tangible truths, the remoter consequences, the deeper and consequently less obvious forces of economic society. The impulses of the moment, the immediate demands of the hour, the present "fact" that stares us in the face (and sometimes blinds us), are not likely to lack vigorous champions ; and to preserve the balance there is need of a craft of thinkers far enough removed from the battle to preserve the wider outlook, mindful of the lessons of the past, jealous for the rights of the future, insistent upon the less obvious truths. This is why economics so frequently appears to the practical man strained and academic. This impression arises from a difference of emphasis which in the main is as salutary as it is inevitable. The academic quality of the economist's work arises sometimes from igno- rance, sometimes from pedantry, but more frequently from his courageous insistence upon the importance of the less tangible truths and the distant consequences of present action. Is not economics, then, a science based upon natural law? The question is largely a verbal one. What do we mean by natural law? In the narrowest sense natural laws are the habits of nature which are subject to absolutely no variation. Such are gravitation and chemical affinity; and the sciences based upon such laws astronomy, physics, and chemistry were the first to develop, and have attained a maximum degree of exactitude. The term " science " is sometimes used in a way to imply only sciences of this character. These sciences are more properly known as exact sciences, and they are char- acterized by the fact that the relations with which they deal can usually be expressed quantitatively. When we come in contact with life, however, and especially with its higher forms, the exactness with which an astronomer THE NATURE AND SCOPE OF ECONOMICS 9 predicts an eclipse or a chemist anticipates a reaction becomes impossible. Not that life is without laws; very far from it. There is, in the first place, the basis of physical nature, with its perfect regularity, upon which all life rests and to which it must conform. Then, too, there are laws governing life directly and pertaining to it. These form the subject of the group of sciences known as biology. We must remember, however, that all we can say of natural laws is that they are habits, apparent regularities or uniformities in the succession of events ; not, so far as we know, compulsory necessities of nature. And the laws of life seem to differ from those of inanimate nature in that they are not quite invariable habits. Variability seems to be inherent in life, increasing as life rises in the scale of development. It is often assumed, to be sure, that these laws are as invariable as any other, and that this seeming variability is only a greater complexity which we do not yet understand. However that may be, the result is the same for the present. The sciences of life are not exact in the sense we have defined. We must further note that in so far as a science deals with facts which seem to be governed by no invariable law, or whose law has not been discovered, it must content itself with a description of this part of its subject. Thus we have the term " descriptive science." We might better speak of the descriptive part of a science, for all sciences are able in part to reduce their facts to law. What has been said of the sciences dealing with life applies to an even greater extent to those sciences which deal with man. It is true that within certain limits man is governed by ab- solutely invariable laws. He is as much bound by gravitation as anything else, and if he falls over a precipice, we can predict the results as certainly as though a stone fell over. But, with- out entering the bog of discussion as to the nature of human freedom, we may safely assume, for practical purposes, that man is also, within certain limits, a law unto himself. No- where do we find an element of variability so great and so seem- ingly ultimate as here. We must remember, therefore, that the sciences which deal with man deal with a being who is modified IO OUTLINES OF ECONOMICS by his environment, but who has the power of modifying that environment by his own conscious effort. Let us consider very carefully what this means. It does not mean simply that man modifies his environment because he has been modified by it and so reacts upon it, just as things do when they come in contact. If we accept this view, we shall come to Herbert Spencer's theory of natural selection. The forces at work accomplish their own results, according to this theory, whether man will or will not, simply by natural action and reaction. This implies that man is modified by his envi- ronment, and that he in turn modifies that environment with- out conscious effort. This theory is based on an assumption that man has no power of initiating an influence, and consist- ently concludes that social development, like geological develop- ment, must be left to work itself out. Spencer, however, goes farther, and stoutly maintains that man, by conscious effort, especially by collective or state effort, not only does not help this development, but actually hinders it. In this the whole theory is abandoned, for it is plain that if man by conscious effort can hinder a process, he can help that process in the same way, if he only has enough wisdom and sense. These it is the purpose of science to give him. In opposition to the theory of natural selection, or unconscious development, has been urged the theory of artificial selection, or conscious development. Ages of natural selection made of the potato a lean, watery, unpalatable tuber ; a relatively few years of artificial selection made it a valuable food product and a table delicacy. Compare the development of domestic ani- mals in the last few years, under man's conscious guidance, with their slow and meager development in a state of nature. Man has precisely this power of consciously modifying the natural and artificial elements of his environment, and this power continually enlarges. So, when we ask if economics deals with natural laws, we really ask whether this being, whose activity in a certain line we are studying, is governed by such laws. If we mean by this to ask whether his action is characterized by absolutely THE NATURE AND SCOPE OF ECONOMICS u invariable habits, like the forces of physics, we must plainly answer, no. If man had no power of initiative, or, on the other hand, were so perfectly rational as always to do the wisest thing, there would be a regularity in his action which might perhaps form the basis of a complicated, but exact, science. As it is, all social sciences are approximate and partly descriptive. There is much in man's action which is exceedingly (though not perfectly) regular, and hence we have general, though appar- ently not invariable, laws. There is a part of his action, how- ever, that seems as yet to be capricious, and we can only make note of it till we have more knowledge. The laws of economics are not comparable to the laws of inanimate nature in invariability, but they are of very general applicability, and are wholly in line with the action and intent of nature, and are, in this sense, " natural." But the laws of economics are not natural laws in the sense in which the word is often used ; namely, laws external to man and not at all the product of man. The laws of economics have been designated as social laws to distinguish them from those of physical science. Social laws describe tendencies, or regularities, which appear especially in the consideration of large masses of facts. Human mortality serves as an illustration. When and how a certain man, as A., will die, is proverbially uncertain ; but when we speak of hundreds of thousands of lives, we can predict with such an approximation of accuracy that the vast business of life insurance can be built upon the regularity of the action of death. The foregoing discussion enables us to answer in a word the much-mooted question, " Is economics a science? " It is not an exact or mathematical science, though certain portions of the subject may possibly become so. It is an approximate and partially descriptive science, like all sciences dealing with man, or even with life. The inexactness of the social sciences is due to the very thing which gives them their supreme value, the nature of man and the greatness of their subject. The Relation of Economics to other Sciences. We have already referred briefly to the relations between economics and some of the other sciences, but the topic is one which re- 12 OUTLINES OF ECONOMICS quires fuller treatment. In one sense, economics may be said to be dependent upon practically every other science, since the discoveries in every field of knowledge almost inevitably react upon the economic life of man. Modern chemistry, to take a single example, has revolutionized some industries, wholly created others, and, through the agency of the pure-food laws, may claim most of the credit for entirely suppressing others. From psychology economics takes the axiomatic principles upon which the laws of value rest; from physical science the lav/ of diminishing returns, which plays a very important part in the theory of distribution ; and from mathematics the methods by which to ascertain how insurance may be safely supplied against accidents, death, and loss by fire. But it is to the sister sciences dealing primarily with man that economics is most vitally related. Man has been busy from the first in several lines of effort. He has talked, worshiped, fought, studied, and each of these lines of effort has developed its own faculties and institutions. For convenience we may arrange these in eight groups, as follows: language, art, education, religion, family life, society life, political life, economic life. Each of these is the subject of a science more or less developed. The group of society life that is, the life of polite society, calls, parties, balls, and the like has been studied but little, and we know few of its governing principles. 1 Language, on the other hand, has a science which has attained to very complete development. The rest lie scattered between these extremes. A peculiar feature of these activities is that they are all of them collective activities, activities which one man cannot well carry on alone. This is obviously true of family and political life, language, and others ; and on careful examination it proves to be true of the rest. It is now admitted, after many experi- ments, that art and even religion do not thrive in solitude. It 1 An attempt to examine scientifically some, at least, of the phenomena of polito society has been made by a learned jurist, the late Professor Rudolph von Ihering, in his Zweck im Rethl. Professor Thorstein Veblen in his Theory of the Leisure Class gives a brilliant though half-satirical explanation of social conventions in terms of origins and survivals. THE NATURE AND SCOPE OF ECONOMICS 13 would seem that if a man could do anything by himself, it would be to get a living ; but the study of economic history impresses us with the insignificance of all such effort and the inevitable tendency of men to drift together in their economic activity. If it were possible for men to live in isolation, every one of the eight lines of effort we have mentioned would soon dwindle into insignificance or altogether cease. So these sciences are all of them social sciences ; and as the sciences that deal with life are now grouped together under the name biology (science of life), so the social sciences may be grouped under the title of sociology, or the science of society, although some sociologists do not define the word " sociology " .in this broad sense of an all-embracing science of human association. Economics, then, is a branch of sociology thus conceived. We have already denned it as the science which treats of those social phenomena that are due to the wealth-getting and wealth- using activities of man. We may speak of the wealth-getting and wealth-using activities in all their relations as economic life or economy. Accordingly, economics is the science which deajs with the economy of man. A useful distinction in lan- guage is thus made between economy, the life itself, and eco- nomics, the science dealing with that life. If this distinction could always be observed, much confusion would be avoided. We have economies of various sorts: the economy of an individual, of a family, a tribe, a city, a state, or a nation, and we have, correspondingly, many economic units. The domi- nant unit in ancient Greece, for example, was the household, which included the family and all the slaves and other depend- ents. These lived together and formed a little group by them- selves. The economic life of Greece meant, largely, a sum of the economic activities of these households, each of which strove to be sufficient unto itself. It is interesting to know that many a well-managed Southern plantation before the Civil War endeavored to produce nearly all the means of life on the planta- tion, and in this respect, as in others, resembled a Greek house- hold. But as time has progressed, these old groups have been partially dissolved, and in many instances in modern 14 OUTLINES OF ECONOMICS times the individual, in his economic activity, constitutes a unit, although the family is still the prevalent economic unit. It is a natural outcome of economic progress, as already ex- plained, that the relations between these units have multiplied indefinitely in number and in importance. This is simply another way of describing the growing interdependence of men. Economics deals especially with the mutual relations of econo- mies of all kinds, private and public. It is chiefly, if not exclusively, a science of human relations, and without these relations could not exist. Because of the organic connection of these relations in their common origin, man, and because economics deals with the individual as he is, and not with an artificially simplified " eco- nomic man," it is impossible wholly to dissociate the social sciences, and particularly impossible to divorce economics completely from ethics and politics. This does not mean that these sciences are all one and cannot be profitably subdivided. On the contrary, because of the limitations of the human mind, they must be studied separately so far as is possible. Scientific progress, like industrial progress, comes largely through spe- cialization and the division of labor. Man cannot profitably study things in general. What it does mean is that there is some territory common to all these sciences, and that occa- sionally the economist is forced to pass ethical judgments and to decide political questions. In the consideration of railway rates, for instance, the economist may be compelled to pass judgment upon what is just and reasonable, and he discovers upon investigation that by common consent what is fair or reasonable must be decided largely upon economic grounds. The same is true of the apportionment of taxes, in which subject ethical, legal, and economic questions are inextricably inter- woven. Commercial policies, restrictive regulations, and sump- tuary laws have been the very stuff and subject-matter of the science of economics from its first beginning. In analyzing the progress of the past or the conditions of the present, we are forced to pass judgment upon the success or failure of many laws and policies which are still in force or under active dis- THE NATURE AND SCOPE OF ECONOMICS i$ cussion. Many of these must be indorsed or repudiated either solely or largely upon economic grounds ; and because of these facts, the economist cannot, even if he would, refrain from pass- ing judgment upon laws and political policies. Nevertheless, as was stated before, economics does not undertake the complete and systematic study of law, ethics, and politics, and its conclu- sions must almost always be supplemented by non-economic considerations which the economist may not have taken into account. Principal Divisions of Economics. This view of the in- evitably practical character of economic science is carried out in the treatment of the subject in the following pages. The history of the evolution of economic society, sketched in Book I, is followed, in Book II, by a discussion of the production, con- sumption, exchange, and distribution of wealth. These sub- jects are treated in close connection with those illustrative economic problems of which the so-called " economic theory," at its best, is but a more comprehensive and consequently more abstract analysis. Book III has been reserved for the subject of public finance, and in an appendix is given a brief sketch of the history of economic thought. QUESTIONS i. What is the meet essential characteristic of economics? Define eco- nomics. 2. Is man or goods the more prominent thing in economic study? Does economics teach the student how to succeed in business? 3. What determines ultimately whether a man is poor or not? What kinds of poverty are there? 4. What is meant by "dear labor"? Is it a good thing for society in general? for employers in general ? for an individual employer? 5 . What is the difference between natural and artificial selection ? Which applies to human society? 6. Are practical ethical and political judgments the chief ends and prod- ucts of economic science? 7. Is economics concerned with the negro question ? bank notes? prohibi- tion? anti-trust laws? race suicide? protection? 8. What is a scientific law ? Contrast with a statutory law ; with a moral law ; with the laws of mathematics. 1 6 OUTLINES OF ECONOMICS REFERENCES Cairnes, J. E. The Character and Logical Method of Political Economy. Cossa, L. An Introduction to the Study of Political Economy. Dunbar, C. F. "The Academic Study of Political Economy," in his Economic Essays. Ingram, J. K. A History of Political Economy. Chap. vii. Keynes, J. N. The Scope and Method of Political Economy. Marshall, Alfred. Principles of Economics, 6th ed., Appendixes C and D. Mill, J. S. Essays on Some Unsettled Questions of Political Economy. Sedgwick, Henry. The Scope and Method of Economic Science. Wagner, Adolph. "On the Present State of Political Economy," Quarterly Journal of Economics, Vol. i. CHAPTER II THE CHARACTERISTICS OF THE PRESENT ECONOMIC SYSTEM Our Environment. Lying back of all of our economic ac- tivity is the fact that we live in an environment in which the things that we desire are not furnished spontaneously in un- limited quantities. Whether it be looked upon as due to the niggardliness of nature or to the insatiability of human wants, the fact is that, for the most part, the material things that we use must be economized. We must put forth effort and exer- cise self-denial in order to enjoy the good things of life. Those human arrangements which help to determine how much of ef- fort, of self-denial, and of enjoyment is to fall to the lot of each of us are the characteristics to which we now turn our attention. There are, however, a number of social institutions which do not fall within the scope of the present chapter. We deal here only with the social conditions directly underlying our economic activity, which is but one aspect of our social life. We must leave to the sociologists and other students of society a discus- sion of such topics as the family, religion, morality, ceremonial institutions, and the nature of government, although, to be sure, these also have their effect upon the economic sphere and are in turn affected by it. Private Enterprise and State Activity. We live in an age when private enterprise, for the most part, is relied upon to furnish us with the necessities and enjoyments of life. The cultivation of the soil, the exploitation of the mines, transport, the various stages of manufacture, and the distribution of the finished product are all left mainly 1 to private initiative. The 1 This applies especially to the United States and England so far as transport