1 
 
 
 
 fnfl 
 
 

Marshall's Principles of Economics, Vol. I. Ed. III. 
 
 ADDITIONAL COERIGENDA. 
 
 159, in title of Book in., for or read and 
 
 17G f. n., 1. 4. for less read more 
 
 198, 11. 4, 5 from bottom, for second note on p. 107 read note on p. 211 
 
 220, 1. 6 from bottom, for or indestructible properties read and inde- 
 structible powers 
 
 280, in last line but six of first paragraph of footnote, dele .so, and in the 
 following line for that its actual increase read though indeed the 
 increase in the whole district e 
 
 594, 1. 19, for raise read lower, for lower read raise 
 
 596, 1. 1, for this chapter read the preceding chapter 
 
 5f 3, 1. 23, for wealth read food 
 
 598, for the first two lines substitute net product of labour; its marginal 
 productivity rules the demand price for it; and on the other side wages 
 tend to retain a 
 
PEINCIPLES 
 
 OF 
 
 ECONOMICS- 
 
 BY 
 
 ALFRED MARSHALL, 
 
 PROFESSOR OF POLITICAL ECONOMY *N THE UNIVERSITY OF CAMBRIDGE; 
 
 FELLOW OF ST JOHN'S COLLEGE, CAMBRIDGE; 
 SOMETIME FELLOW OF BALLIOL COLLEGE, OXFORD. 
 
 VOL. I. 
 
 THIRD EDITION. 
 
 Natura non facit saltum. 
 
 ILon&on : 
 MACMILLAN AND CO. 
 
 AND NEW YOEK. 
 
 1895 
 
 [All Eights reserved] 
 
First Edition 1890. Second Edition 1891, 
 Third Edition 1895. 
 
 CAMBRIDGE : PRINTED BY J. & C. F. CLAY, 
 AT THE UNIVERSITY PRESS. 
 
PREFACE TO THE THIRD EDITION. 
 
 TN this edition several chapters have been re-written; 
 chiefly in order to meet the need, which experience has 
 shown to exist, for fuller explanation on certain points. 
 
 The most important change is in the survey of the central 
 problem of distribution and exchange, which occupies the first 
 two chapters of Book vi. (Book VII. of the first edition). In 
 earlier editions the reader was left to import into them the 
 results of the preceding Books. But I had underrated the 
 difficulty of doing that ; as is shown by the fact that able 
 and careful critics both at home and abroad have raised 
 objections to those chapters which had been anticipated in 
 other parts of the volume. It seemed necessary therefore, 
 to embody in those central chapters a good deal that had 
 been said before ; and to supplement by still further expla- 
 nations. 
 
 The first of these chapters, after reproducing a short 
 historical introduction from the earlier editions, discusses 
 one side of the problem of distribution; namely that on 
 which the forces of demand work. 
 
 The following chapter deals first with the side of supply, 
 and then with the two sides together. Some economists 
 have treated the causes affecting the supply of the agents 
 of production, as exercising an influence in distribution 
 
 ,820683 
 
Tl PREFACE TO THE THIRD EDITION. 
 
 generally, not co-ordinate with, but only subordinate to that 
 of the forces of demand ; and a further attempt is made in 
 this chapter to show that such a treatment, however appro- 
 priate to passing movements of distribution, cannot properly 
 be applied to the broad central problem of normal distribu- 
 tion. The chapter ends with a fuller discussion of general 
 wages than had been given in earlier editions ; and discusses 
 the relations between different kinds of surpluses. 
 
 The fifth and sixth chapters of Book i. and the sixth 
 chapter of Book ill. have been somewhat modified and 
 enlarged in order to make more clear how closely the econo- 
 mist adheres in substance to the methods of inference arid 
 judgment of ordinary life ; and how thorough are the harmony 
 and the mutual dependence between the analytical and the 
 inductive, or historical, methods of economic study. 
 
 The chapters on Capital and Income in Book n. have 
 been combined and re- written (see also Book vi. Ch. I. 10, 
 and Ch. II. 10) in order to give effect to a long cherished 
 design, from which I have been held back hitherto by the 
 fear of breaking too much with tradition and especially 
 English tradition. I have steadily grown in the conviction 
 that there is, and from the nature of the case there must be, 
 something artificial in every broad distinction between capital 
 in general (or " social " capital, i.e. capital not regarded from 
 the point of view of an individual) and other forms of wealth. 
 For indeed whatever line of division be taken, the attributes 
 assigned to capital are not present in equal degrees in all 
 forms of capital, and they are present in some degree in 
 other forms of wealth : such statements for instance as that 
 capital supports, or aids, or employs labour, are not true 
 without reserve of all things that lie within any line of de- 
 marcation that has been proposed for capital ; and they are 
 true in a measure of some forms of wealth that lie outside 
 the line. The discussions of ordinary business life give us 
 
PREFACE TO THE THIRD EDITION. v ii 
 
 little guidance, and impose on us no restrictions in the 
 matter: for they refer almost exclusively to capital from 
 the point of view of the individual or " trade-capital " : and, 
 when they take a wider scope, they do not draw a firm and 
 clear line between capital and other forms of accumulated 
 wealth. Economists remain therefore free to choose their 
 standard definition of Capital with a view to their own con- 
 venience ; and it seems clear that the discussion of the dis- 
 tribution of the national income or dividend is that to which 
 it is most important that their use of the term should be 
 appropriate ; and this points to the treatment of " capital " 
 and "income" as correlative terms. Of course all wealth is 
 designed to yield what in pure theory may be called "an 
 income " of benefit or gain in some form or other ; but the 
 language of the market place refuses to admit so broad a 
 use of the term Income as that. It is however tolerably con- 
 sistent in commonly including a certain number of forms 
 of income, other than money income; and this consensus 
 may well be turned to account. Labour is already defined by 
 nearly all economists so as to include those activities, and 
 those only, which are commonly regarded as the source of 
 income in this broader use of the term : and most if not all 
 economists glide imperceptibly to a closely corresponding use 
 of capital when they come to discuss the problem of dis- 
 tribution. It is now proposed to do this deliberately, 
 and to define capital (from the general point of view) as 
 wealth which yields "income" in forms that are admitted 
 in the broader use of the term in the market place 1 . 
 
 1 Among minor changes, which often affect only one or two paragraphs, may 
 be mentioned those on pp. 20, 21 on the economic conditions of ancient Rome ; 
 57 n and 59 on Adam Smith; 118 on the name Economics; 179 and 183, 4 on 
 variations of elasticity of demand ; 192 on working men's budgets ; 196, 7 on the 
 pleasure of ownership; 214-9 on the plan of Bookiv.; 249, 50 on Turgot's state- 
 ment of the law of diminishing return ; 259 on the area of the earth's surface not 
 yet cultivated ; 263, 4 on conditions affecting birth-rate ; 272, 3 on vital statistics ; 
 280 n on the growth of towns; 319 on the influence of financial systems on th 
 
Vlll PREFACE TO THE THIRD EDITION. 
 
 The ambiguous term " determine " has been displaced, in 
 spite of its prestige, by " govern " or " indicate " as occasion 
 requires. Technical terms have been dispensed with, where- 
 ever it was possible to do so without great loss of clearness 
 or brevity. 
 
 In preparing this edition I have received very great 
 assistance from my wife, and much from Prof. Edgeworth ; 
 and helpful suggestions from Profe. Ashley, Mackenzie, Sidg- 
 wick and Taussig, and from Mr Bateson and Mr Berry. 
 
 apparent as distinguished from the real growth of wealth ; 329 on the inheritance 
 of acquired faculties through other than physical means ; 426 n, and 427, 8 on 
 "the long run"; 435-8 on the relation between supplementary costs and quasi- 
 rents ; 444 n, 445 n on some abnormal movements of value ; 463 n on the doctrine 
 of imputed value ; 559-561, 563 and 565, on Ricardo's doctrine as to value ; 474-6 
 on the phrase "rent does not enter into cost of production"; 625 n on "task- 
 wages"; 6614 on the absence of any broad difference between the older and the 
 newer doctrines of interest [the order of the following pages 665-72 has been 
 changed, and the summary which preceded them has been distributed between 
 Chs. i. n. and xn. of Book vi.j ; 674 on the interest of the working classes that 
 the purchasing "power of money should increase with the progress of man's 
 command over nature ; 693 on remuneration for the net evils of risk as an element 
 of normal profits ; 710 n on Petty 's anticipation of the independence of the doctrine 
 of rent of any particular form of laud tenure ; 799-805 on. mathematical versions 
 of some parts of the theory of exchange and distribution ; on the limits within 
 which such versions are applicable, and on their use within those limits. 
 
PREFACE TO THE FIKST EDITION. 
 
 ECONOMIC conditions are constantly changing, and each 
 generation looks at its own problems in its own way. 
 In England, as well as on the Continent and in America, 
 Economic studies are being more vigorously pursued now 
 than ever before ; but all this activity has only shown the 
 more clearly that Economic science is, and must be, one of 
 slow and continuous growth. Some of the best work of 
 the present generation has indeed appeared at first sight to 
 be antagonistic to that of earlier writers; but when it has 
 had time to settle down into its proper place, and its rough 
 edges have been worn away, it has been found to involve 
 no real breach of continuity in the development of the 
 science. The new doctrines have supplemented the older, 
 have extended, developed, and sometimes corrected them, 
 and often have given them a different tone by a new dis- 
 tribution of emphasis; but very seldom have subverted 
 them. 
 
 The present treatise is an attempt to present a modem 
 version of old doctrines with the aid of the new work, and 
 with reference to the new problems, of our own age. Its 
 general scope and purpose are indicated in Book I.; at the 
 end of which a short account is given of what are taken to 
 be the chief subjects of economic inquiry, and the chief 
 practical issues on which that inquiry has a bearing. /In 
 accordance with English traditions, it is held that the 
 
X PEEFACE TO THE FIRST EDITION. 
 
 functions of the science are to collect, arrange and analyse 
 economic facts, and to apply the knowledge, gained by 
 observation and experience, in determining what are likely 
 to be the immediate and ultimate effects of various groups 
 of causes ; and it is held that the Laws of Economics are 
 statements of tendencies expressed in the indicative mood, 
 and not ethical precepts in the imperative. Economic laws 
 and reasonings in fact are merely a part of the material, 
 of which Conscience and Common-sense have to make use 
 in solving practical problems, and in laying down rules 
 which may be a guide in life. 
 
 But ethical forces are among those of which the eco- 
 nomist has to take account. Attempts have indeed been 
 made to construct an abstract science with regard to the 
 actions of an "economic man," who is under no ethical 
 influences and who pursues pecuniary gain warily and 
 energetically, but mechanically and selfishly. But they 
 have not been successful, nor even thoroughly carried out ; 
 for they have never really treated the economic man as 
 perfectly selfish./ No one could be relied on better than 
 the economic man to endure toil and sacrifice with the 
 unselfish desire to make provision for his family; and his 
 normal motives have always been tacitly assumed to include 
 the family affections. But if these motives are included, 
 why not also all other altruistic motives, the action of which 
 is so far uniform in any class at any time and place, that 
 it can be reduced to general rule ? There seems to be no 
 good reason against including them : and in the present 
 book normal action is taken to be that which may be ex- 
 pected, under certain conditions, from the members of an 
 industrial group ; and no attempt is made to exclude the 
 influence of any motives, the action of which is regular, 
 merely because they are altruistic/ If the book -has any 
 special character of its own, that may perhaps be said to 
 
PREFACE TO THE FIBST EDITION. xi 
 
 lie in the prominence which it gives to this and other 
 applications of the Principle of Continuity./ 
 
 This Principle is applied not only to the ethical quality 
 of the motives by which a man may be influenced in 
 choosing his ends, but also to the sagacity, the energy 
 and the enterprise with which he pursues those ends. 
 Thus stress is laid on the fact that there is a continuous 
 gradation from the actions of " city men," which are based 
 on deliberate and far-reaching calculations, and are executed 
 with vigour and ability, to those of ordinary people who 
 have neither the power nor the will to conduct their affairs 
 in a business-like way. ' The normal willingness to save, the 
 normal willingness to undergo a certain exertion for a certain 
 pecuniary reward, or the normal alertness to seek the best 
 markets in which to buy and sell, or to search out the most 
 advantageous occupation for oneself or for one's children I 
 all these and similar phrases must be relative to the mem- f 
 bers of a particular class at a given place and time; but, 
 when that is once understood, the theory of normal value is 
 applicable to the actions of the unbusiness-like classes in the 
 same way, though not with the same precision of detail, as 
 to those of the merchant or banker. 
 
 And as there is no sharp line of division between conduct 
 which is normal, and that which has to be provisionally 
 neglected as abnormal, so there is none between normal 
 values and " current " or " market " or " occasional " values. 
 The latter are those values in which the accidents of the 
 moment exert a preponderating influence; while normal 
 values are those which would be ultimately attained, if the 
 economic conditions under view had time to work out un- 
 disturbed their full effect. But there is no impassable gulf 
 between these two ; they shade into one another by continu- 
 ous gradations. /The values which we may regard as normal 
 if we are thinking of the changes from hour to hour on a 
 
Xll PREFACE TO THE FIRST EDITION. 
 
 Produce Exchange, do but indicate current variations with 
 regard to the year's history: and the normal values with 
 reference to the year's history are but current values with 
 reference to the history of the century. For the element of 
 Time, which is the centre of the chief difficulty of almost 
 every economic problem, is itself continuous : Nature knows 
 no absolute partition of time into long periods and short ; 
 but the two shade into one another by imperceptible grada- 
 tions, and what is a short period for one problem, is a long 
 period for another. 
 
 Thus for instance the greater part, though not the whole, 
 of the distinction between Rent and Interest on capital turns 
 on the length of the period which we have in view. That 
 which is rightly regarded as interest on " free " or " floating " 
 capital, or on new investments of capital, is more properly 
 treated as a sort of rent a Quasi-rent it is called below on 
 old investments of capital. And there is no sharp line of 
 division between floating capital and that which has been 
 " sunk " for a special branch of production, nor between new 
 and old investments of capital ; each group shades into the 
 other gradually. And thus even the rent of land is seen, 
 not as a thing by itself, but as the leading species of a large 
 genus ; though indeed it has peculiarities of its own which 
 are of vital importance from the point of view of theory as 
 well as of practice. 
 
 Again, though there is a sharp line of division between 
 man himself and the appliances which he uses ; and though 
 the supply of, and the demand for, human efforts and sacrifices 
 have peculiarities of their own, which do not attach to the 
 supply of, and the demand for, material goods ; yet, after all, 
 these material goods are themselves generally the result of 
 human efforts and sacrifices. The theories of the values of 
 labour, and of the things made by it, cannot be separated : 
 they are parts of one great whole; and what differences 
 
PREFACE TO THE FIRST EDITION, Xlii 
 
 there are between them even in matters of detail, turn out 
 on inquiry to be, for the most part, differences of degree 
 rather than of kind. As, in spite of the great differences in 
 form between birds and quadrupeds, there is one Funda- 
 mental Idea running through all their frames, so the 
 general theory of the equilibrium of demand and supply 
 is a Fundamental Idea running through the frames of all 
 the various parts of the central problem of Distribution and 
 Exchange \ 
 
 Another application of the principle of Continuity is to 
 the use of terms. There has always been a temptation to 
 classify economic goods in clearly denned groups, about 
 which a number of short and sharp propositions could be 
 made, to gratify at once the student's desire for logical pre- 
 cision, and the popular liking for dogmas that have the air 
 of being profound and are yet easily handled. But great 
 mischief seems to have been done by yielding to this temp- 
 tation, and drawing broad artificial lines of division where 
 Nature has made none. The more simple and absolute an 
 economic doctrine is, the greater will be the confusion which 
 it brings into attempts to apply economic doctrines to prac- 
 tice, if the dividing lines to which it refers cannot be found 
 in real life. There is not in real life a clear line of division 
 between things that are and are not Capital, or that are 
 and are not Necessaries, or again between labour that is and 
 is not Productive. 
 
 / The notion of Continuity with regard to development is 
 common to all modern schools of economic thought, whether 
 
 i In the Economics of Industry published by my wife and myself in 1879 an 
 endeavour was made to show the nature of this fundamental unity. A short 
 provisional account of the relations of demand and supply was given before the 
 theory of Distribution; and then this one scheme of general reasoning was 
 applied in succession to the earnings of labour, the interest on capital and the 
 Earnings of Management. But the drift of this arrangement was not mad< 
 sufficiently clear; and on Professor Nicholson's suggestion, more prominence has 
 been given to it in the present volume. 
 
XIV PREFACE TO THE FIRST EDITION. 
 
 the chief influences acting on them are those of biology, as 
 represented by the writings of Herbert Spencer ; or of history 
 and philosophy, as represented by Hegel's Philosophy of 
 History, and by more recent ethico-historical studies on the 
 Continent and elsewhere. These two kinds of influences 
 have affected, more than any other, the substance of the 
 views expressed in the present book ; but their form has 
 been most affected by mathematical conceptions of Con- 
 tinuity, as represented in Cournot's Principes Mathematiques 
 de la Thdorie des Richesses. He taught that it is necessary 
 to face the difficulty of regarding the various elements of 
 an economic problem, not as determining one another in a 
 chain of causation, A determining B, B determining C, and so 
 on but as all mutually determining one another. Nature's 
 action is complex : and nothing is gained in the long run by 
 pretending that it is simple, and trying to describe it in a 
 series of elementary propositions. 
 
 Under the guidance of Cournot, and in a less degree of 
 von Thlinen, I was led to attach great importance to the 
 fact that our observations of nature, in the moral as in the 
 physical world, relate not so much to aggregate quantities, 
 as to increments of quantities, and that in particular the 
 demand for a thing is a continuous function, of which the " mar- 
 ginal" 1 increment is, in stable equilibrium, balanced against 
 the corresponding increment of its cost of production. It is 
 not easy to get a clear full view of Continuity in this aspect 
 without the aid either of mathematical symbols or of dia- 
 grams. The use of the latter requires no special knowledge, 
 
 1 The term "marginal" increment is in harmony with von Thiinen's methods 
 of thought and was suggested to me by him, though he does not actually use it. 
 It has heen for some time commonly used by Austrian economists on the initiative 
 of Prof. Wieser, and it has been adopted by Mr Wicksteed. When Jevons' Theory 
 appeared, I adopted his word "final"; but I have been gradually convinced that 
 "marginal " is the better. [In the first Edition this footnote implied wrongly that 
 the phrase, as well as the idea of, Marginal Increment could be traced to von 
 Thunen.] 
 
PREFACE TO THE FIRST EDITION. XV 
 
 and they often express the conditions of economic life more 
 accurately, as well as more easily, than do mathematical 
 symbols; and therefore they have been applied as supple- 
 mentary illustrations in the footnotes of the present volume. 
 The argument in the text is never dependent on them ; and 
 they may be omitted; but experience seems to show that 
 they give a firmer grasp of many important principles than 
 can be got without their aid ; and that there are many pro- 
 blems of pure theory, which no one who has once learnt to 
 use diagrams will willingly handle in any other way. 
 
 The chief use of pure mathematics in economic questions 
 seems to be in helping a person to write down quickly, shortly 
 and exactly, some of his thoughts for his own use : and to 
 make sure that he has enough, and only enough, premisses 
 for his conclusions (i.e. that his equations are neither more 
 nor less in number than his unknowns). But when a great 
 many symbols have to be used, they become very laborious 
 to anyone but the writer himself. And though Cournot's 
 genius must give a new mental activity to everyone who 
 passes through his hands, and mathematicians of calibre 
 similar to his may use their favourite weapons in clearing a 
 way for themselves to the centre of some of those difficult 
 problems of economic theory, of which only the outer fringe 
 has yet been touched ; yet it seems doubtful whether any- 
 one spends his time well in reading lengthy translations 
 of economic doctrines into mathematics, that have not 
 been made by himself. A few specimens of those applica- 
 tions of mathematical language which have proved most 
 useful for my own purposes have, however, been added in an 
 Appendix l . 
 
 i Many of the diagrams in this book have appeared in print already: and I 
 may take this opportunity of giving their history. Mr Henry Cunynghame wh 
 was attending my lectures in 1873, seeing me annoyed by being unable to draw 
 a series of rectangular hyperbolas, invented a beautiful and original machine t 
 the purpose. It was shown at the Cambridge Philosophical Society in 1873 ; and, 
 
XVI PREFACE TO THE FIRST EDITION. 
 
 I have to acknowledge much assistance in preparing this 
 volume for the press. My wife has aided and advised me at 
 every stage of the MSS. and of the proofs, and it owes a 
 very great deal to her suggestions, her care and her judg- 
 ment. Mr J. N. Keynes, and Mr L. L. Price have read all 
 the proofs and have never returned me any without improv- 
 ing them much : Mr Arthur Berry and Mr A. W. Flux have 
 given me valuable help in connection with the mathe- 
 matical Appendix ; and my father, Mr W. H. B. Hall and 
 Mr C. J. Clay have assisted me on special points. 
 
 to explain its use, I read a paper (briefly reported in the Proceedings, Part xv. 
 pp. 318-9), in which I described the theories of Multiple Positions of Equi- 
 librium and of Monopoly values very nearly as they are given below (Book v. 
 Ch. v. and vm.). In 1875-7 I nearly completed a draft of a treatise on The 
 Theory of Foreign Trade, with some allied problems relating to the doctrine of 
 Laisser Faire. The first Part of it was intended for general use, while the 
 second Part was technical; nearly all the diagrams that are now in Book v. 
 Ch. v., vn. and vm. [Ch. xi., xn., xin. of the present edition] were introduced in 
 it, in connection with the problem of the relation of Protection to the Maximum 
 Satisfaction of the community ; and there were others relating to Foreign Trade. 
 But in 1877 I turned aside to work at the Economics of Industry, and afterwards 
 was overtaken by an illness, Avhich nearly suspended my studies for several years. 
 Meanwhile the MSS. of my first projected treatise were lying idle: and it is to 
 them that Professor Sidgwick refers in the Preface to his Political Economy. 
 With my consent he selected four chapters (not consecutive) out of the second 
 Part, and printed them for private circulation. These four chapters contained 
 most of the substance of Book v. Ch. v. and vn., but not Ch. vm. [i.e. Ch. xi. and 
 xn. but not xm. of the third edition] of the present work; together with two 
 chapters relating to the equilibrium of foreign trade. They have been sent to many 
 economists in England and on the Continent: it is of them that Jevons speaks 
 in the Preface to the second edition of his Theory (p. xlv) ; and many of the 
 diagrams in them relating to foreign trade have been reproduced with generous 
 acknowledgments by Prof. Pantaleoni in his Pnncipii di Economia Pura. 
 
 July, 1890. 
 
CONTENTS. 
 
 [Italics are used to give references to definitions of technical terms. Asterisks 
 denote Chapters or Sections which consist largely of new matter.] 
 
 BOOK I. 
 
 PRELIMINARY SURVEY. 
 
 Chapter I. Introduction. 1. Economics is both a study of wealth and 
 a branch of the study of man. The history of the world has been shaped 
 by religious and economic forces. 2. The question whether poverty is 
 necessary gives its highest interest to economics. 3. The science is in 
 the main of recent growth. 4. The fundamental characteristic of modern 
 business is not competition, but Free industry and enterprise. 5. Pre- 
 liminary account of Value. pp. 1 9 
 
 Chapter II. The growth of free industry and enterprise. 1. Physical 
 
 causes act most powerfully in the early stages of civilization, which have 
 necessarily taken place in warm climates. In an early civilization move- 
 ment is slow ; but there is movement. 2. Divided ownership strengthens 
 the force of custom and resists changes. 3. The Greeks brought 
 Northern energy to bear on Oriental culture. Modern in many respects, 
 they yet regarded industry as belonging to slaves, and their impatience of 
 steady industry was a chief cause of their fall. 4.* The apparent 
 resemblance between the economic conditions of the Boman and modern 
 world is merely superficial : it did not anticipate modern socio-economic 
 problems ; but the Stoic philosophy and the cosmopolitan experience of the 
 later Eoman lawyers exercised considerable indirect influence on economic 
 thought and action. 5. The Teutons slow to learn from those whom 
 they had conquered. Learning kept alive by the Saracens. 6, 7. Self- 
 government by the people could exist only in the free towns ; which were 
 the precursors of modern industrial civilization. 8. The influence of 
 Chivalry and of the Church. The growth of large armies led to the 
 overthrow of the free cities. But the hopes of progress were again raised 
 by the invention of printing, the Beformation, and the discovery of the New 
 World. 9. The first benefit of the maritime discoveries went to the 
 Spanish peninsula. But soon moved further on, to Holland, to France, 
 
 and to England K" * 
 
 M. b 
 
XV111 CONTENTS. 
 
 Chapter III. The growth of free industry and enterprise, continued. 
 
 1. The character of Englishmen early showed signs of their modern 
 faculty for organized action. Their trade has been a consequence of their 
 activity in production and in navigation. The capitalist organization of 
 agriculture pioneered the way for that of manufacture, 2, 3. Influence 
 of the Keformation. 4. Origin of large business undertakings. English 
 free enterprise had a tendency towards division of labour, which was 
 promoted by the growth of consumers beyond the seas, wanting large 
 quantities of goods of simple patterns. The undertakers at first merely 
 organized supply, without supervising industry : but later collected into 
 their own factories large bodies of workers. 5. Henceforth manufacturing 
 labour was hired wholesale. The new organization increased production, 
 but was accompanied by great evils ; many of which were, however, due to 
 other causes. 6. The pressure of war, of taxes and of the scarcity 
 of food forced down real wages. But the new system had saved England 
 from French armies. 7. Progress during the nineteenth century. The 
 telegraph and printing-press enable the people now to decide on their own 
 remedies for their evils ; and we are gradually moving towards forms of 
 collectivism, which will be higher than the old, because they will be based 
 on strong self-disciplined individuality. 8. The influence of American, 
 Australian, and German experience on England. . . . pp. 33 51 
 
 Chapter IV. The growth of economic science. 1. Modern economic 
 
 science owes much to ancient thought indirectly, but little directly. The 
 study of economics was stimulated by the discovery of the mines and the 
 trade-routes of the New World. The early fetters on trade were a little 
 relaxed by the Mercantilists. 2. The Physiocrats insisted that restriction 
 is artificial, and liberty is natural ; and that the welfare of the common 
 people should be the first aim of the statesman. 3. Adam Smith 
 developed the doctrine of free trade, and found in the theory of value a 
 common centre that gave unity to economic science. 4. The study of 
 facts was carried on by Young, Eden, Malthus, Tooke and others. 5. 
 Many of the English economists at the beginning of the century had a bias 
 towards rapid generalization and deductive reasoning, but they were well 
 acquainted with affairs and studied the condition of the working classes. 
 6, 7. They did not however allow enough for the dependence of man's 
 character on his circumstances. The influence of socialist aspirations and 
 biological studies in this respect. John Stuart Mill. Characteristics of 
 modern work. 8. Economists of other countries. . . pp. 52 72 
 
 Chapter V.* The SCOpe Of economics. 1, 2. A unified social science is 
 desirable, but unattainable. The value of Comte's suggestions, the weakness 
 of his negations. 3, 4. Economics is chiefly, but not exclusively, 
 concerned with those motives which can be measured by money ; and seeks 
 generally for broad results that are little affected by individual peculiarities. 
 5. Habit itself is largely based on deliberate choice. 6, 7. Economic 
 motives are not exclusively selfish. The desire for money does not exclude 
 other influences ; and may itself arise from noble motives. The range of 
 economic measurement may gradually extend to much philanthropic 
 
CONTENTS. x ix 
 
 action. 8. The motives to collective action are of great and growing 
 importance to the economist. 9. Economists deal mainly with one side 
 of man's life ; but it is the life of a real man, not of a fictitious being. 
 
 pp. 7390 
 
 Chapter VI.* Methods of study, The nature of economic law. 1. 
 
 Almost every step in economics needs both induction and deduction ; the 
 analytical and historical schools must use both, though in different 
 proportions: neither school can dispense with the aid of the other. 
 2, 3, 4. The work of analysis and deduction in economics is often 
 misunderstood ; it does not extend to forging long chains of deductive 
 reasoning. The interpretation of facts of past or contemporary history often 
 involves subtle analysis ; and almost always does so, when it is applied 
 for the guidance of conduct. Strategy and tactics. 5. Untrained 
 common sense can often carry analysis far: but it can seldom discover 
 obscure causes, and especially not the causes of causes. Functions of the 
 machinery of science. 6. Social Laics. Economic Laws. Normal, The 
 Action of a Law. Economic laws are analogous not to the law of gravita- 
 tion, but to secondary laws of natural sciences, relating to the action of 
 heterogeneous forces. All scientific doctrines, including economic doctrines, 
 assume certain conditions and are in this sense hypothetical. 7. The 
 distinction between a Pure and an Applied science is not absolute, but one 
 of degree. There may be but a short step from an applied science to 
 an Art pp. 91 110 
 
 Chapter VII. Summary and Conclusion, 1. Summary. 2. Scien- 
 tific inquiries are to be arranged with reference, not to the practical aims 
 which they subserve, but to the nature of the subjects with which they are 
 concerned. 3. The chief subjects of economic investigation. 4. 
 Practical issues which stimulate the inquiries of the English economist at 
 the present time, though they do not lie wholly within the range of his 
 science. PP- m 118 
 
 BOOK II. 
 
 SOME FUNDAMENTAL NOTIONS. 
 
 Chapter I. Introductory. 1. Economics regards Wealth as satisfying 
 Wants, and as the result of Efforts. 2. The difficulties of classify- 
 ing things which are changing their characters and their uses. 3. 
 Economics must follow the practice of every-day life. 4. Each term 
 must have a definition corresponding to its leading use: and this must be 
 supplemented by an interpretation clause when necessary. pp. 11 
 
 Chapter II. Wealth. 1. The technical use of the term Goods. Material 
 goods. Personal goods. External and Internal goods. Transferable and 
 non-transferable goods. Free goods. Exchangeable goods. 2. A person s 
 
 62 
 
XX CONTENTS. 
 
 wealth consists of those of his External goods which are capable of a money 
 measure. 3. But sometimes it is well to use the term Wealth broadly so 
 as to include all Personal wealth. 4. The individual's share of Collective 
 goods. 5. National Wealth. Cosmopolitan wealth. The juridical basis 
 of rights to wealth pp. 124131 
 
 Chapter III. Production. Consumption. Labour. Necessaries. 
 
 1. Man can produce and consume only utilities, not matter itself. 
 Consumers' and Producers 1 Goods. 2. Productive is a transitive ad- 
 jective ; when precision is necessary the implied substantive must be 
 supplied. 3. Necessaries for existence, and for efficiency. 4. There is 
 waste when any one consumes less than is strictly necessary for efficiency. 
 Conventional necessaries pp. 132 140 
 
 Chapter IV.* Capital. Income. 1. The term Capital has many 
 different uses. The productiveness and the prospectiveness of capital 
 respectively control the demand for it, and the supply of it. 2. 
 Differences between capital and other forms of wealth mainly differences of 
 degree, corresponding to different forms of income yielded by them. 3, 4. 
 Income viewed broadly. Money income and the correlative term Trade 
 capital. 5, 6. Social capital, the result of labour and saving. 7. 
 Consumption capital. Auxiliary capital. 8. Objections to regarding 
 social capital as consisting only of Instrumental goods. 9. The most 
 important uses of the term Social Capital are in connection with the 
 problem of Distribution ; and it is therefore so to be defined that when the 
 real income of society is divided up into the shares of labour, capital 
 (including organization), and land, nothing shall be omitted, and nothing 
 counted twice. 10. Circulating and Fixed capital, Specialized capital' 
 Personal capital. 11. Net Income. 12. Net Advantages. The Usance 
 of wealth. Interest. Profits on Capital. Earnings of Management. Rent. 
 13. Social income. 14. National income a better measure of general 
 economic prosperity than national wealth. . . . pp. 141 158 
 
 BOOK III. 
 
 DEMAND AND CONSUMPTION. 
 
 Chapter I. Introductory. 1. The relation in which the present Book 
 stands to the three following. 2. Insufficient attention has been paid 
 till recently to Demand and Consumption. . . . pp. 159 161 
 
 Chapter II. Wants in relation to activities. 1. Desire for variety. 
 
 2, 3. Desire for distinction. 4. Desire for distinction for its own 
 sake. The position held in Economics by the theory of Consumption. 
 
 pp. 162-167 
 
 Chapter III. The Law Of demand. 1. The Law of Satiable Wants or 
 Diminishing Utility. Total Utility. Marginal Increment. Marginal 
 Utility. 2. Marginal Demand Price. 3. Account must be taken of 
 variations in the utility of money. 4. A person's Demand Schedule. 
 
CONTENTS. xx i 
 
 Meaning of the term an increase of demand. 5. Demand of a Market. 
 Laic of Demand. 6. Demands for rival commodities. pp. 168 177 
 
 Chapter IV. Law of demand, continued. Elasticity of demand. 1. 
 
 Definition of Elasticity of Demand. 2, 3. A price which is low relatively 
 to the rich may be high relatively to the poor. 4.=^ General causes 
 affecting elasticity. 5. Difficulties connected with the element of Time. 
 6. Changes in fashion. 7. Difficulties in the way of obtaining the 
 requisite statistics. NOTE on Statistics of consumption. pp. 178 192 
 
 Chapter V. The choice between different uses of the same thing. 
 
 1, 2. The distribution of a person's means between the gratifications of 
 different wants; so that the same price measures equal utilities at the 
 margin of different purchases. 3.^ The distribution between present 
 and future needs. Discounting future benefits. 4. Distinction between 
 discounting future pleasures, and discounting future pleasurable events. 
 
 pp. 193199 
 
 Chapter VI.* Value and utility. 1. Price and Utility. Consumers 1 
 Rent. Conjuncture. 2. Consumers' rent in relation to the demand of 
 an individual; 3, 4 and in relation to a market. This analysis gives 
 definite expression to familiar notions, but introduces no new subtlety. 
 Individual differences of character may be neglected when we consider the 
 average of large numbers of people ; and if these include rich and poor in 
 equal proportions, price becomes a fair measure of utility, 5 provided 
 allowance is made for collective wealth. 6. Bernoulli's suggestion. 
 Broader aspects of the utility of wealth pp. 200213 
 
 BOOK IV. 
 
 THE AGENTS OF PRODUCTION. 
 LAND, LABOUK, CAPITAL AND ORGANIZATION. 
 
 Chapter I.* Introductory. 1. The agents of production are Land, 
 Labour and Capital: under Capital is included Business Organization, 
 which must for some purposes be studied separately. For other purposes 
 Capital may be combined with Labour, and the agents of production become 
 Nature and Man. 2. Marginal disutility. Although labour is sometimes 
 its own reward, we may regard its supply as governed by the price which is 
 to be got for it. The Supply Schedule for a commodity. Supply Price. 
 
 pp. 214219 
 
 Chapter II. The fertility of land. 1. The notion that land is a free 
 gift of nature while the produce of land is due to man's work is not s 
 accurate : but there is a truth underlying it. 2. Mechanical and chemi- 
 cal conditions of fertility. 3. Man's power of altering the character of 
 the soil. 4. The original qualities count for more, and the artific 
 less, in some cases than in others. In any case the extra return 
 tional capital and labour diminishes sooner or later. . PP- 
 
XX11 CONTENTS. 
 
 Chapter III. The fertility of land, continued. The law of diminishing 
 
 return. 1. Land may be under-cultivated and then the return due to 
 extra capital and labour will increase, until a maximum rate has been 
 reached, after which it will diminish again. Improved methods may 
 enable more capital and labour to be profitably applied. The Law relates 
 to the amount of the produce, not its value. 2. A Dose of capital and 
 labour. Marginal dose, marginal return, margin of cultivation. The 
 marginal dose is not necessarily the last in time. Surplus Produce ; its 
 relation to rent. Eicardo confined his attention to the circumstances of an 
 old country. 3. Every measure of fertility must be relative to place and 
 time. 4. As a rule the poorer soils rise in value relatively to the richer, 
 as the pressure of population increases. 5. Eicardo said that the 
 richest lands were cultivated first ; this is true in the sense in which he 
 meant it. But it was misunderstood by Carey, who collected instances of 
 new settlers passing by lands which have ultimately become very valuable. 
 6. But Eicardo had underrated the indirect advantages which a dense 
 population offer to agriculture. 7. The Laws of Eeturn from fisheries, 
 mines and building ground. NOTE on the meaning of the phrase " a Dose 
 of capital and labour." pp. 229 251 
 
 Chapter IV. The supply of labour. The growth of numbers. l, 2. 
 
 History of the doctrine of population. 3. Malthus. 4, 5. Causes that 
 determine marriage-rate and birth-rate. 6, 7. History of population in 
 England. NOTE on International vital statistics. . . pp. 252273 
 
 Chapter V. The supply of labour, continued. Health and strength. 
 
 1, 2. General conditions of health and strength. 3. The necessaries 
 of life. 4. Hope, freedom and change. 5. Influence of occupation. 
 6. Influence of town life. 7, 8. Nature left to herself tends to weed 
 out the weak. But much well-meant human action checks the increase of 
 the strong, and enables the weak to survive. Practical conclusion. 
 
 pp. 274285 
 
 Chapter VI. The supply of labour, continued. Industrial training. 
 
 1, 2. Unskilled labour a relative term. Skill with which we are 
 familiar, we often do not recognise as skill. Mere manual skill is losing 
 importance relatively to general intelligence and vigour. General ability 
 and specialized skill. 3, 4, 5. Liberal and technical education. Ap- 
 prenticeships. 6. Education in art. 7. Mill thought that the 
 industrial classes were divided into four well-marked grades ; but all such 
 sharp lines of division are tending to fade away. . . pp. 286 301 
 
 Chapter VII. The growth Of wealth. 13. Until recently there was 
 little use of expensive forms of auxiliary capital ; but they are now increas- 
 ing fast, as is also the power to accumulate. 4. Security as a condition 
 of saving. 5. The growth of a money economy gives new temptations to 
 extravagance ; but it has enabled people who have no faculty for business 
 to reap the fruits of saving. 6. The chief motive of saving is family 
 affection. 7. Sources of accumulation. Public accumulations. Co-opera- 
 tion. 8. Choice between present and deferred pleasures. Some waiting, 
 
CONTENTS. xxiii 
 
 or postponement of gratification is generally involved in the accumulation 
 of wealth. Interest is its reward. 9, 10. The higher the reward, the 
 greater the rate of saving as a rule. But there are exceptions. NOTE on the 
 statistics of the growth of wealth. ..... pp. 302^-320 
 
 Chapter VIII. Industrial organization. 1, 2. The doctrine that 
 
 organization increases efficiency is old, but Adam Smith gave it a new life. 
 Economists and biologists have worked together in examining the influence 
 which the struggle for survival exerts on organization ; its harshest features 
 softened by heredity. 3. Ancient castes and modern classes. 4, 5. 
 Adam Smith was cautious but many of his followers exaggerated the 
 economy of natural organization. The development of faculties by use and 
 their inheritance through early training and possibly in other ways. 
 
 pp. 321330 
 
 Chapter IX. Industrial organization, continued. Division of labour. 
 
 The influence Of machinery. 1. Practice makes perfect. 2. In 
 the lower, but not always in the higher grades of work extreme specialization 
 increases efficiency. 3. The influences exerted by machinery on the 
 quality of human life are partly good and partly evil. 4. Machine-made 
 machinery is introducing the new era of Interchangeable Parts. 5. 
 Illustration from the printing trade. 6. Machinery relieves the strain on 
 human muscles ; and thus prevents monotony of work from involving 
 monotony of life. 7. Specialized skill and specialized machinery 
 compared. External and Internal economies. . . pp. 331347 
 
 Chapter X. Industrial organization, continued. The concentration 
 of specialized industries in particular localities. 1. Localized 
 
 industries : their primitive forms. 2. Their various origins. 3. Their 
 advantages ; hereditary skill ; the growth of subsidiary trades ; the use of 
 highly specialized machinery ; a local market for special skill. 4. The 
 influence of improved means of communication on the geographical 
 distribution of industries. Illustration from the recent history of England. 
 
 pp. 348358 
 
 Chapter XI. Industrial organization, continued. Production on a 
 
 large scale. 1- The typical industries for our present purpose are those 
 of manufacture. The economy of material. 24. The advantages of a 
 large factory in the use and improvement of specialized machinery, in 
 buying and selling; in specialized skill; and in the subdivision of the 
 work of business management. Advantages of the small manufacturer in 
 superintendence. Modern developments of knowledge act in a great 
 measure on his side. 5. Large and small trading establishments. 6. 
 Transport trades. Mines and quarries PP- 359370 
 
 Chapter XII. Industrial organization, continued. Business manage- 
 ment. 1. The primitive handicraftsman dealt directly with the consu 
 and so do as a rule the learned professions now. 2. But in most 
 businesses the services of a special class of undertakers intervene. 3, 4^ 
 The chief risks of undertaking sometimes separated from the detailed wot 
 of management in the building and some other trades. The und 
 who is not an employer. 5. The faculties required in the 
 
XXIV CONTENTS. 
 
 manufacturer. 6. The son of a business man starts with so many 
 advantages, that one might expect business men to form something like a 
 caste ; reasons why this result doos not follow. 7. Private partnerships. 
 8, 9. Public joint stock companies. Government undertakings. 10. 
 Co-operative association. Profit-sharing. 11. The working man's 
 opportunities of rising. He is hindered less than at first-sight appears, by 
 his want of capital ; for the Loan-fund is increasing rapidly. But the 
 growing complexity of business is against him. 12. An able business 
 man speedily increases the capital at his command; and one who is not 
 able generally loses his capital the more rapidly, the larger his business is. 
 These two forces tend to adjust capital to the ability required to use it well. 
 Business ability in command of capital has a fairly defined supply price in 
 such a country as England pp. 371 392 
 
 Chapter XIII. Conclusion. The law of increasing in relation to that 
 
 of diminishing return. 1. Summary of the later chapters of this 
 Book. 2. Cost of production should be taken with reference to a Repre- 
 sentative Firm, which has normal access to the economies Internal and 
 External belonging to a given aggregate volume of production. The Laws 
 of Constant Return and Increasing Return. 3. An increase of numbers 
 is generally accompanied by a more than proportionate increase of collective 
 efficiency pp. 393400 
 
 BOOK V. 
 
 THE THEORY OF THE EQUILIBRIUM OF DEMAND AND 
 
 SUPPLY. 
 
 Chaptef I. On markets. ! Introductory. 2. Definition of a Market. 
 3. Limitations of a market with regard to Space. General conditions 
 which affect the extent of the market for a thing ; suitability for grading 
 and sampling ; portability. 4. Highly organized markets. 5. Even 
 a small market is often subject to indirect influences from great distances. 
 6. Limitations of market with regard to Time. . . pp. 401 407 
 
 Chapter II. Temporary equilibrium of demand and supply. 1. in a 
 
 casual barter there is generally no true equilibrium. 2. In a local corn 
 market a true, though temporary, equilibrium is generally reached. 3. 
 As a rule, the marginal utility of money to the several dealers does not 
 appreciably change during the dealing in a corn market, but it does in a 
 labour market. NOTE on Barter pp. 408 415 
 
 Chapter III. Equilibrium of normal demand and supply. 1. Nearly 
 
 all dealings in commodities that are not very perishable, are affected by 
 calculations of the future. 2. Real and Money Cost of production. 
 Expenses of production. Factors of production. 3. The Law of Sub- 
 stitution. 4. The position from which we start : we assume free play 
 for demand and supply. Cost of production by a Representative Firm. 
 
CONTENTS. xxv 
 
 5. Supply Schedule. 6. Equilibrium- amount and equilibrium-price. 
 Stable equilibria. Looseness of the connection between the supply-price of 
 a commodity and its real cost of production. True significance of a 
 position of normal equilibrium. Meaning of the phrase In the long run. 
 7. The influence of utility on value preponderates during short periods, 
 but that of cost of production in the long run. . . pp. 415 423 
 
 Chapter IV. The investment of capital in a business, Prime cost and 
 
 total COSt. 1. Motives determining the investment of capital in the 
 case of a man who makes a thing for his own use. Balancing of future 
 pleasures against present. 2. Investment of capital by the modern 
 business man. Accumulation of past and discounting of future outlays and 
 receipts. Difficulty of distinguishing between expenditure on current and 
 on capital account. 3. The margin of profitableness is not a point on 
 any one route, but a line intersecting all routes. 4. Prime Cost. Supple- 
 mentary and Total cost. Where there is much fixed capital, prices can fall 
 far below their normal level without reaching Prime cost. 5.^ The income 
 that covers supplementary costs is a part of normal profits in the long run ; 
 but for a short run it may be regarded as a Quasi-rent on investments of 
 capital and energy, as will be explained more fully later on. [See 
 Corrigenda.] pp. 429438 
 
 Chapter V. Equilibrium of normal demand and supply, continued. 
 The term Normal with reference to long and short Periods. 1. 
 
 Elasticity of the term Normal in popular as well as in academic use. 2, 3. 
 Long periods and short periods. Studies of the equilibrium of normal demand 
 and supply may be divided into two classes as the periods to which they 
 relate are long, or comparatively short. 4. For short periods appliances 
 of production have to be taken for granted, and the income derived from 
 them is to be regarded as yielding a Quasi-Kent. 5. But for long 
 periods the supply price is that which is just needed to call forth those new 
 investments of capital, material and personal, which are required to make 
 up a certain aggregate volume of production. 6. Scope of the remaining 
 Chapters of Book V., some of which may be provisionally omitted. 
 
 pp. 439451 
 
 Chapter VI. Joint and composite demand : joint and composite supply. 
 
 1. Derived demand and joint demand. Illustration taken from a labour 
 dispute in the building trade. General Law of Derived Demand. 2. 
 Conditions under which a check to supply may raise much the price of a 
 factor of production. 3. Composite Demand. The distribution of an 
 economic good between several uses. 4. Joint supply. Derived supply 
 schedule. 5. Composite supply. Kival commodities cannot generally 
 remain in the field together, if any of them obey the law of increasing 
 return. 6. Complex relations between commodities. pp. 452463 
 
 Chapter VII. Prime and total Cost in relation to joint products. Cost 
 of marketing. Insurance against risk. Cost of reproduction. 1,2. 
 
 Difficulties of assigning to each branch of a mixed business its proper 
 share of the expenses of production, and especially of marketing. 3. 
 Insurance against loss by fire or sea. Other business risks. 4 Un- 
 certainty is an evil in itself. 5. Cost of Reproduction. pp. 
 
XXVI CONTENTS. 
 
 Chapter VIII. On the value of an appliance for production in relation 
 
 to that Of the things produced by it. 1, 2. The question whether 
 the income derived from a factor of production is to be regarded as due to a 
 differential advantage and therefore as partaking of the nature of a rent. 
 General proposition as to the incidence of taxes on different kinds of 
 incomes from appliances of production. 3 5. Kicardo's doctrine that 
 Rent does not enter into cost of production contains an important truth; but 
 needs to be interpreted in rather a constrained sense, especially when 
 applied to any one kind of produce. 6. When rightly interpreted, it is 
 as true of urban as of rural rents. 7. Mining royalties are not rents. 
 
 pp. 473485 
 
 Chapter IX. On the value of an appliance for production in relation 
 to that of the things produced by it, continued. 1. When a new 
 
 country is first settled, land is to be regarded as yielding profits rather than 
 rent. 2. Bent emerges later ; and the shorter the period under conside- 
 ration, the wider are the classes of improvements, the income from which 
 is to be regarded as rent. 3. The quasi-rent of machinery and other 
 implements. 4. The analogy between quasi-rent and rent relates only 
 to short periods, and has no bearing on the broader problems of economic 
 progress. pp. 486492 
 
 Chapter X. On the value of an appliance for production in relation to 
 that of the things produced by it, continued. Situation rent. 
 
 Composite rent. 1. Influence of situation on the value of agricultural 
 land. In all trades access to external economies depends partly on situa- 
 tion. 2. Situation rent. 3. Exceptional cases in which the income 
 derived from advantageous situation is to be regarded as profits rather than 
 rent. 4. The several elements of a Composite rent cannot always be 
 distinguished pp. 493499 
 
 Chapter XI. The equilibrium of normal demand and supply, con- 
 cluded. Multiple positions of equilibrium. 1. The terms average 
 and aggregate expenses of production have a definite meaning only in a 
 perfectly Stationary State ; but in that state average and normal expenses 
 would be identical. 2. Modes of action of the law of increasing return. 
 3. Theory of stable and unstable equilibria. 4. Limitations of the 
 theory. 5. Deficiencies of the Statical method in economics. 
 
 pp. 500517 
 
 Chapter XII. Theory of changes hi normal demand and supply, 
 in relation to the doctrine of maximum satisfaction. 1. in- 
 troduction. 2. Effects of an increase of normal demand. 3. Effects 
 of an increase of normal supply. 4. The cases of constant, diminishing 
 and increasing return. 5 7. Statement and limitations of the doctrine 
 of Maximum Satisfaction. . . . . . . pp. 518531 
 
 Chapter XIII. The Theory of monopolies. 1. We are now to compare 
 
 the monopolist's gains from a high price with the benefits to the public of 
 a low price. 2. The primd facie interest of the monopolist is to get the 
 maximum Net Revenue. 3. The Monopoly Revenue Schedule. 4. A 
 
CONTENTS. 
 
 tax, fixed in total amount, on a monopoly, will not diminish production 
 nor will one proportioned to monopoly net revenue; but it will have that 
 effect if it is proportional to the quantity produced. 5. A monopolist 
 can often work economically. 6. He may lower his price with a view to 
 the future development of his business, or from a direct interest in the 
 welfare of consumers. 7. Total Benefit. Compromise Benefit. 8. The 
 public importance of the statistical study of the law of demand and of 
 consumers' rent pp< 532^547 
 
 Chapter XIV, Summary of the general theory of equilibrium of 
 demand and supply, NOTE on Kicardo's Theory of value. 
 
 pp. 548565 
 
 BOOK VI. 
 
 VALUE, OR DISTRIBUTION AND EXCHANGE. 
 Chapter I.# Preliminary survey of distribution and exchange, 1. 
 
 The Physiocrats assumed, in accordance with the peculiar circumstances of 
 their time and country, that wages were at their lowest possible level, and 
 that much the same was true of the interest on capital. These rigid 
 assumptions were partially relaxed by Adam Smith, and by Malthus. 
 2 5. A series of hypothetical illustrations of the influence of demand 
 in distribution drawn from a society, in which the problem of the relations 
 between capital and labour do not exist. 69. The influence of 
 demand in distribution; the action of the law of substitution being 
 directed by business experts. Marginal uses do not govern value; but, 
 together with value, they are governed by the general conditions of demand 
 and supply. The net product of a particular kind of labour ; and of capital. 
 The demand for capital in general. 10. The national dividend is taken 
 to include those elements of income which are reckoned as such in ordinary 
 discourse pp. 566 589 
 
 Chapter II.* Preliminary survey of distribution and exchange, con- 
 tinued. 1. The causes affecting the supply of the agents of production 
 exert a coordinate influence with those affecting demand over distribution. 
 24. Kecapitulation of the causes, discussed in Book IV., which affect 
 the supply of various forms of labour and capital. The irregular influence 
 which an increase in remuneration exerts on the exertion put forth by an 
 individual. The more regular correspondence between normal wages and 
 the growth of the population in numbers and vigour, especially the latter. 
 The general influence exerted on the accumulation of capital and other 
 forms of wealth, by the benefits to be derived from saving. 5. Land may 
 be regarded as a special form of capital in relation both to the influence of 
 demand in distribution, and to the application of the resources of an 
 individual in production : but it stands on a different footing from capital 
 relatively to that normal influence of the forces of supply in distribution, 
 
xxvili CONTENTS. 
 
 which we are considering in the present chapter. 6. A technical 
 discussion as to consumer's surplus ; worker's surplus ; saver's surplus ; 
 and the temporary producer's surplus or quasi-rent yielded by appliances 
 for production made by man. 7. The mutual relations between the 
 earnings and efficiencies of different groups of workers. 8. We assume 
 throughout no more enterprise, knowledge and freedom of competition 
 than are in fact characteristic of the particular group of workers, employers, 
 &c. at the place and time under discussion. 9 11. On the relations 
 between labour in general and capital in general. Capital aids labour. 
 And it competes with labour for the field of employment : but this phrase 
 needs to be interpreted carefully. Its general meaning, at all events with 
 regard to normal results, is that some kinds of labour aided by much 
 waiting (or saving) compete for employment with other kinds of labour 
 aided by but little waiting. The influence exerted on wages by the growth 
 of wealth in other forms than trade capital. The limited sense in which it 
 is true that wages depend on advances made by capital. The flow of 
 resources to a particular employer may come from consumers of his special 
 wares. But to say that the flow of the resources which sustain production 
 comes from consumers in general, is only another way of saying that it 
 comes from the national dividend. NOTE on the doctrine of the Wages 
 Fund pp. 590623 
 
 Chapter III. Demand and Supply in relation to Labour. Real and 
 
 Nominal Earnings. ! Competition tends to make weekly wages in 
 similar employments not equal, but proportionate to the efficiency of the 
 workers. Time-earnings. Payment by Piecework. Efficiency-earnings. 
 Time-earnings do not tend to equality but efficiency-earnings do. 2, 3. 
 Real wages and Nominal wages. Allowance must be made for variations 
 in the purchasing power of money, with special reference to the consump- 
 tion of the grade of labour concerned ; and for trade expenses and all inci- 
 dental advantages and disadvantages. 4. Wages partly paid in kind. 
 5. The Truck System. 6. Uncertainty of success and irregularity of 
 employment. 7. Supplementary earnings. Family earnings. 8. 
 The attractiveness of a trade does not depend merely on its money- 
 earnings, but its Net Advantages. Influence of individual and national 
 character. Peculiar conditions of the lowest grade of workers. 
 
 pp. 624637 
 
 Chapter IV. Demand and Supply in relation to Labour, continued. 
 
 1. The importance of many peculiarities in the action of demand and 
 supply with regard to labour depends much on the cumulativeness of their 
 effects ; thus resembling the influence of custom. 2 4. First peculiarity : 
 the worker sells his work, but he himself has no price. Consequently the 
 investment of capital in him is limited by the means, the fore-thought, and 
 the unselfishness of his parents. Importance of a start in life. Influence 
 of moral forces. 5. Second peculiarity. The worker inseparable from his 
 work. 6. Third and fourth peculiarities. Labour is perishable, and the 
 sellers of it are often at a disadvantage in bargaining. . pp. 638 649 
 
CONTENTS. 
 
 Chapter V. Demand and supply in relation to labour, concluded. 
 
 1. The fifth peculiarity of labour consists in the great length of time 
 required for providing additional supplies of specialized ability. 2. 
 Parents in choosing trades for their children must look forward a whole 
 generation; difficulties of forecasting the future. 3. Movements of 
 adult labour are of increasing importance in consequence of the growing 
 demand for general ability. 4. Resume of the distinction between 
 long and short periods with reference to normal value. 5, 6. Fluctua- 
 tions of the special earnings (or quasi-rent) of skill and ability, as distin- 
 guished from those which compensate for the exertion involved in any 
 particular task. 7. The extra income earned by natural abilities may 
 be regarded as a rent, when we are considering the sources of the 
 incomes of individuals, but not with reference to the normal earnings of a 
 trade pp. 650-660 
 
 Chapter VI, Demand and supply in relation to capital. i#. The 
 
 theory of interest has been improved recently in many details, but has not 
 undergone any substantial change. 2. The true nature of interest has 
 been in the main well understood by most economists, since the time of 
 Eicardo. But it was misconceived in the Middle Ages, 3 and by 
 Eodbertus and Marx. 4, 5. The Gross interest paid by the borrower 
 includes some insurance against risks, both real and personal, and some 
 earnings of management as well as true or Net interest. It therefore 
 does not tend to equality as net interest does. NOTE on the Purchasing 
 Power of Money in relation to the Eeal Eate of Interest. pp. 661674 
 
 Chapter VII. Demand and supply hi relation to Capital, Business 
 Power and Industrial Organization. 1. The one-sided action of 
 
 the law of Substitution. The ultimate and indirect services rendered by 
 any form of business management play very little part in determining 
 its success in the Struggle for Survival. Services of those who pioneer. 
 2, 3, 4. The action of the Law of Substitution in controlling Earnings 
 of Management, illustrated by comparing firstly the services of foremen 
 with those of ordinary workmen, secondly those of heads of businesses with 
 those of foremen, and lastly those of the heads of large and small busi- 
 nesses. 5. Position of the undertaker who uses much borrowed capital. 
 6. Joint-stock companies. 7. General tendency of modern methods 
 of business to adjust earnings of management to the difficulty of the work 
 done PP- 675-688. 
 
 Chapter VIII. Demand and supply hi relation to Capital and 
 
 Business Power, concluded. 1. We have next to inquire whether 
 there is any general tendency of the rate of profits to equality. In a 
 large business some Earnings of Management are classed as salaries; 
 and in a small one much wages of labour are classed as profits ; and in 
 consequence profits appear higher in small businesses than they really 
 are. 2. The normal annual rate of profits on the capital employed 
 is high where the circulating capital is large relatively to the fixed ; and 
 especially where the wages-bill is very large relatively to the capital. 
 3, 4. Each branch of trade has its customary or fair rate of profits on 
 
XXX CONTENTS. 
 
 the turnover. 5. Profits are a constituent element of normal supply- 
 price ; but the income derived from capital already invested, in a material 
 form or in the acquisition of skill, is generally a quasi-rent. 6 9. A 
 comparison between profits and other earnings ; with a study of the points 
 in which profits resemble, and those in which they differ, from professional 
 earnings and wages. 10. The so-called rent of rare natural abilities is 
 more prominent in business profits than in many, though not all, profes- 
 sional earnings pp. 689 704 
 
 Chapter IX. Demand and supply in relation to Land. 1, 2. The 
 
 rent of land is a species of a large genus. For the present we suppose 
 land to be cultivated by its owners. -Besum6 of earlier discussions. 3. 
 A rise in the real value of produce generally raises the produce value of 
 the surplus, and its real value even more. Distinction between the labour 
 value, and the general purchasing power of produce. 4. Effects 
 of improvements on producer's surplus. 5. Eicardo's doctrine of 
 producer's surplus is generally applicable to nearly all systems of land 
 tenure. But in the modern English system the broad line of division 
 between the landlord's and the farmer's share is also that which is most 
 important for science. 6. Land, whether agricultural or urban, when 
 regarded from the point of view of its individual owner or purchaser, is 
 merely a particular form of capital. 7. The highest urban rents are 
 chiefly paid by traders : but ground rent does not enter into the marginal 
 price of the services of the trader in any sense in which it does not enter 
 into those of the farmer or manufacturer. 8. The capital value of land. 
 NOTE on Bicardo's doctrine as to the incidence of taxes and the influence 
 of improvements in agriculture pp. 705 721 
 
 Chapter X. Demand and supply in relation to Land, continued. 
 
 Land Tenure. ! Early forms of Land-tenure have generally been 
 based on partnerships, the terms of which are determined by custom, rather 
 than by conscious contract ; the so-called landlord is generally the sleeping 
 partner. 2, 3. But custom is much more plastic than at first appears, 
 as is shown even by recent English history. Caution is needed when 
 applying Bicardian analysis to modern English land problems ; as well as 
 to earlier systems. The terms of partnership in them were vague, elastic, 
 and capable of unconscious modification in many ways. 4, 5. The 
 advantages and disadvantages of metayage and peasant-proprietorship. 
 6, 7. The English system enables the landlord to supply that part of the 
 capital for which he can be easily and effectively responsible ; and it gives 
 considerable freedom to the forces of selection, though less than there is 
 in other branches of industry. 8, 9. Large and small holdings. Allot- 
 ments co-operation. 10. Difficulty of deciding what are normal prices 
 and harvests. The tenant's freedom to make and reap the fruits of improve- 
 ments. 11. Conflict between public and private interests in the matter 
 of building, open spaces, and in other matters ... pp. 722 744 
 
 Chapter XI. General view of Distribution. 14. Summary of the 
 
 preceding eight chapters, in which is traced a thread of continuity lying 
 across that traced in Book v. Chapter xiv., and establishing a unity between 
 the causes that govern the normal values of the various agents and appliances 
 
CONTENTS. xxx i 
 
 of production, material and human. 5. The various agents of produc- 
 tion may be competitors for employment, but they are also the sole source 
 of employment for one another. 6. How an increase of capital enriches 
 the field of employment for labour. 7. An increase either in the number 
 or in the efficiency of any group of workers generally benefits other workers : 
 but the former injures, while the latter benefits themselves. 810. 
 Kelations between the interests of different classes of workers in the same 
 business and in the same trade pp. 745 755 
 
 Chapter XII. The influence of Progress on Value, 1. The richness 
 
 of the field of employment for capital and labour in a new country 
 depends partly on the access to markets in which it can sell its goods 
 and mortgage its future incomes for present supplies of what it wants. 
 2, 3. England's foreign trade in last century increased her command 
 over comforts and luxuries, and only within recent years has much in- 
 creased her command over necessaries. 4. Her direct gains from the 
 progress of manufactures have been less than at first sight appears ; but 
 those from the new means of transport have been greater. 5. Changes 
 in the labour values of corn, meat, house-room, fuel, clothing, water, 
 light, news, and travel. 6 8. Progress has raised the labour- value of 
 English land, urban and rural, taken together ; though it has lowered the 
 value of most kinds of material appliances ; and the increase of capital has 
 lowered its proportionate, but not its total income. 9, 10. Nature and 
 causes of changes in the earnings of different industrial classes. 11. The 
 earnings of exceptional ability. 12. Progress has done more than 
 is generally thought to raise the wages of labour, and has probably lessened 
 rather than increased, the inconstancy of employment of free labour ; but 
 very great evils remain. 13. The broader influences of progress. Earn- 
 ings in relation to the Standard of Life, that is of activities as well as of 
 wants. Mischievous ambiguity of the phrase the Standard of Comfort. 
 14. Progress in relation to leisure. The wastefulness of excessive work. 
 15. In some trades shorter hours combined with double shifts would 
 bring almost unmixed gain. 16. But in many trades shortening the 
 hours of labour would lessen the output. 17. Fallacy of supposing that 
 such a diminution of the hours of work, as did not increase efficiency at 
 least in proportion, could permanently increase the demand for labour or the 
 constancy of employment. 18. Fallacy of supposing that, because one 
 trade can gain by making its labour scarce, therefore all trades can do so. 
 The untrustworthiness of direct appeals to facts and of the arguments post 
 hoc ergo propter hoc. 19. General conclusions as to the good and evil of 
 a reduction of the hours of labour PP- 757790 
 
 Mathematical Appendix PP- 791-811 
 
 Index pp. 813-823 
 
COERIGENDA. 
 
 Page 214, delete second marginal note 
 
 273, the last number in the table should be 2-2, not 12-2 
 
 ,, 301, 11. 4, 5, should read the vigour of the people as a whole, if not their 
 
 numbers, and both the numbers and vigour of any trade in particular 
 .,, 435, the second marginal note should read The income that covers supple- 
 mentary costs is a part of normal projits in the long run ; but for a 
 short run it may be regarded as a Quasi-rent on investments of capital 
 and energy. 
 
 ,, 570 n. last line but two, for in the text read in the last note 
 661 second marginal note, for individual read fundamental 
 
BOOK I. 
 
 PRELIMINARY SURVEY. 
 CHAPTER I. 
 
 INTRODUCTION. 
 
 1. POLITICAL ECONOMY or ECONOMICS is a study of 
 man's actions in the ordinary business of life; it inquires !fl!" 
 how he gets his income and how he uses it. Thus it is on the f s c ^^ cs 
 one side a study of wealth, and on the other, and more im- of wealth 
 portant side, a part of the study of man. For man's character o?the P& 
 has been moulded by his every-day work, and by the material man 7 f 
 resources which he thereby procures, more than by any other 
 influence unless it be that of his religious ideals; and the 
 two great forming agencies of the world's history have been 
 the religious and the economic. Here and there the ardour 
 of the military or the artistic spirit has been for a while 
 predominant: but religious and economic influences have 
 nowhere been displaced from the front rank even for a time ; 
 and they have nearly always been more important than all 
 others put together. Religious motives are more intense 
 than economic ; but their direct action seldom extends over 
 so large a part of life. For the business by which a person ^ a s cter 
 earns his livelihood generally fills his thoughts during by far formed by 
 the greater part of those hours in which his mind is at its W o r k &1 y 
 best; during them his character is being formed by the 
 way in which he uses his faculties in his work, by the 
 thoughts and the feelings which it suggests, and by his 
 relations to his associates in work, his employers or his 
 employes. 
 
 And very often the influence exerted on a person's 
 
 i 
 
2 INTRODUCTION. 
 
 BOOK i, character by the amount of his income is hardly less, if it 
 CH '*' is less, than that exerted by the way in which it is earned. 
 
 faus e e r s ty Jt mav make little Difference to tne fulness of life of a family 
 degra- whether its yearly income is 1000 or 5000; but it makes 
 a very great difference whether the income is 30 or 150 : 
 for with 1 50 the family has, with 30 it has not, the material 
 conditions of a complete life. It is true that in religion, in 
 the family affections and in friendship, even the poor may 
 find scope for many of those faculties which are the source 
 of the highest happiness. But the conditions which surround 
 extreme poverty, especially in densely crowded places, tend 
 to deaden the higher faculties. Those who have been called 
 the Residuum of our large towns have little opportunity for 
 friendship ; they know nothing of the decencies and the 
 quiet, and very little even of the unity of family life ; and 
 religion often fails to reach them. No doubt their physical, 
 mental, and moral ill-health is partly due to other causes 
 than poverty, but this is the chief cause. 
 
 And in addition to the Residuum there are vast numbers 
 of people both in town and country who are brought up with 
 insufficient food, clothing, and house-room, whose education 
 is broken off early in order that they may go to work Tor 
 wages, who thenceforth are engaged during long hours in 
 exhausting toil with imperfectly nourished bodies, and have 
 therefore no chance of developing their higher mental faculties. 
 Their life is not necessarily unhealthy or unhappy. Rejoicing 
 in their affections towards God and man, and perhaps even 
 possessing some natural refinement of feeling, they may lead 
 lives that are far less incomplete than those of many who 
 have more material wealth. But, for all that, their poverty 
 is a great and almost unmixed evil to them. Even when they 
 are well, their weariness often amounts to pain, while their 
 pleasures are few; and when sickness comes, the suffering 
 caused by poverty increases tenfold. And though a contented 
 spirit may go far towards reconciling them to these evils, 
 there are others to which it ought not to reconcile them. 
 Overworked and undertaught, weary and careworn, without 
 quiet and without leisure, they have no chance of making 
 the best of their mental faculties. 
 
 
THE URGENCY OF THE PROBLEM OF POVERTY. 3 
 
 Although then some of the evils which commonly go with BOOK i. 
 poverty are not its necessary consequences; yet, broadly CH ' 1 ' 
 speaking, " the destruction of the poor is their poverty," and 
 the study of the causes of poverty is the study of the causes 
 of the degradation of a large part of mankind. 
 
 2. Slavery was regarded by Aristotle as an ordinance May we not 
 of nature, and so probably was it by the slaves themselves in thelSf 
 olden time. The dignity of man was proclaimed by the poverty is 
 Christian religion: it has been asserted with increasing vehe- necessar r ? 
 mence during the last hundred years : but it is only through 
 the spread of education during quite recent times that we are 
 beginning at last to feel the full import of the phrase. Now 
 at last we are setting ourselves seriously to inquire whether 
 it is necessary that there should be any so-called "lower 
 classes" at all : that^is, whether there need be large numbers 
 of people doomed from their birth to hard work in order to 
 provide for others the requisites of a refined and cultured 
 life ; while they themselves are prevented by their poverty 
 and toil from having any share or part in that life. 
 
 The hope that poverty and ignorance may gradually be 
 extinguished, derives indeed much support from the steady 
 progress of the working classes during the present century. 
 The steam-engine has relieved them of much exhausting 
 and degrading toil; wages have risen; education has been 
 improved and become more general; the railway and the 
 printing-press have enabled members of the same trade in 
 different parts of the country to communicate easily with 
 one another, and to undertake and carry out broad and far- 
 seeing lines of policy ; while the growing demand for intel- 
 ligent work has caused the artisan classes to increase so 
 rapidly that they now outnumber those whose labour is 
 entirely unskilled. A great part of the artisans have ceased 
 to belong to the "lower classes" in the sense in which 
 the term was originally used; and some of them already 
 lead a more refined and noble life than did the majority of 
 the upper classes even a century ago. 
 
 This progress has done more than anything else to give 
 practical interest to the question whether it is really impos- 
 sible that all should start in the world with a fair chance of 
 
 12 
 
INTRODUCTION. 
 
 BOOK I. 
 CH. I. 
 
 Need for 
 some pre- 
 liminary 
 inquiry 
 as to the 
 tardy 
 growth of 
 economic 
 
 leading a cultured life, free from the pains of poverty and 
 the stagnating influences of excessive mechanical toil ; and 
 this question is being pressed to the front by the growing 
 earnestness of the age. 
 
 The question cannot be fully answered by economic 
 science; for the answer depends partly on the moral and 
 political capabilities of human nature ; and on these matters 
 the economist has no special means of information ; he must 
 do as others do, and guess as best he can. But the answer 
 depends in a great measure upon facts and inferences, which 
 are within the province of economics ; and this it is which 
 gives to economic studies their chief and their highest 
 interest. 
 
 3. It might have been expected that a science, which 
 deals with questions so vital for the wellbeing of mankind, 
 would have engaged the attention of many of the ablest 
 thinkers of every age, and be now well advanced towards 
 maturity. But the fact is that the number of scientific 
 economists has always been small relatively to the difficulty 
 of the work to be done ; and that the science is still almost 
 in its infancy. The chief causes of this paradoxical result 
 are two. Firstly, the bearing of economics on the higher 
 wellbeing of man has been overlooked ; and a science which 
 has wealth for its subject-matter, is often repugnant at first 
 sight to many students; for indeed those who do most to 
 advance the boundaries of knowledge, seldom care much 
 about the possession of wealth for its own sake. And, 
 secondly, many of those conditions of industrial life, and of 
 those methods of production, distribution and consumption, 
 with which modern economic science is concerned, are them- 
 selves only of recent date. 
 
 The ordinary business of life is entirely different in form 
 from what it was even a little while ago. It is indeed\true 
 that the change in substance is in some respects not so great 
 as the change in outward form ; and much more of modern 
 economic theory than at first appears can be adapted to the 
 conditions of backward races. But unity in substance under- 
 lying many varieties of form is not easy to detect ; and the 
 changes in form have had the effect of making writers in all 
 
BOOK I. 
 OH. I. 
 
 ECONOMICS IS A MODERN SCIENCE. 
 
 ages profit less than they otherwise might have done by the 
 work of their predecessors. 
 
 The economic conditions of modern life, though more 
 complex, are in many ways more definite than those of 
 earlier times. Business is more clearly marked off from 
 other concerns; the rights of individuals as against others 
 and as against the community are more sharply defined ; and 
 above all the emancipation from custom, and the growth of 
 free activity, of constant forethought and restless enterprise 
 have given a new precision and a new prominence to the 
 causes that govern the relative values of different things and 
 different kinds of labour. The starting point of our science 
 therefore cannot be made clear without a brief account of 
 the growth of modern forms of industrial life ; and to that 
 we proceed next. We are however in difficulty for want of 
 a word to express properly the special character of these 
 modern forms. 
 
 4. It is often said that the modern forms of industrial The funda- 
 life are distinguished from the earlier by being more character- 
 competitive. But this account is not quite satisfactory, modern 
 The strict meaning of competition seems to be the racing of j^g tnal 
 one person against another, with special reference to bidding not cpm- 
 for the sale or purchase of anything. This kind of racing is 
 no doubt both more intense and more widely extended than 
 it used to be : but it is only a secondary, and one might 
 almost say, an accidental consequence from the fundamental 
 characteristics of modern industrial life. 
 
 There is no one term that will express these characteris- but self- 
 tics adequately. They are, as we shall presently see, a certain i 
 
 independence and habit of choosing one's own course for 
 oneself, a self-reliance ; a deliberation and yet a promptness choice and 
 of choice and judgment, and a habit of forecasting the future thought. 
 and of shaping one's course with reference to distant aims. 
 They may and often do cause people to compete with one 
 another; but on the other hand they may tend, and just now 
 indeed they are tending, in the direction of co-operation and 
 combination of all kinds good and evil. But these tendencies 
 towards collective ownership and collective action are quite 
 different from those of earlier times, because they are the 
 
6 INTRODUCTION. 
 
 BOOK i. result not of custom, not of any passive drifting into as- 
 
 CH>1 ' sociation with one's neighbours, but of free choice by each 
 
 individual of that line of conduct which after careful 
 
 deliberation seems to him the best suited for attaining his 
 
 ends, whether they are selfish or unselfish. 
 
 "Compe- The term "competition" has gathered about it evil 
 implies too savour, and has come to imply a certain selfishness and 
 weifas 8 indifference to the wellbeing of others. Now it is true that 
 too little, there is less deliberate selfishness in early than in modern 
 
 Man is not . * . 
 
 more forms of industry ; but there is also less deliberate unselfish- 
 than ness. It is deliberateness, and not selfishness, that is the 
 
 he was. characteristic of the modern age. 
 
 For instance, while custom in a primitive society extends 
 the limits of the family, and prescribes certain duties to 
 one's neighbours which fall into disuse in a later civilization, 
 it also prescribes an attitude of hostility to strangers. In 
 a modern society the obligations of family kindness become 
 more intense, though they are concentrated on a narrower 
 area; and neighbours are put more nearly on the same 
 footing with strangers. In ordinary dealings with both of 
 them the standard of fairness and honesty is lower than in 
 some of the dealings of a primitive people with their 
 neighbours, but it is much higher than in their dealings 
 with strangers. Thus it is the ties of neighbourhood alone 
 that have been relaxed : the ties of family are in many ways 
 stronger than before, family affection leads to much more 
 self-sacrifice and devotion than it used to do ; and sympathy 
 with those who are strangers to us is a growing source of a 
 kind of deliberate unselfishness that never existed before the 
 modern age. That country which is the birthplace of 
 modern competition devotes a larger part of its income than 
 any other to charitable uses, and spent twenty millions on 
 purchasing the freedom of the slaves in the West Indies. 
 
 In every age poets and social reformers have tried to 
 stimulate the people of their own time to a nobler life by 
 enchanting stories of the virtues of the heroes of old. But 
 neither the records of history nor the contemporary observ- 
 ation of backward races, when carefully studied, give any 
 support to the doctrine that man is on the whole harder and 
 
CHARACTERISTICS OF MODERN BUSINESS. 7 
 
 harsher than he was, or that he was ever more willing than BOOK i. 
 he is now to sacrifice his own happiness for the benefit of CH-I ' 
 others in cases where custom and law have left him free to 
 choose his own course. Among races whose intellectual 
 capacity seems not to have developed in any other direction, 
 and who have none of the originating power of the modern 
 business man, there will be found many who show an evil 
 sagacity in driving a hard bargain in a market even with 
 their neighbours. No traders are more unscrupulous in 
 taking advantage of the necessities of the unfortunate than 
 the corn-dealers and money-lenders of the East. 
 
 Again, the modern era has undoubtedly given new open- Man is not 
 ings for dishonesty in trade. The advance of knowledge has Sonest 18 " 
 discovered new ways of making things appear other than^ a a g nhe 
 they are, and has rendered possible many new forms of 
 adulteration. The producer is now far removed from the 
 ultimate consumer; and his wrong-doings are not visited 
 with the prompt and sharp punishment which falls on the 
 head of a person who, being bound to live and die in his 
 native village, plays a dishonest trick on one of his neigh- 
 bours. The opportunities for knavery are certainly more 
 numerous than they were; but there is no reason for 
 thinking that people avail themselves of a larger proportion 
 of such opportunities than they used to do. On the contrary, 
 modern methods of trade imply habits of trustfulness on the 
 one side and a power of resisting temptation to dishonesty 
 on the other, which do not exist among a backward people. 
 Instances of simple truth and personal fidelity are met with 
 under all social conditions: but those who have tried to 
 establish a business of modern type in a backward country 
 find that they can scarcely ever depend on the native 
 population for filling posts of trust. It is even more difficult 
 to dispense with imported assistance for work which calls for 
 a strong moral character than for that which requires great 
 skill and mental ability. Adulteration and fraud in trade 
 were rampant in the middle ages to an extent that is very 
 astonishing, when we consider the difficulties of wrong-doing 
 without detection at that time. 
 
 The term "competition" is then not well suited to 
 
8 INTRODUCTION. 
 
 BOOK i. describe the special characteristics of industrial life in the 
 
 . , T T 
 
 ' modern age. We need a term that does not imply any 
 moral qualities, whether good or evil, but which indicates 
 the undisputed fact that modern business and industry are 
 characterized by more self-reliant habits, more forethought, 
 more deliberate and free choice. There is not any one term 
 Economic adequate for this purpose : but Freedom of Industry and 
 Enterprise, or more shortly, Economic Freedom, points in the 
 right direction, and may be used in the absence of a better. 
 Of course this deliberate and free choice may lead to a 
 certain departure from individual freedom when co-operation 
 or combination seems to offer the best route to the desired 
 end. The questions how far these deliberate forms of 
 association are likely to destroy the freedom in which they 
 had their origin, and how far they are likely to be conducive 
 to the public weal, will occupy a large share of our attention 
 towards the end of this treatise. 
 
 5. There is another word of which some account 
 should be given here ; because it will often occur in this 
 Preliminary Survey; and confusion might arise from the 
 want of a proper distinction between the different senses in 
 which it is commonly used. 
 
 Value. " The word value " says Adam Smith " has two different 
 
 meanings, and sometimes expresses the utility of some 
 particular object and sometimes the power of purchasing 
 other goods which the possession of that object conveys. 
 The one may be called value in use, the other value in 
 exchange." In the place of " value in use " we now speak 
 of " utility ;" while instead of " value in exchange " we often 
 say " exchange- value " or simply " value." "Value " by itself 
 always means value in exchange. 
 
 The value, that is the exchange value, of one thing in 
 terms of another at any place and time, is the amount of 
 that second thing which can be got there and then in 
 exchange for the first. Thus the term value is relative, and 
 expresses the relation between two things at a particular 
 place and time. 
 
 Civilized countries generally adopt gold or silver or both 
 as money. Instead of expressing the values of lead and tin, 
 
VALUE. 
 
 and wood, and corn and other things in terms of one another 
 we express them in terms of money in the first instance ; 
 and call the value of each thing thus expressed its price. If 
 we know that a ton of lead will exchange for fifteen sovereigns 
 at any place and time, while a ton of tin will exchange for 
 ninety sovereigns, we say that their prices then and there 
 are 15 and 90 respectively, and we know that the value of 
 a ton of tin in terms of lead is six tons then and there. 
 
 The price of every thing rises and falls from time to 
 time and place to place ; and with every such change the 
 purchasing power of money changes so far as that thing goes. 
 If the purchasing power of money rises with regard to some 
 things and at the same time falls equally with regard to 
 equally important things, its general purchasing power (or 
 its power of purchasing things in general) has remained 
 stationary. It is true that this way of speaking is vague, 
 because we have not considered how to compare the import- 
 ance of different things. That is a difficulty which we shall 
 have to deal with later on : but meanwhile we may accept 
 the phrase in the vague but quite intelligible usage that it 
 has in ordinary discourse. Throughout the earlier stages of 
 our work it will be best to speak of the exchange value of a 
 thing at any place and time as measured by its price, that 
 is, the amount of money for which it will exchange then and 
 there, and to assume that there is no change in the general 
 purchasing power of money 1 . 
 
 1 In this we are only following the practice of the ordinary business of life, 
 which invariably starts by considering one change at a time and assuming for 
 a while that "other things are equal." As Cournot points out (Principe* 
 Mathematiqtiea de la Theorie des Richesses, Ch. n.), we get the same sort of 
 convenience from assuming the existence of a standard of uniform purchasing 
 power by which to measure value, that astronomers do by assuming that there 
 is a "mean sun" which crosses the meridian at uniform intervals, so that 
 the clock can keep pace with it; whereas the actual sun crosses the meridian 
 sometimes before and sometimes after noon as shown by the clock. 
 
 BOOK I. 
 CH. I. 
 
CHAPTER II. 
 
 THE GROWTH OF FREE INDUSTRY AND ENTERPRISE. 
 
 BOOK i. 1. ALTHOUGH the proximate causes of the chief events 
 
 CH ' II- in history are to be found in the actions of individuals, yet 
 
 individual most of the conditions which have made these events possible 
 
 action 
 
 and race are traceable to the influence of inherited institutions and race 
 
 qualities and of physical nature. Race qualities themselves 
 orfone are > nowever > mainly caused by the action of individuals and 
 J n j?k er: physical causes in more or less remote time. A strong race 
 much in- has often sprung, in fact as well as in name, from some pro- 
 physidl y genitor of singular strength of body and character. The 
 ' es ' usages which make a race strong in peace and war are often 
 due to the wisdom of a few great thinkers who have inter- 
 preted and developed its customs and rules, perhaps by 
 formal precepts, perhaps by a quiet and almost nnperceived 
 influence. But none of these things are of any permanent 
 avail if the climate is unfavourable to vigour: the gifts of 
 nature, her land, her waters, and her skies, determine the 
 character of the race's work, and thus give a tone to social 
 and political institutions. 
 
 Savage These differences do not show themselves clearly so long 
 
 life is ruled 
 
 by custom as man is still savage. Scanty and untrustworthy as is our 
 
 pufse information about the habits of savage tribes, we know 
 enough of them to be sure that they show a strange 
 uniformity of general character, amid great variety of detail. 
 Whatever be their climate and whatever their ancestry, we 
 find savages living under the dominion of custom and 
 impulse ; scarcely ever striking out new lines for themselves ; 
 never forecasting the distant future, and seldom making 
 
INFLUENCE OF PHYSICAL CAUSES. 11 
 
 provision even for the near future ; fitful in spite of their BOOK i. 
 servitude to custom, governed by the fancy of the moment ; 
 ready at times for the most arduous exertions, but incapable 
 of keeping themselves long to steady work. Laborious and 
 tedious tasks are avoided as far as possible ; those which are 
 inevitable are done by the compulsory labour of women. 
 
 It is when we pass from savage life to the early forms Physical 
 of civilization that the influence of physical surroundings 
 forces itself most on our notice. This is partly because fn 
 early history is meagre, and tells us but little of the par- ^? 
 ticular events and of the influences of strong individual tion 
 characters by which the course of national progress has 
 been guided and controlled, hastened onwards or turned 
 backwards. But it is chiefly because in this stage of his 
 progress man's power of contending with Nature is small, 
 and he can do nothing without her generous help. Nature 
 has marked out a few places, on the earth's surface as 
 specially favourable to man's first attempts to raise himself 
 from the savage state ; and the first growth of culture and 
 the industrial arts was directed and controlled by the physi- 
 cal conditions of these favoured spots. 
 
 Even the simplest civilization is impossible unless man's which 
 efforts are more than sufficient to supply him with the 
 necessaries of life ; some surplus over them is required to 
 support that mental effort in which progress takes its rise, climates. 
 And therefore nearly all early civilizations have been in warm 
 climates where the necessaries of life are small, and where 
 Nature makes bountiful returns even to the rudest cultiva- 
 tion. They have often gathered around a great river which 
 has lent moisture to the soil and afforded an easy means of 
 communication. The rulers have generally belonged to a 
 race that has recently come from a cooler climate in a distant 
 country or in neighbouring mountain lands; for a warm 
 climate is destructive of energy, and the force which enabled 
 them to rule has almost in every case been the product of given their 
 
 i On the general question of the influence of physical surroundings on race 
 character, both directly and indirectly, by determining the nature of the dominant 
 occupations, see Knies, Politische (Ekonomie, Hegel's Philosophy of History, and 
 Buckle's History of Civilization. Compare also Aristotle's Politics, and 
 quieu's Esprit des Lois. 
 
12 
 
 THE GROWTH OF ECONOMIC FREEDOM. 
 
 BOOK I. 
 CH. II. 
 
 energies 
 to war and 
 politics, 
 not to 
 industry. 
 
 The in- 
 fluence of 
 a warm 
 climate. 
 
 1 
 
 the more temperate climate of their early homes. They 
 have indeed retained much of their energy in their new 
 homes for several generations, living meanwhile in luxury on 
 the surplus products of the labour of the subject races ; and 
 have found scope for their abilities in the work of rulers, 
 warriors, and priests. Originally ignorant, they have quickly 
 learnt all that their subjects had to teach, and have gone 
 beyond them. But in this stage of civilization an enter- 
 prising intellectual character has almost always been confined 
 to the ruling few, it has scarcely ever been found in those 
 who have borne the main burden of industry. 
 
 The reason of this is that the climate which has rendered 
 an early civilization possible has also doomed it to weakness 1 . 
 In colder climates nature provides an invigorating atmo- 
 sphere ; and though man has a hard struggle at first, yet as 
 his knowledge and riches increase he is able to gain plentiful 
 food and warm clothing ; and at a later stage he provides 
 himself with those large and substantial buildings which are 
 the most expensive requisites of a cultured life in places in 
 which the severity of the weather makes it necessary that 
 nearly all domestic services and meetings for social inter- 
 course should have the protection of a roof. But the fresh 
 invigorating air which is necessary to the fulness of life 
 cannot be obtained at all when Nature does not freely give it 2 . 
 The labourer may indeed be found doing hard physical work 
 under a tropical sun ; the handicraftsman may have artistic 
 instincts ; the sage, the statesman or the banker may be acute 
 and subtle : but high temperature makes hard and sustained 
 physical work inconsistent with a high intellectual activity. 
 Under the combined influence of climate and luxury the 
 
 1 Montesquieu says quaintly (Bk. xiv. ch. 2), that the superiority of strength 
 caused by a cold climate produces among other effects " a greater sense of supe- 
 riority that is, less desire of revenge ; and a greater opinion of security that is, 
 more frankness, less suspicion, policy, and cunning." These virtues are emi- 
 nently helpful to economic progress. 
 
 2 This may have to be modified a little, but only a little, if Mr Galton should 
 prove to be right in thinking that small numbers of a ruling race in a hot country, 
 as for instance the English in India, will be able to sustain their constitutional 
 vigour unimpaired for many generations by a liberal use of artificial ice, or of the 
 cooling effects of the forcible expansion of compressed air. See his Presidential 
 Address to the Anthropological Institute in 1887. 
 
THE INFLUENCE OF CUSTOM. 13 
 
 ruling class gradually lose their strength ; fewer and fewer of BOOK i. 
 them are capable of great things : and at last they are over- CH ' " 
 thrown by a stronger race which has come most probably 
 from a cooler climate. Sometimes they form an interme- 
 diate caste between those whom they have hitherto ruled 
 and their new rulers ; but more often they sink down among 
 the spiritless mass of the people. 
 
 Such a civilization has often much that is interesting to in an early 
 the philosophical historian. Its whole life is pervaded almost 
 
 unconsciously by a few simple ideas which are interwoven in ! s slo h w ' 
 that pleasant harmony that gives their charm to Oriental movement. 
 carpets. There is much to be learnt from tracing these ideas 
 to their origin in the combined influence of race, of physical 
 surroundings, of religion, philosophy and poetry; of the 
 incidents of warfare and the dominating influence of strong 
 individual characters. All this is instructive to the econo- 
 mist in many ways ; but it does not throw a very direct light 
 on the motives, which it is his special province to study. 
 For in such a civilization the ablest men look down on work; 
 there are no bold free enterprising workmen, and no adven- 
 turous capitalists ; despised industry is regulated by custom, 
 and even looks to custom as its sole protector from arbitrary 
 tyranny. 
 
 The greater part of custom is doubtless but a crystallized Custom is 
 form of oppression and suppression. But a body of custom gether on 
 which did nothing but grind down the weak could not long [ h g strong, 
 survive. For the strong rest on the support of the weak, 
 their own strength cannot sustain them without that support; 
 and if they organize social arrangements which burden the 
 weak wantonly and beyond measure, they thereby destroy 
 themselves. Consequently every body of custom that en- 
 dures, contains provisions that protect the weak from the 
 most reckless forms of injury 1 . 
 
 In fact when there is little enterprise and no scope 
 effective competition, custom is a necessary shield to defend cessary 
 people not only from others who are stronger than them- wheiTte 
 selves, but even from their neighbours in the same rank o f meansof 
 
 i Coinp. Bagehot's Physics and Politics, also Mr Herbert Spencer's and Sir 
 Henry Maine's writings. 
 
14 THE GROWTH OF ECONOMIC FREEDOM. 
 
 BOOK i. life. If the village smith can sell his ploughshares to none 
 but the village, and if the village can buy their shares from 
 
 CH ' "' 
 
 Scation no one ^ ut ^ m > ^ is to the interest of all that the price 
 are small, should be fixed at a moderate level by custom. By such 
 means custom earns sanctity: and there is nothing in the 
 first steps of progress that tends to break down the primitive 
 habit of regarding the innovator as impious, and an enemy. 
 Thus the influence of economic causes is pressed below the 
 surface. There they work surely and slowly ; but they take 
 generations instead of years to produce their effect : their 
 action is so subtle as easily to escape observation altogether ; 
 and they can indeed hardly be traced except by those who 
 have learnt where to look for them by watching the more 
 conspicuous and rapid workings of similar causes in modern 
 times \ 
 
 Divided 2. This force of custom in early civilizations is partly 
 
 strength- 1 * a cause and partly a consequence of the limitations of indi- 
 ens the vidual rights in property. As regards all property more or 
 custom less, but especially as regards land, the rights of the individual 
 
 and resists , . , , , . . , " , . 
 
 changes, are generally derived from and limited by, and in every way 
 subordinate to those of the household and the family in the 
 narrower sense of the term. The rights of the household are 
 in like manner subordinate to those of the village ; which is 
 often only an expanded and developed family, according to 
 traditionary fiction if not in fact. The affairs of government 
 have always received the careful attention of historians ; and 
 prominence has been given to the influence which the forms 
 of government have exerted on the development of industry 
 and commerce. But insufficient attention has been paid 
 to that exerted by the collective ownership of property. 
 
 1 Thus the "moderate level" at which custom fixes the price of a ploughshare 
 will be found when analysed to mean that which gives the smith in the long run 
 about an equal remuneration (account being taken of all his privileges and per- 
 quisites) with that of his neighbours who do equally difficult work; or in other 
 words, that which under the regime of free enterprise, of easy communications 
 and effective competition, we should call a normal rate of pay. If a change of 
 circumstances makes the pay of smiths, including all indirect allowances, either 
 less or more than this, there almost always sets in a change in the substance of 
 the custom, often almost unrecognized and generally without any change in 
 form, which will bring it back to this level. But to this point we must return 
 later on. 
 
INFLUENCE OF COLLECTIVE OWNERSHIP. 15 
 
 BOOK I. 
 
 It is true that in an early stage of civilization few would 
 have had much desire to depart far from the practices CH ' "' 
 that were prevalent around them. However complete and 
 sharply denned had been the rights of individuals over their 
 own property, they would have been unwilling to face the anger 
 with which their neighbours would regard any innovation, 
 and the ridicule which would be poured on any one who should 
 set himself up to be wiser than his ancestors. But many 
 little changes would occur to the bolder spirits ; and if they 
 had been free to try experiments on their own account, changes 
 might have grown by small and almost imperceptible stages, 
 until sufficient variation of practice had been established to 
 blur the clear outline of customary regulations, and to give 
 considerable freedom to individual choice. When however 
 each head of a household was regarded as only senior partner 
 and trustee for the family property, the smallest divergence 
 from ancestral routine met with the opposition of people 
 who had a right to be consulted on every detail. 
 
 And further in the background behind the authoritative 
 resistance of the family was that of the village. For though 
 each family had sole use for a time of its cultivated ground, 
 yet many operations were generally conducted in common, so 
 that each had to do the same things as the others at the 
 same time. Each field when its turn came to be fallow, be- 
 came part of the common pasture land; and the whole land of 
 the village was subject to redistribution from time to time 1 . 
 Therefore the village had a clear right to prohibit any in- 
 
 1 Though the matter is not altogether free from controversy, there seems good 
 reason to believe that the Teutonic Mark system was a survival of primitive 
 customs that had prevailed, of course with endless variety in detail, among the 
 forefathers of nearly all white races. Traces of such a plan exist even now 
 in India and among some Sclavonic peoples, and analogies to it are found among 
 some races of other colours. In the Mark system, in its typical form, one 
 small part, the home mark, was set aside permanently for living on, and each 
 family retained its share in that for ever. The second part or arable mark was 
 divided into three large fields, in each of which each family had a plot. Two 
 of these were cultivated every year, and one left fallow. The third and largest 
 part was used as grazing land by the whole village in common; as was also 
 the fallow field in the arable mark. In some cases the arable mark was from time 
 to time abandoned to pasture, and land to make a new arable mark was cut out of 
 the common mark, and this involved a redistribution. Thus the treatment of its 
 land by every family affected for good or ill all the members of the viUage. 
 
16 THE GROWTH OF ECONOMIC FREEDOM. 
 
 BOOK i. novation; for it might interfere with their plans for the 
 CH.JI. co u ec tive cultivation ; and it might ultimately impair the 
 value of the land, and thus injure them when the time came 
 for the next redistribution. In consequence there often 
 grew up a complex network of rules, by which every 
 cultivator was so rigidly bound, that he could not use his 
 own judgment and discretion even in the most trivial details 1 . 
 It is probable that this has been the most important of all 
 the causes which have delayed the growth of the spirit of 
 free enterprise among mankind. It may be noticed that 
 the collective ownership of property was in harmony with 
 that spirit of quietism which pervades many eastern religions ; 
 and that its long survival among the Hindoos has been 
 partly due to the repose which is inculcated in their religious 
 writings. 
 
 The in- It is probable that while the influence of custom over 
 
 custom on prices, wages and rent has been overrated, its influence 
 
 methods over the forms of production and the general economic 
 
 r industry arrangements of society has been underrated. In the one 
 
 lative. case its effects are obvious, but they are not cumulative; and 
 
 in the other they are not obvious, but they are cumulative. 
 
 And it is an almost universal rule that when the effects of a 
 
 cause, though small at any one time, are constantly working 
 
 in the same direction, their influence is much greater than 
 
 at first sight appears possible. 
 
 But however great was the influence of custom in early 
 
 civilization the spirit of Greeks and Romans was full of 
 
 enterprise, and more interest attaches to the inquiry why 
 
 they knew and cared so little for those social aspects of 
 
 economic problems which are of so great interest to us. 
 
 The Greeks | 3. Recent studies in biology and in philology have 
 
 Northern thrown discredit on much that was thought well-established 
 
 in the early history of civilization. But there seems no reason 
 to doubt that nearly all the chief pioneers of progress have 
 been Aryans who, in successive waves, have spread over 
 ?S & Europe and Asia from early homes in lands of frost and 
 
 snow. Some went far southwards early : early they became 
 
 1 Compare the Duke of Argyll's account of Runrig cultivation in Unseen 
 Foundations of Society, Ch. ix. 
 
 
THE RISE OF GREECE. 17 
 
 rulers and leaders of other nations, and early they lost their BOOK i. 
 best strength under the influence of luxury and a warm CH " "' 
 climate. But others went on increasing in strength through 
 long centuries amid the invigorating' influences of a bracing 
 climate aTirl constant conflict ; and at last a band of them, 
 coming southwards from the Danube, found itself in a moun- 
 tainous land whose many harbours opened on the Mediter- 
 ranean Sea. Each harbour was cut off from its neighbours 
 by the mountains and was united by the sea with the most 
 suggestive thoughts and mysteries of the world. The Greeks 
 were within a few days' sail of nearly all that was best worth 
 knowing about, whether in thought or feeling, in action or 
 in aspiration. Persia, Assyria, Phoenicia, Judaea, and Egypt, 
 were all at the eastern end of that great sea that unites Asia, 
 Africa, and Europe ; and India was not far off. 
 
 The new impulse towards freedom in thought and action The older 
 came from the sea. The homes of most of the earlier 
 civilizations had been in great river-basins, whose well- 
 watered plains were seldom visited by famine; for in a 
 climate in which heat is never lacking, the fertility of the 
 soil varies almost directly with its moisture : the rivers also 
 offered means of easy communication that were favourable to 
 simple forms of trade and division of labour, and did not. 
 hinder the movements of the large armies by which the 
 despotic force of the central government was maintained. It 
 is true that the Phoenicians lived on the sea. This great 
 Semitic race did good service by preparing the way for free 
 intercourse among many peoples, and by spreading the 
 knowledge of writing, of arithmetic, and of weights and 
 measures : but they gave their chief energies to commerce 
 and manufacture. It was left for the genial sympathies and 
 the fresh spirit of the Greeks to breathe in the full breath of 
 freedom over the sea: and to absorb into their own free 
 lives the best thoughts and the highest art of the Old 
 World. 
 
 Their numberless settlements in Asia Minor, Magna 
 Grsecia, and last of all in Hellas proper, developed freely g^ 
 their own ideals under the influence of the new thoughts f k r n e J ^f e ' 
 that burst upon them ; having constant intercourse with one and the 
 M. 2 
 
18 THE GROWTH OF ECONOMIC FREEDOM. 
 
 BOOK i. another, as well as with those who held the keys of the older 
 ' learning ; sharing one another's experiences, but fettered by 
 variation no authority- Energy and enterprise, instead of being re- 
 pressed by the weight of traditional usage, were encouraged 
 to found a new colony and work out new ideas without 
 restraint. 
 Their cli- Their climate absolved them from the need of exhausting 
 
 mate made 
 
 culture work ; they left to their slaves what drudgery had to be done, 
 
 pensive, and gave themselves up to the free play of their fancy. 
 
 House-room, clothing and firing cost but little ; their genial 
 
 sky invited them to out-of-door life, making intercourse for 
 
 and yet social and political purposes easy and without expense. And 
 
 quickly y e ^ the cool breezes of the Mediterranean so far refreshed 
 
 strengtti eir tne i r vigour, that they did not for many generations lose the 
 
 spring and elasticity of temper which they had brought from 
 
 their homes in the North. Under these conditions were 
 
 matured a sense of beauty in all its forms, a subtle fancy and 
 
 an originality of speculation, an energy of political life, and a 
 
 delight in subordinating the individual to the state, such as 
 
 the world has never again known 1 . 
 
 Modern in The Greeks were more modern in many respects than the 
 respects, peoples of Mediaeval Europe, and in some respects were even 
 not y antici- ^ n advance of our own time. But they did not attain to the 
 pate the conception of the dignity of man as man ; they regarded 
 
 economic J Jo 
 
 problems slavery as an ordinance of nature, they tolerated agriculture 
 
 which have J J 
 
 grown up but they looked on all other industries as involving degrada- 
 sense of tion J an( ^ they knew little or nothing of those economic 
 of labour* 7 P r blems, which are of absorbing interest to our own age 2 . 
 
 They had never felt the extreme pressure of poverty. 
 Earth and sea, and sun and sky had combined to make it 
 
 1 Compare Neumann and Partsch, Physikalische Geographic von Greichen- 
 land, ch. i. 
 
 2 See above p. 4. Thus even Plato says: "Nature has made neither boot- 
 makers nor blacksmiths ; such occupations degrade the people engaged in them, 
 miserable mercenaries excluded by their very position from political rights." 
 (Laics, xn.) And Aristotle continues: "In the state which is best governed the 
 citizens... must not lead the life of mechanics or tradesmen, for such a life is 
 ignoble and inimical to virtue." (Politics, vrr. 9 ; see also HI. 5.) These passages 
 give the key-note of Greek thought with regard to business. But of course there 
 were few independent fortunes, especially in the early days of Greece, so that 
 many of their best thinkers were compelled to take some share in business. 
 
THE FALL OF GREECE. j 
 
 easy for them to obtain the material requisites for a perfect BOOK i. 
 life. Even their slaves had considerable opportunities of CH ' " 
 culture : and had it been otherwise, there was nothing in the 
 Greek temper, and nothing in the lessons that the world had 
 up to that time learnt, to make them seriously concerned. 
 The excellence of Greek thought has made it a touchstone 
 by which many of the leading thinkers of after ages have 
 tried every new inquiry: and the impatience with which the 
 academic mind has often regarded the study of economics is 
 in a great measure due to the impatience which the Greeks 
 felt for the anxious cares and plodding work of business. 
 
 And yet a lesson might have been learnt from the quick Their 
 decadence of Greece ; which was brought about by the want 
 of that solid earnestness of purpose which no race has ever 
 maintained for many generations without the discipline in( i u3tr y 
 of steady industry. Socially and intellectually they were their fall 
 free: but they had not learnt to use their freedom well; they 9 yr^ 
 had no self-mastery, no steady persistent resolution. They 
 had all the quickness of perception and readiness for new ^ ^ 
 suggestions which are elements of business enterprise ; but V^' -4 ^ 
 they had not its fixity of purpose and patient endurance. j <^ *****' 
 The genial climate gradually relaxed tHeir~physIcal energies; . , 1 1 
 they were without that safeguard to strength of character ' 
 
 which comes from resolute and steadfast persistence in hard 
 work ; and they sank into frivolity. V ^ < 
 
 4. Civilization still moving westwards had its next The 
 centre in Rome. The Romans were a great army, rather 
 than a great nation. They resembled the Greeks in leaving 
 
 business as much as possible to slaves : but in most other fitted them 
 
 . . , for busi- 
 
 respects were a contrast to them. In opposition to the iresh ness, but 
 fulness of the life of the Greeks, to the youthful joy with 
 which they gave free play to all their faculties and developed 
 their own idiosyncrasy, the Romans showed the firm will, politics. 
 the iron resolution, the absorption in definite serious aims of 
 the mature man 1 . 
 
 i This fundamental opposition between the Greek and Roman tempers was 
 made clear by Hegel in his Philosophy of History. " Of the Greeks in the first 
 genuine form of their freedom we may assert that they had no conscience ; the 
 habit of living for their country without further analysis or reflection was the 
 principle dominant among them.... Subjectivity plunged the Greek world into 
 
 22 
 
20 THE GROWTH OF ECONOMIC FREEDOM. 
 
 BOOK i. Singularly free from the restraints of custom, they shaped 
 
 CH ' "' their own lives for themselves with a deliberate choice that 
 
 never Deen known before. They were strong andjdaring, 
 conditions steady of purpose and abundant in resour(5e, orderly in habit, 
 some , and clearsighted in judgment ; and thus, though they_Dre- 
 modern 8 , ferred war and politics, they had in constant use all the 
 inform; faculties required for business enterprise. 
 
 Nor was the principle of association inactive. Trade 
 gilds had some vigour in spite of the paucity of artisans who 
 were free. Those methods of combined action for business 
 purposes, and of production on a large scale by slave labour 
 in factories, in which Greece had been the pupil of the East, 
 gained new strength when imported into Rome. The facul- 
 ties and the temper of the Romans fitted them especially 
 well for the management of joint-stock companies; and a 
 comparatively small number of very wealthy men, with no 
 middle class, were able with the aid of trained slaves and 
 freedmen, to undertake large contracts by land and by sea at 
 home and abroad. They made capital hateful ; but they 
 made it powerful and efficient ; they developed the appliances 
 of money-lending with great energy; and partly in conse- 
 quence of the unity of the imperial power, and the wide 
 extent of the Roman language, there was in some important 
 respects more freedom of commerce and of movement 
 throughout the civilized world in the days of the Roman 
 empire than even now. 
 
 When, then, we recollect how great a centre of wealth 
 Rome was ; how monstrous the fortunes of individual Romans 
 (and they have only recently been surpassed); and how vast the 
 scale of her military and civil affairs, of the provision needed 
 for them and of the machinery of her traffic; we cannot 
 wonder that many writers have thought they found much 
 resemblance between her economic problems and our own. 
 
 ruin " ; and the harmonious poetry of the Greeks made way for " the prose life of 
 the Romans," which was full of subjectivity, and "a hard dry contemplation of 
 certain voluntary aims." A generous, though discriminating tribute to the services 
 which Hegel indirectly rendered to Historical Economics is given by Roscher, 
 Gesch. der Nat. (EJc. in Deutschland, 188. Compare also the chapters on 
 Religion in Mommsen's History, which seem to have been much influenced by 
 Hegel ; also Kautz, Entwickelung der National- (EJconomie, Bk. i. 
 
ROME. 21 
 
 But the resemblance is superficial and illusory. It extends BOOK i. 
 only to forms, and not to the living spirit of national life. CH ' " 
 It does not extend to the recognition of the worth of the life 
 of the common people which in our own time is giving to 
 economic science its highest interest 1 . 
 
 In ancient Rome industry and commerce lacked the vital but not 
 strength which they have attained in more recent times, 
 Her imports were won by the sword ; they were not bought 
 with the products of skilled work in which the citizens took 
 a worthy pride, as were those of Venice or Florence or 
 Bruges. Traffic_and industry alike were pursued almost 
 with a sole "eye to the money_^ains to be derived from 
 them ; and the tone of business life was degraded by the 
 public disdain which showed itself in the " legal and practi- 
 cally effective restriction 2 " of the Senators from all forms 
 of business except those connected with the land. The 
 Equites found their richest gains in farming the taxes, in 
 the plunder of provinces, and, in later times, in the personal 
 favour of the Emperors, and did not cherish that spirit of 
 probity and thorough work which are needed for the making 
 of a great national trade; and at length private enterprise 
 was stifled by the ever-growing shadow of the State 3 . 
 
 1 See above Ch. i. 2. The misunderstanding is in some measure attributable 
 to the influence of the generally acute and well-balanced Eoscher. He took a 
 special delight in pointing out analogies between ancient and modern problems; 
 and though he also pointed out differences, yet the general influence of his 
 writings tended to mislead. (His position is well criticized by Knies, Politische 
 (EJconomie vom geschichtlichen Standpunkt e : especially p. 391 of the second edition.) 
 
 2 Friedlander, Sittengeschichte Roms, p. 225. Mommsen goes so far as to say 
 (History, Book iv. ch. xi.): "Of trades and manufactures there is nothing to be 
 said, except that the Italian nation in this respect persevered in an inactivity 
 bordering on barbarism... The only brilliant side of Eoman private economics was 
 money dealing and commerce." Many passages in Cairnes' Slave Power read like 
 modern versions of Mommsen' 's History. Even in the towns the lot of the poor free 
 Roman resembled that of the "mean white" of the Southern Slave States. 
 Latif undid perdidere Italiam ; but they were farms like those of the Southern 
 States, not England. The weakness of free labour at Rome is shown in 
 Liebenam's Geschichte des romischen Vereinswesens. 
 
 3 One aspect of this is described by Prof. Schmoller in his short but excellent 
 account of the Trading Companies of Antiquity. After showing how trading groups 
 of which all the members belong to one family may thrive even among primitive 
 peoples, he argues (Jahrbuch fur Qesetzgebung, xvi. pp. 7402) that no form of 
 business association of the modern type could flourish long in such conditions as 
 those of ancient Rome unless it had some exceptional privileges or advantages as 
 the Societies Publicanorum had. The reason why we modems succeed in bring- 
 
22 THE GROWTH OF ECONOMIC FREEDOM. 
 
 BOOK I. 
 
 But though the Romans contributed but little directly 
 ' to the progress of economic science, yet indirectly they 
 funded 7 exerte d a profound influence over it, for good and evil, by 
 the modem laying the foundations of modern jurisprudence. What phi- 
 property, losophic thought there was in Rome was chiefly Stoic ; and 
 The stoic most of the great Roman Stoics were of Oriental origin. 
 Sube* 7 Their philosophy when transplanted to Rome developed a 
 co ? mo ~ great practical power without losing its intensity of feeling ; 
 experience and in spite of its severity, it had in it much that is kindred 
 Roman to the suggestions of modern social science. Most of the 
 great lawyers of the Empire were among its adherents, and 
 thus it set the tone of the later Roman Law, and through it 
 of all modern European Law. Now the strength of the 
 Roman State had caused State rights to extinguish those of 
 the Clan and the Tribe in Rome at an earlier stage than in 
 Greece. But many of the primitive Aryan habits of thought 
 as to property lingered on for a long while even in Rome. 
 Great as was the power of the head of the family over its 
 members, the property which he controlled was for a long 
 time regarded as vested in him as the representative of the 
 family rather than as an individual. But when Rome had 
 become imperial, her lawyers became the ultimate inter- 
 preters of the legal rights of many nations : and under Stoic 
 influence they set themselves to discover the fundamental 
 Laws of Nature, which they believed to lie in concealment 
 at the foundation of all particular codes. This search for the 
 universal, as opposed to the accidental elements of justice, 
 acted as a powerful solvent on rights of common holding, for 
 which no other reason than that of local usage could be 
 led them given. The later Roman law therefore gradually but steadily 
 fo^iarge enlarged the sphere of contract ; gave it greater precision, 
 the sphere greater elasticity, and greater strength. At last almost all 
 tract. social arrangements had come under its dominion ; the pro- 
 ing and keeping many people "under the same hat" to work together, which 
 Antiquity failed in doing, "is to be sought exclusively in the higher level of 
 intellectual and moral strength, and the greater possibility now than then of 
 binding together men's egoistic commercial energies by the bonds of social 
 sympathy." See also Deloume, Les Manieurs d' Argent a Some', an article on 
 State control of Industry in the fourth century by W. A. Brown in the Political 
 Science Quarterly, Vol. n. ; Blanqui's History of Political Economy, ch. v. and vi. ; 
 and Ingram's History, ch. 11. 
 
EOME. 23 
 
 perty of the individual was clearly marked out, and he could BOOK i. 
 deal with it as he pleased. We see then that from the CH " "' 
 breadth and nobility of the Stoic character modern lawyers 
 have inherited a high standard of duty : and from its austere 
 self-determination they have derived a tendency to define 
 sharply individual rights in property. And therefore to 
 Roman and especially Stoic influence we may trace indirectly 
 much of the good and evil of our present economic system ; 
 on the one hand much of the untrammelled vigour of the 
 individual in managing his own affairs, and on the other not 
 a little harsh wrong done under the cover of rights estab- 
 lished by a system of law which has held its ground because 
 its main principles are wise and just. 
 
 The strong sense of duty which Stoicism brought with it But a new 
 from its Oriental home had in it something also of Eastern needed. W& 
 quietism. The Stoic, though active in well-doing, was proud 
 of being superior to the troubles of the world : he took his 
 share in the turmoil of life because it was his duty to do so, 
 but he never reconciled himself to it : his life remained sad 
 and stern, oppressed by the consciousness of its own failures. 
 This inner contradiction, as Hegel says, could not pass away 
 till inward perfection was recognized as an object that could 
 be attained only through self-renunciation ; and thus its pur- 
 suit was reconciled with those failures which necessarily ac- 
 company all social work. For this great change the intense 
 religious feeling of the Jews prepared the way. But the 
 world was not ready to enter into the fulness of the Christian 
 spirit, till a new tone had been given to it by the deep per- 
 sonal affections of the German race. Even among the German 
 peoples true Christianity made its way slowly: and for a long 
 time after the fall of Rome there was chaos in Western Europe. 
 
 5. The Teuton, strong and resolute as he was, found it 
 very difficult to free himself from the bonds of custom and of 
 ignorance. The heartiness and fidelity 1 which gave him his 
 special strength, inclined him to cherish overmuch the insti- wiu>m he 
 tutions and customs of his family and his tribe. No other qu ered. 
 
 i Hegel (Philosophy of History, Part iv.) goes to the root of the matter when 
 he speaks of their energy, their free spirit, their absolute self-determination 
 (Eigenshm), their heartiness (Gemlith), and adds, "Fidelity is their second watch 
 word as Freedom is the first." 
 
24 THE GROWTH OF ECONOMIC FREEDOM. 
 
 BOOK i. great conquering race has shown so little capacity as the 
 CH ' n ' Teutons have done for adopting new ideas from the more 
 cultured, though weaker, people whom they conquered. They 
 prided themselves on their rude strength and energy; and 
 cared little for knowledge and the arts. But these found a 
 temporary refuge on the Eastern coasts of the Mediterranean; 
 until another conquering race coming from the south was 
 ready to give them new life and vigour. 
 
 Our debt The Saracens learnt eagerly the best lessons that the 
 
 Saracens, conquered had to teach. They nurtured the arts and sciences, 
 
 and kept alive the torch of learning at a time when the 
 
 Christian world cared little whether it went out or not ; 
 
 and for this we must ever owe them gratitude. But their 
 
 moral nature was not so full as that of the Teutons. The 
 
 warm climate and the sensuality of their religion caused 
 
 their vigour rapidly to decay; and they have exercised very 
 
 little direct influence on the problems of modern civilization l . 
 
 Later on The education of the Teutons made slower but surer pro- 
 
 moved atl n gress. They carried civilization northwards to a climate in 
 
 north- which sustained hard work has gone hand in hand with the 
 wards and & 
 
 westwards, s l ow growth of sturdy forms of culture ; and they carried it 
 westwards to the Atlantic. Civilization, which had long ago 
 left the shores of the rivers for those of the great inland sea, 
 was ultimately to travel over the vast ocean. 
 
 and the But these changes worked themselves out slowly. The 
 
 between 68 * fi rs ^ point of interest to us in the new age is the re-opening 
 
 countr nd ^ ^e old conflict between town and nation that had been 
 
 revived, suspended by the universal dominion of Rome ; which was 
 
 indeed an army with head-quarters in a town, but drawing 
 
 its power from the broad land. 
 
 Without 6. Until a few years ago complete and direct self- 
 
 telegraph government by the people was impossible in a great nation : 
 
 ing-mesa' ^ cou ^ exist only in towns or very small territories. Govern- 
 freedom in ment was necessarily in the hands of the few, who looked 
 
 a large * 
 
 country upon themselves as privileged upper classes, and who treated 
 fined C to" the workers as lower classes. Consequently the workers, 
 tocracy even wnen permitted to manage their own local affairs, were 
 
 1 A brilliant eulogy of their work is given by Draper, Intellectual Development 
 of Europe, ch. xiii. 
 
THE TEUTONS. 25 
 
 often wanting in the courage, the self-reliance, and the BOOKI. 
 habits of mental activity, which are required as the basis of* CH ' n ' 
 business enterprise. And as a matter of fact both the 
 central Government and the local magnates did interfere 
 directly with the freedom of industry ; prohibiting migration, 
 and levying taxes and tolls of the most burdensome and 
 vexatious character. Even those of the lower classes who 
 were nominally free, were plundered by arbitrary fines and 
 dues levied under all manner of excuses, by the partial 
 administration of justice, and often by direct violence and 
 open pillage. These burdens fell chiefly on just those 
 people who were more industrious and more thrifty than 
 their neighbours, those among whom, if the country had 
 been free, the spirit of bold enterprise would gradually 
 have arisen to shake off the bonds of tradition and 
 custom. 
 
 Far different was the state of people in the towns. There but seif- 
 the industrial classes found strength in their numbers ; and 
 even when unable to gain the upper hand altogether, they 
 
 were not, like their brethren in the country, treated as towns 
 
 was not 
 
 though they belonged to a different order of beings from physically 
 their rulers. In Florence and in Bruges, as in ancient 111 
 Athens, the whole people could hear, and sometimes did 
 hear, from the leaders of public policy a statement of their 
 plans and the reasons for them, and could signify their 
 approval or disapproval before the next step was taken. 
 The whole people could on occasion discuss together the 
 social and industrial problems of the time, knowing each 
 other's counsel, profiting by each other's experience, working 
 out in common a definite resolution and bringing it into 
 effect by their own action. But nothing of this kind could 
 be done over a wide area till the invention of the telegraph, 
 the railway and the cheap press. 
 
 By their aid a nation can now rea^ in the morning what Such as^ 
 its leaders have said on the evening before; and ere another ^uime^ 
 day has passed the judgment of the nation on it is pretty well a i arge 
 known. By their aid the council of a large trades-union can cc 
 at a trifling cost submit a difficult question to the judgment 
 of their members in every part of the country and get their 
 
26 THE GROWTH OF ECONOMIC FREEDOM. 
 
 BOOK i. decision within a few days. Even a large country can now be 
 CH ' "' ruled by its people ; but till now what was called " popular 
 Government " was of physical necessity the government by a 
 more or less wide oligarchy. Only those few who could 
 themselves go frequently to the centre of Government, or 
 who could at least receive constant communication from it, 
 could take part directly in government. And though a 
 much larger number of people would know enough of what 
 was going on to make their will broadly effective, through 
 their choice of representatives, yet even they were a small 
 minority of the nation till a few years ago ; and the repre- 
 sentative system itself is only of recent date. 
 The case Switzerland indeed has been free : for its mountains op- 
 
 of Switzer- 
 land is ex- pose obstacles to the movements of large armies, and render 
 
 cavalry almost useless ; and it has nourished a sturdy race, 
 which has been strengthened from time to time by refugees 
 from among the bolder spirits of neighbouring lands. But 
 the range of intercourse of those who live in mountains is 
 generally small. _ Except when enriched by the lavish 
 expenditure of tourists from more favoured lands, they 
 live hard lives, having long hours of work during their 
 short summer, and stagnating in close rooms during a 
 great part of the year. They have not therefore had 
 that mental activity and enterprise which has characterized 
 the free cities. 
 
 The Medi- 7. In the Middle Ages the history of the rise and 
 were the fall of fy)wns is the history of the rise and fall of successive 
 cursors waves on the tide of progress. The mediaeval towns as a 
 of modern ru } e owed their origin to trade and industry, and did not 
 
 industrial . i * 
 
 civUiza- despise them. And though the wealthier citizens were some- 
 times able to set up a close government in which the workers 
 had no part, they seldom retained their power long ; and the 
 great body of the inhabitants frequently had the full rights 
 of citizens, deciding for themselves the foreign and domestic 
 policy of their city, and at the same time working with their 
 hands and taking pride in their work. They organized 
 themselves into Gilds, thus increasing their cohesion and 
 educating themselves in self-government ; and though the 
 Gilds were often exclusive, and their trade-regulations 
 
MEDIAEVAL FREE CITIES. 27 
 
 BOOK I. 
 CH. II. 
 
 ultimately retarded progress, yet they did excellent work 
 before this deadening influence had shown itself 1 . 
 
 The citizens gained culture without losing energy ; without 
 neglecting their business, they learnt to take an intelligent 
 interest in many things besides their business. They led the 
 way in the fine arts, and they were not backward in those of 
 war. They took pride in magnificent expenditure for public 
 purposes ; and they took equal pride in a careful husbanding 
 of the public resources, in clear and clean State budgets, 
 and in systems of taxes levied equitably and based on 
 sound business principles. Thus they led the way towards 
 modern industrial civilization ; and if they had gone on their 
 course undisturbed, and retained their first love of liberty 
 and social equality, they would probably long ago have 
 worked out the solutions of many social and economic 
 problems which we are only now beginning to face. But 
 after being long troubled by tumults and war, they at last 
 succumbed to the growing power of the countries by which 
 they were surrounded ; and indeed when they had obtained 
 dominion over their neighbours, their own rule had often 
 been harsh and oppressive, so that their ultimate overthrow 
 by the country was in some degree the result of a just retri- 
 bution. They have suffered for their wrong doings, but the 
 fruit of their good work remains, and is the source of much 
 that is best in the social and economic traditions that our 
 age has inherited from its predecessors. 
 
 8. Feudalism was perhaps a necessary stage in the Chivalry^ 
 development of the Teutonic race. It gave scope to the tecUhe Pr 
 political ability of the dominant class, and educated the P or - 
 common people in habits of discipline and order. But it 
 concealed under forms of some outward beauty much cruelty 
 and uncleanness, physical and moral. The practices of 
 chivalry combined extreme deference to women in public 
 with much domestic tyranny : it combined elaborate rules of 
 courtesy towards combatants of the knightly order with 
 
 i What is true of the great free towns that were practically autonomous is 
 true in a less degree of the so-called free boroughs of England. Their constitutions 
 were even more various than the origins of their liberties; hut it now seen* 
 probable that they were generally more democratic and less oligarchic than was 
 at one time supposed. See especially Gross, The Gild Merchant, ch. vn. 
 
28 THE GROWTH OF ECONOMIC FREEDOM. 
 
 BOOK i. cruelty and extortion in dealing with the lower classes. The 
 ' ruling classes were expected to discharge their obligations 
 towards one another with frankness and generosity 1 : they 
 had ideals of life which were not devoid of nobility; arid 
 therefore their characters will always have some attractive- 
 ness to the thoughtful historian as well as to the chronicler 
 of wars, of splendid shows and of romantic incidents. But 
 their consciences were satisfied when they had acted up to 
 the code of duty which their own class required of them: 
 and one article of that code was to keep the lower classes 
 in their place; though they were often kind and even 
 affectionate towards those retainers with whom they lived in 
 daily contact. 
 
 The So far as cases of individual hardship went, the Church 
 
 helped the strove to defend the weak and to diminish the sufferings of 
 economic* ^ e P oor - Perhaps those finer natures who were attracted to 
 its service might often have exercised a wider and a better 
 influence, if they had been free from the vow of celibacy, 
 and able to mingle with the world. But this is no reason for 
 rating lightly the benefit which the clergy, and still more 
 the monks, rendered to the poorer classes. The monasteries 
 were the homes of industry, and in particular of the scientific 
 treatment of agriculture : they were secure colleges for the 
 learned, and they were hospitals and alms-houses for the 
 suffering. The Church acted as a peace-maker in great 
 matters and in small : the festivals and the markets held 
 under its authority gave freedom and safety to trade 2 . 
 
 1 But the treachery that was common in Italian cities was not very rare in 
 northern castles. People compassed the death of their acquaintances by assas- 
 sination and poison: the host was often expected to taste the food and drink 
 which he offered to his guest. But as a painter rightly fills his canvas with the 
 noblest faces he can find, and keeps as much in the background as possible what 
 is ignoble, so the popular historian may be justified in exciting the emulation of 
 the young by historical pictures in which the lives of noble men and women stand 
 out in bold relief, while a veil is drawn over much of the surrounding depravity. 
 When however we want to take stock of the world's progress, we must reckon the 
 evil of past times as it really was; to be more than just to our ancestors then is 
 to be less than just to the best hopes of our race. 
 
 2 We are perhaps apt to lay too much stress on the condemnation by the 
 Church of "usury" and some kinds of trade. There was then very little scope 
 for lending capital to be used in business, and when there was, the prohibition 
 could be evaded by many devices, some of which were indeed sanctioned by the 
 Church itself. And though St Chrysostom said that "he who procures an article 
 
THE MEDIAEVAL CHURCH. 29 
 
 BOOK I. 
 CH. II. 
 
 Again, the Church was a standing protest against caste 
 exclusiveness. It was democratic in its organization, as was 
 the army of ancient Rome. It was always willing to raise to 
 the highest posts the ablest men, in whatever rank they were 
 born ; its clergy and monastic orders did much for the physical 
 and moral wellbeing of the people ; and it sometimes even led 
 them in open resistance to the tyranny of their rulers 1 . 
 
 But, on the other hand, it did not set itself to help them but 
 to develop their faculties of self-reliance and self-deter- St^ 
 mination, and to attain true inner freedom. While willing others - 
 that those individuals who had exceptional natural talents 
 should rise through its own offices to the highest posts, it 
 helped rather than hindered the forces of feudalism in their 
 endeavour to keep the working classes as a body ignorant, 
 devoid of enterprise, and in every way dependent on those 
 above them. Teutonic feudalism was more kindly in its 
 instincts than the military dominion of ancient Rome ; and 
 the laity as well as clergy were influenced by the teachings, 
 imperfectly understood as they were, of the Christian re- 
 ligion with regard to the dignity of man as man. Never- 
 theless the rulers of the country districts during the early 
 middle ages united all that was most powerful in the oriental 
 subtlety of theocratic caste and in the Roman force of dis- 
 cipline and resolution ; and they used their combined 
 strength in such a manner as on the whole to retard the 
 growth of strength and independence of character among the 
 lower orders of the people. 
 
 to make profit by disposing of it entire and unaltered, is ejected from the temple 
 of God," yet the Church encouraged merchants to buy and sell goods unaltered at 
 fairs and elsewhere. The authority of Church and State and the prejudices of 
 the people combined to put difficulties in the way of those who bought up large 
 quantities of goods in order to sell them retail at a profit. But though much of 
 the business of these people was legitimate trade, some of it was certainly 
 analogous to the "rings" and "corners" in modern produce markets. Compare 
 the excellent chapter on the Canonist Doctrine in Ashley's History and the 
 notice of it by Mr Hewins in the Economic Revieiv, vol. iv. 
 
 1 Indirectly it aided progress by promoting the Crusades; of which Prof. 
 Ingram well says (History, ch. ii.) that they "produced a powerful economic 
 effect by transferring in many cases the possessions of the feudal chiefs to the 
 industrial classes, whilst by bringing different nations and races into contact, by 
 enlarging the horizon and widening the conceptions of the populations, as well as 
 by affording a special stimulus to navigation, they tended to give a new activity 
 to international trade." 
 
30 
 
 THE GROWTH OF ECONOMIC FREEDOM. 
 
 BOOK I. 
 CH. II. 
 
 Overthrow 
 of the 
 cities. 
 
 The inven- 
 tion of 
 printing, 
 the Refor- 
 mation, 
 and the 
 discovery 
 of the 
 New 
 World. 
 
 The first 
 benefit of 
 the mari- 
 time dis- 
 coveries 
 went to 
 
 The military force of feudalism was however for a long 
 time weakened by local jealousies. It was admirably adapted 
 for welding into one living whole the government of a vast 
 area under the genius of a Charles the Great : but it was 
 equally prone to dissipate itself into its constituent elements 
 as soon as its guiding genius was gone. Italy was for a long 
 time ruled by its towns, one of which indeed, of Roman 
 descent, with Roman ambition and hard fixity of purpose 
 held its water-ways against all attack till quite modern 
 times. And in the Netherlands and other parts of the Con- 
 tinent the free towns were long able to defy the hostility 
 of kings and barons around them. But at length stable 
 monarchies were established in Austria, Spain and France. 
 A despotic monarchy, served by a few able men, drilled and 
 organized the military forces of vast multitudes of ignorant 
 but sturdy country folk ; and the enterprise of the free towns, 
 their noble combination of industry and culture, was cut short 
 before they had had time to outgrow their early mistakes. 
 
 Then the world might have gone backwards if it had not 
 happened that just at that time new forces were rising to 
 break up the bonds of constraint and spread freedom over 
 the broad land. Within a very short period came the inven- 
 tion of printing, the Revival of Learning, the Reformation, 
 and the discovery of the ocean routes to the New World and 
 to India, Any one of these events alone would have been 
 sufficient to make an epoch in history ; but coming together 
 as they did, and working all in the same direction, they 
 effected a complete revolution. 
 
 Thought became comparatively free, and knowledge 
 ceased to be altogether inaccessible to the people. The free 
 temper of the Greeks revived; the strong self-determining 
 spirits gained new strength, and were able to extend their 
 influence over others. And a new continent suggested new 
 problems to the thoughtful, at the same time that it offered 
 a new scope to the enterprise of bold adventurers. 
 
 9. The countries which took the lead in the New 
 maritime adventure were those of the Spanish Peninsula. It 
 seemed for a time as though the leadership of the world, having 
 settled first in the most easterly peninsula of the Mediterra- 
 
THE SHORES OF THE ATLANTIC. - 31 
 
 nean, and thence moved to the middle peninsula, would BOOKX. 
 settle again in that westerly peninsula which belonged both CH ' n> 
 to the Mediterranean arid the Atlantic. But the power of the 
 industry had by this time become sufficient to sustain wealth peSdia. 
 and civilization in a northern climate. And the Spanish and 
 Portuguese could not hold their own for long against the 
 more sustained energy and the more generous spirit of the 
 northern people ; the colonists of England, Holland, and even 
 France demanded and obtained far more freedom than those 
 of Spain and Portugal. 
 
 The early history of the people of the Netherlands is But soon 
 indeed a brilliant romance. Founding themselves on fishing Srther on, 
 and weaving, they built up a noble fabric of Art and Litera- toHoUand ; 
 ture, of Science and Government. But Spain set herself to 
 crush out the rising spirit of freedom, as Persia had done 
 before. And as Persia strangled Ionia, but only raised yet 
 higher the spirit of Greece Proper; so the Austro-Spanish 
 Empire subdued the Belgian Netherlands, but only roused the 
 patriotism and energy of the Dutch Netherlands and England. 
 
 Holland suffered from England's jealousy of her commerce, 
 but still more from the restless military ambition of France. 
 It soon became clear that Holland was defending the free- 
 dom of Europe against French aggression. But at a critical 
 time in her history she was deprived of the aid she might 
 reasonably have expected from Protestant England ; and 
 though from 1 688 onwards that aid was liberally given, her 
 bravest and most generous sons had then already perished 
 on the battle-field, and she was overburdened with debt. 
 She has fallen into the background : but Englishmen above 
 all others are bound to acknowledge what she did, and what 
 more she might have done for freedom and enterprise. 
 
 France and England were thus left to contend for the to France; 
 empire of the Ocean. France had greater natural resources 
 than any other northern country, and more of the spirit of the 
 new age than any southern country ; and she was for some time 
 the greatest power of the world. But she squandered in per- 
 petual wars her wealth and the blood of the best of those 
 citizens whom she had not already driven away by religious 
 persecution. The progress of enlightenment brought with it 
 
32 THE GROWTH OF ECONOMIC FREEDOM. 
 
 BOOK i. no generosity on the part of the ruling class towards the 
 
 CH. II. , , , . , ,., 
 
 ruled, and no wisdom in expenditure. 
 
 From revolutionary America came the chief impulse 
 towards a rising of the oppressed French people against their 
 rulers. But the French were strikingly wanting in that self- 
 controlling freedom which had distinguished the American 
 colonists. Their energy and courage was manifested again in 
 Eif land ^ e great Napoleonic wars. But their ambition overleaped 
 itself, and ultimately left to England the leadership of 
 enterprise on the Ocean. Thus the industrial problems of 
 the New World are being worked out under the direct 
 influence, as to some extent those of the Old World are 
 under the indirect influence of the English character. We 
 may then return to trace with somewhat more detail the 
 growth of free enterprise in England. 
 
men. 
 
 CHAPTER III. 
 
 THE GROWTH OF FREE INDUSTRY AND ENTERPRISE 
 CONTINUED. 
 
 1. ENGLAND'S geographical position caused her to be BOOK i. 
 peopled by the strongest members of the strongest races of CH - m - 
 northern Europe ; a process of natural selection brought to The ch - 
 her shores those members of each successive migratory wave English- 
 who were most daring and self-reliant. Her climate is better 
 adapted to sustain energy than any other in the northern 
 hemisphere. She is divided by no high hills, and no part of 
 her territory is more than twenty miles from navigable water, 
 and thus there was no material hindrance to freedom of 
 intercourse between her different parts ; while the strength 
 and wise policy of the Norman and Plantagenet kings pre- 
 vented artificial barriers from being raised by local magnates. 
 
 As the part which Rome played in history is chiefly 
 due to her having combined the military strength of a great 
 empire with the enterprise and fixedness of purpose of an 
 oligarchy residing in one city, so England owes her greatness 
 to her combining, as Holland had done on a smaller scale 
 before, much of the free temper of the mediaeval city with the 
 strength and broad basis of a nation. The towns of England 
 had been less distinguished than those of other lands; but 
 she assimilated them more easily than any other country did, 
 and so gained in the long run most from them. 
 
 The custom of primogeniture inclined the younger sons 
 of noble families to seek their own fortunes ; and having no 
 special caste privileges they mixed readily with the common 
 people. This fusion of different ranks tended to make poli- 
 tics business-like; while it warmed the veins of business 
 
 3 
 
34 THE GROWTH OF ECONOMIC FREEDOM. 
 
 BOOK i. adventure with the generous daring and romantic aspirations 
 _! _ of noble blood. Resolute on the one hand in resistance to 
 tyranny, and on the other in submission to authority when 
 it is justified by their reason, the English have made many 
 revolutions ; but none without a definite purpose. While 
 reforming the constitution they have abided by the law : they 
 alone, unless we except the Dutch, have known how to com- 
 bine order and freedom ; they alone have united a thorough 
 reverence for the past with the power of living for the future 
 rather than in the past. But the strength of character which 
 in later times made England the leader of manufacturing 
 progress, showed itself at first chiefly in politics, in war, and 
 in agriculture. 
 
 While they The English yeoman archer was the forerunner of the 
 anagricui- English artisan. He had the same pride in the superiority 
 tion they ^ his food and his physique over those of his Continental 
 rrva l s ; he had the same indomitable perseverance in acquiring 
 
 their perfect command over the use of his hands, the same free 
 
 faculty independence and the same power of self-control and of rising 
 
 izedaction. * emergencies; the same habit of indulging his humours 
 
 when the occasion was fit, but, when a crisis arose, of preserv- 
 
 ing discipline even in the face of hardship and misfortune 1 . 
 
 But the industrial faculties of Englishmen remained 
 latent for a long time. They had not inherited much ac- 
 quaintance with nor much care for the comforts and luxuries 
 of civilization. In manufactures of all kinds they lagged 
 behind the Latin countries, Italy, France and Spain, as 
 well as the free cities of northern Europe. Gradually the 
 wealthier classes got some taste for imported luxuries, and 
 England's trade slowly increased. 
 
 Their trade But there was for a long time no sign on the surface of her 
 conse een a ^ture commerce. That indeed is the product of her special 
 quence of circumstances as much as, if not more than, of any natural 
 
 their 
 
 activity in bias of her people. They had not originally, and they have not 
 and in*" a now, that special liking for dealing and bargaining, nor for the 
 
 navigation. 
 
 1 For the purposes of statistical comparison the well-to-do yeoman must be 
 ranked with the middle classes of to-day, not with the artisans : for those who 
 were hetter off than he were very few in number ; while the great mass of the 
 people were far below him ; and were, even in the prosperous fifteenth century, 
 much worse off in almost every respect than they are now. 
 
EARLY SIGNS OF ENGLAND'S ECONOMIC FUTURE. 35 
 
 more abstract side of financial business, which is found among BOOK i. 
 the Jews, the Italians, the Greeks and the Armenians ; trade CH ' m ' 
 with them has always taken the form of action rather than 
 of manoeuvring and speculative combination. Even now 
 the subtlest financial speculation on the London Stock Ex- 
 change is done chiefly by those races which have inherited 
 the same aptitude for trading which the English have for 
 action. 
 
 The qualities which have caused England in later times The capi- 
 under different circumstances to explore the world, and to 
 make goods and carry them for other countries, caused her 
 
 even in the middle ages to pioneer the modern organization of neere d the 
 agriculture, and thus to set the model after which most other that of 
 modern business is being moulded. She took the lead in 
 converting labour dues into money payments, a change which 
 much increased the power of everyone to steer his course in 
 life according to his own free choice. For good and for evil 
 the people were set free to exchange away their rights in the 
 land and their obligations to it. The relaxation of the bonds 
 of custom was hastened alike by the great rise of real wages 
 which followed the Black Death in the fourteenth century ; 
 and by the great fall of real wages which, in the six- 
 teenth century, resulted from the depreciation of silver, the 
 debasement of coin, the appropriation of the revenues of the 
 monasteries to the purposes of court extravagance ; and lastly 
 by the extension of sheep farming, which set many workers 
 adrift from their old homes, and lowered the real incomes 
 and altered the mode of life of those who remained. The 
 movement was further extended by the growth of the royal 
 power in the hands of the Tudors, which put an end to 
 private war, and rendered useless the bands of retainers 
 which the barons and landed gentry had kept together. 
 The habit of leaving real property to the eldest son, and 
 distributing personal property among all the members of the 
 family, on the one hand increased the size of landed pro- 
 perties, and on the other narrowed the capital which the 
 owners of land had at their own command for working it 1 . 
 
 1 Mr Rogers says that in the thirteenth century the value of arable land was 
 only a third of the capital required to work it; and he believes that so long as the 
 
 32 
 
THE GROWTH OF ECONOMIC FREEDOM. 
 
 BOOK i. These causes tended to establish the relation of landlord 
 
 ' and tenant in England : while the foreign demand for 
 English work and the English demand for foreign luxuries 
 led, especially in the sixteenth century, to the concentration 
 of many holdings into large sheep-runs worked by capitalist 
 farmers. That is, there was a great increase in the number 
 of farmers who undertook the management and the risks of 
 agriculture, supplying some capital of their own, but borrow- 
 ing the land for a definite yearly payment, and hiring labour 
 for wages : in like manner as, later on, the new order of 
 English business men undertook the management and the 
 risks of manufacture, supplying some capital of their own 
 but borrowing the rest on interest and hiring labour for 
 wages. Thus the English large farm, arable and pastoral, 
 worked with borrowed capital was the forerunner of the 
 English factory, in the same way as English archery was the 
 forerunner of the skill of the English artisan 1 . 
 
 England's 2. Meanwhile the English character was deepening. 
 The natural gravity and intrepidity of the stern races that 
 nac * settled on the shores of England inclined them to em- 
 
 spiritof the brace the doctrines of the Reformation; and these reacted on 
 tion their habits of life, and gave a tone to their industry. Man 
 was, as it were, ushered straight into the presence of his 
 Creator, with no human intermediary: life became intense 
 and full of awe; and now for the first time large numbers 
 of rude and uncultured people yearned towards the mysteries 
 of absolute spiritual freedom. The isolation of each person's 
 religious responsibility from that of his fellows, rightly under- 
 stood, was a necessary condition for the highest spiritual 
 progress 2 . But the notion was new to the world, it was 
 bare and naked, not yet overgrown with pleasant instincts ; 
 
 owner of the land was in the habit of cultivating it himself, the eldest son often 
 used various devices for alienating a part of his laud to his younger brothers in 
 exchange for some of their capital. Six Centuries of Work and Wages, pp. 51, "2. 
 
 1 This parallelism is further developed in Book vi. ; see especially cli. ix. 5. 
 
 2 The Reformation "was the affirmation of Individuality... In dividuahty is 
 not the sum of life, but it is an essential part of life in every region of our nature 
 and our work, in our work for the part and for the whole. It is true, though it is 
 not the whole truth, that we must live and die alone, alone with God." Bishop 
 Westcott's Social Aspects of Christianity, p. 121. Comp. also Hegel's Philosophy 
 of History, part iv. section iii. ch. 2. 
 
INFLUENCE OF THE REFORMATION. 37 
 
 and even in kindly natures individuality showed itself BOOKI. 
 with a hard sharpness of outline, while the coarser natures CH - m - 
 became self-conscious and egotistic. Among the Puritans 
 especially, the eagerness to give logical definiteness and pre- 
 cision to their religious creed was an absorbing passion, 
 hostile to all lighter thoughts and lighter amusements. 
 When occasion arose they could take combined action, which 
 was made irresistible by their resolute will. But they took 
 little joy in society; they shunned public amusements, and 
 preferred the quieter relaxations of home life ; and, it must 
 be confessed, some of them took an attitude hostile to art \ 
 
 The first growth of strength had then something in it which 
 that was rude and ill-mannered ; but that strength was 
 required for the next stage upwards. Individualism had 
 to be purified and softened by much tribulation ; it had to for the next 
 become less self-assertive without becoming weaker, before social life, 
 new instincts could grow up around it to revive in a higher 
 form what was most beautiful and most solid in the old collec- 
 tive tendencies. Individualism governed by the temper of the 
 Reformed religion intensified family life, making it deeper 
 and purer, and holier than it had ever been before. It is true 
 that even the highest elements of our nature can be used 
 wrongly, that an exclusive devotion to family cares has evils 
 of its own. Nevertheless the family affections of those races 
 which have adopted the Reformed religion are the richest 
 and fullest of earthly feelings : there never has been before 
 any material of texture at once so strong and so fine, with 
 which to build up a noble fabric of social life. 
 
 Holland and other countries shared with England the 
 great ordeal which was thus opened by the spiritual upheaval 
 that closed the middle ages. But from many points of view, 
 
 1 The licentiousness of some forms of art created in serious but narrow minds 
 a prejudice against all art ; and in revenge socialists now rail at the Reformation 
 as having injured both the social and the artistic instincts of man. But it may be 
 questioned whether the intensity of the feelings which were engendered by the 
 Reformation has not enriched art more than their austerity has injured it. They 
 have developed a literature and a music of their own ; and if they have led man to 
 think slightingly of the beauty of the works of his own hands, they have certainly 
 increased his power of appreciating the beauties of nature. It is no accident that 
 landscape painting owes most to lands in which the Reformed religion has pre- 
 vailed. 
 
38 THE GROWTH OF ECONOMIC FREEDOM. 
 
 BOOK i. and especially from that of the economist, England's experi- 
 
 _J ' ences were the most instructive and the most thorough ; and 
 
 were typical of all the rest. England led the way in the 
 modern evolution of industry and enterprise by free and self- 
 determining energy and will. 
 Theecono- R 3. The effects of the Reformation on England's indus- 
 
 mic iniiu- 
 
 enceofthe trial and commercial character were intensified by the fact 
 tionon that many of those who had adopted the new doctrines in 
 was inten- o * ner countries sought on her shores a safe asylum from 
 thro* h re ligi us persecution. By a sort of natural selection, those 
 her attract- of the French and Flemings, and others whose character was 
 artisans 866 most akin to the English, and who had been led by that 
 Continent cnarac ter to sturdy thoroughness of work in the manufactur- 
 ing arts, came to mingle with them, and to teach them those 
 arts for which their character had all along fitted them 1 . 
 During the seventeenth and eighteenth centuries, the court 
 and the upper classes remained more or less frivolous and 
 licentious ; but the middle class and some parts of the work- 
 It gave a ing class adopted a severe view of life; they took little 
 tone to her delight in amusements that interrupted work, and they had 
 men"and a n ig n standard as to those material comforts which could 
 on her^n 6 * ^ e ktained only by unremitting, hard work. They strove to 
 dustries. produce things that had a solid and lasting utility, rather 
 than those suited only for the purpose of festivities and 
 ostentation. The tendency, when once it had set in, was 
 promoted by the climate ; for, though not very severe, it 
 is specially unsuited to the lighter amusements; and the 
 clothing, houseroom and other requisites for a comfortable 
 existence in it, are of a specially expensive character. 
 
 These were the conditions under which the modern in- 
 dustrial life of England was developed : the desire for material 
 comforts tends towards a ceaseless straining to extract from 
 every week the greatest amount of work that can be got out 
 of it. The firm resolution to submit every action to the 
 deliberate judgment of the reason tends to make everyone 
 constantly ask himself whether he could not improve his 
 position by changing his business, or by changing his method 
 
 1 Dr Smiles has shown that the debt which England owes to these immigrants 
 is greater than historians have supposed, though they have always rated it highly. 
 
ORIGIN OF LARGE BUSINESS UNDERTAKINGS. 39 
 
 of doing it. And, lastly, complete political freedom and seen- BOOK i. 
 rity enables everyone to adjust his conduct as he has decided CH ' m ' 
 that it is his interest to do, and fearlessly to commit his 
 person and his property to new and distant undertakings. 
 
 In short, the same causes which have enabled England 
 and her colonies to set the tone of modern politics, have 
 made them also set the tone of modern business. The same 
 qualities which gave them political freedom gave them also 
 free enterprise in industry and commerce 1 . 
 
 4. Freedom of industry and enterprise, so far as its English 
 action reaches, tends to cause everyone to seek that employ- prise natu- 
 ment of his labour and capital in which he can turn them 
 to best advantage ; and this again leads him to try to obtain 
 a special skill and facility in some particular task, by which 
 he may earn the means of purchasing what he himself wants. 
 And hence results a complex industrial organization, with 
 much subtle division of labour 2 . 
 
 Some sort of division of labour is indeed sure to grow 
 up in any civilization that has held together for a long 
 while, however primitive its form. Even in very backward 
 countries we find highly specialized trades; but we do not 
 find the work within each trade so divided up that the 
 planning and arrangement of the business, its management 
 and its risks, are borne by one set of people, while the 
 manual work required for it is done by hired labour. This 
 form of division of labour is at once characteristic of the 
 modern world generally, and of the English race in particular. 
 It may be merely a passing phase in man's development; 
 it may be swept away by the further growth of that free 
 enterprise which has called it into existence. But for the 
 present it stands out for good and for evil as the chief fact 
 in the form of modern civilization, the kernel of the modern 
 economic problem. 
 
 The most vital changes hitherto introduced into industrial 
 
 1 Rogers argues with great force (Six Centuries of Work and Wages, ch 1), 
 that the commutation of personal for money dues was effected earlier in England 
 than on the Continent, and was a chief cause of what is most character^ 
 England's political history. 
 
 2 This subject is studied in detail below, Book iv. chs. vin xn. 
 
40 
 
 THE GROWTH OF ECONOMIC FREEDOM. 
 
 BOOK i. 
 
 manage- 
 ment of 
 business, 
 
 and the 
 
 localization 
 
 of industry, 
 
 life, centre around this growth of business Undertakers 1 . 
 We have already seen how the undertaker made his appear- 
 ance at an early stage in England's agriculture. The farmer 
 borrowed land from his landlord, and hired the necessary 
 labour, being himself responsible for the management and 
 risks of the business. The selection of farmers has not in- 
 deed been governed by perfectly free competition, but has 
 been restricted to a certain extent by inheritance and by 
 other influences, which have often caused the leadership of 
 agricultural industry to fall into the hands of people who have 
 had no special talents for it. But England is the only country 
 in which any considerable play has been given to natural 
 selection : the agricultural systems of the Continent have 
 allowed the accident of birth to determine the part which 
 every man should take in cultivating land or controlling its 
 cultivation. The greater energy and elasticity obtained by 
 even this narrow play of selection in England, has been 
 sufficient to put English agriculture in advance of all others, 
 and has enabled it to obtain a much larger produce than is 
 got by an equal amount of labour from similar soils in any 
 other country of Europe 2 . 
 
 But the natural selection of the fittest to undertake, to 
 organize, and to manage has much greater scope in manu- 
 facture. The tendency to the growth of undertakers in 
 manufactures had set in before the great development of 
 England's foreign trade ; in fact traces of it are to be found 
 in the woollen manufacture in the fifteenth century 3 . But 
 the opening up of large markets in new countries gave a 
 
 1 This term, which has the authority of Adam Smith and is habitually used 
 on the Continent, seems to be the best to indicate those who take the risks and 
 the management of business as their share in the work of organized industry. 
 
 2 In the latter half of the eighteenth century, especially, the improvements 
 in agriculture moved very fast. Implements of all kinds were improved, 
 draining was carried out on scientific principles, the breeding of farm animals 
 was revolutionized by Bakewell's genius; turnips, clover, rye-grass, &c. came 
 into general use, and enabled the plan of refreshing land by letting it lie fallow to 
 be superseded by that of "alternating husbandry." These and other changes 
 constantly increased the capital required for the cultivation of land; while the 
 growth of fortunes made in trade increased the number of those who were able 
 and willing to purchase their way into country society by buying large properties. 
 And thus in every way the modern commercial spirit spread in agriculture. 
 
 3 Comp. Ochenkowski, Englands rcirthschaftliche JEntwickelung, p. 112. 
 
EXPANSION OF MARKETS IN THE NEW WORLD. 41 
 
 great stimulus to the movement, both directly and through BOOK i. 
 its influence on the localization of industry, that is, the con- CH ' m> 
 centration of particular branches of production in certain 
 localities. 
 
 The records of mediaeval fairs and wandering merchants These tend- 
 show that there were many things each of which was made moted by 
 in only one or two places, and thence distributed north and 
 
 south, east and west, over the whole of Europe. But the sumer be- 
 wares whose production was localized and which travelled far, seas, who 
 
 were almost always of high price and small bulk : the cheaper 
 and heavier goods were supplied by each district for itself. 
 In the colonies of the new world, however, people had not 
 always the leisure to provide manufactures for themselves : 
 and they were often not allowed to make even those which 
 they could have made ; for though England's treatment of her 
 colonies was more liberal than that of any other country, she 
 thought that the expense which she incurred on their behalf 
 justified her in compelling them to buy nearly all kinds of 
 manufactures from herself. There was also a large demand 
 for simple goods to be sold in India and to savage races. 
 
 These causes led to the localization of much of the heavier 
 manufacturing work. In work which requires the highly 
 trained skill and delicate fancy of the operative, organi- 
 zation is sometimes of secondary importance. But the power 
 of organizing great numbers of people gives an irresistible 
 advantage when there is a demand for whole ship cargoes of 
 goods of a few simple patterns. Thus localization and the 
 growth of the system of capitalist undertakers were two 
 parallel movements, due to the same general cause, and each 
 of them promoting the advance of the other. 
 
 The factory system and the use of expensive appliances 
 in manufacture, came at a later stage. They are commonly &. ai merely 
 supposed to be the origin of the power which undertakers ^ 
 wield in English industry ; and no doubt they increased it. 
 But it had shown itself clearly before their influence was industry: 
 
 . - tllc.it WflS 
 
 felt. At the time of the French Revolution there was not a st m done 
 very great deal of capital invested in machinery whether 
 driven by water or steam power; the factories were not 
 large, and there were not many of them. But nearly all 
 
42 THE GROWTH OF ECONOMIC FREEDOM. 
 
 BOOK i. the textile work of the country was then done on a system of 
 ' m ' contracts. This industry was controlled by a compara- 
 tively small number of undertakers who set themselves 
 to find out what, where and when it was most advan- 
 tageous to buy and to sell, and what things it was most 
 profitable to have made. They then let out contracts 
 for making these things to a great number of people 
 scattered over the country. The undertakers generally sup- 
 plied the raw material, and sometimes even the simple 
 implements that were used; those who took the contract 
 executed it by the labour of themselves and their families, 
 and sometimes but not always by that of a few assistants 1 . 
 
 As time went on, the progress of mechanical invention 
 caused the workers to be gathered more and more into small 
 factories in the neighbourhood of water power; and when 
 steam came to be substituted for water power, then into 
 larger factories in great towns. Thus the great undertakers 
 who bore the chief risks of manufacturing, without directly 
 managing and superintending, began to give way to wealthy 
 employers, who conducted the whole business of manufac- 
 turing on a large scale. The new factories attracted the 
 attention of the most careless observer ; and this last move- 
 ment was not liable to be overlooked by those who were not 
 actually engaged in the trade, as the preceding movement 
 had been 2 . 
 
 1 The relations in which the undertaking the risks of a business stands to the 
 work of managing it, and superintending those who are engaged in it, are dis- 
 cussed below in Book iv. ch. xn. ; the causes which govern the remunerations of 
 these several tasks are studied in Book vi. ch. vii. vm. xi. xn. 
 
 2 The quarter of a century beginning with 1760 saw improvements follow one 
 another in manufacture even more rapidly than in agriculture. During that 
 period the transport of heavy goods was cheapened by Brindley's canals, the pro- 
 duction of power by Watt's steam-engine, and that of iron by Cort's processes of 
 puddling and rolling, and by Roebuck's method of smelting it by coal in lieu 
 of the charcoal that had now become scarce ; Hargreaves, Crompton, Arkwright, 
 Cartwright and others invented, or at least made economically serviceable, 
 the spinning- jenny, the mule, the carding machine, and the power-loom ; 
 Wedgwood gave a great impetus to the pottery trade that was already growing 
 rapidly; and there were important inventions in printing from cylinders, in 
 bleaching by chemical agents, and in other processes. A cotton factory was 
 for the first time driven directly by steam-power in 1785, the last year of the 
 period. The beginning of the nineteenth century saw steam-ships and steam 
 printing-presses, and the use of gas for lighting towns. Railway locomotion, tele- 
 
RISE OF THE FACTORY SYSTEM. 43 
 
 Thus at length general attention was called to the great BOOK i. 
 change in the organization of industry which had long been CH ' m - 
 going on ; and it was seen that the system of small businesses f ut ra - 
 controlled by the workers themselves was being displaced by tuSer-* ' 
 the system of large businesses controlled by the specialized Sd to 
 ability of capitalist undertakers. The change would have J^ 8 
 worked itself out very much as it has done, even if there bodies of 
 had been no factories : and it will go on working itself out Henceforth 
 
 even if the retail distribution of force by electric or other 
 agencies should cause part of the work that is now done in j 
 factories to be taken to the home of the workers 1 . wholesale. 
 
 5. The new movement both in its earlier and later 
 forms has tended constantly to relax the bonds that used 
 to bind nearly everyone to live in the parish in which he 
 was born ; and it developed free markets for labour, which 
 invited people to come and take their chance of finding 
 employment. And in consequence of this change the causes 
 that determine the value of labour began to take a new 
 character. Up to the eighteenth century manufacturing 
 labour had been hired, as it were, always retail; in that 
 century it began to be hired wholesale. Up to that time its 
 price had been in the main either nominally fixed by custom 
 or determined by the incidents of bargaining in very small 
 markets : the bargaining had been sometimes for the hire of 
 labour, sometimes for the sale of its products, the workman 
 having himself undertaken the risks of production. But 
 since then its price has more and more been determined by 
 the circumstances of supply and demand over a large area 
 a town, a country, or the whole world. 
 
 The new organization of industry added vastly to the 
 efficiency of production ; for it went far towards securing was ac- 
 that each man's labour should be devoted to just the highest 
 
 graphy and photography came a little later. Our own age has seen numberless 
 improvements and new economics in production, prominent among which are those 
 relating to the production of steel, the telephone, the electric light, and the gas- 
 engine ; and the social changes arising from material progress are in some respects 
 more rapid now than ever. But the groundwork of the changes that have 
 happened since 1785 was chiefly laid in the inventions of the years 1760 to 1785. 
 
 i See Held's Sociale Geschichte EngUnds, Bk. n. ch. in. Compare also Mi- 
 Carroll D. Wright's vigorous defence of the Factory system, Vol. n. of the U. S. 
 Census for 1880. 
 
44 THE GROWTH OF ECONOMIC FREEDOM. 
 
 BOOK i. kind of work which he was capable of performing well, and 
 CH^HI. fa&t his work should be ably directed and supplied with the 
 
 e l ils i'- m ^ ny k es t mechanical and other assistance that wealth and the 
 
 of which 
 
 were due knowledge of the age could afford. But it brought with it 
 causes. great evils. Which of these evils was unavoidable we cannot 
 tell. For just when the change was moving most quickly, 
 England was stricken by a combination of calamities almost 
 unparalleled in history. They were the cause of a great 
 part it is impossible to say of how great a part of the 
 sufferings that are commonly ascribed to the sudden out- 
 break of unrestrained competition. The loss of her great 
 colonies was quickly followed by the great French war, which 
 cost her more than the total value of the accumulated wealth 
 she had at its commencement. An unprecedented series of 
 bad harvests made bread fearfully dear. And worse than all, 
 a method of administration of the poor law was adopted which 
 undermined the independence and vigour of the people. 
 
 The first part of this century therefore saw free enter- 
 prise establishing itself in England under unfavourable 
 circumstances, its evils being intensified and its beneficial 
 influences being hindered by external misfortunes. 
 There were 6. The trade customs and the gild regulations by 
 attempts to which the weak had been defended in past times, were un- 
 ordinances su ^able to the new industry. In some places they were 
 regulating abandoned by common consent : in others they were success- 
 fully upheld for a time. But it was a fatal success ; for the 
 new industry, incapable of flourishing under the old bonds, 
 left those places for others where it could be more free 1 . 
 Then the workers turned to Government for the enforcement 
 of old laws of Parliament prescribing the way in which the 
 trade should be carried on, and even for the revival of the 
 regulation of prices and wages by justices of the peace. 
 which had These efforts could not but fail. The old regulations 
 good and had been the expression of the social, moral and economic 
 ideas of the time; they had been felt out, rather than 
 
 1 The tendency of industries to flee away from places where they were over- 
 regulated by the gilds was of old standing, and had shown itself in the thirteenth 
 century, though it was then comparatively feeble. See Gross' Gild Merchant, 
 Vol. I. pp. 43 and 52. 
 
BEGINNING OF THE NINETEENTH CENTURY. 45 
 
 thought out ; they were the almost instinctive result of the BOOK i. 
 experience of generations of men who had lived and died CH ' m 
 under almost unchanged economic conditions. In the new but were 
 age changes came so rapidly that there was no time for this, ^mode^i 
 Each man had to do what was right in his own eyes, with change* 1 "* 1 
 but little guidance from the experience of past times ; those 
 who endeavoured to cling to old traditions were quickly 
 supplanted. 
 
 The new race of undertakers consisted chiefly of those The manu- 
 who had made their own fortunes, strong, ready, enterprising ^ere^ 8 
 
 men : who, looking at the success obtained by their own chiefl y 
 
 J strong self- 
 
 energies, were apt to assume that the poor and the weak m de men, 
 
 were to be blamed rather than to be pitied for their mis- only the 
 fortunes. Impressed with the folly of those who tried to 
 bolster up economic arrangements which the stream of pro- tion> 
 gress had undermined, they were apt to think that nothing 
 more was wanted than to make competition perfectly free 
 and to let the strongest have their way. They glorified 
 individualism, and were in no hurry to find a modern sub- 
 stitute for the social and industrial bonds which had kept 
 men together in earlier times. 
 
 Meanwhile misfortune had reduced the total net income of The pres- 
 the people of England. In 1820 a tenth of it was absorbed 
 in paying the mere interest on the National Debt. The goods 
 that were cheapened by the new inventions were chiefly 
 manufactured commodities of which the working man was wages, 
 but a small consumer. As England had then almost a 
 monopoly of manufactures, he might indeed have got his 
 food cheaply if manufacturers had been allowed to change 
 their wares freely for corn grown abroad ; but this was pro- 
 hibited by the landlords who ruled in Parliament. The 
 labourer's wages, so far as they were spent on ordinary food, 
 were the equivalent of what his labour would produce on 
 the very poor soil which was forced into cultivation to eke 
 out the insufficient supplies raised from the richer grounds. 
 He had to sell his labour in a market in which the forces of 
 supply and demand would have given him a poor pittance 
 even if they had worked freely. But he had not the full 
 advantage of economic freedom ; he had no efficient union 
 
46 THE GROWTH OF ECONOMIC FREEDOM. 
 
 BOOK i. with his fellows; he had neither the knowledge of the 
 _J _ ' market, nor the power of holding out for a reserve price, 
 tne seller of commodities has, and he was urged on to 
 
 healthy and work and to let his family work during long hours, and under 
 work, unhealthy conditions. This reacted on the efficiency of 
 eredthe the working population, and therefore on the net value of 
 
 hig 8 power * ne ^ r w o r k> and therefore it kept down their wages. The 
 employment of very young children for long hours was no 
 new thing : it had been common in Norwich and elsewhere 
 even in the seventeenth century ; but the moral and physical 
 misery and disease caused by excessive work under bad 
 conditions reached their highest point among the factory 
 population in the first quarter of the century; and they 
 diminished slowly during the second quarter, and more rapidly 
 since then. 
 
 But the After the workmen had recognised the folly of attempts 
 
 haJ saved 31 to revive the old rules regulating industry, there was no 
 
 longer any wish to curtail the freedom of enterprise. The 
 French sufferings of the English people at their worst were never 
 
 armies, and ft r r 
 
 the work- comparable to those which had been caused by the want 
 cepted it. of freedom in France before the Revolution ; and it was 
 argued that, had it not been for the strength which England 
 derived from her new industries, she would probably have 
 succumbed to a foreign military despotism, as the free cities 
 had done before her. Small as her population was she at 
 some times bore almost alone the burden of war against a 
 conqueror in control of nearly all the resources of the 
 Continent ; and at other times subsidized larger, but poorer 
 countries in the struggle against him. Rightly or wrongly, 
 it was thought at the time that Europe might have fallen 
 permanently under the dominion of France, as she had fallen 
 in an earlier age under that of Rome, had not the free 
 energy of English industries supplied the sinews of war 
 against the common foe. Little was therefore heard in 
 complaint against the excess of free enterprise, but much 
 against that limitation of it which prevented Englishmen 
 from obtaining food from abroad in return for the manu- 
 factures which they could now so easily produce. 
 
 even trades-unions, which were then beginning that 
 
PROGRESS DURING THE NINETEENTH CENTURY. 47 
 
 brilliant though chequered career which has been more full BOOK i. 
 of interest and instruction than almost anything else in CH ' III- 
 English history, passed into the phase of seeking little from P lic y of 
 authority except to be left alone. They had learnt by bitter Unions. 
 experience the folly of attempting to enforce the old rules by 
 which Government had directed the course of industry ; and 
 they had as yet got no far-reaching views as to the regula- 
 tion of trade by their own action : their chief anxiety was to 
 increase their own economic freedom by the removal of the 
 laws against combinations of workmen. 
 
 7. It has been left for our own generation to perceive People 
 all the evils which arose from the suddenness of this increase 
 of economic freedom. Now first are we getting to understand 
 the extent to which the capitalist employer, untrained to his the evUs 
 
 . 111. f econo- 
 
 new duties, was tempted to subordinate the wellbeing of his mic free- 
 workpeople to his own desire for gain ; now first are we itaegene 
 
 learning the importance of insisting that the rich have S 
 duties as well as rights in their individual and in their 
 collective capacity ; now first is the economic problem of the 
 new age showing itself to us as it really is. This is partly 
 due to a wider knowledge and a growing earnestness. But 
 however wise and virtuous our grandfathers had been, they 
 could not have seen things as we do ; for they were hurried 
 along by urgent necessities and terrible disasters \ 
 
 But we must judge ourselves by a severer standard. For 
 we are not now struggling for national existence ; and our greater 
 
 & . means and 
 
 resources have not been exhausted by great wars : on the must aim 
 contrary our powers of production have been immensely 
 increased ; and, what is at least as important, the repeal of 
 the Corn Laws and the growth of steam communication have 
 enabled a largely increased population to obtain sufficient 
 supplies of food on easy terms. The average money income 
 
 1 In times of peace no one ventures openly to rank money as of high import- 
 ance hi comparison with human lives; but in the crisis of an expensive war 
 money can always be used so as to save them. A general who at a critical time 
 sacrifices lives in order to protect material, the loss of which would cause the 
 loss of many men, is held to have acted rightly, though no one would openly 
 defend a sacrifice of soldiers' lives in order to save a few army stores in time of 
 peace. And at the beginning of this century every check to the production of 
 wealth was likely to cause a loss of life to English soldiers, and increased the 
 risk of their losing that national liberty which was dearer than life. 
 
48 THE GROWTH OF ECONOMIC FREEDOM. 
 
 BOOK i. of the people has more than doubled ; while the price of 
 _J _ ' almost all important commodities except animal food and 
 houseroom has fallen by one-half or even further. It is true 
 that even now, if wealth were distributed equally, the total 
 production of the country would only suffice to provide 
 necessaries and the more urgent comforts for the people l , and 
 that as things are, many have barely the necessaries of life. 
 But the nation has grown in wealth, in health, in education 
 and in morality; and we are no longer compelled to sub- 
 ordinate almost every other consideration to the need of 
 increasing the total produce of industry. 
 
 The new In particular during the present generation this increased 
 
 on freedom prosperity has made us rich and strong enough to impose 
 
 new restraints on free enterprise ; some temporary material 
 women and ^ oss ^ em ^ submitted to for the sake of a higher and greater 
 children, ultimate gain. But these new restraints are different from 
 the old. They are imposed not as a means of class domi- 
 ' nation ; but with the purpose of defending the weak, and 
 especially children and the mothers of children, in matters 
 in which they are not able to use the forces of competition 
 in their own defence. The aim is to devise, deliberately and 
 promptly, remedies adapted to the quickly changing circum- 
 stances of modern industry ; and thus to obtain the good, 
 without the evil, of the old defence of the weak that in other 
 ages was gradually evolved by custom. 
 
 The tele- Even when industry remained almost unchanged in cha- 
 
 prTnting nd racter for many generations together, custom was too slow 
 
 p {*? ss ,, en ~ in its growth and too blind to be able to apply pressure 
 
 people now only when pressure was beneficial: and in this later stage 
 
 on their 6 custom can do but little good, and much harm. But by the 
 
 dies for a ^ ^ ^ e telegraph and the printing-press, of representative 
 
 their evils, government and trade associations, it is possible for the 
 
 people to think out for themselves the solution of their own 
 
 problems. The growth of knowledge and self-reliance has 
 
 given them that true self-controlling freedom, which enables 
 
 1 The average income per head in the United Kingdom, which was about 15 
 in 1820, is about 37 now ; i.e. it has risen from about 75 to 185 per family of 
 five ; and its purchasing power is nearly as great as that of 400 in 1820. A few 
 artisans' families earn about 185, and would not gain by an equal distribution of 
 wealth : but they have only enough for a healthy and many-sided life. 
 
 
MODERN TENDENCIES. 49 
 
 them to impose of their own free will restraints on their BOOKI. 
 own actions; and the problems of collective production, CH ' m> 
 collective ownership and collective consumption are entering 
 on a new phase. 
 
 Projects for great and sudden changes are now, as ever, And we are 
 foredoomed to fail, and to cause reaction ; we cannot move movfcjf 5 " 
 safely, if we move so fast that our new plans of life altogether towards 
 
 T . 8 forms of 
 
 outrun our instincts. It is true that human nature can be collective 
 modified: new ideals, new opportunities and new methods of higher than 
 action may, as history shows, alter it very much even in a because 
 few generations ; and this change in human nature has based on f 
 
 . strong self- 
 
 perhaps never covered so wide an area and moved so fast as disciplined 
 in the present generation. But still it is a growth, and ity. 
 therefore gradual ; and changes of our social organization 
 must wait on it, and therefore they must be gradual too. 
 
 But though they wait on it, they may always keep a little 
 in advance of it, promoting the growth of our higher social 
 nature by giving it always some new and higher work to do, 
 some practical ideal towards which to strive. Thus gradually 
 we may attain to an order of social life, in which the common 
 good overrules individual caprice, even more than it did in 
 the early ages before the sway of individualism had begun. 
 But unselfishness then will be the offspring of deliberate will, 
 though aided by instinct individual freedom then will de- 
 velop itself in collective freedom ; a happy contrast to the 
 old order of life, in which individual slavery to custom caused 
 collective slavery and stagnation, broken only by the caprice 
 of despotism or the caprice of revolution. 
 
 5 8. We have been looking at this movement from the America is 
 
 . throwing 
 
 English point of view. But other nations are taking their much light 
 share in it. America faces new practical difficulties with economic 
 such intrepidity and directness that she is already con- P roblems - 
 testing with England the leadership in economic affairs; 
 she supplies many of the most instructive instances of the 
 latest economic tendencies of the age, such as the growing 
 democracy of trade and industry, arid the development of 
 speculation and trade combination in every form, and she 
 will probably before long take the chief part in pioneering 
 the way for the rest of the world. 
 
 M. 4 
 
50 THE GROWTH OF ECONOMIC FREEDOM. 
 
 BOOK i. Nor is Australia showing less signs of vigour than her 
 
 CH^III. e |^ er gigt er . sne h as indeed some advantage over the United 
 Australia. States in the greater homogeneity of her people. For, though 
 the Australians and nearly the same may be said of the 
 Canadians come from many lands, and thus stimulate one 
 another to thought and enterprise by the variety of their 
 experiences and their habits of thought, yet nearly all of 
 them belong to one race : and the development of social 
 and economic institutions can proceed in some respects more 
 easily, and perhaps ultimately even faster than would be 
 possible if they had to be adjusted to the capacities, the 
 temperaments, the tastes, and the wants of peoples who have 
 little affinity with one another. 
 
 On the Continent the power of obtaining important 
 results by free association is less than in English speaking 
 countries ; and in consequence there is less resource and less 
 thoroughness in dealing with industrial problems. But their 
 treatment is not quite the same in any two nations : and 
 there is something characteristic and instructive in the 
 methods adopted by each of them ; particularly in relation to 
 the sphere of governmental action. In this matter Germany 
 is taking the lead. It has been a great gain to her that 
 her manufacturing industries developed later than those of 
 England ; and she has been able to profit by England's ex- 
 perience and to avoid many of her mistakes 1 . 
 
 Gennany I* 1 Germany an exceptionally large part of the best 
 
 facilities" 11 intellect i n the nation seeks for employment under Govern- 
 
 forexperi- ment, and there is probably no other Government which 
 
 the man- contains within itself so much trained ability of the highest 
 
 business by order. On the other hand the energy, the originality and 
 
 the Govern- ^ ne ^ arm g which make the best men of business in England 
 
 the people. a nd America have not yet been fully developed in Germany ; 
 
 while the German people have a great faculty of obedience. 
 
 They are thus in strong contrast to the English, whose 
 
 1 List worked out with much suggestiveness the notion that a backward nation 
 must learn its lessons not from the contemporary conduct of more forward nations, 
 but from their conduct when they were in the same state in which it is now. But, 
 as Knies well shows (Politische (Ekonomie, n. 5), the growth of trade and the 
 improvement of the means of communication are making the developments of 
 different nations tend to synchronize. 
 
ECONOMIC MOVEMENTS IN GERMANY. 51 
 
 strength of will makes them capable of thorough dis- BOOKI. 
 cipline when they see the necessity for it, but who are not CH " m< 
 naturally docile. The control of industry by Government is 
 seen in its best and most attractive forms in Germany; 
 and at the same time the special virtues of private industry, 
 its vigour, its elasticity and its resource are not seen to their 
 best advantage there. In consequence the problems of the 
 economic functions of Government have been studied in 
 Germany with great care, and with results that may be very 
 instructive to English speaking people ; provided they re- 
 collect that the arrangements best suited for the German 
 character, are probably not quite the best for them; since 
 they could not, if they would, rival the Germans in their 
 steadfast docility, and in their easy contentment with inex- 
 pensive kinds of food, clothing, house-room and amusements. 
 
 And Germany contains a larger number than any other 
 country of the most cultivated members of that wonderful 
 race who have been leaders of the world in intensity of 
 religious feeling and in keenness of business speculation. 
 In every country, but especially in Germany, much of what 
 is most brilliant and suggestive in economic practice and in 
 economic thought is of Jewish origin. And in particular 
 to German Jews we owe many daring speculations as to 
 the conflict of interests between the individual and society, 
 and as to their ultimate economic causes and their possible 
 socialistic remedies. 
 
 But we are trenching on the subject of the next chapter. 
 In this and the previous chapter we have seen how recent 
 is the growth of economic freedom, and how new is the 
 substance of the problem with which economic science has 
 now to deal ; in the next chapter we have to inquire how 
 the form of that problem has been fashioned by the progress 
 of events and the personal peculiarities of great thinkers. 
 
 4-2 
 
CHAPTER IV. 
 
 THE GROWTH OF ECONOMIC SCIENCE. 
 
 BOOK I. 
 CH. IV. 
 
 Modern 
 economic 
 science 
 owes much 
 to ancient 
 thought 
 indirectly, 
 but little 
 directly. 
 
 1. WE have seen how economic freedom has its roots 
 in the past, but is in the main a product of quite recent 
 times ; we have next to trace the parallel growth of economic 
 science. The social conditions of the present day have been 
 developed from early Aryan and Semitic institutions by the 
 aid of Greek thought and Roman law ; but modern economic 
 speculations have been very little under the direct influence 
 of the theories of the ancients. 
 
 It is true that modern economics had its origin in 
 common with other sciences at the time when the study 
 of classic writers was reviving. But an industrial system 
 which was based on slavery, and a philosophy which regarded 
 manufacture and commerce with contempt, had little that 
 was congenial to the hardy burghers who were as proud 
 of their handicrafts and their trade as they were of their 
 share in governing the State. These strong but uncultured 
 men might have gained much from the philosophic temper 
 and the broad interests of the great thinkers of past times. 
 But, as it was, they set themselves to work out their own 
 problems for themselves ; and modern economics had at its 
 origin a certain rudeness and limitation of scope, and a bias 
 towards regarding wealth as an end rather than a means of 
 man's life. Its immediate concern was generally with the 
 public revenue, and the effects and yield of taxes ; and here 
 the statesmen of the free cities and the great empires alike 
 found their economic problems more urgent and more diffi- 
 cult, as trade became broader and war more expensive. 
 
EARLY MIDDLE AGES. 53 
 
 In all ages, but especially in the early middle ages, BOOKI. 
 statesmen and merchants had busied themselves with en- CH ' ^ 
 deavours to enrich the State by regulating trade. One chief Influeuce 
 object of their concern had been the supply of the precious *$?* 
 metals, which they thought the best indication if not the W$T 
 chief cause of material prosperity, whether of the individual 
 or the nation. But the voyages of Vasco de Gama and 
 Columbus raised commercial questions from a secondary to 
 a dominating position among the nations of Western Europe. 
 Theories with regard to the importance of the precious 
 metals and the best means of obtaining supplies of them, 
 became the arbiters of public policy: they dictated peace 
 and war, they determined alliances that issued in the rise 
 and fall of nations and they governed the migration of 
 peoples over the face of the globe. 
 
 Regulations as to trade in the precious metals were but The early 
 one group of a vast body of ordinances, which undertook, oftS?* 
 with varying degrees of minuteness and severity, to arrange 
 for each individual what he should produce and how he 
 should produce it, what he should earn and how he should 
 spend his earnings. The natural adhesiveness of the Teutons 
 had given custom an exceptional strength in the early middle 
 ages. And this strength told on the side of trade gilds, of 
 local authorities and of national Governments when they set 
 themselves to cope with the restless tendency to change 
 that sprang directly or indirectly from the trade with the 
 New World. In France this Teutonic bias was directed by 
 the Roman genius for system, and paternal government 
 reached its zenith; the trade regulations of Colbert have 
 become a proverb. It was- just at this time that economic 
 theory first took shape and the so-called Mercantile system 
 became prominent. 
 
 As years went on there set in a tendency towards eco- The 
 
 * mercantile 
 
 nomic freedom, and those who were opposed to the new theory 
 ideas claimed on their side the authority of the Mercantilists loosen the 
 of a past generation. It is not therefore to be wondered 
 at that the Mercantilists are commonly believed to have 
 promoted the state regulation of trade and industry. But 
 they did not. The regulations and restrictions which 
 
4 THE GROWTH OF ECONOMIC SCIENCE. 
 
 BOOK i. are found in their systems belonged to the age ; the 
 
 ' changes which they set themselves to bring about were in 
 
 the direction of the freedom of enterprise. In opposition 
 to those who wished to prohibit absolutely the exportation 
 of the precious metals, they argued that it should be per- 
 mitted in all cases in which the trade would in the long 
 run bring more gold and silver into the country than it 
 took out 1 . st*nn*~jl>4^ ItJL+sT^A, 
 
 The Mercantilists indeed did not look beyond the imme- 
 diate purpose for which they were contending ; they did not 
 dream of establishing a new principle of social and political 
 life. But by raising the question whether the State would 
 not benefit by allowing the trader to manage his business 
 as he liked in one particular case, they had unwittingly 
 started a new tendency of thought ; and this moved on by 
 imperceptible steps in the direction of economic freedom, 
 being assisted on its way by the circumstances of the time, 
 no less than by the tone and temper of men's minds in 
 Western Europe. A little was done here and a little there, 
 in England and Holland, in Italy and France. The steps 
 are difficult to trace : it is not easy to tell how much each 
 writer owes to the suggestions of others in his own and 
 other countries (for there was much international intercourse 
 on such subjects) ; nor how far he himself intended the 
 suggestions which we with our later knowledge read into his 
 passing hints. But we know that the broadening movement 
 did go on till, in the latter half of the eighteenth century, 
 the time was ripe for the doctrine that the well-being of the 
 community almost always suffers when the State attempts 
 to oppose its own artificial regulations to the " natural " 
 liberty of every man to manage his own affairs in his own 
 way 2 . 
 
 1 Some account of the relations between Mediaeval and Mercantile Theories of 
 money and trade will be given in the second volume of this work. 
 
 2 For a sketch of the history the reader may be referred to Kautz's profound, 
 just and suggestive Die geschicktliche EntwicTcelung der National- Oelconomik, to 
 Travers Twiss' View of the Progress of Political Economy, and to the histories of 
 Professors Ashley, Cossa, Cunningham and Ingram, to Dr Bonar's Philosophy and 
 Political Economy, and to various articles by Mr Hewins, Dr Stephen Bauer and 
 others in the Dictionary of Political Economy and elsewhere. 
 
THE MERCANTILE SYSTEM. 55 
 
 2. The first systematic attempt to form an economic BOOK i. 
 science on a broad basis was made in France about the CH ' IY ' 
 middle of the eighteenth century by a group of statesmen e sio 
 and philosophers under the leadership of Quesnay, the noble- crats in - 
 minded physician to Louis XV. 1 The corner-stone of their that re- 
 policy was obedience to Nature 2 . Jj* is 
 
 They were the first to proclaim the doctrine of free trade ? ndliber ty 
 as a broad principle of action, going in this respect beyond 
 even such advanced English writers as Sir Dudley North ; 
 and there was much in the tone and temper of their treat- 
 ment of political and social questions which was prophetic of 
 a later age. They fell however into a confusion of thought 
 which was common even among scientific men of their time, 
 but which- has been banished after a long struggle from the 
 physical sciences. They confused the ethical principle of 
 conformity to nature, which is expressed in the imperative 
 
 1 I pass by Cantillon, whose essay Sur la Nature de Commerce, written in 1755, 
 covers a wide range, and has some claims to be called systematic. It is acute and 
 in some respects ahead of his time; though it now appears that he had been 
 anticipated on several important points by Nicholas Barbon, who wrote sixty years 
 earlier. Kautz was the first to recognize the importance of Cantillon's work ; and 
 Jevons declared he was the true founder of Political Economy. For a well- 
 balanced estimate of his place in economics, see an article by Mr Higgs in the 
 Quarterly Journal of Economics, Vol. vi. 
 
 2 In the two preceding centuries writers on economic questions had continually 
 appealed to Nature ; each disputant claiming that his scheme was more natural 
 than that of others, and the philosophers of the eighteenth century, some of 
 whom exercised a great influence on economics, were wont to find the standard 
 of right in conformity to Nature. In particular Locke anticipated much of the 
 work of the French economists in the general tone of his appeals to Nature, 
 and in some important details of his theory. But Quesnay and the other French 
 economists who worked with him, were drawn to the pursuit of natural laws of 
 social life by several forces in addition to those which were at work in England. 
 
 The luxury of the French court, and the privileges of the upper classes 
 which were ruining France, showed the worst side of an artificial civilization, 
 and made thoughtful men yearn for a return to a more natural state of society. 
 The lawyers, among whom much of the best mental and moral strength of the 
 country was to be found, were full of the Law of Nature which had been developed 
 by the Stoic lawyers of the later Roman Empire, and as the century wore on, 
 the sentimental admiration for the "natural" life of the American Indians which 
 Rousseau had kindled into flame, began to influence the economists. Before 
 long they were called Physiocrats or adherents of the rule of Nature; this name 
 being derived from the title of Dupont de Nemours" Physiocratie ou Constitution 
 Naturelle du Gourernement le plus avantageux au Genre Humain published in 
 1768. It may be mentioned that their enthusiasm for agriculture and for the 
 naturalness and simplicity of rural life was in part derived from their Stoic 
 masters. 
 
6 THE GROWTH OF ECONOMIC SCIENCE. 
 
 BOOK i. mood, and prescribes certain laws of action, with those causal 
 CH>IV - l aw s which science discovers by interrogating Nature, and 
 which are expressed in the indicative mood. For this and 
 other reasons their work has but little direct value. 
 
 But its indirect influence on the present position of 
 economics has been very great. For, firstly, the clearness and 
 logical consistency of their arguments have caused them to 
 exercise a great influence on later thought. And, secondly, 
 the chief motive of their study was not, as it had been with 
 most of their predecessors, to increase the riches of mer- 
 chants and fill the exchequers of kings 1 ; it was to diminish 
 the suffering and degradation which was caused by extreme 
 poverty. They thus gave to economics its modern aim of 
 seeking after such knowledge as may help to raise the quality 
 of human life 2 . 
 
 3. The next great step in advance, the greatest step 
 that economics has ever taken, was the work, not of a school 
 but of an individual. Adam Smith was not indeed the only 
 great English economist of his time. Shortly before he wrote, 
 important additions to economic theory had been made by 
 Hume and Steuart, and excellent studies of economic facts 
 had been published by Anderson and Young. But Adam 
 Smith's breadth was sufficient to include all that was best 
 in all his contemporaries, French and English ; and, though 
 he undoubtedly borrowed much from others, yet the more 
 one compares him with those who went before and those who 
 came after him, the finer does his genius appear, the broader 
 his knowledge and the more well balanced his judgment. 
 
 He resided a long time in France in personal converse 
 
 1 Even the generous Vauban (writing in 1717) had to apologize for his interest 
 in the well-being of the people, arguing that to enrich them was the only way to 
 enrich the king Pauvres paysans, pauvre Royaume, pauvre Royauine, pauvre Roi. 
 
 2 Their favourite phrase Laissez faire, laissez atter, is commonly misapplied 
 now. Laissez faire means that anyone should be allowed to make what things he 
 likes, and as he likes; that all trades should be open to everybody; that Govern- 
 ment should not, as the Colbertists insisted, prescribe to manufacturers the 
 fashions of their cloth. Laissez atter (or passer) means that persons and goods 
 should be allowed to travel freely from one place to another, and especially from 
 one district of France to another, without being subject to tolls and taxes and 
 vexatious regulations. It may be noticed that laissez alter was the signal used 
 in the Middle Ages by the Marshals to slip the leash from the combatants at a 
 Tournament. 
 
THE RULE OF NATURE. 57 
 
 with the physiocrats, he made a careful study of the BOOK, 
 English and French philosophy of his time, and he got to ^ 
 know the world practically by wide travel and by intimate 
 association with Scotch men of business. To these advan- 
 tages he added unsurpassed powers of observation, judgment 
 and reasoning. The result is that wherever he differs from 
 his predecessors, he is more nearly right than they; while 
 there is scarcely any economic truth now known of which 
 he did not get some glimpse. And since he was the first to 
 write a treatise on wealth in all its chief social aspects, he 
 might on this ground alone have a claim to be regarded as 
 the founder of modern economics 1 . 
 
 But the area which he" opened up was too vast to be 
 thoroughly surveyed by one man ; and many truths of which 
 at times he caught sight escaped from his view at other 
 times. It is therefore possible to quote his authority in 
 support of many errors ; though, on careful examination, 
 he is always found to be working his way towards the 
 truth 2 . 
 
 He developed the Physiocratic doctrine of Free Trade He greatly 
 with so much practical wisdom, and with so much knowledge fhJdoc-^ 
 of the actual conditions of business, as to make it a great 
 force in real life ; and he is most widely known both here 
 
 1 Compare the short but weighty statement of Adam Smith's claims to supre- 
 macy in Wagner's Gniiidlegung, Ed. 3, pp. 6, &c. ; also Hasbach's Unterswhwigen 
 iiber Adam Smith (in which the notice of the influence of Dutch thought on both 
 English and French is of special interest) ; and L. L. Price's Adam Smith and his 
 relations to ftecent Economics in the Economic Journal, Vol. in. Prof. Cunning- 
 ham's History, 306, argues forcibly that his great achievement lay in isolating 
 the conception of national wealth, while previous writers had treated it in 
 conscious subordination to national power": but perhaps each half of this 
 contrast is drawn with too sharp outlines. 
 
 2 For instance, he had not quite got rid of the confusion prevalent in his tune 
 between the laws of economic science and the ethical precept of conformity to 
 nature. "Natural" with him sometimes means that which the existing forces 
 actually produce or tend to produce, sometimes that which his own human nature 
 makes him wish that they should produce. In the same way, he sometimes 
 regards it as the province of the economist to expound a science, and at others to 
 set forth a part of the art of government. But loose as his language often is, 
 we find on closer study that he himself knows pretty well what he is about. 
 When he is seeking for causal laws, that is, for laws of nature in the modern use 
 of the term, he uses scientific methods; and when he utters practical precepts he 
 generally knows that he is only expressing his own views of what ought to be, 
 even when he seems to claim the authority of nature for them. 
 
58 THE GROWTH OF ECONOMIC SCIENCE. 
 
 BOOK i. and abroad for his argument that Government generally 
 CH^IV. ^ oeg j iarm ky interfering in trade. While giving many 
 instances of the ways in which self-interest may lead the 
 individual trader to act injuriously to the community, he 
 contended that even when Government acted with the best 
 intentions, it nearly always served the public worse than 
 the enterprise of the individual trader, however selfish he 
 might happen to be. So great an impression did he make 
 on the world by his defence of this doctrine that most 
 German writers have it chiefly in view when they speak of 
 Smithianismus 1 . 
 
 but his But after all, this was not his chief work. His chief work 
 
 was to 1 was to combine and develop the speculations of his French 
 fheorvof 6 an( ^ English contemporaries and predecessors as to value, 
 value a His highest claim to have made an epoch in thought is that 
 
 common A 
 
 centre that he was the first to make a careful and scientific inquiry into 
 
 toecouoimc the mariner in which value measures human motive, on the 
 
 science. one g ^ e measur i n g the desire of purchasers to obtain wealth, 
 
 and on the other the efforts and sacrifices (or " Real Cost 
 
 of Production") undergone by its producers 2 . 
 
 Possibly the full drift of what he was doing was not 
 seen by him, certainly it was not perceived by many of his 
 followers. But for all that, the best economic work which 
 came after the Wealth of Nations is distinguished from that 
 which went before, by a clearer insight into the balancing 
 and weighing, by means of money, of the desire for the 
 possession of a thing on the one hand, and on the other 
 
 1 The popular use of this term in Germany implies not only that Adam 
 Smith thought that the free play of individual interests would do more for the 
 public weal than Government interference could, but further that it almost always 
 acted in the ideally best way. But the leading German economists are well 
 aware that he steadily insisted on the frequent opposition that there is between 
 private interests and the public good : and the old use of the term Smithianismus 
 is becoming discredited. See for instance a long list of such conflicts quoted from 
 the Wealth of Nations by Knies, Politische Oekonomie, Ch. in. 3. See also 
 Feilbogen's Smith und Turgot and Zeyss' Smith und der Eiyennutz. 
 
 2 The relations of Value to Cost of Production had been indicated by the 
 Physiocrats and by many earlier writers, among whom may be mentioned Han-is, 
 Cantillon, Locke, Barbon, Petty ; and even Hobbes who hinted, though vaguely, 
 that plenty dependeth on labor and abstinence applied by man to working up and 
 accumulating the gifts of nature by land and by sekproventus terras, et aqitce, 
 labor et parsimonia. 
 
BOOK I. 
 
 ADAM SMITH. 
 
 of all the various efforts and self-denials which directly and 
 indirectly contribute towards making it. Important as had 
 been the steps that others had taken in this direction, the ad- 
 vance made by him was so great that he really opened out this 
 new point of view, and by so doing made an epoch. In this 
 he and the economists, who went before and came after him, 
 were not inventing a new academic notion ; they were merely 
 giving definiteness and precision to notions that are familiar 
 in common life. In fact the ordinary man, without analytical 
 habits of mind, is apt to regard money as measuring motive 
 and happiness more closely and exactly than it actually does ; 
 and this is partly because he does not think out the manner 
 in which the measurement is effected. Economic language 
 seems technical and less real than that of common life. But 
 in truth it is more real, because it is more careful and takes 
 more account of differences and difficulties 1 . 
 
 4. None of Adam Smith's contemporaries and imme- The study 
 diate successors had a mind as broad and well balanced as f facts ' 
 his. But they did excellent work, each giving himself up 
 to some class of problems to which he was attracted by the 
 natural bent of his genius, or the special events of the time 
 in which he wrote. During the remainder of the eighteenth 
 century the chief economic writings were historical and 
 descriptive, and bore upon the condition of the working 
 classes, especially in the agricultural districts. Arthur Young 
 continued the inimitable records of his tour, Eden wrote a 
 history of the poor which has served both as a basis and as a 
 model for all succeeding historians of industry ; while Malthus 
 showed by a careful investigation of history what were the 
 forces which had as a matter of fact controlled the growth 
 of population in different countries and at different times. 
 
 1 See below Ch. v. Adam Smith saw that while economic science is based on 
 a study of facts, the facts are so complex, that they generally can teach nothing 
 directly; they must be interpreted by careful reasoning and analysis. And as 
 Hume said, the Wealth of Nations "is so much illustrated with curious facts that 
 it must take the public attention." This is exactly what Adam Smith did: he 
 seldom attempted to prove anything by detailed induction or history. The data 
 of his proofs were chiefly facts that were within everyone's knowledge, facts 
 physical, mental and moral. But he illustrated his proofs by curious and in- 
 structive facts ; he thus gave them life and force, and made his readers feel that 
 they were dealing with problems of the real world, and not with abstractions ; and 
 his book, though not well arranged, is a model of method. 
 
60 THE GROWTH OF ECONOMIC SCIENCE. 
 
 BOOK i. But on the whole the most influential of the immediate 
 
 ' successors of Adam Smith was Bentham. He wrote little on 
 
 opposition 8 econom i cs himself, but he went far towards setting the tone 
 
 to custom- of the rising school of English economists at the beginning of 
 
 tions on the nineteenth century. He was an uncompromising logician 
 
 which no anc ^ averse to all restrictions and regulations for which no 
 
 reason c ^ ear reason c uld be given, and his pitiless demands that 
 
 could be they should justify their existence received support from the 
 
 greatly circumstances of the age. England had won her unique 
 
 English 6 position in the world by her quickness in adapting herself 
 
 ea?iy7n 8t8 ^ ever J new economic movement; while by their adher- 
 
 this ence to old-fashioned ways the nations of Central Europe 
 
 had been prevented from turning to account their great 
 
 natural resources. The business men of England therefore 
 
 were inclined to think that the influence of custom and 
 
 sentiment in business affairs was harmful, that in England 
 
 at least it had diminished, was diminishing, and would soon 
 
 vanish away : and the disciples of Bentham were not slow to 
 
 conclude that they need not concern themselves much about 
 
 custom. It was enough for them to discuss the tendencies 
 
 of man's action on the supposition that everyone was always 
 
 on the alert to find out what course would best promote his 
 
 own interest, and was free and quick to follow it 1 . 
 
 There is then some justice in the charges frequently 
 brought against the English economists of the beginning of 
 this century, that they neglected to inquire with sufficient 
 care whether a greater range might not be given to collec- 
 tive as opposed to individual action in social and economic 
 affairs ; that they exaggerated the strength of competition 
 and its rapidity of action : and there is some ground, though 
 a very slight one, for the charge that their work is marred 
 
 1 Another way in which he influenced the young economists around him was 
 through his passionate desire for security. He was indeed an ardent reformer. 
 He was an enemy of all artificial distinctions between different classes of men ; 
 he declared with emphasis that any one man's happiness was as important as 
 any other's, and that the aim of all action should be to increase the sum total 
 of happiness; he admitted that other things being equal this sum total would 
 be the greater, the more equally wealth was distributed. Nevertheless so full 
 was his mind of the terror of the French revolution, and so great were the 
 evils which he attributed to the smallest attack on security that, daring analyst 
 as he was, he felt himself and he fostered in his disciples an almost superstitious 
 reverence for the existing institutions of private property. 
 
ACHIEVEMENTS OF RICARDO AND HIS FOLLOWERS. 61 
 
 by a certain hardness of outline and even harshness of BOOKI. 
 temper. These faults were partly due to Bentham's direct CB ' IV _' 
 influence, partly to the spirit of the age of which he was 
 an exponent. But they were partly also due to the fact 
 that economic study had again got a good deal into the 
 hands of men whose strength lay in vigorous action rather 
 than in philosophical thought. 
 
 5. Statesmen and merchants again threw themselves Many of 
 into problems of money and foreign trade with even more ^bS to^ 
 energy than they used to do when these questions were wards P id 
 
 r> i , i i i n generaliza- 
 
 nrst started in the earlier period of the great economic tion. 
 change at the end of the Middle Ages. It might at first 
 sight seem probable that their contact with real life, their 
 wide experience, and their vast knowledge of facts would 
 have led them to take a wide survey of human nature' and 
 to found their reasonings on a broad basis. But the training 
 of practical life often leads to a too rapid generalization 
 from personal experience. 
 
 So long as they were well within their own province Their work 
 their work was excellent. The theory of currency is just S so long 
 that part of economic science in which but little harm is Seated of 
 done by neglecting to take much account of any human mone y> 
 motives except the desire for wealth; and the brilliant 
 school of deductive reasoning which Ricardo led was here 
 on safe ground 1 . 
 
 1 He is often spoken of as a representative Englishman : but this is just what 
 he was not. His strong constructive originality is the mark of the highest genius 
 in all nations. But that quality by which he is distinguished from most other 
 scientific geniuses is his aversion to inductions and his delight in abstract 
 reasonings. And this quality is due, not to his English education, but, as 
 Bagehot points out, to his Semitic origin. Nearly every branch of the Semitic 
 race has had some special genius for dealing with abstractions, and several of 
 them have had a bias towards the abstract calculations connected with the trade 
 of money dealing, and its modern developments. There is no truly English econo- 
 mist whose method resembles that of Ricardo; his power of threading his way 
 without slip through intricate paths to new and unexpected results has never been 
 surpassed. But it is difficult even for an Englishman to follow his track ; and his 
 foreign critics have, as a rule, failed to detect the real drift and purpose of his 
 work. Even the ablest of them frequently undertake to refute him by establisliing 
 propositions which are consistent with his and often even involved in them. 
 For he never explains himself : he never shows what his purpose is in working 
 first on one hypothesis and then on another, nor how by properly combining the 
 results of his different hypotheses it is possible to cover a great variety of 
 practical questions. See the Note at the end of Book v. It is to be remembered 
 
62 THE GROWTH OF ECONOMIC SCIENCE. 
 
 BOOK i. The economists next addressed themselves to the theory 
 
 _J ' of foreign trade and cleared away many of the flaws which 
 
 foreign Adam Smith had left in it. There is no other part of 
 trade, economics except the theory of money, which so nearly falls 
 within the range of pure deductive reasoning. It is true 
 that a full discussion of a free trade policy must take account 
 of many considerations that are not strictly economic ; but 
 most of these, though important for agricultural countries, 
 and especially for new countries, had little bearing in the 
 case of England. 
 
 nor did During all this time the study of economic facts was 
 
 neglect not neglected in England. The statistical studies of Petty, 
 statistics Arthur Young, Eden, and others were ably continued by 
 Tooke, M c Culloch and Porter. And though it may be true 
 that an undue prominence is given in their writings to 
 those facts which were of direct interest to merchants and 
 other capitalists, the same cannot be said of the admirable 
 series of Parliamentary inquiries into the condition of the 
 and in- working classes, which were brought about by the influence 
 f the economists. In fact, the public and private collections 
 ^ statistics an d the economic histories that were produced 
 working in England at the end of the last century and the beginning 
 of this, may fairly be regarded as the origin of systematic 
 historical and statistical studies in economics. 
 
 But they Nevertheless there was a certain narrowness in their 
 
 knowledge work : it was truly historical ; but for the greater part it was 
 
 plrat e ive m " not "comparative." Hume, Adam Smith, Arthur Young 
 
 Method. and others had been led by their own instinctive genius and 
 
 the example of Montesquieu occasionally to compare social 
 
 facts of different ages and different countries, and to draw 
 
 lessons from the comparison. But no one had grasped the 
 
 notion of the comparative study of history on a systematic 
 
 plan. In consequence the writers of that time, able and 
 
 earnest as they were in their search for the actual facts of life, 
 
 worked rather at haphazard. They overlooked whole groups 
 
 of facts which we now see to be of vital importance, and they 
 
 however that his Principles was not originally designed for publication. It 
 consists of terse notes, written for the benefit of himself and perhaps a few 
 friends, on points of special difficulty. 
 
BOOK I. 
 
 SHORTCOMINGS OF RICARDO AND HIS FOLLOWERS. 
 
 often failed to make the best use of those which they collected. 
 
 And this narrowness was intensified when they passed from CH ' IV " 
 
 the collection of facts to general reasonings about them. 
 
 6. For the sake of simplicity of argument, Ricardo Their de- 
 and his followers often spoke as though they regarded man as simplicity 
 a constant quantity, and they never gave themselves enough JtmSimes 
 trouble to study his variations. The people whom they to ar s ue as 
 knew most intimately were city men; and they sometimes mankind 
 expressed themselves so carelessly as almost to imply that same* 16 
 other Englishmen were very much like those whom they Jjjjjjj 1 ^ 
 knew in the city. city men. 
 
 They were aware that the inhabitants of other countries 
 had peculiarities of their own that deserved study; but 
 they seemed to regard such differences as superficial and 
 sure to be removed, as soon as other nations had got to 
 know that better way which Englishmen were ready to 
 teach them. The same bent of mind that led our lawyers to 
 impose English civil law on the Hindoos, led our economists 
 to work out their theories on the tacit supposition that the 
 world was made up of city men. And though this did little 
 harm so long as they were treating of money and foreign 
 trade, it led them astray as to the relations between the 
 different industrial classes. It caused them to speak of 
 labour as a commodity without staying to throw themselves 
 into the point of view of the workman ; and without dwelling 
 upon the allowances to be made for his human passions, his 
 instincts and habits, his sympathies and antipathies, his class 
 jealousies and class adhesiveness, his want of knowledge and 
 of the opportunities for free and vigorous action. They 
 therefore attributed to the forces of supply and demand a 
 much more mechanical and regular action than is to be found 
 in real life : and they laid down laws with regard to profits 
 and wages that did not really hold even for England in their 
 own time 1 . 
 
 1 As regards wages there were even some logical errors in the conclusions 
 they deduced from their own premises. These errors when traced back to their 
 origin are little more than careless modes of expression. But they were seized 
 upon eagerly by those who cared little for the scientific study of economics, and 
 cared only to quote its doctrines for the purpose of keeping the working classes in 
 their place ; and perhaps no other great school of thinkers has ever suffered so 
 
64 
 
 THE GROWTH OF ECONOMIC SCIENCE. 
 
 BOOK I 
 CH. IV. 
 
 circum- 
 stances. 
 The 
 Socialists 
 
 But their most vital fault was that they did not see how 
 liable to change are the habits and institutions of industry. 
 not e aii d ow In P ai> ticular they did not see that the poverty of the poor 
 
 forThe 1 is the chief cause of tnat weakness aild inefficiency which 
 dependence are the causes of their poverty : they had not the faith that 
 character modern economists have in the possibility of a vast improve- 
 ment in the condition of the working classes. 
 
 The perfectibility of man had indeed been asserted by the 
 socialists. But their views were based on little historic and 
 scientific study; and were expressed with an extravagance 
 that moved the contempt of the business-like economists of 
 the age. The socialists did not study the doctrines which 
 they attacked ; and there was no difficulty in showing that 
 they had not understood the nature and efficiency of the 
 existing economic organization of society. The economists 
 therefore did not trouble themselves to examine carefully 
 any of their doctrines, and least of all their speculations as 
 to human nature 1 . 
 
 But the socialists were men who had felt intensely, and 
 who knew something about the hidden springs of human 
 action of which the economists took no account. Buried 
 among their wild rhapsodies there were shrewd observa- 
 tions and pregnant suggestions from which philosophers 
 and economists had much to learn. And gradually their 
 influence began to tell. Comte's debts to them were very 
 great ; and the crisis of John Stuart Mill's life, as he 
 tells us in his autobiography, came to him from reading 
 them. 
 
 7. When we come to compare the modern view of the 
 vital problem of the Distribution of Wealth with that which 
 prevailed at the beginning of the century we shall find that 
 
 The grow- 
 ing ten- 
 dency of 
 economists 
 to take 
 
 much from the way in which its "parasites" (to use a term that is commonly 
 applied to them in Germany), professing to simplify economic doctrines, really 
 enunciated them without the conditions required to make them true. 
 
 1 A partial exception must be made for Malthus, whose studies of population 
 were suggested by Godwin's essay. But he did not properly belong to the 
 Eicardian school and he was not a man of business. Half a century later Bastiat, 
 a lucid writer but not a profound thinker, maintained the extra vagant doctrine 
 that the natural organization of society under the influence of competition is the 
 best not only that can be practically effected, but even that can be theoretically 
 conceived. 
 
VARIETY AND PLIABILITY OF HUMAN NATURE. 65 
 
 BOOK I. 
 IV. 
 
 over and above all changes in detail and all improvements 
 in scientific accuracy of reasoning, there is a fundamental CH " Iv ' 
 change in treatment ; for, while the earlier economists argued account of 
 as though man's character and efficiency were to be regarded biuty of 
 as a fixed quantity, modern economists keep constantly in nXre 
 mind the fact that it is a product of the circumstances 
 under which he has lived. This change in the point of view 
 of economics is partly due to the fact that the changes in 
 human nature during the last fifty years have been so rapid 
 as to force themselves on the attention ; partly to the direct 
 influence of individual writers, socialists and others; and 
 partly to the indirect influence of a similar change in some 
 branches of natural science. 
 
 At the beginning of this century the mathematico- is partly 
 
 i i /> , i i 11 due to the 
 
 physical group of sciences were in the ascendant ; and these influence of 
 
 sciences, widely as they differ from one another, have this studies * 1 
 
 point in common, that their subject-matter is constant and 
 
 unchanged in all countries and in all ages. The progress 
 
 of science was familiar to men's minds but the development 
 
 of the subject-matter of science was strange to them. As 
 
 the century wore on the biological group of sciences were 
 
 slowly making way, and people were getting clearer ideas as 
 
 to the nature of organic growth. They were learning that 
 
 if the subject-matter of a science passes through different 
 
 stages of development, the laws which apply to one stage 
 
 will seldom apply without modification to others ; the laws 
 
 of the science must have a development corresponding to 
 
 that of the things of which they treat. The influence of 
 
 this new notion gradually spread to the sciences which relate 
 
 to man ; and showed itself in the works of Goethe, Hegel, 
 
 Comte and others. 
 
 At last the speculations of biology made a great stride 
 forwards: its discoveries fascinated the attention of the 
 world as those of physics had done in earlier years ; and 
 there was a marked change in the tone of the moral and 
 historical sciences. Economics has shared in the general 
 movement; and is getting to pay every year a greater 
 attention to the pliability of human nature, and to the 
 way in which the character of man affects and is affected by 
 
66 THE GROWTH OF ECONOMIC SCIENCE. 
 
 BOOK i. the prevalent methods of the production, distribution and 
 J ' consumption of wealth. The first important indication of the 
 
 Stuart new movemen t was seen in John Stuart Mill's admirable 
 
 Mill. Principles of Political Economy 1 . 
 
 Recent Mill's followers have continued his movement away from 
 
 econo 8 the position taken up by the immediate followers of Ricardo ; 
 
 mists. an( j ^6 human as distinguished from the mechanical element 
 is taking a more and more prominent place in economics. 
 The new temper is shown in Cliffe Leslie's historical in- 
 quiries, and in the many-sided work of Bagehot, Cairnes and 
 other writers yet living; but above all in that of Jevons, 
 which has secured a permanent and notable place in eco- 
 nomic history by its rare combination of many various 
 qualities of the highest order. 
 
 Character- A higher notion of social duty is spreading everywhere. 
 
 modern In Parliament, in the press and in the pulpit, the spirit of 
 
 work! 8 humanity speaks more distinctly and more earnestly. Mill 
 and the economists who have followed him have helped 
 onwards this general movement, and they in their turn have 
 been helped onwards by it. Partly for this reason, partly in 
 consequence of the modern growth of historical science, 
 their study of facts has been broader and more philosophic. 
 It is true that the historical and statistical work of some 
 of the earlier economists has seldom if ever been surpassed. 
 But much information which was beyond their reach, is 
 now accessible to everyone ; and economists who have 
 
 1 James Mill had educated his son in the straitest tenets of Bentham and 
 Ricardo, and had implanted in his mind a zeal for clearness and definiteness. 
 And in 1830 John Mill wrote an essay on economic method in which he proposed 
 to give increased sharpness of outline to the abstractions of the science. He 
 faced Ricardo' s tacit assumption that no motive of action except the desire 
 for wealth need be much considered by the economist ; he held that it was 
 dangerous so long as it was not distinctly stated, but no longer; and he half 
 promised a treatise which should be deliberately and openly based on it. But 
 he did not redeem the promise. A change had come over his tone of 
 thought and of feeling before he published in 1848 his great economic work. 
 He called it Principles of Political Economy, ivith some of their Applications 
 to Social Philosophy [it is significant that he did not say to other branches of 
 Social Philosophy ; comp. Ingrain's History, p. 154] , and he made in it no attempt 
 to mark off by a rigid line those reasonings which assume that man's sole motive 
 is the pursuit of wealth from those which do not. The change in his attitude was 
 a part of the great changes that were going on in the world around him, though 
 he was not fully aware of their influence on himself. 
 
MODERN TENDENCIES OF ECONOMICS. 67 
 
 BOOK I. 
 CH. IV. 
 
 neither McCulloch's familiarity with practical business, nor 
 his vast historical learning, are enabled to get a view of the 
 relations of economic doctrine to the true facts of life which 
 is both broader and clearer than his. In this they have 
 been helped by the general improvement which has taken 
 place in the methods of all sciences, including that of 
 history. 
 
 Thus in every way economic reasoning is now more The aban- 
 exact than it was : the premisses assumed in any inquiry dogmMhe 
 are stated with more rigid precision than formerly. But jJj^t'S" 
 this greater exactness of thought is partly destructive in analysis, 
 its action ; it is showing that many of the older applications 
 of general reasoning were invalid, because no care had been 
 taken to think out all the assumptions that were implied 
 and to see whether they could fairly be made in the special 
 cases under discussion. As a result, many dogmas have been 
 destroyed which appeared to be simple only because they 
 were loosely expressed; but which, for that very reason, 
 served as an armoury with which partisan disputants (chiefly 
 of the capitalist class) have equipped themselves for the 
 fray. This destructive work might appear at first sight to 
 have diminished the value of processes of general reasoning 
 in economics : but really it has had the opposite result. It 
 has cleared the ground for newer and stronger machinery, 
 which is being steadily and patiently built up. It has 
 enabled us to take broader views of life, to proceed more 
 surely though more slowly, to be more scientific and much 
 less dogmatic than those good and great men who bore the 
 first brunt of the battle with the difficulties of economic 
 problems ; and to whose pioneering work we owe our own 
 more easy course. 
 
 The change may, perhaps, be regarded as a passing onward 
 from that early stage in the development of scientific method, 
 in which the operations of Nature are represented as con- 
 ventionally simplified for the purpose of enabling them to 
 be described in short and easy sentences, to that higher 
 stage in which they are studied more carefully, and repre- 
 sented more nearly as they are, even at the expense of some 
 loss of simplicity and definiteness, and even apparent lucidity. 
 
 52 
 
68 
 
 THE GROWTH OF ECONOMIC SCIENCE. 
 
 BOOK I. 
 CH. IV. 
 
 French 
 econo- 
 mists. 
 
 American 
 School. 
 
 German 
 econo- 
 mists. 
 
 And in consequence general reasoning in economics has made 
 more rapid progress, and established a firmer position in this 
 generation in which it is subject to hostile criticism at every 
 step, than when it was at the height of its popularity and 
 its authority was seldom challenged. 
 
 So far we have looked at recent progress from the point 
 of view of England only : but progress in England has been 
 only one side of a broader movement which has extended 
 over the whole western world. 
 
 8. English economists have had many followers and 
 many critics in foreign countries. The French school has had 
 a continuous development from its own great thinkers in 
 the eighteenth century, and has avoided many errors and 
 confusions, particularly with regard to wages, which have 
 been common among the second rank of English economists. 
 From the time of Say downwards it has done a great deal of 
 useful work. In Cournot it has had a constructive thinker 
 of the highest genius; while Fourier, St Simon, Proudhon 
 and Louis Blanc have made many of the most valuable, as 
 well as many of the wildest suggestions of Socialism. 
 
 A generation ago, the " American school " of economists 
 was supposed to consist of the group of Protectionists who 
 followed Carey's lead. But there are now growing up in 
 America new schools of thinkers, who are studying the 
 science for its own sake ; and there are many signs that 
 America is on the way to take the same leading position in 
 economic thought, that she has already taken in economic 
 practice. 
 
 Economic science is showing signs of renewed vigour 
 in two of its old homes, Holland arid Italy. And more 
 especially is the vigorous analytical work of the Austrian 
 economists attracting much attention in all countries. 
 
 But on the whole the most important economic work that 
 has been done on the Continent in this century is that of 
 Germany. While recognizing the leadership of Adam Smith, 
 the German economists have been irritated more than any 
 others by what they have regarded as the insular narrowness 
 and self-confidence of the Ricardian school. In particular 
 they resented the way in which the English advocates of 
 
GERMAN ECONOMISTS. 
 
 free trade tacitly assumed that a proposition which had OOKI. 
 been established with regard to a manufacturing country, CH - Iv ' 
 such as England was, could be carried over without modi- 
 fication to agricultural countries. The brilliant genius and List. 
 national enthusiasm of List overthrew this presumption; 
 and showed that the Ricardians had taken but little account 
 of the indirect effects of free trade. No great harm might be 
 done in neglecting them so far as England was concerned ; 
 because there they were in the main beneficial and thus added 
 to the strength of its direct effects. But he showed that 
 in Germany and still more in America, many of its indirect 
 effects were evil ; and he contended that these evils out- 
 weighed its direct benefits. Many of his arguments were 
 invalid, but some of them were not ; and as the English 
 economists scornfully refused them a patient discussion, able 
 and public- spirited men, impressed by the force of those 
 which were sound, acquiesced in the use for the purposes 
 of popular agitation of other arguments which were un- 
 scientific, but which appealed with greater force to the 
 working classes. 
 
 American manufacturers adopted List as their advocate : 
 and the beginning of his fame, as well as of the systematic 
 advocacy of protectionist doctrines in America, was in the 
 wide circulation by them of a popular treatise which he 
 wrote for them 1 . 
 
 The Germans are fond of saying that the Physiocrats and The 
 the school of Adam Smith underrated the importance of press the 
 national life ; that they tended to sacrifice it on the one 
 
 1 It has already been observed that List overlooked the tendency of modern 
 inter-communication to make the development of different nations synchronize. 
 His patriotic fervour perverted in many ways his scientific judgment : but Germans 
 listened eagerly to his argument that every country had to go through the same 
 stages of development that England had gone through, and that she had protected 
 her manufactures when she was in transition from the agricultural to the manu- 
 facturing stage. He had a genuine desire for truth ; his method was in harmony 
 with the comparative method of inquiry which is being pursued with vigour by all 
 classes of students in Germany, but especially by her historians and lawyers ; and 
 the direct and indirect influence of his thought has been very great. His Outlines 
 of a New System of Political Economy appeared in Philadelphia in 1827, and his 
 Das national* System der Politischen Oekonomie in 1840. It is a disputed point 
 whether Carey owed much to List. As to the general relations between their 
 doctrines, see Knies, Pol. Oek., 2nd edition, pp. 440, &c. 
 
70 THE GROWTH OF ECONOMIC SCIENCE. 
 
 BOOK i. hand to a selfish individualism and on the other to a limp 
 
 ' philanthropic cosmopolitanism. They urge that List did 
 
 th^sS mSt reat service in stimulating a feeling of patriotism, which is 
 
 individual- mO re generous than that of individualism, and more sturdy 
 
 ism on tne ~ 
 
 one hand and definite than that of cosmopolitanism. It may be 
 poiitanism doubted whether the cosmopolitan sympathies of the Physio- 
 other 6 crats and of the English economists have been as strong as 
 the Germans think. But there is no question that the recent 
 political history of Germany has influenced the tone of her 
 economists in the direction of nationalism. Surrounded by 
 powerful and aggressive armies Germany can exist only by 
 the aid of an ardent national feeling ; and German writers have 
 insisted eagerly, perhaps too eagerly, that altruistic feelings 
 have a more limited scope in the economic relations between 
 countries than in those between individuals. 
 
 Their great But though national in their sympathies, the Germans 
 
 work in the . . . . . J ,. r 
 
 study of are nobly international in their studies. I hey have taken 
 
 MstSyby the l ea d i n ^ ne "comparative" study of economic, as well 
 * active as f g enera l history. They have brought side by side the 
 method, social and industrial phenomena of different countries and 
 
 and in rela- 
 tion to of different ages; have so arranged them that they throw 
 
 history and light upon and interpret one another, and have studied them 
 Sence" a ^ ^ n connection with the suggestive history of juris- 
 prudence 1 . The work of a few members of this school is 
 tainted by exaggeration, and even by a narrow contempt for 
 the reasonings of the Ricardian school, the drift and purpose 
 of which they have themselves failed to understand : and 
 this has led to much bitter and dreary controversy. But 
 with scarcely an exception, the leaders of the school have 
 been free from this narrowness. It would be difficult to 
 overrate the value of the work which they and their fellow 
 workers in other countries have done in tracing and ex- 
 plaining the history of economic habits and institutions. It 
 is one of the great achievements of our age ; and an 
 important addition to our real wealth. It has done more 
 
 1 The excellence of this work may perhaps partly be attributed to the union of 
 legal and economic studies in the avenues to many careers in Germany as in other 
 countries of the Continent. A splendid instance is to be found in Prof. Wagner's 
 contributions to economics. 
 
GERMAN ECONOMISTS. 
 
 71 
 
 than almost anything else to broaden our ideas, to increase BOOK i 
 our knowledge of ourselves, and to help us to understand the CH ' IV 
 centra] plan, as it were, of the Divine government of the 
 world. 
 
 They have given their chief attention to the historical Their 
 treatment of the science, and to its application to the W rl 
 conditions of German social and political life, especially to 
 the economic duties of the German bureaucracy. But led 
 by the brilliant genius of Hermann they have made careful 
 and profound analyses which add much to our knowledge, 
 and they have greatly extended the boundaries of economic 
 theory 1 . 
 
 German thought has also given an impetus to the study German 
 of socialism and the functions of the State. It is from Sociallsm ' 
 German writers, some of whom have been of Jewish origin, 
 that the world has received the greater part of the most 
 thoroughgoing of recent propositions for utilizing the pro- 
 perty of the world for the benefit of the community with 
 but little reference to the existing incidents of ownership. 
 It is true that on closer investigation their work turns out to 
 be less original as well as less profound than at first sight 
 appears : but it derives great power from its dialectic 
 ingenuity, its brilliant style, and in some cases from its 
 wide-reaching though distorted historical learning. 
 
 Besides the revolutionary socialists, there is a large body 
 of thinkers in Germany who are setting themselves to insist 
 on the scantiness of the authority which the institution of 
 private property in its present form can derive from history ; 
 and to urge on broad scientific and philosophic grounds 
 a reconsideration of the rights of society as against the 
 individual. The political and military institutions of the Germans 
 German people have recently increased their natural ten- English 
 
 1 In such matters, the English, the Germans, the Austrians, and indeed every 
 nation claim for themselves more than others are willing to allow them. This is 
 partly because each nation has its own intellectual virtues, and misses them in the 
 writings of foreigners ; while it does not quite understand the complaints which 
 others make as to its shortcomings. But the chief reason is that, since a new idea 
 is generally of gradual growth, and is often worked out by more than one nation 
 at the same time; each of those nations is likely to claim it, and thus to under- 
 estimate the originality of the others. 
 
72 
 
 THE GROWTH OF ECONOMIC SCIENCE. 
 
 BOOK i. dency to rely more on Government and less on individual 
 
 cH^tv. en terprise than Englishmen do. And in all questions bear- 
 
 have much i ng . on soc i a l reforms the English and German nations have 
 
 to learn 
 
 from one much to learn from one another. 
 
 another. 
 
 There is 
 some dan- 
 ger that the 
 severe and 
 less 
 
 popular 
 task of 
 careful 
 scientific 
 reasoning 
 may be 
 neglected. 
 
 But amid all the historical learning and reforming en- 
 thusiasm of the age there is danger that a difficult but 
 important part of the work of economic science may be 
 neglected. The popularity of economics has tended in some 
 measure to the neglect of careful and rigorous reasoning. 
 The growing prominence of what has been called the bio- 
 logical view of the science has tended to throw the notions 
 of economic law and measurement into the background ; as 
 though such notions were too hard and rigid to be applied 
 to the living and ever-changing economic organism. But 
 biology itself teaches us that the vertebrate organisms are 
 the most highly developed. The modern economic organism 
 is vertebrate ; and the science which deals with it should not 
 be invertebrate. It should have that delicacy and sensitive- 
 ness of touch which are required for enabling it to adapt 
 itself closely to the real phenomena of the world ; but none 
 the less must it have a firm backbone of careful reasoning 
 and analysis. 
 
CHAPTER V. 
 
 THE SCOPE OF ECONOMICS 1 . 
 
 | 1. THERE are some who hold, with Comte, that the BOOK i. 
 scope of any profitable study of man's action in society must CH ' v ' 
 be coextensive with the whole of social science. They argue 
 
 that all the aspects of social life are so closely connected, Science, 
 that a special study of any one of them must be futile ; desirable, 
 and they urge on economists to abandon their distinctive taimlbie, 
 rdle and to devote themselves to the general advancement of 
 a unified and all embracing social science. But the whole 
 range of man's actions in society is too wide and too various 
 to be analysed and explained by a single intellectual effort. 
 Comte himself and Mr Herbert Spencer have brought to the as is shown 
 
 , , by experi- 
 
 task unsurpassed knowledge and great genius ; they have ence, 
 made epochs in thought by their broad surveys and their 
 suggestive hints ; but they can hardly be said even to have 
 made a commencement with the construction of a unified 
 social science 2 . 
 
 The physical sciences made slow progress so long as the ^gf 
 brilliant but impatient Greek genius insisted on searching from the 
 
 P 11 i i history of 
 
 after a single basis for the explanation ot all physical Physical 
 phenomena ; and their rapid progress in the modern age is S( 
 due to a breaking up of broad problems into their component 
 parts. Doubtless there is a unity underlying all the forces 
 of nature ; but whatever progress has been made towards 
 
 i The reader is referred to Dr Keynes' Scope and Method of Political Economy 
 for a more full and detailed investigation of many of the subjects of this 
 the next chapters. 
 
 > A less ambitious aim has been more nearly attained in the Ban nnd Leb< 
 den Socialen Korpers of the eminent economist Professor Schaffle. 
 
74 
 
 THE SCOPE OF ECONOMICS. 
 
 BOOK I. 
 CH. V. 
 
 discovering it, has depended on knowledge obtained by per- 
 sistent specialized study, no less than on occasional broad 
 surveys of the field of nature as a whole. And similar 
 patient detailed work is required to supply the materials 
 which may enable future ages to understand better than 
 we can the forces that govern the development of the social 
 organism. 
 
 But on the other hand it must be fully conceded to 
 Comte that, even in the physical sciences, it is the duty 
 of those who are giving their chief work to a limited field, 
 to keep up close and constant correspondence with those 
 who are engaged in neighbouring fields. Specialists who 
 never look beyond their own domain are apt to see things 
 out of true proportion ; much of the knowledge they get 
 together is of comparatively little use ; they work away at 
 the details of old problems which have lost most of their 
 significance and have been supplanted by new questions 
 rising out of new points of view ; and they fail to gain that 
 large illumination which the progress of every science throws 
 by comparison and analogy on those around it. Comte did 
 good service therefore by insisting that the solidarity of social 
 phenomena must render the work of exclusive specialists 
 even more futile in social than in physical science. Mill 
 conceding this continues : " A person is not likely to be 
 a good economist who is nothing else. Social phenomena 
 acting and reacting on one another, they cannot rightly be 
 understood apart ; but this by no means proves that the 
 material and industrial phenomena of society are not them- 
 selves susceptible of useful generalizations, but only that 
 these generalizations must necessarily be relative to a given 
 form of civilization and a given stage of social advancement 1 ." 
 
 1 Mill, On Comte, p. 82. His controversy with Comte is still worth studying. 
 Comte's arguments have recently been restated with great force and eloquence by 
 Dr Ingram: but they do not appear to have shaken Mill's position that Comte, 
 though right when he affirmed, was wrong when he denied. And this remark may 
 be extended : it would seem that in the long controversy which has been waged 
 in England, Germany, and more recently in America, as to the right method 
 of economic study, nearly every one has been right when he has affirmed that a 
 certain method is useful ; it has generally been the one best adapted for that part 
 of the many-sided work of economics in which he has had the most interest. But 
 he has been wrong in denying that other methods are useful : they may be un- 
 
ECONOMICS IN RELATION TO SOCIAL SCIENCE. 75 
 
 2. This is a valid answer to Comte's denial of the BOOK i. 
 utility of an independent science of economics. But it does CH ' V " 
 not show that the scope assigned to economics by Mill and *? ut . the 
 his predecessors was exactly the right one. Any widening a'Signed to 
 of that scope must no doubt result in some sacrifice ofsdenceby 
 definiteness and precision, and the resulting loss may be 
 greater than the gain. But it need not necessarily be so ; 
 and what is wanted is a general principle which shall deter- 
 mine the point in the widening of the scope of economics, 
 at which the growing loss of scientific precision would begin 
 to outweigh the gain of increasing reality and philosophic 
 completeness. 
 
 We must then inquire what are the advantages which 
 have enabled economics, though far behind the more advanced 
 physical sciences, yet to outstrip every other branch of social 
 science. For it would seem reasonable to conclude that any 
 broadening of the sc'ope of the science which biings it more 
 closely to correspond with the facts, and to take account of 
 the higher aims of life, will be a gain on the balance provided 
 it does not deprive the science of those advantages : but that 
 any further extension beyond that limit would cause more 
 loss than gain. 
 
 3. The advantage which economics has over other Economics 
 
 f jr f ,1 - conce 
 
 branches of social science appears to arise from the fact that i tse if 
 it concerns itself chiefly with those desires, aspirations and 
 other affections of human nature, the outward manifestations 
 of which appear as incentives to action in a form which is measur- 
 easily measurable, and which therefore are specially amenable 
 to treatment by scientific machinery. An opening is made 
 for the methods and the tests of science as soon as the 
 force of a person's motives can be measured by the sum of 
 money which he will just give up in order to secure a de- 
 sired satisfaction, or again the sum which is just required 
 to induce him to undergo a certain fatigue 1 . 
 
 suited for those purposes of which he has been chiefly thinking; but they may 
 probably be better suited than his own favourite methods for other and equally 
 important purposes. But more of this in the next chapter. 
 
 i J. S. Mill had himself indicated the centre of the strength of economics when 
 he says (Logic, Book VI. Ch. xx. 3) that in economic phenomena "the psycho- 
 logical law mainly concerned is the familiar one that a greater gain is preferred to 
 
76 THE SCOPE OF ECONOMICS. 
 
 BOOK i. But here a little explanation is needed. We cannot 
 
 ' measure any affection of the mind directly ; the ut- 
 
 most we can do is to measure it indirectly through its 
 
 effect. No one can compare and measure accurately against 
 
 one another even his own mental states at different times : 
 
 and no one can measure the mental states of another at all 
 
 except indirectly and conjecturally by their effects. 
 
 Even com- It is not merely that some affections belong to man's 
 
 sures P and higher nature and others to his lower, and are thus different 
 
 kind. But further, there is no means of comparing directly 
 pared nl y with one another mere physical pleasures and pains : they 
 strength of can only be compared indirectly, by their effects ; and even 
 
 theincen- , . ., 
 
 tives which this comparison is necessarily to some extent conjectural, 
 un l ess they occur to the same person at the same time. We 
 cannot directly compare the pleasures which two persons 
 derive from smoking ; nor even those which the same person 
 derives from it at different times. But if we find a man in 
 doubt whether to spend a few pence on a cigar, or a cup of 
 tea, or on riding home instead of walking home, then we 
 may follow ordinary usage, and say that he expects from 
 them equal pleasures. On another day he may have neither 
 more nor less money to spare ; but his mood may be different, 
 and perhaps there may be several ways in which he can get 
 more pleasure from spending the money than he could have 
 got on the earlier day from any way of spending it 1 . 
 
 If then we wish to compare even physical gratifications, 
 we must do it not directly, but indirectly by the incentives 
 which they afford to action. If the desires to secure either 
 of two pleasures will induce people in similar circumstances 
 each to do just an hour's extra work, or will induce men in 
 the same rank of life and with the same means each to pay 
 a shilling for it, we then may say that those pleasures are 
 
 a smaller;" and argues that science gets a better hold in economic than in other 
 social phenomena because it deals with motives that can be easily measured one 
 against another. 
 
 1 For simplicity this illustration refers to things consumed in a single use. 
 But most of the material objects of desire are more or less enduring sources of 
 gratification: and of course the desire for such an object is not generally accom- 
 panied by a conscious anticipation of the particular pleasures to be derived from 
 its use; among Avhich a prominent place must often be given to the mere pleasure 
 of possession. We must return to these points. 
 
THE MEASUREMENT OF MOTIVE. 77 
 
 equal for our purposes, because the desires for them are BOOKI. 
 equally strong incentives to action for persons who are primd CH " v ; 
 facie similar and similarly situated *. 
 
 Thus measuring a mental state, as men do in ordinary and this 
 life, by its motor-force or the incentive which it affords to conTSsoi 
 action, no new difficulty is introduced by the fact that some can !> e 
 of the motives of which we have to take account belong Classes 
 to man's higher nature, and others to his lower. 
 
 For suppose that the person whom we saw doubting 
 between several little gratifications for himself had thought 
 after a while of a poor invalid whom he would pass on his 
 way home, and had spent some time in making up his 
 mind whether he would choose a physical gratification for 
 himself, or would do a kindly act and rejoice in another's joy. 
 As his desires turned now towards the one, now the other, 
 there would be change in the quality of his mental states, 
 which it is the function of the psychologist to analyse. But 
 the economist studies mental states rather through their 
 manifestations than in themselves ; and if he finds they afford 
 evenly balanced incentives to action, he treats them primd 
 facie as for his purpose equal. No doubt his concern with them 
 does not end there. Even for the narrower uses of economic 
 studies, it is important to know whether the desires which pre- 
 vail are such as will help to build up a strong and righteous 
 character. And in the broader uses of those studies, when 
 they are being applied to practical problems, the economist, 
 like every one else, must concern himself with the ultimate 
 aims of man, and take account of differences in real value 
 between gratifications that are equally powerful incentives to 
 action and have therefore equal economic measures. A study 
 of these measures is only the starting-point of economics : 
 but it is the starting-point 2 . 
 
 i The objections raised by some philosophers to speaking of two pleasures as 
 equal, under any circumstances, seem to apply only to uses of the phrase other 
 than those with which the economist is concerned. 
 
 * It has however unfortunately happened that the customary uses of economic 
 terms have sometimes suggested the belief that economists are adherents of the 
 philosophical system of Hedonism or of Utilitarianism. For, while they have 
 generally taken for granted that the greatest pleasures are those which come with 
 the endeavour to do one's duty, they have spoken of "pleasures" and "pains" as 
 supplying the motives to all action, and have thus brought themselves under the 
 
78 THE SCOPE OF ECONOMICS. 
 
 CH. V. 
 
 BOOK i. 4. There are several other limitations of the measure- 
 
 ment of motive by money to be discussed. The first of 
 these arises from the necessity of taking account of the 
 variations in the amount of pleasure, or other satisfaction, 
 represented by the same sum of money to different persons 
 and under different circumstances. 
 
 censure of those philosophers, with whom it is a matter of principle to insist that 
 the desire to do one's duty is a different thing from a desire for the pleasure 
 which, if one happens to think of the matter at all, one may expect from doing it ; 
 though perhaps it may he not incorrectly described as a desire for "self-satis- 
 faction" or "the satisfaction of the permanent self." 
 
 Thus T. H. Green (Prolegomena to Ethics, pp. 165-6) says : The pleasure to 
 be derived from doing one's duty " cannot be the exciting cause of the desire, any 
 more than the pleasure of satisfying hunger can be the exciting cause of hunger... 
 When the idea of which the realisation is sought is not that of enjoying any 
 pleasure, the fact that self-satisfaction is sought in the effort to realize the idea of 
 
 the desired object does not make pleasure the object of the desire The man who 
 
 calmly faces a life of suffering in the fulfilment of what he conceives to be his 
 mission could not bear to do otherwise. So to live is his good. If he could attain 
 the consciousness of having accomplished, if he could count himself to have 
 apprehended and probably just in proportion to the elevation of his character he 
 is unable to do so he would find satisfaction in the consciousness and with it a 
 certain pleasure. But supposing this pleasure to be attained, only the exigencies 
 of a theory could suggest the notion that, as so much pleasure, it makes up for the 
 pleasures foregone and the pains endured in the life through which it has been 
 reached." While to others it appears obvious that the pain of deliberately refusing 
 to do his duty, and so to live " as is his good," is less than the pains which 
 he would endure in so living. 
 
 It is true that this large use of "pain and pleasure" has sometimes served 
 as a bridge by which to pass from individualistic Hedonism to a complete ethical 
 creed, without recognizing the necessity for the introduction of an independent 
 major premiss, and for such a premiss the necessity would appear to be absolute, 
 although opinions will perhaps always differ as to its form. Some will regard it 
 as the Categorical Imperative ; while others will regard it as a simple belief that, 
 whatever be the origin of our moral instincts, their indications are borne out by a 
 verdict of the experience of mankind to the effect that true happiness is not to be 
 had without self-respect, and that self-respect is to be had only on the condition 
 of endeavouring so to live as to promote the progress of the human race. 
 
 It is clearly not the part of economics to appear to take a side in ethical 
 controversy : and since there is a general agreement that all incentives to action, 
 in so far as they are conscious desires at all, may without impropriety be spoken 
 of shortly as desires for " satisfaction," it may perhaps be well to use this word 
 instead of "pleasure," when occasion arises for referring to the aims of all 
 desires, whether appertaining to man's higher or lower nature. The simple 
 antithesis to satisfaction is "dissatisfaction": but perhaps it may be well to use 
 the shorter and equally colourless Avord "detriment" in its place. 
 
 Keference may also be made to Prof. Mackenzie's interesting discussion of 
 " The relations between Ethics and Economics " in the International Journal of 
 Ethics, vol. in., and in his Introduction to Social Philosophy: but his position 
 appears to be even more uncompromising than Green's. 
 
BROAD RESULTS LITTLE AFFECTED BY INDIVIDUAL PECULIARITIES. 79 
 
 A shilling may measure a greater pleasure (or other BOOKI. 
 satisfaction) at one time than at another even for the CH ' v> 
 same person ; because money may be more plentiful with T1 ? e same 
 him, or because his sensibility may vary 1 . And persons measures 
 whose antecedents are similar, and who are outwardly like satisfac- 
 one another, are often affected in very different ways f^pereons 
 by similar events. When, for instance, a band of city ^ ith e<lual 
 school children are sent out for a day's holiday in the 
 country, it is probable that no two of them derive from it 
 enjoyment exactly the same in kind, or equal in intensity. 
 The same surgical operation causes different amounts of pain 
 to different people. Of two parents who are, so far as we can 
 tell, equally affectionate, one will suffer much more than the 
 other from the loss of a favourite son. Some who are not 
 very sensitive generally are yet specially susceptible to par- 
 ticular kinds of pleasure and pain ; while differences in nature 
 and education make one man's total capacity for pleasure or 
 pain much greater than another's. 
 
 It would therefore not be safe to say that any two men 
 with the same income derive equal benefit from its use ; or 
 that they would suffer equal pain from the same diminution 
 of it. Although when a tax of 1 is taken from each of two 
 persons having an income of 300 a-year, each will give up 
 that 1 worth of pleasure (or other satisfaction) which he 
 can most easily part with, i.e., each will give up what is 
 measured to him by just 1 ; yet the intensities, of the 
 satisfaction given up may not be nearly equal. 
 
 Nevertheless, if we take averages sufficiently broad to but these 
 
 r . ,. . differences 
 
 cause the personal peculiarities of individuals to counter- may gene- 
 balance one another, the money which people of equal incomes 
 will give to obtain a benefit or avoid an injury is a good 
 measure of the benefit or injury. If there are a thousand 
 persons living in Sheffield, and another thousand in Leeds, nmnbers 
 each with about 100 a-year, and a tax of 1 is levied on 
 all of them, we may be sure that the loss of pleasure or other 
 injury which the tax will cause in Sheffield is of about equal 
 importance with that which it will cause in Leeds: and 
 anything that increased all the incomes by 1 would give 
 
 1 Compare Prof. Edgeworth's Mathematical Psychics. 
 
80 THE SCOPE OF ECONOMICS. 
 
 BOOK i. command over equivalent pleasures and other benefits in the 
 c ^_^ two towns. This probability becomes greater still if all of 
 them are adult males engaged in the same trade ; and there- 
 fore presumably somewhat similar in sensibility and tempera- 
 ment, in taste and education. Nor is the probability much 
 diminished, if we take the family as our unit, and compare 
 the loss of pleasure that results from diminishing by 1 the 
 income of each of a thousand families with incomes of 100 
 a-year in the two places. 
 Thesignifi- Next we must take account of the fact that a stronger 
 
 cance of a m . . 
 
 given price incentive will be required to induce a person to pay a given 
 for^hepoor price for anything if he is poor than if he is rich. A 
 rich! t] shilling is the measure of less pleasure to a rich man than 
 to a poor one. A rich man in doubt whether to spend 
 a shilling on a single cigar, is weighing against one another 
 smaller pleasures than a poor man, who is doubting whether 
 to spend a shilling on a supply of tobacco that will last him 
 for a month. The clerk with 100 a year will walk to 
 business in a much heavier rain than the clerk with 300 a 
 year; for a sixpenny omnibus fare measures a greater 
 pleasure to the poorer man than to the richer. If the poorer 
 man spends the money, he will suffer more from the want of 
 it afterwards than the richer would. The pleasure that is 
 measured in the poorer man's mind by sixpence is greater 
 than that measured by it in the richer man's mind. 
 But this is But this source of error also is lessened when we are able 
 tantLacom- to consider the actions and the motives of large groups 
 group^ W f people. If we know, for instance, that a bank failure 
 of rich S and has taken 200 >0 from tne people of Leeds and 100,000 
 poor in like from those of Sheffield, we may fairly assume that the 
 tions. suffering caused in Leeds has been about twice as great 
 as in Sheffield; unless indeed we have some special reason 
 for believing that the shareholders of the bank in the one 
 town were a richer class than those in the other ; or that the 
 loss of employment caused by it pressed in uneven propor- 
 tions on the working classes in the two towns. 
 
 Increase of By far the greater number of the events with which 
 
 means economics deals affect in about equal proportions all the 
 
 8 different classes of society ; so that if the money measures 
 
BROAD RESULTS LITTLE AFFECTED BY INDIVIDUAL PECULIARITIES. 81 
 
 BOOK I. 
 
 of the happiness caused by two events are equal, it is reason- 
 able and in accordance with common usage to regard the CH ' V ' 
 amounts of the happiness in the two cases as equivalent. m * air 
 And further as money is likely to be turned to the higher "alp. 
 uses of life in about equal proportions, by any two large S * 
 groups of people taken without special bias from any two 
 parts of the western world, there is even some primd facie 
 probability that equal additions to their material resources 
 will make about equal additions to the fulness of life, and 
 the true progress of the human race. 
 
 5. To pass to another point. When we speak of Action is 
 the measurement of desire by the action to which it forms rSfdby 
 the incentive, it is not to be supposed that we assume every hablt 
 action to be deliberate, and the outcome of calculation. For 
 in this, as in every other respect, economics takes man just 
 as he is in ordinary life : and in ordinary life people do not 
 weigh beforehand the results of every action, whether the 
 impulses to it come from their higher nature or their lower 1 . 
 
 Some people are of wayward temperament, and could But habit 
 give no good account even to themselves of the motives of largely 
 their action. But if a man is steadfast and thoughtful, even deUb^nite 
 his impulses are the products of habits which he has adopted choice - 
 more or less deliberately. And, whether they are an ex- 
 pression of his higher nature or not: whether they are 
 the mandates of his conscience, the pressure of social con- 
 nection, or the claims of his bodily wants; he yields 
 a certain relative precedence to them without reflection now, 
 because on previous occasions he has decided deliberately 
 to yield that relative precedence : the predominant at- 
 tractiveness of one course of action over others, even when 
 not the result of calculation at the time, is the product of 
 more or less deliberate decisions made by him before in 
 somewhat similar cases 2 . 
 
 1 This is specially true of that group of gratifications, which is sometimes 
 named "the pleasures of the chase." They include not only the light-hearted 
 emulation of games and pastimes, of hunts and steeplechases, but the more 
 serious contests of professional and business life: and they will occupy a good 
 deal of our attention in discussions of the causes that govern wages and profits, 
 and forms of industrial organization. 
 
 2 Some reference to these characteristics of habit and custom has been made 
 in Ch. ii. ; and we shall need to return to them towards the end of the treatise. 
 
 M. 6 
 
82 THE SCOPE OF ECONOMICS. 
 
 BOOK i. Now the side of life with which economics is specially 
 
 concerned is that in which man's conduct is most deliberate, 
 
 ne most often rec kons up the advantages and 
 business disadvantages of any particular action before he enters on it. 
 
 conduct 
 
 And further it is that side of his life in which, when he does 
 follow habit and custom, and proceed for the moment 
 without calculation, the habits and customs themselves are 
 most nearly sure to have proceeded from a close and careful 
 watching the advantages and disadvantages of different 
 courses of conduct 1 . 
 
 It is true that when a habit or a custom which has 
 grown up under one set of conditions, influences action under 
 other conditions, there is so far no exact relation between the 
 effort and the end which is attained by it. But in business 
 matters in the modern world such habits quickly die 
 away 2 . 
 
 Thusbusi- Thus then the most systematic part of people's lives 
 
 has 8 glne- is generally that by which they earn their living. The work 
 
 money ^ a ^ those engaged in any one occupation can be carefully 
 
 measure, observed ; general statements can be made about it, and 
 
 tested by comparison with the results of other observations ; 
 
 and numerical estimates can be framed as to the amount 
 
 of money or general purchasing power that is required to 
 
 supply a sufficient motive for them. 
 
 Again, the unwillingness to postpone enjoyment, and 
 thus to save for future use, is measured by the interest 
 on accumulated wealth which just affords a sufficient in- 
 centive to save for the future. This measurement presents 
 however some special difficulties, the study of which must be 
 postponed. 
 
 1 There will not in general have been any f ormal reckoning up of two sides of 
 a balance-sheet: but men going home from their day's work, or in their social 
 meetings, will have said to one another, " It did not answer to do this, it would 
 have been better to do that," and so on. What makes one course answer better 
 than another, will not necessarily be a selfish gain, nor any material gain ; and 
 it will often have been argued that "though this or that plan saved a little trouble 
 or a little money, yet it was not fair to others," and "it made one look mean," or 
 "it made one feel mean." 
 
 2 In backward countries there are still many habits and customs similar to 
 those that lead a beaver in confinement to build himself a dam. They are full of 
 suggest! veness to the historian, and must be reckoned with by the legislator. 
 
DESIRE FOR MONEY OFTEN SPRINGS FROM NOBLE MOTIVES. 83 
 
 And, lastly, the desire to obtain anything that is ordi- BOOKI. 
 narily bought and sold for money, is for that very reason CH ' V ' 
 measurable by the price that people are willing to pay for it. 
 
 6. But here, as elsewhere, we must ever bear in mind 
 that the desire to make money does not itself necessarily 
 proceed from motives of a low order, even when it is tO 
 be spent on oneself. Money is a means towards ends, and 
 the ends are noble, the desire for the means is not ignoble. be nobl e- 
 The lad who works hard and saves all he can, in order to 
 be able to pay his way afterwards at a University, is eager 
 for money; but his eagerness is not ignoble. In short, 
 money is general purchasing power, and is sought as a 
 means to all kinds of ends, high as well as low, spiritual 
 as well as material 1 . 
 
 Thus though it is true that "money" or "general pur- And there 
 chasing power" or "command over material wealth," is the m 
 centre around which economic science clusters ; this is so, not Q 
 because money or material wealth is regarded as the main th . at econ - 
 aim of human effort, nor even as affording the main subject- gards man 
 matter for the study of the economist, but because in this m a selfish 
 world of ours it is the one convenient means of measuring 
 human motive on a large scale. If the older economists 
 had made this clear, they would have escaped many grievous 
 misrepresentations ; and the splendid teachings of Carlyle and 
 Ruskin as to the right aims of human endeavour and the 
 right uses of wealth, would not then have been marred by 
 bitter attacks on economics, based on the mistaken belief 
 that that science had no concern with any motive except the 
 selfish desire for wealth, or even that it inculcated a policy of 
 sordid selfishness 2 . 
 
 1 See an admirable essay by Cliffe Leslie on The Love of Money. We do 
 indeed hear of people who pursue money for its own sake without caring for what 
 it will purchase, especially at the end of a long life spent in business : but in this 
 as in other cases the habit of doing a thing is kept up after the purpose for which 
 it was originally done has ceased to exist. The possession of wealth gives such 
 people a feeling of power over then- fellow-creatures, and insures them a sort of 
 envious respect in which they find a bitter but strong pleasure. 
 
 2 The fact that the predominant position which money holds in economics, 
 results rather from its being a measure of motive than an aim of endeavour, may be 
 illustrated by the reflection that the almost exclusive use of money as a measure 
 of motive is, so to speak, an accident, and perhaps an accident that is not found in 
 
 62 
 
84 THE SCOPE OF ECONOMICS. 
 
 BOOK i. Again, when the motive to a man's action is spoken of as 
 
 lied by the money which he will earn, it is not meant 
 his mind is closed to all other considerations save those 
 
 does not ex- o f gain. For even the most purely business relations of 
 
 elude other . e r J 
 
 influences ; life assume honesty and good faith ; while many of them 
 
 take for granted, if not generosity, yet at least the absence 
 
 of meanness, and the pride which every honest man takes in 
 
 such as the acquitting himself well. Again, much of the work by which 
 
 afforded by people earn their living is pleasurable in itself; and there is 
 
 itself and truth m the contention of socialists that more of it might be 
 
 the instinct ma de so. Indeed even business work, that seems at first 
 
 of power. 
 
 sight unattractive, often yields a great pleasure by offering 
 scope for the exercise of men's faculties, and for their in- 
 stincts of emulation and of power. For just as a racehorse 
 
 other worlds than ours. When we want to induce a man to do anything for us we 
 generally offer him money. It is true that we might appeal to his generosity or 
 sense of duty ; but this would be calling into action latent motives that are already 
 in existence, rather than supplying new motives. If we have to supply a new 
 motive we generally consider how much money will just make it worth his while 
 to do it. Sometimes indeed the gratitude, or esteem, or honour which is held out 
 as an inducement to the action may appear as a new motive : particularly if it can 
 be crystallized in some definite outward manifestation; as for instance in the 
 right to make use of the letters C.B., or to wear a star or a garter. Such distinc- 
 tions are comparatively rare and connected with but few transactions ; and they 
 would not serve as a measure of the ordinary motives that govern men in the acts 
 of every-day life. But political services are more frequently rewarded by such 
 honours than in any other way : so we have got into the habit of measuring them 
 not in money but in honours. We say, for instance, that A's exertions for the 
 benefit of his party or of the State, as the case may be, were fairly paid for 
 by knighthood; while knighthood was but shabby pay for B, he had earned a 
 baronetcy. 
 
 It is quite possible that there may be worlds in which no one ever heard of 
 private property in material things, or wealth as it is generally understood ; but 
 public honours are meted out by graduated tables as rewards for every action that 
 is done for others' good. If these honours can be transferred from one to 
 another without the intervention of any external authority they may serve to 
 measure the strength of motives just as conveniently and exactly as money does 
 with us. In such a world there may be a treatise on economic theory very similar 
 to the present, even though there be little mention in it of material things, and 
 no mention at all of money. 
 
 It may seem almost trivial to insist on this, but it is not so. For a misleading 
 association has grown up in people's minds between that measurement of motives 
 which is prominent in economic science, and an exclusive regard for material 
 wealth to the neglect of other and higher objects of desire. The only conditions 
 required in a measure for economic purposes are that it should be something 
 definite and transferable. Its taking a material form is practically convenient, 
 but is not essential. 
 
MAN NOT ASSUMED TO BE ABSORBED IN PURSUIT OF GAIN. 85 
 
 BOOK 
 
 or an athlete strains every nerve to get in advance of his 
 competitors, and delights in the strain ; so a manufacturer or CH ' V ' 
 a trader is often stimulated much more by the hope of 
 victory over his rivals than by the desire to add something 
 to his fortune 1 . 
 
 7. It has indeed always been the practice of economists Economists 
 to take careful account of all the advantages which attract 
 
 1 German economists have done good service by dwelling on this class of 
 considerations also, but they seem to be mistaken in supposing that it was over- 
 looked by the older English economists. It is an English habit to leave much to 
 be supplied by the common sense of the reader ; in this case reticence has been 
 carried too far, and has led to frequent misunderstanding at home as well as 
 abroad. 
 
 Thus prominence has been given to Mill's statement, that " Political Economy 
 considers man as occupied solely in acquiring and consuming wealth" (Essays, 
 p. 138, and again, Logic, Bk. VI. Ch. ix. 3). But it is forgotten that he is there 
 referring to an abstract treatment of economic questions, which he once indeed 
 contemplated; but which he never executed, preferring to write on "Political 
 Economy, with some of its applications to Social Philosophy." It is forgotten also 
 that he goes on to say, " There is, perhaps, no action of a man's life in which he is 
 neither under the immediate nor under the remote influence of any impulse but 
 the mere desire of wealth;" and it is forgotten that his treatment of economic 
 questions took constant account of many motives besides the desire for wealth 
 (see above, Ch. iv. 7). His discussions of economic motives are, however, 
 inferior both in substance and in method to those of his German contemporaries, 
 and notably Hermann. An instructive argument that non-purchasable, non- 
 measurable pleasures vary at different times and tend to increase with the 
 progress of civilization is to be found in Knies' Political Economy, in. 3 ; and 
 the English reader may be referred to Syme's Outlines of an Industrial Science. 
 
 But it may be well to give here the heads of the analysis of economic motives 
 (Motive im wirthschaftlicken Handeln) in the third edition of Prof. Wagner's 
 monumental treatise. He divides them into Egoistic and Altruistic. The former 
 are four in number. The first and least intermittent in its action is the striving 
 for one's own economic advantage, and the fear of one's own economic need. 
 Next comes the fear of punishment, and the hope of reward. The third group 
 consists of the feeling of honour, and the striving for recognition (Geltungsstreben), 
 including the desire for the moral approbation of others, and the fear of shame 
 and contempt. And the last of the egoistic motives is the craving for occupation, 
 the pleasure of activity ; and the pleasure of the work itself and its surroundings, 
 including "the pleasures of the chase." The altruistic motive is "the impelling 
 force ( Trieb) of the inward command to moral action, the pressure of the feeling 
 of duty, and the fear of one's own inward blame, that is, of the gnawings of 
 conscience. In its pure form this motive appears as the 'Categorical Imperative,' 
 which one follows because one feels in one's soul the command to act in this or 
 that manner, and feels the command to be right.... The following of the command 
 is no doubt regularly bound up with feelings of pleasure (Lustgefuhleu), and the 
 not following it with feelings of pain. Now it may be, and often is, that these 
 feelings act as strongly as the Categorical Imperative, or even more strongly, 
 in driving us, or in taking part in driving us on to do or to leave undone. And 
 in so far as this is the case this motive also has in it an egoistic element, or at 
 least itself merges into one." 
 
86 THE SCOPE OF ECONOMICS. 
 
 BOOK i. people generally towards an occupation, whether they appear 
 
 CH '^' in a money form or not. Other things being equal, people 
 
 foiMidma w ^ P re ^ er an occupation in which they do not need to soil 
 
 tagesof au their hands, in which they enjoy a good social position, and 
 
 occupation ' jx? ^ j j 
 
 other than so on ; and since these advantages anect, not indeed every one 
 
 materia exac ^iy [ u the same way, but most people in nearly the same 
 
 way, their attractive force can be estimated and measured by 
 
 the money wages to which they are regarded as equivalent. 
 
 and they Again, the desire to earn the approval, to avoid the 
 
 ed^clals contempt of those around one is a stimulus to action which 
 
 thies**" often works with some sort of uniformity in any class of 
 
 persons at a given time and place ; though local and tem- 
 
 porary conditions influence greatly not only the intensity 
 
 of the desire for approval, but also the range of persons 
 
 whose approval is desired. A professional man, for instance, 
 
 or an artisan will be very sensitive to the approval 
 
 or disapproval of those in the same occupation, and care 
 
 little for that of other people ; and there are many economic 
 
 problems, the discussion of which would be altogether unreal, 
 
 if care were not taken to watch the direction and to estimate 
 
 pretty closely the force of motives such as these. 
 
 and family As there may be a taint of selfishness in a man's desire 
 to do what seems likely to benefit his fellow-workers, so 
 there may be an element of personal pride in his desire that 
 his family should prosper during his life and after it. But 
 still the family affections generally are so pure a form of 
 altruism, that their action might have shown little sem- 
 blance of regularity, had it not been for the uniformity in 
 the family relations themselves. As it is, their action is 
 fairly regular; and it has always been fully reckoned with 
 by economists, especially in relation to the distribution of 
 the family income between its various members, the expenses 
 of preparing children for their future career, and the 
 accumulation of wealth to be enjoyed after the death of 
 him by whom it has been earned. 
 
 It is then not the want of will but the want of power, 
 that prevents economists from reckoning in the action of 
 motives such as these ; and they welcome the fact that some 
 kinds of philanthropic action can be described in statistical 
 
ECONOMISTS LARGELY CONCERNED WITH ALTRUISTIC MOTIVES. 87 
 
 BOOK I. 
 CH. V. 
 
 returns, and can to a certain extent be reduced to law, if 
 sufficiently broad averages are. taken. For indeed there is 
 scarcely any motive so fitful and irregular, but that some 
 law with regard to it can be detected by the aid of wide and 
 patient observation. It would perhaps be possible even now 
 to predict with tolerable closeness the subscriptions that a 
 population of a hundred thousand Englishmen of average 
 wealth will give to support hospitals and chapels and 
 missions ; and, in so far as this can be done, there is a basis 
 for an economic discussion of supply and demand with 
 reference to the services of hospital nurses, missionaries and 
 other religious ministers. It will however probably be 
 always true that the greater part of those actions, which are 
 due to a feeling of duty jmd^ love of one's neighbour, cannot 
 be classed, reduced to law ancPmeasured ; and it is for this 
 reason, and not because they are not based on self-interest, .' 
 that the machinery of economics cannot be brought to bear 
 on them. 
 
 5 8. Perhaps the earlier English economists confined their The 
 
 .,..,, -~ motives to 
 
 attention too much to the motives of individual action. But collective 
 in fact economists, like all other students of social science, of 
 are concerned with individuals chiefly as members of the 
 social organism. As a cathedral is something more than the ance 
 stones of which it is made, as a person is something more 
 than a series of thoughts and feelings, so the life of society is 
 something more than the sum of the lives of its individual 
 members. It is true that the action of the whole is made 
 up of that of its constituent parts; aud that in most 
 economic problems the best starting-point is to be found in 
 the motives that affect the individual, regarded not indeed 
 as an isolated atom, but as a member of some particular 
 trade or industrial group; but it is also true, as German 
 writers have well urged, that economics has a great and an 
 increasing concern in motives connected with the collective 
 ownership of property and the collective pursuit of important 
 aims. The growing earnestness of the age, the growing 
 intelligence of the mass of the people, and the growing 
 power of the telegraph, the press, and other means of 
 communication are ever widening the scope of collective 
 
88 THE SCOPE OF ECONOMICS. 
 
 BOOK i. action for the public good ; and these changes, together with 
 CH ' v ' the spread of the co-operative movement, and other kinds of 
 voluntary association are growing up under the influence of 
 various motives besides that of pecuniary gain ; and they are 
 ever opening to the economist new opportunities of measuring 
 motives whose action it had seemed impossible to reduce to 
 any sort of law. 
 
 But in fact the variety of motives, the difficulties of 
 measuring them, and the manner of overcoming those 
 difficulties are among the chief subjects with which we shall 
 be occupied during the remainder of this treatise. Almost 
 every point touched in the present chapter will need to 
 be discussed in fuller detail with reference to some one or 
 more of the leading problems of economics. 
 
 Economists 9. To conclude provisionally : economists study the 
 individual actions of individuals, but study them in relation to social 
 rather than individual life ; and therefore concern themselves 
 but little with personal peculiarities of temper and character. 
 They watch carefully the conduct of a whole class of people, 
 sometimes the whole of a nation, sometimes only those living 
 in a certain district, more often those engaged in some 
 particular trade at some time and place : and by the aid of 
 statistics, or in other ways, they ascertain how much money 
 on the average the members of the particular group they are 
 watching, are just willing to pay as the price of a certain 
 thing which they desire, or how much must be offered to 
 them to induce them to undergo a certain effort or abstinence 
 that they dislike. The measurement of motive thus obtained 
 is not indeed perfectly accurate ; for if it were, economics 
 would rank with the most advanced of the physical sciences, 
 and not as it actually does with the least advanced. 
 andmea- But yet the measurement is accurate enough to enable 
 
 play of experienced persons to forecast fairly well the extent of the 
 demand 111 results that will follow from changes in which motives of 
 
 at fireUif 7 * n ^ s ^ n ^ are cn i e % concerned. Thus, for instance, they can 
 simple estimate very closely the payment that will be required to 
 produce an adequate supply of labour of any grade, from 
 the lowest to the highest, for a new trade which it is pro- 
 posed to start in any place. When they visit a factory of a 
 
PROVISIONAL CONCLUSIONS. 89 
 
 kind that they have never seen before, they can tell within a BOOK i. 
 shilling or two a week what any particular worker is earning, 
 by merely observing how far his is a skilled occupation and 
 what strain it involves on his physical, mental and moral 
 faculties. And they can predict with tolerable certainty 
 what rise of price will result from a given diminution of the 
 supply of a certain thing, and how that increased price will 
 react on the supply. 
 
 And, starting from simple considerations of this kind, and after- 
 economists go on to analyse the causes which govern the moreVom- 
 local distribution of different kinds of industry, the terms on plex cases> 
 which people living in distant places exchange their goods 
 with one another, and so on: and they can explain and 
 predict the ways in which fluctuations of credit will affect 
 foreign trade ; or again the extent to which the burden of a 
 tax will be shifted from those on whom it is levied, on to 
 those for whose wants they cater ; and so on. 
 
 In all this they deal with man as he is : not with an They deal 
 abstract or " economic " man ; but a man of flesh and blood ; with one 
 influenced by egoistic motives and shaping his business life man's f iife, 
 to a great extent with reference to them ; but not above the 
 
 frailties of vanity or recklessness, and not below the delight life of a real 
 of doing his work well for its own sake, nor below the delight a fictitious 
 in sacrificing himself for the good of his family, his neighbours, 
 or his country, and not below the love of a virtuous life for 
 its own sake. They deal with man as he is. But being 
 concerned chiefly with those actions in which the action 
 of motive is so regular that it can be predicted, and the 
 estimate of the motor-forces can be verified by results, 
 they have established their work on a scientific basis. 
 
 For in the first place, they deal with facts which can The claims 
 
 . . . of econo- 
 
 be observed, and quantities which can be measured and mics to be 
 recorded ; so that when differences of opinion arise with * re Its 
 regard to them, the differences can be brought to the test 
 of public and well-established records; and thus science 
 obtains a solid basis on which to work. In the second tests, 
 place, the problems, which are grouped as economic, internal 
 because they relate specially to man's conduct under the 
 influence of motives that are measurable by a money price, 
 
THE SCOPE OF ECONOMICS. 
 
 BOOK i. are found to make a fairly homogeneous group. Of course 
 _!_' they have a great deal of subject-matter in common : that is 
 obvious from the nature of the case. But, though not so 
 obvious a priori, it will also be found to be true that there is 
 a fundamental unity of form underlying all the chief of 
 them ; and that in consequence, by studying them together, 
 the same kind of economy that is gained, as by sending 
 a single postman to deliver all the letters in a certain 
 street, instead of each one entrusting his letters to a 
 separate messenger. For the analyses and organized pro- 
 cesses of reasoning that are wanted for any one group of 
 them, will be found generally useful for other groups. 
 
 The less then we trouble ourselves with scholastic in- 
 quiries as to whether a certain consideration comes within 
 the scope of economics, the better. If the matter is impor- 
 tant let us take account of it as far as we can. If it is one 
 as to which there exist divergent opinions, such as cannot be 
 brought to the test of exact and well-ascertained knowledge ; 
 if it is one on which the general machinery of economic 
 analysis and reasoning cannot get any grip, then let us leave 
 it aside in our purely economic studies. But let us do so, 
 simply because the attempt to include it would lessen the 
 certainty and the exactness of our economic knowledge 
 without any commensurate gain; and remembering always 
 that some sort of account of it must be taken by our ethical 
 instincts and our common sense, when they as ultimate 
 arbiters come to apply to practical issues the knowledge 
 obtained and arranged by economics and other sciences. 
 
CHAPTER VI. 
 
 METHODS OF STCDY. THE NATURE OF ECONOMIC LAW. 
 
 1. IT is the function of economics, as of almost every BOOK i. 
 other science, to collect facts, to arrange and interpret them, CH>VI ' 
 and to draw inferences from them. " Observation and de- Econom | cs 
 
 . . uses both 
 
 scnption, definition and classification are the preparatory induction 
 activities. But what we desire to reach thereby is a know- auction 
 ledge of the interdependence of economic phenomena.... In- 
 duction and deduction are both needed for scientific thought 
 as the right and left foot are both needed for walking 1 ." The 
 methods required for this twofold work are not peculiar to 
 economics; they are the common property of all sciences. 
 All the devices for the discovery of the relations between 
 cause and effect, which are described in treatises on scientific 
 method, have to be used in their turn by the economist : 
 there is not any one method of investigation which can 
 properly be called the method of economics; but every 
 method must be made serviceable in its proper place, either 
 singly or in combination with others. And as the number of 
 combinations that can be made on the chess board, is so great 
 that probably no two games exactly alike were ever played ; 
 so no two games which the student plays with nature to 
 wrest from her her hidden truths, which were worth playing 
 at all, ever made use of quite the same methods in quite the 
 same way. 
 
 1 Prof. Schmoller in the article on Volkswirtschaft in Conrad's Handioor- 
 terbuch. 
 
92 METHODS OF STUDY. THE NATURE OF ECONOMIC LAW. 
 
 BOOK i. But in some branches of economic inquiry and for some 
 
 c ^l!^' purposes, it is more urgent to ascertain new facts, than to 
 
 different trou ble ourselves with the mutual relations and explanations 
 
 propor- of those which we already have. While in other branches 
 
 different there is still so much uncertainty as to whether those causes of 
 
 any event which lie on the surface and suggest themselves 
 
 at first are both true causes of it and the only causes of it, 
 
 that it is even more urgently needed to scrutinize our 
 
 reasonings about facts which we already know, than to seek 
 
 for more facts. 
 
 Analytical For this and other reasons, there always has been and 
 toricaf there probably always will be a need for the existence side 
 areboth ^v side of workers with different aptitudes and different 
 needed and aims, some of whom give their chief attention to the ascer- 
 
 supplement 
 
 each tainment of facts, while others give their chief attention to 
 
 discovering obscure causal connections between individual 
 facts or classes of facts and to developing the machinery, 
 or organon, of scientific analysis. It is to be hoped that 
 these two schools will always exist side by side ; each doing 
 its own work thoroughly, and each making use of the work 
 of the other. Let us look at the work of each 1 . 
 
 1 The discussions of the last twenty years have gradually proved that those 
 who are doing the most genuine and original work in any part of the large field of 
 economic investigation, are agreed in fundamental principle as to the right use of 
 various scientific methods for various parts of the work: and that what real 
 differences exist between them, are mainly differences of emphasis. It is now 
 generally admitted that the severe criticism which the founders of the German 
 Historical School sometimes made on the older economists if quoted by itself, 
 gives a misleading impression of their true position. Roscher and Knies not 
 only spoke often with generous appreciation of the Avork of their predecessors; 
 but, especially in their later years, they themselves made habitual use of the 
 analytical methods which had come down to them from the "classical" econo- 
 mists. And on the other hand even those who rate highly the importance of 
 analytical methods are glad to acknowledge the great services which the historical 
 method, in the hands of really able men, renders to economics generally, and 
 even to economic analysis. 
 
 The most notable controversy on method of recent times is that between 
 Prof. Carl Menger and Prof. Schmoller. It was conducted with great acumen, 
 but perhaps with some slight exaggeration on either side. Prof. Wagner, who 
 was one of the earliest leaders of the historical movement in economics, and 
 whose unsurpassed learning gives a singular weight to his judgment, took a view 
 of the controversy which seems just and well balanced. (Part of his criticism is 
 accessible to English readers in the first number of the Harvard Journal of 
 Economics.) And the account which he has recently published (Grwidlegung, Ed. 
 in. Book i. ch. n.) of the services to be rendered by the historical and analytical 
 
INDUCTION AND DEDUCTION INSEPARABLE. 93 
 
 2. To begin with, there is no scope in economics for BOOK i. 
 long chains of reasoning ; that is for chains in which each CH ' VI ' 
 link is supported, wholly or mainly, by that which went The 
 before, and without obtaining further support and guidance Deduction 
 from observation and the direct study of real life. Such micsdoes 
 chains might indeed afford interesting speculation in 
 closet : but they could not correspond to nature closely long 
 
 . , . . J chains of 
 
 enough to be of use as a guide in action. The classical reasoning 
 economists treated economics not as an academic diversion, 
 but as a means towards attaining important public ends ; 
 and none of them, not even Ricardo, indulged in long chains 
 of deductive reasoning without reference to direct observation. 
 
 It is true that the forces with which economics deals though 
 have one advantage for deductive treatment in the fact that 
 their method of combination is, as Mill observed, that 
 
 mecham- 
 
 mechanics rather than of chemistry. ' That is to say, wnen caily 
 we know the action of two economic forces separately as for chemically, 
 instance the influences which an increase in the rate of 
 wages and a diminution in the difficulty of the work in a 
 trade will severally exert on the supply of labour in it we 
 can predict fairly well their conjoint action, without waiting 
 for specific experience of it 1 . 
 
 But even in mechanics long chains of deductive reasoning 
 are directly applicable only to the occurrences of the labora- 
 tory. By themselves they are seldom a sufficient guide for 
 
 methods, and of their mutual interdependence, is a masterpiece of subtle and 
 sound exposition. 
 
 But meanwhile it has become apparent that Prof. Schmoller's part of the 
 controversy had been somewhat misunderstood. He is now the recognized 
 leader of the specially historical tendencies of German economics ; and as his mani- 
 festo, in the article already quoted, formally disavows the narrow and contentious 
 doctrines that have been put forward by some of the younger adherents of 
 the school in Germany and elsewhere ; it may be hoped that at last the tune has 
 come for the cessation of ban-en controversy and the devotion of all the energies 
 of economists to various forms of constructive work, each supplementing the 
 other. See also Prof. Ashley "On the Study of Economic History" in the 
 Harvard Journal of Economics, Vol. vn. 
 
 1 Mill exaggerated the importance of this fact: and was led by it to make 
 excessive claims for the deductive method in economics. See the last of his Essays ; 
 Book vi. of his Logic, and especially its ninth chapter ; also pp. 157161 of his 
 Autobiography. His practice, like that of many other writers on economic 
 method of all shades of opinion, was less extreme than his profession. But see 
 above, pp. 65, 6. 
 
METHODS OF STUDY. THE NATURE OF ECONOMIC LAW. 
 
 BOOK I. 
 CH. VI. 
 
 The com- 
 plexity of 
 economic 
 pheno- 
 mena. 
 
 dealing with the heterogeneous materials and the complex 
 and uncertain combination of the forces of the real world. 
 For that purpose they need to be supplemented by specific 
 experience, and applied in harmony with, and often in 
 subordination to, a ceaseless study of new facts, a ceaseless 
 search for new inductions 1 . 
 
 But the forces of which economics has to take account 
 are more numerous, less definite, less well known, and more 
 diverse in character than those of mechanics; while the 
 material on which they act is more uncertain and less 
 homogeneous. Again the cases in which economic forces 
 combine with more of the apparent arbitrariness of chemistry 
 than of the simple regularity of pure mechanics, are neither 
 rare nor unimportant. And further, though unexpected com- 
 binations of forces are less likely to produce startling results 
 in economics than in chemistry, yet they are far more difficult 
 to exclude 2 . 
 
 1 Long chains of deductive reasoning are indeed directly serviceable in astro- 
 nomy, in which nature herself has given practically exclusive possession to a 
 few definite forces; and the astronomer's predictions of the movements of the 
 solar system are subject to only one hypothesis, namely that nature will not bring 
 into it any large external body for which he has not reckoned. 
 
 When the calculations of theoretical mechanics are applied in an engineering 
 problem in which the forces of nature are few and definite, and the materials 
 simple and homogeneous, they correspond roughly to nature somewhat as does 
 a view seen through a window-pane of inferior glass. The engineer for instance 
 can calculate with fair precision the angle at which an ironclad will lose its 
 stability in still water; but before he predicts how she would behave in a storm, 
 he will avail himself of the observations of experienced sailors who have 
 watched her movements in an ordinary sea. If her lines are new, but specific 
 experience has been had of the speed of ships with nearly similar lines, he may 
 perhaps calculate fairly well what her speed will be. But partly because rushing 
 water lays aside all pretence of being a frictionless fluid, his theory will not 
 enable him to give a good guess under conditions at all far away from specific 
 experience: nor can he even now quite understand why a torpedo is so much 
 more wasteful of propelling force than a fish at an equal distance below the 
 surface. And throughout the whole of his work he has to be guided by specific 
 observation more than by deductive reasoning as to the allowance to be made for 
 flaws of material, and for the fitful action of natural forces. 
 
 2 A knowledge of the actions of an elastic string under tensions of ten and 
 twenty pounds may not tell us how it will act under a tension of thirty: for then 
 it may not stretch further, but break and spring back. And two economic forces 
 acting in the same direction may introduce changes into men's habits and aims in 
 life ; and produce results different in kind, perhaps even partly opposed to, those 
 which would result from either alone. For instance a small addition to a man's 
 income will generally increase his purchases a little in almost every direction: 
 
SPECIAL DIFFICULTIES IN ECONOMIC REASONING. 95 
 
 Lastly, while the matter with which the chemist deals is 
 the same always, economics, like biology, deals with a matter, 
 of which the inner nature and constitution, as well as the 
 outer form, is constantly changing 1 . 
 
 Thus if we look at the history of such strictly economic 
 relations as those of business credit and banking, of trade- 
 unionism or co-operation, we see that modes of working, that 
 have been generally successful at some times and places, 
 have uniformly failed at others. The difference may some- 
 times be explained simply as the result of variations in general 
 enlightenment, or of moral strength of character and habits 
 of mutual trust. But often the explanation is more difficult. 
 At one time or place men will go far in trust of one another 
 and in sacrifice of themselves for the common well-being, but 
 only in certain directions; and at another time or place 
 there will be a similar limitation, but the directions will be 
 different ; and every variation of this kind limits the range 
 of deduction in economics 2 . 
 
 but A large addition may alter his habits, perhaps increase his self-respect and 
 make him cease to care for some things altogether. The spread of a fashion from 
 a higher social grade to a lower may destroy the fashion among the higher grade. 
 And again increased earnestness in our care for the poor may make charity more 
 lavish, or may destroy some of its forms altogether. 
 
 1 The chemist's predictions all rest on the latent hypothesis that the specimen 
 operated upon is what it is supposed to be, so at least that the impurities in it are 
 only such as may be neglected. The economist's predictions involve the further 
 hypothesis that the nature of man is substantially the same as when those facts 
 were observed on which his reasonings are mainly based. Even the chemist, 
 when he deals not with inanimate matter but with living beings can seldom sail 
 safely any considerable way out of sight of the firm land of specific experience. 
 He must rely mainly on that to tell him how a new drug will affect a person in 
 health, and again how it will affect a person with a certain disease; and even 
 after some general experience he may find unexpected results in its action on 
 persons of different constitutions or in a new combination with other drugs. But 
 by patient interrogation of nature and the progress of analysis, the reign of law 
 is being made to invade new fields hi both therapeutics and economics: and 
 some sort of prediction, independent of specific experience is becoming possible 
 as to the separate and combined action of an ever increasing variety of agencies. 
 
 2 Compare above, ch. i. 4 and ch. rv. 7. For our present purpose the 
 pliability of the race is more important than the pliability of the individual. It is 
 true that individual character changes, partly in an apparently arbitrary way, and 
 partly according to well known rules. It is true for instance that the average age 
 of the workmen engaged in a labour dispute is an important element in any 
 forecast of the lines on which it will run. But as, generally speaking, young and 
 old, people of a sanguine and a despondent temperament are found in about like 
 proportions at one place as at another, and at one time as at another, individual 
 
 BOOK I. 
 CH. VI. 
 
96 METHODS OF STUDY. THE NATURE OF ECONOMIC LAW. 
 
 BOOK i. | 3. The function then of analysis and deduction in 
 
 _J ' economics is not to forge a few long chains of reasoning, but 
 
 ofthe work to f r g e rightly many short chains and single connecting 
 ofanaly- links. This however is no trivial task. If the economist 
 deduction reasons rapidly and with a light heart, he is apt to make bad 
 mics. connections at every turn of his work. He needs to make 
 careful use of analysis and deduction, because only by their 
 aid can he select the right facts, group them rightly, and 
 make them serviceable for suggestions in thought and guid- 
 ance in practice ; and because, as surely as every deduction 
 must rest on the basis of inductions, so surely does every 
 inductive process involve and include analysis and deduction. 
 Expiana- Or to put the same thing in another way the explanation 
 
 prediction of the past and the prediction of the future are not different 
 operations, but the same worked in opposite directions, the 
 
 operation one f rO m effect to cause, the other from cause to effect. For 
 
 in opposite 
 
 directions, to obtain "a knowledge of individual causes" we need "induc- 
 tion ; the final conclusion of which is indeed nothing but the 
 inversion of the syllogism which is employed in deduction.... 
 Induction and deduction rest on the same tendencies, the 
 same beliefs, the same needs of our reason 1 ." 
 
 peculiarities of character and changes of character are a less hindrance to the 
 general application of the deductive method, than at first sight appears. Compare 
 above, ch. v. 4. For similar reasons the philosophic questions relating to the 
 freedom of the will, do not concern the economist as such : his reasonings do not 
 assume any particular answers to those questions. 
 
 1 It may be well to quote the whole passage, which occurs in Prof. Schmoller's 
 article on Volkswirtschaft already mentioned: "What we call the inductive 
 process starts from the particular, from observation, and seeks the rule which 
 declares what has been observed, which declares to be true of a class what has 
 been found to be true of the observed instances. The more complex a phenomenon, 
 and the even more imperfect our observation of the complex conditions, resulting 
 as they do from a combination of the most various causes, the more difficult is it 
 to discover the true rule, the more often do we get no further than hypotheses, 
 and provisional guesses as to the uniformity of the result. But we apply even 
 these to obtain further conclusions. 
 
 Deduction, which rests on the same tendencies, the same beliefs, the same 
 needs of our reason as induction, consists in the wider application of those rules 
 as to causality which have been obtained by induction. What was true in accu- 
 rately observed cases must be true in all exactly similar cases ; the rule is sought 
 for only in order to apply it further. Every rule attributes a predicate, a mode of 
 action, a characteristic to a class of things ; an analysis of the notion of the subject 
 and predicate shows what is contained in the rule in question, to what purposes it 
 applies, what cases come under it, what it can account for." 
 
EXPLANATION THE INVERSE OF PREDICTION. 97 
 
 We can explain an event completely only by first dis- BOOKI. 
 covering all the events which can have affected it, and the CH ' YI> 
 ways in which they can severally have done so. In so far as 
 our analysis of any of these facts or relations is imperfect, 
 in so far is our explanation liable to error ; and the inference 
 latent in it is already on its way to build up an induction 
 which, though probably plausible, is false. While in so far 
 as our knowledge and analysis are complete, we are able 
 by merely inverting our mental process to deduce and predict 
 the future almost as certainly as we could have explained 
 the past on a similar basis of knowledge. It is only when 
 we go beyond a first step that a great difference arises 
 between the certainty of prediction and the certainty of 
 explanation: for any error made in the first step of prediction, 
 will be accumulated and intensified in the second ; while in 
 interpreting the past, error is not so likely to be accumu- 
 lated ; for observation or recorded history will probably bring 
 a fresh check at each step 1 . 
 
 It must then always be remembered that though obser- The 
 vation or history may tell us that one event happened at the O f inter- 7 
 same time as another, or after it, they cannot tell us whether 
 the first was the cause of the second. That can be done only 
 
 i The science of the tides presents many close analogies to economics. In 
 either science one set of leading forces exercises a visible influence over almost 
 every movement, and a predominating influence over some : in the science of the 
 tides, it is the attractions of the moon and sun, in economics it is the desire to 
 obtain comfort at the least cost. In either case a merely deductive study of the 
 action of the leading forces either by themselves, or in conjunction with forces 
 less universal in their action, would give results that might have a scientific 
 interest but would be useless for guidance. But in either case such deductions 
 are useful in giving life to observed facts, in connecting them with one another, 
 and thus helping to build up the secondary laws of the science. 
 
 It is true for instance that even now no knowledge of sea-currents and of the 
 action of the wind on the water would enable a man to say exactly what difference 
 there would be between the tides in the ports of Guernsey and Jersey, nor the 
 exact limits of the points on the English coast at which there are four tides every 
 day, nor how strong a gale in the North Sea would be required to make the water 
 at the London Docks fall a couple of feet in the middle of a time of rising tide. 
 And yet a study of general principles has aided in the selection of the right facts 
 for observation, and in connecting them with one another by secondary laws, 
 which aid both in explaining known facts and predicting results of known causes. 
 The same processes, both inductive and deductive, are used in nearly the same way 
 in the explanation of a known fact in the history of the tides, and in the pred 
 of an unknown fact. (Compare Mill, Logic, Book vi. ch. in.) 
 
 7 
 
98 METHODS OF STUDY. THE NATURE OF ECONOMIC LAW. 
 
 BOOK i. by reason acting on the facts. When it is said that a certain 
 
 CH VT 
 
 _! ' event in history teaches this or that, formal reckoning is 
 
 never made for all the conditions which were present when 
 the event happened ; some are tacitly, if not unconsciously, 
 assumed to be irrelevant. This assumption may be justifiable 
 in any particular case ; but it may not. Wider experience, 
 more careful inquiry, may show that the causes to which the 
 event is attributed could not have produced it unaided ; 
 perhaps even that they hindered the event, which was 
 brought about in spite of them by other causes that have 
 escaped notice. 
 
 This difficulty has been made prominent by recent con- 
 troversies as to contemporary events in our own country. 
 Whenever a conclusion is drawn from them that meets 
 with opposition, it has to stand a sort of trial ; rival ex- 
 planations are offered ; new facts are brought to light ; the 
 old facts are tested and rearranged, and in some cases shown 
 to support the opposite conclusion from that on behalf of 
 which they were at first invoked. 
 
 Both the difficulty of analysis and the need for it are 
 increased by the fact that no two economic events are 
 seldom alike in all respects. Of course there may be a close 
 resemblance between two simple incidents : the terms of the 
 leases of two farms may be governed by nearly the same 
 causes: two references of wages questions to Boards of 
 Arbitration may raise substantially the same question. But 
 there is no exact repetition even on a small scale. However 
 nearly two cases correspond, we have to decide whether the 
 difference between the two may be neglected as practically 
 unimportant ; and this may not be very easy, even if the two 
 cases refer to the same place and time. 
 The And if we are dealing with the facts of remote times 
 
 untrust- . M 
 
 worthiness we must allow for the changes that have meanwhile come 
 facie over the whole character of economic life : however closely 
 drawn 66 a P r bl em of to-day may resemble in its outward incidents 
 from the another recorded in history, it is probable that a closer ex- 
 past, animation will detect a fundamental difference between their 
 
 real characters. Till this has been made, no valid argument 
 
 can be drawn from one case to the other. 
 
DIFFICULTY OF INTERPRETING DISTANT EVENTS. 99 
 
 4. This brings us to consider the relation in which BOOKI. 
 economics stands to the facts of distant times. 
 
 The study of economic history may have various aims, The aid 
 and correspondingly various methods. Regarded as a branch 
 
 of general history it may aim at helping us to understand is not 
 " what has been the institutional framework of society at the for all 
 several periods, what has been the constitution of the various * 
 
 social classes and their relation to one another": it may 
 " ask what has been the material basis of social existence ; 
 how have the necessities and conveniences of life been 
 produced; by what organization has labour been provided 
 and directed ; how have the commodities thus produced been 
 distributed ; what have been the institutions resting on this 
 direction and distribution " ; and so on \ 
 
 And for this work, interesting and important as it is on 
 its own account, not very much analysis is essential ; and 
 most of what is needed may be supplied for himself by a 
 man of active and inquiring mind. Saturated with a 
 knowledge of the religious and moral, the intellectual 
 and aesthetic, the political and social environment, the 
 economic historian may extend the boundaries of our 
 knowledge and may suggest new and valuable ideas, even 
 though he may have contented himself with observing 
 those affinities and those causal relations which lie near 
 the surface. 
 
 But even in spite of himself, his aims will surely run but iUs 
 beyond these limits ; and will include some attempt to deriving 
 discover the inner meaning of economic history, to unveil f^nfthl 
 the mysteries of the growth and decay of custom, and other g|* for 
 phenomena which we are not any longer contented to take present. 
 as ultimate and insoluble facts given by nature: nor is 
 he likely altogether to withhold himself from suggesting 
 inferences from the events of the past for guidance in the 
 present. And indeed the human mind abhors a vacuum 
 in its notions of the causal relations between the events that 
 are presented vividly to it. By merely placing things 
 together in a certain order, and consciously or unconsciously 
 
 1 Ashley, On the Stitdy of Economic History. 
 
 7-2 
 
100 METHODS OF STUDY. THE NATURE OF ECONOMIC LAW. 
 
 BOOK i. suggesting post hoc ergo propter hoc, the historian takes 
 CH> VI on himself some responsibility as a guide 1 . 
 
 And if this is his main aim, if his interests lie chiefly 
 in the attempt to discover the hidden springs of the 
 economic order of the world, and to obtain light from the 
 past for guidance in the present; then he should avail 
 himself of every resource that may help him to detect real 
 differences that are disguised by a similarity of name or 
 outward appearance, and real similarities that are obscured by 
 a superficial difference ; to select the true causes of each 
 event and assign to each its proper weight ; and above all to 
 detect the remoter causes of change. 
 
 An analogy An analogy may be borrowed from naval affairs. The 
 details of a battle with appliances that have passed away 
 
 1 For example: the introduction of long leases at fixed money rents in 
 North Britain was followed by a great improvement in agriculture, and in the 
 general condition of the people there ; but before inferring that it was the sole, 
 or even the chief cause of the improvement, we must inquire what other changes 
 were taking place at the same time, and how much of the improvement is to be 
 referred to each of them. We must, for instance, allow for the effects of changes 
 in the prices of agricultural produce, and of the establishment of civil order in the 
 border provinces. To do this requires care and scientific method ; and till it has 
 been done, no trustworthy inference can be drawn as to the general tendency of 
 the system of long leases. And even when it has been done, we cannot argue 
 from this experience to a proposal for a system of long leases in, say, Ireland now, 
 without allowing for differences in the character of local and world markets for 
 various kinds of agricultural produce, for probable changes in the production and 
 consumption of gold and silver, and so on. The history of Land Tenures is full 
 of antiquarian interest ; but until carefully analysed and interpreted by the aid of 
 economic theory it throws no trustworthy light on the question what is the best 
 form of land tenure to be adopted now in any country. Thus some argue that 
 since primitive societies usually held their land in common, private property in 
 land must be an unnatural and transitional institution. Others with equal confi- 
 dence contend that, since private property in land has extended its range with the 
 progress of civilization, it is a necessary condition for further progress. But to 
 wrest from history her true teaching on the subject requires the effects of the 
 common holding of land in the past to be analysed so as to discover how far each 
 of them is likely to act always in the same way, how far to be modified by changes 
 in the habits, the knowledge, the wealth, and the social organization of mankind. 
 Even more interesting and instructive is the history of the professions, made by 
 Gilds and other Corporations and Combinations in industry and in domestic and 
 foreign trade, that they used their privileges on the whole for the benefit of the 
 public. But to bring in a complete verdict on the question, and still more to deduce 
 from it sound guidance for our own time, needs not only the wide general 
 knowledge and subtle instincts of the practised historian, but also a grasp of 
 many of the most difficult analyses and reasonings relating to monopolies, to 
 foreign trade, to the incidence of taxation, etc. 
 
STRATEGY AND TACTICS. 
 
 may be of great interest to the student of the general BOOKI. 
 history of those times; but they may afford little useful CH ' VI> 
 guidance for the naval commander of to-day, who has to 
 deal with a wholly different material of war. And therefore, 
 as Captain Mahan has admirably shown, the naval com- 
 mander of to-day will give more attention to the strategy 
 than to the tactics of past times 1 . 
 
 It is only recently, and to a great extent through the 
 wholesome influence of the criticisms of the historical school, 
 that prominence has been given to that distinction in 
 economics which corresponds to the distinction between 
 strategy and tactics in warfare. Corresponding to tactics 
 are those details and outward forms of economic organization 
 which depend on temporary or local aptitudes, customs and 
 relations of classes; on the influence of individuals; or on 
 the changing appliances and needs of production. While to 
 strategy corresponds that more fundamental substance of 
 economic organization, which depends mainly on such wants 
 and activities, such preferences and aversions as are found in 
 man everywhere : they are not indeed always the same in 
 form, nor even quite the same in substance; but yet they 
 have a sufficient element of permanence and universality to 
 enable them to be brought in some measure under general 
 statements, whereby the experiences of one time and one age 
 may throw light on the difficulties of another. This distinction 
 
 1 He will concern himself not so much with the incidents of particular combats, 
 as with practical illustrations of those leading principles of action which will 
 enable him to hold his whole force in hand, and yet give to each part of it 
 adequate initiative ; to keep up wide communication, and yet to be able to concen- 
 trate quickly, and select a point of attack at which he can bring an overwhelming 
 force. A man saturated with the general history of a period, may give a vivid 
 picture of the tactics of a battle, which will be true in its main outlines, and 
 almost harmless even if occasionally wrong: for no one is likely to copy 
 tactics, the appliances of which have passed away. But to comprehend the 
 strategy of a campaign, to separate the real from the apparent motives of 
 a great general of past times, a man must be a strategist himself. And 
 if he is to make himself responsible for suggesting, however unobtrusively, the 
 lessons which the strategists of to-day have to learn from the story which he 
 records ; then he is bound to have analysed thoroughly the naval conditions of 
 to-day, as well those of the time about which he is writing ; and he must neglect 
 no aid for this end that is to be had from the work of many minds in many 
 countries studying the difficult problem of strategy. As it is with naval history, 
 so it is with economic. 
 
102 METHODS OF STUDY. THE NATURE OF ECONOMIC LAW. 
 
 BOOK i. was probably seldom present in Ricardo's mind : it is certainly 
 ' not prominent in his writings : and when attention is paid, 
 not to the principles which are embodied in his method of 
 working, but to particular conclusions which he reaches ; 
 when these are converted into dogmas and applied crudely to 
 the conditions of times or places other than his own, then no 
 doubt they are almost unmixed evils. His thoughts are like 
 sharp chisels with which it is specially easy to cut one's fingers, 
 because they have such awkward handles. 
 
 But modern economists distilling his crude expressions ; 
 extracting their essence, and adding to it ; rejecting dogmas, 
 but developing principles of analysis and reasoning, are 
 finding the Many in the One and the One in the Many : 
 they are showing for instance that the principles of his 
 analysis of rent are not applicable to much that commonly 
 goes by the name of rent to-day; but that they are ap- 
 plicable with proper care to much that has the outward 
 form of rent, in the economic conditions of almost every stage 
 of civilization as well as to much that does not appear at first 
 sight to be of the nature of rent at all \ 
 
 Common- | 5. Jt is doubtless true that much of this work has less 
 need of elaborate analytical methods, than of a shrewd 
 
 1 Of course no student of strategy can ignore tactics. And, though no one life 
 will reach out to a study in detail of the tactics of every fight which man has waged 
 with his economic difficulties ; yet no study of the broad problems of economic 
 strategy is likely to be worth much unless it is combined with an intimate 
 knowledge of the tactics as well as the strategy of man's struggles against his 
 difficulties in some particular age and country. And further every student should 
 make by personal observation a minute study of some particular set of details, 
 not necessarily for publication, but for his own training ; and this will help him 
 much to interpret and weigh the evidence which he obtains in print or writing, 
 whether with regard to present or past times. Of course every thoughtful and 
 observant man is always obtaining, from conversation and current literature, a 
 knowledge of the economic facts of his own time , and especially in his own neigh- 
 bourhood ; and the store of facts which he thus imperceptibly gets is sometimes 
 more full and thorough in certain special regards than is to be distilled from all 
 the records in existence as to some classes of facts in remote places and times. 
 But independently of this, the direct and formal study of facts, perhaps mainly 
 those of his own age, will much exceed the study of mere analysis and "theory," 
 in its demands on the time of any serious economist ; even though he may be one 
 of those who rank most highly the importance of ideas relatively to facts, even 
 though he may think that it is not so much the collection of new facts as the 
 better study of those already collected, that is our most urgent need now, or that 
 will help us most in improving the tactics as well as the strategy of man's contests 
 with his difficulties. 
 
FUNCTIONS OF COMMON SENSE AND OF SCIENTIFIC MACHINERY. 103 
 
 mother-wit, of a sound sense of proportion, and of a large BOOK i. 
 experience of life. But on the other hand there is much CH ' VI ' 
 work that is not easily to be done without such machinery. ^. other - 
 Natural instinct will select rapidly and combine justly, g far in 
 considerations which are relevant to the issue in hand ; but *"* y81 ' 
 it will select chiefly from those which are familiar ; it will 
 seldom lead a man far below the surface or far beyond the 
 limits of his personal experience. 
 
 And it happens that in economics, neither those effects of but not far 
 known causes, nor those causes of known effects which are fo r afi h 
 most patent, are generally the most important. "That which P? 0868 - 
 is not seen " is often better worth studying than that " which 
 is seen." Especially is this the case if we are not dealing 
 with some question of merely local or temporary interest, but 
 are seeking guidance in the construction of a far-reaching 
 policy for the public good ; or if, for any other reason, we 
 are concerned less with immediate causes, than with causes 
 of causes, causae causantes. For experience shows, as might 
 have been anticipated, that common sense, and instinct, 
 are inadequate for this work ; that even a business training 
 does not always lead a man to search far for those causes of 
 causes, which lie beyond his immediate experience ; and 
 that it does not always direct that search well, even when he 
 makes the attempt. For help in doing that, everyone must 
 perforce rely on the powerful machinery of thought and know- 
 ledge that has been gradually built up by past generations. 
 For indeed the part which systematic scientific reasoning 
 plays in the production of knowledge resembles that which 
 machinery plays in the production of goods. 
 
 When the same operation has to be performed over and Analogy 
 
 x . between 
 
 over again in the same way, it generally pays to make a the 
 machine to do the work ; though when there is so much o^dence" 
 changing variety of detail that it is unprofitable to use JJjfJJjJf of 
 machines, the goods must be made by hand. Similarly in production, 
 knowledge, when there are any processes of investigation or 
 reasoning in which the same kind of work has to be done 
 over and over again in the same kind of way; then it is 
 worth while to reduce the processes to system, to organize 
 methods of reasoning and to formulate general propositions 
 
104 METHODS OF STUDY. THE NATURE OF ECONOMIC LAW. 
 
 CH. VI. 
 
 BOOK i. to be used as machinery for working on the facts and as 
 vices for holding them firmly in position for the work. And 
 though it be true that economic causes are intermingled 
 with others in so many different ways, that exact scientific 
 reasoning will seldom bring us very far on the way to the 
 conclusion for which we are seeking, yet it would be foolish 
 to refuse to avail ourselves of its aid, so far as it will 
 reach : just as foolish as would be the opposite extreme of 
 supposing that science alone can do all the work, and that 
 nothing will remain to be done by practical instinct and 
 trained common sense. An architect without practical 
 wisdom and aesthetic instincts will build but a poor house 
 however thorough his knowledge of mechanics : but without 
 any knowledge of it he will build insecurely or wastefully 1 . 
 
 For mental faculties, like manual dexterity, die with 
 those who possess them : but the improvement which each 
 generation contributes to the machinery of manufacture or 
 to the organon of science is handed down to the next. 
 There may be no abler sculptors now than those who worked 
 on the Parthenon, no thinker with more mother-wit than 
 Aristotle. But the appliances of thought develop cumula- 
 tively as do those of material production 2 . 
 
 1 A Brindley, without academic instruction, may do some engineering work 
 better than a man of inferior mother- wit, however well he may have been trained. 
 A wise nurse, who reads her patients by instinctive sympathy, may give better 
 counsel on some points than a learned physician. But yet the study of analytical 
 mechanics should not be neglected by the engineer, nor that of physiology by the 
 medical man. 
 
 2 Ideas, whether those of art and science, or those embodied in practical 
 appliances, are the most "real" of the gifts that each generation receives from its 
 predecessors. The world's material wealth would quickly be replaced if it were 
 destroyed, but the ideas by which it was made were retained. If however the 
 ideas were lost, but not the material wealth, then that would dwindle and the 
 world would go back to poverty. And most of our knowledge of mere facts could 
 quickly be recovered if it were lost, but the constructive ideas of thought 
 remained ; while if the ideas perished, the world would enter again on Dark Ages. 
 Thus the pursuit of ideas is not less "real " work in the highest sense of the word 
 than is the collection of facts; though the latter may in some cases properly 
 be called in German a Realstudium, that is, a study specially appropriate to 
 Realschulen. In the highest use of the word, that study of any field of the wide 
 realm of economics is most " real " in which the collection of facts, and the analysis 
 and construction of ideas connecting them are combined in those proportions 
 which are best calculated to increase knowledge and promote progress in that 
 particular field. And what this is, cannot be settled offhand, but only by 
 careful study and by specific experience. 
 
LAWS OF NATURAL SCIENCE VARY IN PRECISION. 105 
 
 6. This brings us to consider the nature of Economic BOOK i. 
 Laws. Some have said that the term is inappropriate, CH ' VI ' 
 because there are no definite and universal propositions in ^^coree 
 economics which can compare with the Laws of Gravitation s P nd to 
 and of Conservation of Energy in physics. But the objection natural 17 
 would appear to be irrelevant. For though there are no ing to the" 
 economic laws of that class, there are many which may rank 
 
 with the secondary laws of those natural sciences, which neous 
 resemble economics in dealing with the complex action of 
 many heterogeneous and uncertain causes. The laws of bio- 
 logy, for instance, or to take an example from a purely physi- 
 cal science the laws of the tides, like those of economics vary 
 much in definiteness, in range of application and in certainty 1 . 
 
 An economic law is then nothing but a general proposi- 
 tion, or statement of uniformity, more or less certain, more 
 or less definite. A countless number of such statements 
 might be made : but there are not very many of which it is 
 necessary to make a formal statement : and there are fewer 
 still to which it is worth while to give a special name 2 . 
 
 Thus a law of social science, or a Social Law, is a state- Definition 
 ment that a certain course of action may be expected under soc iail 
 certain conditions from the members of a social group. 
 
 1 There is indeed a sense in which all physical laws, including even that of 
 gravitation, are but schemes for holding ascertained uniformities and tendencies 
 in a convenient grip ; while they derive their prestige partly from the number and 
 certainty of the facts which they hold within their grip, and partly from the number 
 and cogency of the chains of inductive and deductive reasoning which connect 
 them with other laws. 
 
 2 The selection is directed less by purely scientific considerations than by 
 practical convenience. If there is any general statement which one wants to 
 bring to bear so often, that the trouble of quoting it at length, when needed, is 
 greater than that of burdening this discussion with an additional formal statement 
 and an additional technical name, then it receives a special name, otherwise not. 
 
 The term Rule (German Rec/el) has been suggested as a substitute for Law: 
 but the objections to it, in English, at all events, seem very great. It seems how- 
 ever to be the only possible short substitute for Law; and brevity is essential. 
 
 The relation of "natural and economic laws," is exhaustively discussed by 
 Neumann (Zeitschrift fur die gesamte Staatswissenschaft, 1892) who concludes 
 (p. 464) that there is no other word than Law (Gesetz) to express those statements 
 of tendency, which play so important a part in natural as well as economic 
 science. And Prof. Wagner (OnmcOegung, 8691) comes to the same con- 
 clusion after a somewhat similar analysis of the different kinds of laws. See also 
 Keynes, Scope and Method, and an article by Prof. Ritchie, "What are economic 
 Laws," in the second volume of the Economic fttvieio. 
 
106 METHODS OF STUDY. THE NATURE OF ECONOMIC LAW. 
 
 BOOK i. Economic laws are those social laws which relate to 
 _J ' branches of conduct in which the strength of the motives 
 
 ec&nomic cn ^ e % concerned can be measured by a money price. 
 
 There is thus no hard and sharp line of division between 
 those social laws which are, arid those which are not, to be 
 regarded also as economic laws: for there is a continuous 
 gradation from social laws concerned almost exclusively with 
 motives that can be measured by price, to social laws in 
 which such motives have little place, and which are therefore 
 generally as much less precise and exact than economic 
 laws, as those are than the laws of the more exact physical 
 sciences 1 . 
 
 Corresponding to the substantive " law " is the adjective 
 " legal." But this term is used only in connection with 
 " law " in the sense of an ordinance of government ; not in 
 the sense of a scientific statement of connection between 
 cause and effect. The adjective used for this purpose is 
 derived from " norma," a term which is nearly equivalent to 
 " law," and might perhaps with advantage be substituted 
 for it in scientific discussions. And following our definition 
 of an economic law, we may say that the course of action 
 which may be expected under certain conditions from the 
 
 Definition members of an industrial group is the normal action of the 
 
 of normal, mem berS of that gTOUp 2 . 
 
 1 The term Economic Law is also given for convenience to some laws of physical 
 science of which economics makes use. The best known of these is the Law of 
 Diminishing Return (Book IV. Ch. m.), which, at all events hi its simplest form, 
 is properly a statement of physical facts and belongs to agricultural science. 
 
 2 It will be noticed that this use of the word Normal is broader than that which 
 is often adopted. Thus it is frequently said that those results only are normal 
 which are due to the undisturbed action of free competition. But the term has 
 often to be applied to conditions in which perfectly free competition does not 
 exist, and can hardly even be supposed to exist ; and even where free competition 
 is most dominant, the normal conditions of every fact and tendency will include 
 vital elements that are not a part of competition nor even akin to it. Thus, for 
 instance, the normal arrangement of many transactions in retail and wholesale 
 trade, and on Stock and Cotton Exchanges, rests on the assumption that verbal 
 contracts, made without witnesses, will be honourably discharged; and in 
 countries in which this assumption cannot legitimately be made, some parts of the 
 Western doctrine of normal value are inapplicable. Again, the prices of various 
 Stock Exchange securities are affected "normally" by the patriotic feelings not 
 only of the ordinary purchasers, but of the brokers themselves: and so on. 
 
 The use of the term now proposed is more in accordance with its etymological 
 meaning, as well as with the ordinary language of everyday life. An objection may 
 
LIMITATIONS OF ECONOMIC LAWS. 107 
 
 Normal action is not always morally right; very often BOOKI. 
 
 it is action which we should use our utmost efforts to stop. CH ' VI ' 
 For instance, the normal condition of many of the very 
 
 poorest inhabitants of a large town is to be devoid of n . 
 enterprise, and unwilling to avail themselves of the oppor- action. 
 tunities that may offer for a healthier and less squalid life 
 elsewhere ; they have not the strength, physical, mental and 
 moral, required for working their way out of their miserable 
 surroundings. The existence of a considerable supply of 
 labour ready to make match-boxes at a very low rate is 
 normal in the same way that a contortion of the limbs is a 
 normal result of taking strychnine. It is one result, a deplor- 
 able result, of the action of those laws which we have to study 1 . 
 
 [The phrase just used the action of a laiv is sanctioned Expiana- 
 by authority, and is convenient on account of its brevity, phrase the 
 
 But it is elliptical : for a law itself does not take action, it 
 merely records action. When we speak of the action of a 
 law, what we mean is the action of those causes, the results or 
 tendencies of which are described by the law.] 
 
 It is sometimes said that the laws of economics are 
 " hypothetical." Of course, like every other science, it under- triues 
 takes to study the effects which will be produced by certain 1^^^ 
 causes, not absolutely, but subject to the condition that other assume 
 
 J * certain 
 
 things are equal, and that the causes are able to work out conditions 
 their effects undisturbed. Almost every scientific doctrine, this sense 
 when carefully and formally stated, will be found to contain 
 some proviso to the effect that other things are equal : the 
 action of the causes in question is supposed to be isolated ; 
 
 be raised that it has not a sufficiently definite and rigid outline : but it will be 
 found that the difficulties arising from this source are not very great ; and that 
 the use now proposed will help to bring the doctrines of economics into closer 
 connection with real life. 
 
 1 This indicates one peculiarity which economics shares with a few other 
 sciences, the nature of the material of which can be modified by human effort. 
 It may be a moral or practical precept to modify that nature and thus modify laws 
 of nature; as for instance by substituting capable workers for those who can only 
 do such work as matchbox making ; or again by modifying the breeds of cattle 
 so that they mature early, and carry much flesh on light frames. Jonah's prophecy 
 of the fall of Nineveh saved it. (See Venn, Empirical Logic, ch. xxv.) And the 
 laws of the fluctuation of credit and prices have been much altered by increased 
 powers of prediction. 
 
108 
 
 METHODS OF STUDY. THE NATURE OF ECONOMIC LAW. 
 
 BOOK I. 
 CH. VI. 
 
 But in 
 economics 
 the implied 
 conditions 
 must be 
 empha- 
 sized. 
 
 Limita- 
 tions of 
 economic 
 law. 
 
 The dis- 
 tinction 
 between 
 jiure and 
 applied 
 Sciences 
 is not 
 absolute 
 
 certain effects are attributed to them, but only on the hypo- 
 thesis that no cause is permitted to enter except those 
 distinctly allowed for 1 . 
 
 These conditioning clauses are not continually repeated, 
 but the common sense of the reader supplies them for 
 himself. In economics it is necessary to repeat them oftener 
 than elsewhere, because its doctrines are more apt than those 
 of any other science to be quoted by persons who have had 
 no scientific training, and who perhaps have heard them only 
 at second hand and without their context 2 . 
 
 It is however true that an economic law may be appli- 
 cable only to a very narrow range of circumstances which 
 may exist together at one particular place and time, but 
 quickly pass away. When they are gone the law has no 
 practical bearing ; because the particular set of causes with 
 which it deals are nowhere to be found acting together 
 without important disturbance from other causes. Though 
 economic analysis and general reasoning are of wide applica- 
 tion, we cannot insist too urgently that every age and every 
 country has its own problems; and that every change in 
 social conditions is likely to require a new development of 
 economic doctrines. 
 
 7. But in all this much turns on the extent to which we 
 are treating economics as an applied science. The contrast 
 between pure and applied sciences is not absolute, but one 
 of degree. For instance mechanics is an applied science 
 relatively to geometry; but a pure science relatively to 
 
 1 It is true that on account of the changing material of economics, special 
 difficulty is often caused by the condition that time must be allowed for causes to 
 produce their effects. For meanwhile the material on which they work, and 
 perhaps even the causes themselves, will have changed, and the tendencies which 
 are being described will not have a sufficiently "long run" in which to work 
 themselves out fully. This difficulty will occupy our attention later on. See 
 especially Book v. ch. xi. 
 
 2 One reason why ordinary conversation is simpler in form than a scientific 
 treatise, is that in conversation we can safely omit conditioning clauses ; because, 
 if the hearer does not supply them for himself, we quickly detect the misunder- 
 standing, and set it right. Adam Smith and many of the earlier writers 011 
 economics attained seeming simplicity by following the usages of conversation, 
 and omitting conditioning clauses. But this has caused them to be constantly 
 misunderstood, and has led to much waste of time and trouble in profitless 
 controversy ; they purchased apparent ease at too great a cost even for that great 
 gain. 
 
PURE AND APPLIED ECONOMICS. ART OF ECONOMICS. 109 
 
 engineering : while engineering itself is often spoken of as a BOOK i. 
 pure science by men, who devote their lives to the applied CH ' YI> 
 science of railway development. Now in a sense the whole b j* one 
 of economics is an applied science ; because it always deals 
 more or less with the uncertain and irregular conditions of 
 life as they actually exist. 
 
 But some parts of it are relatively pure, because 
 they are concerned mainly with broad general proposi- 
 tions. For, in order that a proposition may be of broad 
 application it must necessarily contain few details : it cannot 
 adapt itself to particular cases ; and if it points to any 
 prediction, that must be governed by a strong conditioning 
 clause in which a very large meaning is given to the phrase 
 " other things being equal." (In logical phrase a proposition 
 can gain in Extension, only by sacrificing Intension.) 
 
 And other parts of the science are relatively applied, 
 because they deal with narrower questions more in detail; 
 they take more account of local and temporary elements ; 
 and they consider economic conditions in fuller and closer 
 relation to other conditions of life. Thus we may have a 
 pure science of credit and an applied science of credit. The 
 applied science of credit will include the science of banking. 
 And even the science of banking itself may be treated in two 
 ways, either as general and relatively pure, or as particular 
 and applied to special circumstances of individual districts. 
 
 Now in such a matter as banking or taxation, in which There may 
 the economic element predominates over all others, there short step 
 
 may be but a short step from the laws of the applied science 
 in the indicative mood to the precepts of practice, or Art, Science to 
 in the imperative mood. There may be but a short step 
 from the applied science of banking in its more general 
 sense, to broad rules or precepts of the general Art of 
 banking: while the step from a particular local problem of 
 the applied science of banking to the corresponding rule of 
 practice or precept of Art may be shorter still. 
 
 Of course an economist retains the liberty, common toButitfc 
 all the world, of expressing his opinion that a certain course regard 
 
 i -f economics 
 
 of action is the right one under given circumstances ; anti it only as 
 the difficulties of the problem are chiefly economic, he may a Sc 
 
110 METHODS OF STUDY. THE NATURE OF ECONOMIC LAW. 
 
 CH. VI. 
 
 BOOK i. speak with a certain authority. But on the whole, though 
 the matter is one on which opinions differ, it seems best that 
 he should do so rather in his private capacity, than as 
 claiming to speak with the authority of economic science. 
 
 In spite of much good authority to the contrary among 
 continental writers, and the earlier English writers, and even 
 some recent English writers, there seems to be a balance of 
 advantage in avoiding the use of the phrase, the Art of 
 Economics, or of Political Economy. It seems better to 
 regard the science as pursuing its inquiries with more 
 or less direct reference to certain practical issues, and as 
 pointing the way towards solutions of them, than to make 
 pretension to the authority of an Art, complete and self- 
 contained, and responsible for the entire direction of conduct 
 in certain matters. But we shall return to this point in the 
 next chapter. 
 
CHAPTER VII. 
 
 SUMMARY AND CONCLUSION. 
 
 1. WE have traced the growth of economic freedom 
 and enterprise, and have seen that the chief features of 
 modern economic problems, and the chief incentives to 
 economic study are of quite recent date. Till not very long 
 ago the Distribution and Exchange of wealth were governed 
 in the main by conditions which changed but slowly, and by 
 institutions which had the authority of custom and prescrip- 
 tion, and which most people were content to take as they 
 found them. Even where there was no slavery and no rigid 
 system of caste, the governing classes seldom took much 
 thought for the material well-being of the great mass of the 
 workers ; while the workers had not the habits of mind nor 
 the opportunities of thought and action required for thinking 
 out the problems of their own lives. Much of modern 
 economics might indeed have been anticipated in the towns 
 of the Middle Ages, in which an intelligent and daring spirit 
 was for the first time combined with patient industry ; but 
 they were not left to work out their career in peace ; and the 
 world had to wait for the dawn of the new economic era till a 
 whole nation was ready for the ordeal of economic freedom. 
 
 We have seen how England especially was prepared for 
 the task, but how towards the end of last century, the changes 
 which had so far been slow and gradual, suddenly became 
 rapid and violent. Mechanical inventions, the concentration 
 of industries, and a system of manufacturing on a large scale 
 for distant markets broke up the old traditions of industry, 
 and left everyone to bargain for himself as best he might ; 
 and at the same time stimulated a rapid increase of popula- 
 tion for which no provision had been made beyond standing- 
 room in factories and workshops. Thus free competition, or 
 
 BOOK i. 
 CH ' vn ' 
 
112 SUMMARY AND CONCLUSION. 
 
 BOOK i. rather, freedom of industry and enterprise, was set loose to 
 CH^VII. ^^ jy^ a nu g e untrained monster, its wayward course. The 
 a ^ use f their new power by able but uncultured business 
 men led to evils on every side ; it unfitted mothers for their 
 duties, it weighed down children with overwork and disease ; 
 and in many places it degraded the race. Meanwhile the 
 kindly meant recklessness of the poor law did even more to 
 lower the moral and physical energy of Englishmen than the 
 hard-hearted recklessness of the manufacturing discipline ; 
 for by depriving the people of those qualities which would 
 fit them for the new order of things, it increased the evil and 
 diminished the good caused by the advent of free enterprise. 
 And yet the time at which free enterprise was showing 
 itself in an unnaturally harsh form, was the very time in 
 which economists were most lavish in their praises of it. 
 This was partly because they saw clearly, what we of this 
 generation have in a great measure forgotten, the cruelty of 
 the yoke of custom and rigid ordinance which it had dis- 
 placed ; partly because the general tendency of thought in 
 England was that freedom in all matters, political and social, 
 was worth having at every cost except the loss of security : 
 but partly also it was that the productive force which free 
 enterprise was giving to the nation, was the only means by 
 which, weakened as it was by a series of bad harvests, it 
 could offer a successful resistance to Napoleon. Economists 
 therefore treated free enterprise not indeed as an unmixed 
 good, but as the natural state of things ; and they regarded 
 its evils as of secondary importance. 
 
 Adhering to the lines of thought that had been started 
 chiefly by mediaeval traders, and continued by French and 
 English philosophers in the latter half of the eighteenth 
 century, Ricardo and his followers developed a theory of the 
 action of free enterprise (or, as they said, free competition) 
 which contained many truths that will be of high import- 
 ance so long as the world exists. Their work was wonderfully 
 complete within the narrow area which it covered ; but 
 much of the best of it consists of problems relating to rent 
 and the value of corn ; problems on the solution of which 
 the fate of England just then seemed to depend, but which, 
 
SUMMAKY. 
 
 in the particular form in which they were worked out by BOOKI. 
 Ricardo, have very little direct bearing on the present state CH ' ^ 
 of things. A good deal of the rest of their work was Summar y 
 
 ill -111- of Book i. 
 
 narrowed and almost spoiled by its regarding too exclusively 
 the peculiar condition of England at that time; and this 
 narrowness has caused a reaction. 
 
 So that now, when more experience and leisure, and 
 greater material resources have enabled us to bring free 
 enterprise somewhat under control, to diminish its power 
 of doing evil and increase its power of doing good, there is 
 growing up among many economists a sort of spite against 
 it. Some German economists in particular seem to exag- 
 gerate its evils, attributing to it the ignorance and suffering, 
 which are the results either of tyranny and oppression in 
 past ages, or of the misunderstanding and mismanagement 
 of economic freedom. 
 
 Intermediate between these two extremes are the great 
 body of economists who, in Germany, England, America, 
 and other countries, are bringing to the study of economic 
 questions an unbiassed desire to ascertain the truth, and a 
 willingness to go through with the long and heavy work by 
 which alone scientific results of any value can be obtained. 
 Varieties of mind, of temper, of training and of opportunities 
 lead them to work in different ways, and to give their chief 
 attention to different parts of the problem. Some set 
 themselves to collect and arrange facts and statistics re- 
 lating either to past or to present times; while others 
 occupy themselves chiefly with analysis and reasoning on 
 the basis of those facts which are ready at hand. This 
 division of labour, however, implies not opposition, but 
 harmony of purpose. The work of all adds something or 
 other to that knowledge, which enables us to understand 
 the influences exerted on the quality and tone of man's 
 life by the manner in which he earns his livelihood and by 
 the character of that livelihood. 
 
 The economist must be greedy of facts; but facts by 
 themselves teach nothing. History tells of sequences and 
 coincidences ; but reason alone can interpret and draw lessons 
 from them. The work to be done is so various that much 
 
 8 
 
114 SUMMARY AND CONCLUSION. 
 
 BOOK i. of it must be left to be dealt with by trained common sense, 
 C fl2?' which is the ultimate arbiter in every practical problem. 
 c^Book*! Economic science is but the working of common sense aided 
 by appliances of organized analysis and general reasoning, 
 which facilitate the task of collecting, arranging, and drawing 
 inferences from particular facts. Though its scope is always 
 limited, though its work without the aid of common sense 
 is always vain, yet in almost every difficult problem it will 
 enable common sense to go further than would otherwise be 
 possible. Its chief work is connected with the measurement 
 of motives by the price which, as a "normal" or general rule, 
 is sufficient to induce a person of a particular class under 
 given conditions to undertake a certain task or undergo a 
 certain sacrifice. A statement with regard to man's normal 
 action, or in other words an economic law, is hypothetical 
 only in the same sense as are the laws of the physical sciences : 
 for they also contain or imply conditions. But there is more 
 difficulty in making the conditions clear, and more danger in 
 any failure to do so, in economics than in physics. The laws 
 of human action are not indeed as simple, as definite or as 
 clearly ascertainable as the law of gravitation ; but many of 
 them may rank with the laws of those natural sciences 
 which deal with complex subject-matter. The raison d'etre 
 of economics as a separate science is that it deals chiefly 
 with that part of man's action which is most under the con- 
 trol of measurable motives ; and which therefore lends itself 
 better than any other to systematic reasoning and analysis. 
 
 The study of theory must go hand and hand with that 
 of facts: and for dealing with most modern problems it is 
 modern facts that are of the greatest use. For the economic 
 records of the distant past are in some respects slight and 
 untrustworthy; and the economic conditions of early times 
 are wholly unlike those of the modern age of free enterprise, 
 of general education, of true democracy, of steam, of the 
 cheap press and the telegraph. 
 
 Scientific 2. Economics has then as its purpose firstly to acquire 
 are U tobe knowledge for its own sake, and secondly to throw light on 
 arranged practical issues. But though we are bound, before entering on 
 ference any study, to consider carefully what are its uses, we should 
 
BOOK I. 
 
 SUMMARY. 
 
 not plan out our work with direct reference to them. For by 
 so doing we are tempted to break off each line of thought CH ' vn ' 
 as soon as it ceases to have an immediate bearing on that not io . the 
 particular aim which we have in view at the time: the K^-hici: 
 direct pursuit of practical aims leads us to group together ser? e SUb " 
 bits of all sorts of knowledge, which have no connection nafurVof 6 
 with one another except for the immediate purposes of the * he sub : 
 moment; and which throw but little light on one another. whi <^ ' 
 Our mental energy is spent in going from one to another ; concerned, 
 nothing is thoroughly thought out ; no real progress is made. 
 
 The best grouping, therefore, for the purposes of science 
 is that which collects together all those facts and reasonings 
 which are similar to one another in nature : so that the 
 study of each may throw light on its neighbour. By 
 working thus for a long time at one set of considerations, 
 we get gradually nearer to those fundamental unities which 
 are called nature's laws: we trace their action first singly, 
 and then in combination ; and thus make progress slowly but 
 surely. The practical uses of economic studies should never 
 be out of the mind of the economist, but his special business 
 is to study and interpret facts and to find out what are the 
 effects of different causes acting singly and in combination. 
 
 3. Economics is then the science which investigates Questions 
 man's action in the ordinary business of life. It pursues the vestigated 
 inquiries : So^omist. 
 
 How does economic freedom tend, so far as its influence 
 reaches, to arrange the demand and supply of wealth, 
 distribution and exchange ? What organization of industry 
 and trade does economic freedom tend to bring about ; what 
 forms of division of labour ; what arrangements of the money 
 market, of wholesale and retail dealing, and what relations 
 between employer and employed ? How does it tend to 
 adjust values, that is, the prices of material things whether 
 produced on the spot or brought from a distance, rents of 
 all kinds, interest on capital and the earnings of all forms of 
 work, including that of undertaking and managing business 
 enterprises ? How does it affect the course of foreign trade ? 
 Subject to what limitations is the price of anything a 
 measure of its real utility ? What increase of happiness is 
 
 82 
 
116 
 
 SUMMARY AND CONCLUSION. 
 
 Practical 
 which 
 
 economist 
 
 present 
 
 though 
 
 noUie 
 w W y 41 
 
 within the 
 
 range of 
 
 his science. 
 
 primd facie likely to result from a given increase in the 
 wealth of any class of society ? How far is the industrial 
 efficiency of any class impaired by the insufficiency of its 
 income ? How far would an increase of the income of any 
 class, if once effected, be likely to sustain itself through its 
 effects in increasing their efficiency and earning power ? 
 
 How far does, as a matter of fact, the influence of 
 economic freedom reach (or how far has it reached at any 
 particular time) in any place, in any rank of society, or in 
 any particular branch of industry ? What other influences 
 are most powerful there ; and how is the action of all these 
 influences combined ? In particular, how far does economic 
 freedom tend of its own action to build up combinations 
 and monopolies, and what are their effects ? How are the 
 various classes of society likely to be affected by its action in 
 the long run ; what will be the intermediate effects while its 
 ultimate results are being worked out; and, account being 
 taken of the time over which they will spread, what is the 
 relative importance of these two classes of ultimate and 
 intermediate effects ? What will be the incidence of any 
 system of taxes ? What burdens will it impose on the 
 community, and what revenue will it afford to the State ? 
 
 4. The above are the main questions with which 
 economic science has to deal directly, and with reference to 
 which its main work of collecting facts, of analysing them 
 an( ^ reason i n g about them should be arranged. The practical 
 issues which, though lying for the greater part outside the 
 range of economic science, yet supply a chief motive in the 
 background to the work of the economist, vary from time 
 * time, an( ^ fr m place to place, even more than do the 
 economic facts and conditions which form the material of 
 his studies. The following problems seem to be of special 
 urgency now in our own country : 
 
 How should we act so as to increase the good and 
 diminish the evil influences of economic freedom, both in 
 its ultimate results and in the course of its progress ? If 
 the first are good and the latter evil, but those who suffer 
 the evil, do not reap the good ; how far is it right that they 
 should suffer for the benefit of others ? 
 
BOOK I. 
 CH. VII. 
 
 ORDER AND AIMS OF ECONOMIC INQUIRIES. 117 
 
 Taking it for granted that a more equal distribution of 
 wealth is to be desired, how far would this justify changes in 
 the institutions of property, or limitations of free enterprise 
 even when they would be likely to diminish the aggregate of 
 wealth ? In other words, how far should an increase in the 
 income of the poorer classes and a diminution of their work 
 be aimed at, even if it involved some lessening of national 
 material wealth ? How far could this be done without in- 
 justice, and without slackening the energies of the leaders 
 of progress? How ought the burdens of taxation to be 
 distributed among the different classes of society ? 
 
 Ought we to rest content with the existing forms of 
 division of labour? Is it necessary that large numbers of 
 the people should be exclusively occupied with work that has 
 no elevating character ? Is it possible to educate gradually 
 among the great mass of workers a new capacity for the 
 higher kinds of work; and in particular for undertaking 
 co-operatively the management of the business in which 
 they are themselves employed ? 
 
 What are the proper relations of individual and collective 
 action in a stage of civilization such as ours ? How far ought 
 voluntary association in its various forms, old and new, to 
 be left to supply collective action for those purposes for 
 which such action has special advantages? What business 
 affairs should be undertaken by society itself acting through 
 its Government, imperial or local? Have we, for instance, 
 carried as far as we should the plan of collective ownership 
 and use of open spaces, of works of art, of the means of 
 instruction and amusement, as well as of those material 
 requisites of a civilized life, the supply of which requires 
 united action, such as gas and water, and railways ? 
 
 When Government does not itself directly intervene, how 
 far should it allow individuals and corporations to conduct 
 their own affairs as they please ? How far should it regulate 
 the management of railways and other concerns which are 
 to some extent in a position of monopoly, and again of land 
 and other things the quantity of which cannot be increased 
 by man ? Is it necessary to retain in their full force all the 
 existing rights of property ; or have the original necessities 
 
118 
 
 SUMMARY AND CONCLUSION. 
 
 BOOK i. for which they were meant to provide, in some measure 
 
 CH. VII. , 
 
 passed away ? 
 
 Are the prevailing methods of using wealth entirely 
 justifiable? What scope is there for the moral pressure of 
 social opinion in constraining and directing individual action 
 in those economic relations in which the rigidity and violence 
 of Government interference would be likely to do more harm 
 than good ? 
 
 In what respect do the duties of one nation to another 
 in economic matters differ from those of members of the 
 same nation to one another? 
 
 The domi- 
 nant aim 
 of econo- 
 mics in the 
 present 
 generation 
 is to con- 
 tribute to 
 a solution 
 of social 
 problems. 
 
 Economics is thus taken to mean a study of the economic 
 aspects and conditions of man's political, social and private 
 life ; but more especially of his social life. The aims of the 
 study are to gain knowledge for its own sake, and to obtain 
 guidance in the practical conduct of life, and especially of 
 social life. The need for such guidance was never so urgent 
 as now ; a later generation may have more abundant leisure 
 than we for researches that throw light on obscure points in 
 abstract speculation, or in the history of past times, but do 
 not afford immediate aid in present difficulties. 
 
 But though thus largely directed by practical needs, 
 economics avoids as far as possible the discussion of those 
 exigencies of party organization, and those diplomacies of 
 home and foreign politics of which the statesman is bound 
 to take account in deciding what measures that he can 
 propose will bring him nearest to the end that he desires to 
 secure for his country. It aims indeed at helping him to 
 determine not only what that end should be, but also what 
 are the best methods of a broad policy devoted to that end. 
 But it shuns many details of political tactics, which the 
 practical man cannot ignore : and it is therefore a Science, 
 Pure and Applied, rather than a Science and an Art. And it 
 is better described as Social Economics, or as Economics 
 simply, than as Political Economy. 
 
BOOK II. 
 
 SOME FUNDAMENTAL NOTIONS. 
 CHAPTER I. 
 
 INTRODUCTORY. 
 
 1. WE have seen that economics is, on the one side, BOOK u. 
 a Science of Wealth ; and, on the other, that part of the CH ' r ' 
 Social Science of man's action in society, that deals with Econ mics 
 
 * regards 
 
 his Efforts to satisfy his Wants, in so far as the efforts and wealth as 
 wants are capable of being measured in terms of wealth, or Wants and 
 its general representative, i.e. money. We shall be occupied result of 
 during the greater part of this volume with these wants and Efforts - 
 efforts, and the causes by which the prices that measure the 
 wants are brought into equilibrium with those that measure 
 the efforts. For this purpose we shall have to study in Book 
 III. wealth in relation to the diversity of man's wants which 
 it has to satisfy, and in Book IV. wealth in relation to the 
 diversity of man's efforts by which it is produced. 
 
 But in the present Book, we have to inquire which of But it is 
 all the things that are the result of man's efforts, and are make a 
 capable of satisfying man's wants, are to be counted as 
 Wealth ; and into what groups or classes these are to be 
 divided. For there is a compact group of terms connected 
 with Wealth itself, and with Capital, the study of each of 
 which throws light on the others ; while the study of the 
 whole together is a direct continuation, and in some respects 
 a completion, of that inquiry as to the scope and methods of 
 
120 INTRODUCTORY. 
 
 BOOK ii. economics on which we have just been engaged. And, 
 
 ' therefore, instead of taking what may seem the more natural 
 
 course of starting with an analysis of wants, and of wealth in 
 
 direct relation to them, it seems on the whole best to deal 
 
 with this group of terms at once. 
 
 In doing this we shall of course have to take some 
 account of the variety of wants and efforts ; but we shall not 
 want to assume anything that is not obvious and a matter of 
 common knowledge. The real difficulty of our task lies in 
 another direction ; being the result of the need under which 
 economics, alone among sciences, lies of making shift with a 
 few terms in common use to express a great number of 
 subtle distinctions. 
 Principles 8 2. AsMillsays 1 : " The ends of scientific classification 
 
 ofclassifi- . J . 
 
 cation. are best answered when the objects are formed into groups 
 respecting which a greater number of general propositions 
 can be made, and those propositions more important, than 
 those which could be made respecting any other groups into 
 which the same things could be distributed." But we meet 
 at starting with the difficulty that those propositions which 
 are the most important in one stage of economic develop- 
 ment, are not unlikely to be among the least important in 
 another, if indeed they apply at all. 
 
 The diffi- In this matter economists have much to learn from the 
 
 classifying recent experiences of biology : and Darwin's profound discus- 
 which are s i n f ^ ne question 8 throws a strong light on the difficulties 
 their ging ^ e f re lls - He points out that those parts of the structure 
 characters which determine the habits of life and the general place of 
 
 and their . . 
 
 uses. each being in the economy of nature, are as a rule not those 
 which throw most light on its origin, but those which throw 
 least. The qualities which a breeder or a gardener notices 
 as eminently adapted to enable an animal or a plant to 
 thrive in its environment, are for that very reason likely to 
 have been developed in comparatively recent times. And in 
 like manner those properties of an economic institution 
 which play the most important part in fitting it for the 
 
 1 Logic, Bk. IV. ch. vn. Par. 2. 
 
 2 Origin of Species-, ch. xiv. 
 
DIFFICULTIES OF ECONOMIC NOMENCLATURE. 121 
 
 work which it has to do now, are for that very reason likely BOOK n . 
 to be in a great measure of recent growth 1 . CH - T - 
 
 But on the other hand we must keep constantly in mind 
 the history of the terms which we use. For, to begin with, 
 this history is important for its own sake; and because it 
 throws side lights on the history of the economic develop- 
 ment of society. And further, even if the sole purpose of our 
 study of economics were to obtain knowledge that would 
 guide us in the attainment of immediate practical ends, we 
 should yet be bound to keep our use of terms as much as 
 possible in harmony with the traditions of the past ; in order 
 that we might be quick to perceive the indirect hints and 
 the subtle and subdued warnings, which the experiences of 
 our ancestors offer for our instruction. 
 
 3. Our task is difficult. In physical sciences indeed, in its use 
 
 r , ,1 PI- f terms 
 
 whenever it is seen that a group of things have a certain set economics 
 
 of qualities in common, and will often be spoken of together, 
 they are formed into a class with a special name ; an as soon 
 as a new notion emerges, a new technical term is invented 
 to represent it. But economics cannot venture to follow this every-day 
 example. Its reasonings must be expressed in language that 
 is intelligible to the general public; it must therefore en- 
 deavour to conform itself to the familiar terms of every-day 
 life, and so far as possible must use them as they are 
 commonly used. 
 
 In common use almost every word has many shades of But that is 
 meaning, and therefore needs to be interpreted by the con- consistent, 
 text. And, as Bagehot has pointed out, even the most 
 formal writers on economic science are compelled to follow 
 this course ; for otherwise they would not have enough words 
 at their disposal. But unfortunately they do not always 
 
 1 Instances are found in many of the relations between employer and 
 employed, between middleman and producer, between bankers and their two 
 classes of clients, those from whom they borrow and those to whom they lend. 
 The substitution of the term "interest" for "usury" corresponds to a general 
 change in the character of loans, which has given an entirely new key-note to our 
 analysis and classification of the different elements into which the cost of produc- 
 tion of a commodity may be resolved. Again, the general scheme of division of 
 labour into skilled and unskilled is undergoing a gradual change ; the scope of the 
 term "rent" is being broadened in some directions and narrowed in others; and 
 so on. 
 
122 INTRODUCTORY. 
 
 BOOK ii. avow that they are taking this freedom ; sometimes perhaps 
 ^ll* they are scarcely even aware of the fact themselves. The 
 bold and rigid definitions, with which their expositions of 
 the science begin, lull the reader into a false security. Not 
 being warned that he must often look to the context for a 
 special interpretation clause, he ascribes to what he reads a 
 meaning different from that which the writers had in their 
 own minds ; and perhaps misrepresents them and accuses 
 them of folly of which they had not been guilty. Mis- 
 understandings of this kind have been a frequent source of 
 controversies that have diverted energy from constructive 
 work, and have hindered the progress of the science 1 , 
 or definite. Again, most of the chief distinctions marked by economic 
 terms are differences not of kind but of degree. At first 
 sight they appear to be differences of kind, and to have 
 sharp outlines which can be clearly marked out ; but a more 
 careful study has shown that there is no real breach of 
 continuity. It is a remarkable fact that the progress of 
 economics has discovered hardly any new real differences in 
 kind, while it is continually resolving apparent differences in 
 kind into differences in degree. We shall meet with many 
 instances of the evil that may be done by attempting to 
 draw broad, hard and fast lines of division, and to formulate 
 
 1 We ought " to write more as we do in common life, where the context is a 
 sort of unexpressed ' interpretation clause ; ' only as in Political Economy we have 
 more difficult things to speak of than in ordinary conversation, we must take 
 more care, give more warning of any change ; and at times write out ' the inter- 
 pretation clause' for that page or discussion lest there should be any mistake. 
 I know that this is difficult and delicate work; and all that I have to say in 
 defence of it is that in practice it is safer than the competing plan of inflexible 
 definitions. Any one who tries to express various meanings on complex things 
 with a scanty vocabulary of fastened senses, will find that his style grows cum- 
 brous without being accurate, that he has to use long periphrases for common 
 thoughts, and that after all he does not come out right, for he is half the time 
 falling back into the senses which fit the case in hand best, and these are some- 
 times one, sometimes another, and almost always different from his 'hard and 
 fast' sense. In such discussions we should learn to vary our definitions as we 
 want, just as we say 'let x, ?/, z, mean' now this, and now that, in different prob- 
 lems; and this, though they do not always avow it, is really the practice of the 
 clearest and most effective writers." (Bagehot's Postulates of English Political 
 Economy, pp. 78, 9.) Cairnes also (Logical Method of Political Economy, Lect. 
 vi.) combats "the assumption that the attribute on which a definition turns ought 
 to be one which does not admit of degrees ; " and argues that " to admit of degrees 
 is the character of all natural facts." 
 
DIFFICULTIES OF ECONOMIC NOMENCLATURE. 123 
 
 definite propositions with regard to differences between BOOKH. 
 things which nature has not separated by any such lines. CH ' '; 
 
 4. We must then analyze carefully the real character- Each term 
 istics of the various things with which we have to deal ; and ?&S, 
 we shall thus generally find that there is some use of each siding to 
 term which has distinctly greater claims than any other to its leadi g 
 
 i_ 11 j 'j_ i v i use, supple- 
 
 e called its leading use, on the ground that it represents a me ?ted by 
 distinction that is more important for the purposes of modern pretation 
 science than any other that is in harmony with ordinary wheTue- 
 usage. This may be laid down as the meaning to be given cessar y- 
 to the term whenever nothing to the contrary is stated or 
 implied by the context 1 . When the term is wanted to be 
 used in any other sense, whether broader or narrower, the 
 change must be indicated; and a formal interpretation 
 clause must be supplied, if there is the slightest danger of 
 a misunderstanding 2 . 
 
 1 Even among the most careful thinkers there will always remain differ- 
 ences of opinion as to the exact places in which some at least of the lines 
 of definition should be drawn. The questions at issue must hi general be 
 solved by judgments as to the practical convenience of different courses ; and such 
 judgments cannot always be established or overthrown by scientific reasoning: 
 there must remain a margin of debateable ground. But there is no such margin 
 in the analysis itself : if two people differ with regard to that, they cannot both 
 be right. And the progress of the science may be expected gradually to establish 
 this analysis on an impregnable basis. 
 
 2 When it is wanted to narrow the meaning of a term (that is, in logical lan- 
 guage, to diminish its extension by increasing its intension) a qualifying adjective 
 will generally suffice, but a change in the opposite direction cannot as a rule be 
 so simply made. Contests as to definitions are often of this kind: A and B are 
 qualities common to a great number of things, many of these things have in 
 addition the quality C, and again many the quality D, while some have both C 
 and D. It may then be argued that on the whole it will be best to define a term 
 so as to include all things which have the qualities A and B, or only those 
 which have the qualities A, B, C, or only those which have the qualities, A,B,D] 
 or only those which have A, B, C, D. The decision between these various 
 courses must rest on considerations of practical convenience, and is a matter 
 of far less importance than a careful study of the qualities -4, B, C, D, and of 
 their mutual relations. But unfortunately this study has occupied a much smaller 
 space in English economics than controversies as to definitions; which have 
 indeed occasionally led indirectly to the discovery of scientific truth, but always 
 by roundabout routes, and with much waste of time and labour. 
 
CHAPTER II. 
 
 WEALTH. 
 
 BOOK II. 
 CH. II. 
 
 ALL wealth consists of things that satisfy wants, directly 
 or indirectly. All wealth consists of desirable things, or 
 consists of things that satisfy human wants; but not all desirable 
 thfng^or tnni g s are reckoned as wealth. The affection of friends, for 
 Goods. instance, is an important element of well-being, but it is not 
 reckoned as wealth, except by a poetic licence. Let us then 
 begin by classifying desirable things, and then consider 
 which of them should be accounted as elements of wealth. 
 
 1. In the absence of any short term in common use to 
 represent all desirable things, or things that satisfy human 
 wants, we may for brevity sometimes use the term Goods for 
 that purpose 1 . 
 
 Material Desirable things or goods are Material, or Personal and 
 
 Immaterial. Material Goods consist of useful material 
 things, and of all rights to hold, or use, or derive benefits 
 from material things, or to receive them at a future time. 
 Thus they include the physical gifts of nature, land and 
 water, air and climate ; the products of agriculture, mining, 
 fishing, and manufacture ; buildings, machinery, and imple- 
 ments; mortgages and other bonds; shares in public and 
 private companies, all kinds of monopolies, patent-rights, 
 copyrights; also rights of way and other rights of usage. 
 Lastly, opportunities of travel, access to good scenery, 
 museums, etc. ought strictly speaking to be reckoned under 
 this head. 
 Personal A man's Personal Goods fall into two classes. Under the 
 
 Goods. 
 
 1 The term Commodity has also been used for it ; but Good is shorter, and is in 
 correspondence with the German Out. 
 
CLASSIFICATION OF GOODS. 125 
 
 first come the benefits he derives from other persons, such as BOOK n. 
 labour dues and personal services of all kinds, property in CH ' "' 
 slaves, the organization of his business, and his business 
 connection generally. The second class consists of his own 
 qualities and faculties for action and for enjoyment. 
 
 The former of these two classes is to be classed as External 
 External, and the latter Internal 1 . Vernal 
 
 Again, goods may be Transferable or Non-transferable. Transfer- 
 Among the latter are to be classed a person's qualities and JJ^."^. 
 faculties for action and enjoyment (i.e. his internal goods) ; fer<Me 
 also such part of his business connection as depends on 
 personal trust in him, and cannot be transferred as part of 
 his vendible good will ; also the advantages of climate, light, 
 air, and his privileges of citizenship and rights and opportu- 
 nities of making use of public property 2 . 
 
 1 For, in the words in which Hermann begins his masterly analysis of wealth, 
 " Some Goods are internal, others external, to the individual. An internal good is 
 that which he finds in himself given to him by nature, or which he educates in 
 himself by his own free action, such as muscular strength, health, mental attain- 
 ments. Everything that the outer world offers for the satisfaction of his wants is 
 an external good to him." 
 
 2 The above classification of goods may be expressed thus : 
 
 i external I transferable 
 
 fmatenal j , , , 
 
 ( non-transferable 
 I . j transferable 
 
 (.personal j non . transferable 
 internal-personal-non-transferable. 
 Or to adopt another arrangement which is more convenient for some pur- 
 poses, thus : . 
 
 (material-external j transferable 
 
 ( non-transferable 
 Goods are -/ (transferable 
 
 | personal f X < non-transferable 
 
 1 {internal-non-transferable. 
 
 The land in its original state was a free gift of nature. But in settled 
 countries it is not a free good from the point of view of the individual. Wood is 
 still free in some Brazilian forests: the fish of the sea are free generally: but 
 some sea fisheries are jealously guarded for the exclusive use of members of a 
 certain nation, and may be classed as national property. Oyster beds that have 
 been planted by man are not free in any sense ; those that have grown naturally 
 are free in every sense if they are not appropriated ; if they are private property 
 they are still free gifts from the point of view of the nation, but since the nation 
 has allowed its rights in them to become vested in individuals they are not free 
 from the point of view of the individual, and the same is true of private rights of 
 fishing in many rivers. But the wheat grown on free land and the fish caught in 
 free fisheries are not free: for they have been acquired by labour. 
 
126 WEALTH. 
 
 BOOK n. Those goods are Free, which are not appropriated and 
 CH - "' are afforded by Nature without requiring the effort of man. 
 
 Exchangeable goods are all those transferable goods 
 
 able goods, which are limited in quantity and not free. This distinction 
 
 is however not very important practically, because there are 
 
 not many goods which are transferable, but being free, have 
 
 no exchange value. 
 
 A person's 2. We may now pass to the question which classes of 
 
 a man's goods are to be reckoned as part of his wealth. 
 
 The question is one as to which there is some difference of 
 
 opinion, but the balance of argument as well as of authority 
 
 seems clearly to incline in favour of the following answer : 
 
 consists of When a man's Wealth is spoken of simply, and without 
 
 ofgoodsf 6 any interpretation clause in the context, it is to be taken to 
 
 consist of two classes of goods. 
 
 material In the first class are those material goods to which he 
 
 goods, k as ^ -j^ aw or Q us t oin ) private rights of property, and 
 which are therefore transferable and exchangeable. These 
 it will be remembered include not only such things as land 
 and houses, furniture and machinery, and other material 
 things which may be in his single private ownership, but 
 also any shares in public companies, debenture bonds, mort- 
 gages and other obligations which he may hold from others 
 to pay goods to him. On the other hand, the debts which 
 he owes to others may be regarded as negative wealth ; and 
 they must be subtracted from his gross possessions before his 
 true net wealth can be found. It is perhaps hardly necessary 
 to say specially that services and other goods, which pass out 
 of existence in the same instant that they come into it, do 
 not contribute to the stock of wealth, and may therefore be 
 left out of our account 1 . 
 
 and such In the second class are those immaterial goods which 
 
 Sternal 1 * belong to him, are external to him, and serve directly as 
 areused ^e means of enabling him to acquire material goods. Thus 
 to obtain it excludes all his own personal qualities and faculties, even 
 goods. those which enable him to earn his living ; because they are 
 
 1 That part of the value of the share in a trading company which is due to the 
 personal reputation and connection of those who conduct its affairs ought properly 
 to come under the next head as external personal goods. But this point is not of 
 much practical importance. 
 
THE WEALTH OF AN INDIVIDUAL. 127 
 
 Internal. And it excludes his personal friendships, in so far -BOOK n. 
 as they have no direct business value. But it includes his C ^J^- 
 business and professional connections, the organization of his 
 business, and where such things exist his property in 
 slaves, labour dues, &c. 
 
 This use of the term Wealth is in harmony with the The two 
 usage of ordinary life : and, at the same time, it includes 
 
 those goods, and only those, which come clearly within the 
 scope of economic science, as defined in Book I. ; and which Goods. 
 may therefore be called Economic Goods. For it includes all 
 those things, external to a man, which (i) belong to him, 
 and do not belong equally to his neighbours, and therefore 
 are distinctly his; and (ii) which are directly capable of a 
 money measure, a measure that represents on the one side 
 the efforts and sacrifices by which they have been called 
 into existence, and, on the other, the wants which they 
 satisfy 1 . 
 
 3. A broader view of wealth has indeed to be taken A broader 
 for some purposes ; but then recourse must be had to a J^ f 4 
 special interpretation clause, to prevent confusion. Thus, for weo * < * is 
 instance, the carpenter's skill is as direct a means of enabling required. 
 him to satisfy other people's material wants, and therefore 
 indirectly his own, as are the tools in his work-basket ; and 
 therefore it is convenient to have a term which will include 
 it as part of wealth in a broader use. Pursuing the lines 
 indicated by Adam Smith 2 , and followed by most continental 
 economists, we may define Personal Wealth so as to include Persona! 
 
 wealth. 
 
 1 It is not implied that the owner of Transferable goods, if he transferred 
 them, could always realize the whole money value, which they have for him. 
 A well-fitting coat, for instance, may be worth the price charged for it by an 
 expensive tailor to its owner, because he wants it and cannot get it made for less : 
 but he could not sell it for half that sum. The successful financier who has spent 
 50,000 on having a house and grounds made to suit his own special fancy, is 
 from one point of view right in reckoning them in the inventory of his property at 
 their cost price : but, should he fail, they will not form an asset to his creditors of 
 anything like that value. 
 
 And in the same way from one point of view we may count the business con- 
 nection of the solicitor or physician, the merchant or the manufacturer, at the full 
 equivalent of the income he would lose if he were deprived of it ; while yet we 
 must recognize that its exchange value, i.e. the value which he could get for it by 
 selling it, is much less than that. 
 
 2 Comp. Wealth of Nations, Book n. Ch. ii. 
 
128 
 
 BOOK II. 
 CH. II. 
 
 A broad 
 term to 
 include all 
 forms of 
 private 
 wealth. 
 
 But we 
 still have 
 to take 
 account 
 of the in- 
 dividual's 
 share 
 of the 
 common 
 wealth. 
 
 WEALTH. 
 
 all those energies, faculties, and habits which directly con- 
 tribute to making people industrially efficient; together 
 with those business connections and associations of any kind, 
 which we have already reckoned as part of wealth in the 
 narrower use of the term. Industrial faculties have a claim 
 to be regarded as economic, not only on account of their 
 importance as factors in the production of wealth, but 
 because their value is as a rule capable of some sort of 
 indirect measurement 1 . 
 
 But confusion would be caused by using the term 
 " wealth " simply when we desire to include a person's 
 industrial qualities. For this purpose it will be best to 
 use the more explicit phrase " material and personal wealth." 
 " Wealth " simply should always mean external wealth only. 
 
 8 4. But we still have to take account of those material 
 goods which are common to him with his neighbours; and 
 which therefore it would be a needless trouble to mention 
 when comparing his wealth with theirs ; though they may be 
 important for some purposes, and especially for comparisons 
 between the economic conditions of distant places or distant 
 times. 
 
 These goods consist of the benefits which he derives 
 from living in a certain place at a certain time, and being a 
 member of a certain state or community ; they include civil 
 and military security, and the right and opportunity to make 
 use of public property and institutions of all kinds, such as 
 roads, gaslight, etc., and rights to justice or to a free educa- 
 tion. The townsman and the countryman have each of them 
 
 1 "The bodies of men are without doubt the most valuable treasure of a 
 country," said Davenant in the seventeenth century; and similar phrases have been 
 common whenever the trend of political development has made men anxious that 
 the population should increase fast. 
 
 Many curious, but practically unimportant, subtleties are met with in develop- 
 ing the definition of personal wealth ; for instance, in so far as a person uses his 
 faculties to do things for his own enjoyment, the benefit that he derives from 
 them, though certainly part of his well-being, is perhaps best excluded from the 
 estimate of his wealth. But the line of partition here is very thin. For instance, 
 the faculties of an opera-singer are part of his wealth in so far as he uses them 
 for hire, but are only elements of his well-being and not of his wealth in so far as 
 he uses them to sing in private for his own pleasure. When, however, a dress- 
 maker makes a dress for herself, her dressmaking faculties may be regarded as 
 wealth in the broad use of that term. 
 
COLLECTIVE WEALTH. 129 
 
 for nothing many advantages which the other either cannot BOOKH. 
 get at all, or can get only at great expense. Other things C JL^' 
 being equal, one person has more real wealth in its broadest 
 sense than another, if the place in which the former lives has 
 a better climate, better roads, better water, more wholesome 
 drainage ; and again better newspapers, books, and places of 
 amusement and instruction. House-room, food arid clothing, 
 which would be insufficient in a cold climate, may be abund- 
 ant in a warm climate : on the other hand, that warmth 
 which lessens men's physical needs, and makes them rich 
 with but a slight provision of material wealth, makes them 
 poor in the energy that procures wealth. 
 
 Many of these things are Collective Goods ; i.e. goods Collective 
 which are not in private ownership. And this brings us to 
 consider wealth from the Social, as opposed to the Individual 
 point of view. 
 
 5. Let us then look at those elements of the wealth of in a broad 
 a nation which are commonly ignored when estimating the nSkmai 
 wealth of the individuals composing it. The most obvious wealtl1 
 forms of such wealth are public material property of all 
 kinds, such as roads and canals, buildings and parks, gas- 
 works and waterworks ; though unfortunately many of them 
 have been secured not by public savings, but by public 
 borrowings, and there is the heavy "negative" wealth of a 
 large debt to be set against them. 
 
 But the Thames has added more to the wealth of England account 
 than all its canals, and perhaps even than all its railroads, taken of 
 
 And though the Thames is a free gift of nature, except in so 
 far as its navigation has been improved, while the canal is 
 the work of man, we ought for many purposes to reckon the 
 Thames a part of England's wealth. 
 
 German economists often lay stress on the non-rnaterial the organi- 
 elements of national wealth ; and it is right to do this in societyor 
 some problems relating to national wealth, but not in all. the state> 
 Scientific knowledge indeed, wherever discovered, soon be- 
 comes the property of the whole civilized world, and may be 
 considered as cosmopolitan rather than as specially national 
 wealth. The same is true of mechanical inventions and of 
 many other improvements in the arts of production ; and it 
 M. 9 
 
130 WEALTH. 
 
 BOOK n. is true of music. But those kinds of literature which lose 
 CH - " their force by translation, may be regarded as in a special 
 sense the wealth of those nations in whose language they are 
 written. And the organization of a free and well-ordered 
 State is to be regarded for some purposes as an important 
 element of national wealth. 
 
 But national wealth includes the individual as well as 
 
 the collective property of its members. And in estimating 
 
 the aggregate sum of their individual wealth, we may save 
 
 some trouble by omitting all debts and other obligations due 
 
 Debts to one member of a nation from another. For instance, so 
 
 member fl of far as the English national debt and the bonds of an English 
 
 another 1 10 railway are owned within the nation, we can adopt the 
 
 omitted simple plan of counting the railway itself as part of the 
 
 national wealth, and neglecting railway and Government 
 
 bonds altogether. But we still have to deduct for those 
 
 bonds etc. issued by the English Government or by private 
 
 Englishmen, and held by foreigners; and to add for those 
 
 foreign bonds etc. held by Englishmen 1 . 
 
 1 The value of a business may be to some extent due to its having a monopoly, 
 either a complete monopoly, secured perhaps by a patent ; or a partial monopoly, 
 owing to its wares being better known than others which are really equally good ; 
 and in so far as this is the case the business does not add to the real wealth of 
 the nation. If the monopoly were broken down, the diminution of national wealth 
 due to the disappearance of its value would generally be more than made up, 
 partly by the increased value of rival businesses, and partly by the increased 
 purchasing power of the money representing the wealth of other members of the 
 community. (It should, however, be added that in some exceptional cases, the 
 price of a commodity may be lowered in consequence of its production being 
 monopolized : but such cases are very rare, and may be neglected for the present.) 
 
 Again, business connections and trade reputations add to the national wealth, 
 only in so far as they bring purchasers into relation with those producers who 
 will meet their real wants most fully for a given price ; or in other words, only 
 in so far as they increase the extent to which the efforts of the community as a 
 whole meet the wants of the community as a whole. Nevertheless when we are 
 estimating national wealth, not directly but indirectly as the aggregate of indi- 
 vidual wealth, we must allow for these businesses at their full value, even though 
 this partly consists of a monopoly which is not used for the public benefit. For 
 the injury they do to rival producers was allowed for in counting up the values 
 of the businesses of those rivals ; and the injury done to consumers by raising the 
 price of the produce, which they buy, was allowed for in reckoning the purchasing 
 power of their means, so far as this particular commodity is concerned. 
 
 A special case of this is the organization of credit. It increases the efficiency 
 of production in the country, and thus adds to national wealth. And the power 
 of obtaining credit is a valuable asset to any individual trader. If, however, any 
 
NATIONAL AND COSMOPOLITAN WEALTH. 131 
 
 Cosmopolitan wealth differs from national wealth much as BOOK n. 
 that differs from individual wealth. In reckoning it, debts c ^_^ 
 due from members of one nation to those of another may ^yj~ 
 conveniently be omitted from both sides of the account, wealth. 
 Again, just as rivers are important elements of national 
 wealth, the ocean is one of the most valuable properties of 
 the world. The notion of cosmopolitan wealth is indeed 
 nothing more than that of national wealth extended over the 
 whole area of the globe. 
 
 Individual and national rights to wealth rest on the basis The juridi- 
 of civil and international law, or at least of custom that has O f rights to 
 the force of law. An exhaustive investigation of the econo- wea * 
 mic conditions of any time and place requires therefore an 
 inquiry into law and custom; and economics owes much to 
 those who have worked in this direction. But its boundaries 
 are already wide ; and the historical and juridical bases of 
 the conceptions of property are vast subjects which may best 
 be discussed in separate treatises 1 . 
 
 accident should drive him out of business, the injury to national wealth is some- 
 thing less than the whole value of that asset ; because some part at least of the 
 business, which he would have done, will now be done by others with the aid of 
 some part at least of the capital which he would have borrowed. 
 
 There are similar difficulties as to how far money is to be reckoned as part of 
 national wealth; but to treat them thoroughly would require us to anticipate a 
 good deal of the Theory of Money. 
 
 1 Here again special reference may be made to Wagner's Volkswirthschaftslehre ; 
 which throws much light on the connection between the economic concept of 
 wealth and the juridical concept of rights in private property. 
 
 92 
 
CH III 
 
 CHAPTER III. 
 
 PRODUCTION. CONSUMPTION. LABOUR. NECESSARIES. 
 
 BOOK n. R i. MAN cannot create material things. In the mental 
 and moral world indeed he may produce new ideas ; but 
 when he is said to produce material things, he really only 
 matter 6 P r duces utilities ; or in other words, his efforts and sacrifices 
 but only result in changing the form or arrangement of matter to 
 inherent in adapt it better for the satisfaction of wants. All that he 
 can do in the physical world is either to readjust matter so 
 as to make it more useful, as when he makes a log of wood 
 into a table ; or to put it in the way of being made more 
 useful by nature, as when he puts seed where the forces of 
 nature will make it burst out into life 1 . 
 
 The trader It is sometimes said that traders do not produce: that 
 utilities, while the cabinet-maker produces furniture, the furniture- 
 dealer merely sells what is already produced. But there is 
 no scientific foundation for this distinction. They both 
 produce utilities, and neither of them can do more: the 
 furniture-dealer moves and rearranges matter so as to 
 make it more serviceable than it was before, and the car- 
 penter does nothing more. The sailor or the railway-man 
 who carries coal above ground produces it, just as much 
 
 1 As James Mill has said, " The distinction between what is done by labour 
 and what is done by nature is not always observed. Labour produces its effects 
 only by consistency with the laws of nature. It is found that the agency of man 
 can be traced to very simple elements. He does nothing but produce motion. 
 He can move things towards one another, and he can separate them from one 
 another. The properties of matter perform the rest." (Elements of Political 
 Economy, Ch. i.) Dr Bonar (Philosophy and Political Economy, p. 249) quotes 
 from Bacon, Nointm Organon iv., "Ad opera nil aliud potest homo quam ut corpora 
 naturalia admoveat et amoveat, reliqua natura intus agit." 
 
MAN PRODUCES AND CONSUMES ONLY UTILITIES. 133 
 
 as the miner who carries it underground ; the dealer in fish BOOK n. 
 helps to move on fish from where it is of comparatively little c ^_^ 1 - 
 use to where it is of greater use, and the fisherman does no 
 more. It is true that if there are more traders than are 
 necessary there is a waste. But there is also waste if there 
 are two men to a plough which can be well worked by one 
 man; in both cases all those who are at work produce, 
 though they may produce but little. Some American and 
 other writers have revived the mediaeval attacks on trade on 
 the ground that it does not produce. But they have not 
 aimed at the right mark. They should have attacked the 
 imperfect organization of trade, particularly of retail trade 1 . 
 
 Consumption may be regarded as negative production. Man can 
 
 T , ,-TJ- i consume, 
 
 Just as man can produce only utilities, so he can consume as he can 
 nothing more. He can produce services and other imma- JJJJy'uti' 
 terial products, and he can consume them. But as his lities - 
 production of material products is really nothing more than 
 a rearrangement of matter which gives it new utilities; so 
 his consumption of them is nothing more than a disarrange- 
 ment of matter, which diminishes or destroys its utilities. 
 Often indeed when he is said to consume things, he does 
 nothing more than to hold them for his use, while, as 
 Senior says, they " are destroyed by those numerous gradual 
 agents which we call collectively time 2 " As the " producer" 
 of wheat is he who puts seed where nature will make it 
 grow, so the " consumer " of pictures, of curtains, and even 
 of a house or a yacht does little to wear them out him- 
 self; but he uses them while time wastes them. 
 
 Goods have been divided into Consumers' goods (called Consumers 1 
 also Consumption goods, or again goods of the first Order), Producers' 
 such as food, clothes, &c., which satisfy wants directly ; and goods ' 
 Producers goods (called also Production goods, or again 
 Instrumental, or again Intermediate goods), such as ploughs 
 and loom's and raw cotton, which satisfy wants indirectly by 
 contributing towards the production of the first class of goods. 
 
 1 Production, in the narrow sense, changes the form and nature of products. 
 Trade and transport change their external relations. 
 
 2 Political Economy, p. 54. Senior would like to substitute the verb "to use " 
 for the verb "to consume." 
 
134 PRODUCTION. CONSUMPTION. LABOUR. NECESSARIES. 
 
 BOOK ii. The line of division between the two classes is however vague, 
 
 cH^ni. ^ g ^awn j n diff er ent places by different writers; and the 
 
 terms can seldom be used safely without special explanation 1 . 
 
 Nearly all 2. All labour is directed towards producing some effect. 
 
 some sense For though some exertions are taken merely for their own 
 
 productive. sa k e> as w hen a game is played for amusement, they are not 
 
 counted as labour. We may define labour as any exertion 
 
 of mind or body undergone partly or wholly with a view to 
 
 some good other than the pleasure derived directly from the 
 
 work 2 . And if we had to make a fresh start it would be 
 
 best to regard all labour as productive except that which 
 
 failed to promote the aim towards which it was directed, 
 
 and so produced no utility. But in all the many changes 
 
 which the meaning of the word " productive " has undergone, 
 
 it has had special reference to stored-up wealth, to the 
 
 comparative neglect and sometimes even to the exclusion 
 
 of immediate and transitory enjoyment 3 ; and an almost 
 
 1 Thus flour to be made into a cake when already in the house of the consumer, 
 is treated by some as a Consumers' good ; while not only the flour, but the cake 
 itself is treated as a Producers' good when in the hand of the confectioner. Prof. 
 Carl Menger (Volksivirthschqftslelire, ch. i. 2) says bread belongs to the first 
 order, flour to the second, a flour mill to the third order and so on. It appears 
 that a railway train carrying people on a pleasure excursion, also some tins of 
 biscuits, and milling machinery and some machinery that is used for making 
 milling machinery, is at one and the same time a good of the first, second and 
 fourth orders. But such subtleties are of little use. 
 
 2 This is Jevons' definition (Theory of Political Economy, ch. v.), except 
 that he includes only painful exertions. But he himself points out how painful 
 idleness often is. Most people work more than they would if they considered 
 only the direct pleasure resulting from the work ; but in a healthy state, pleasure 
 predominates over pain in a great part even of the work that is done for hire. 
 Of course the definition is elastic; an agricultural labourer working in his 
 garden in the evening thinks chiefly of the fruit of his labours; a mechanic 
 returning home after a day of sedentary toil finds positive pleasure in his garden 
 work, but he too cares a good deal about the fruit of his labour; while a rich 
 man working in like manner, though he may take a pride in doing it well, will 
 probably care little for any pecuniary saving that he effects by it. 
 
 8 Thus the Mercantilists who regarded the precious metals, partly because 
 they were imperishable, as wealth in a fuller sense than anything else, regarded 
 as unproductive or " sterile " all labour that was not directed to producing goods 
 for exportation in exchange for gold and silver. The Physiocrats thought 
 all labour sterile which consumed an equal value to that which it produced; 
 and regarded the agriculturist as the only productive worker, because his labour 
 alone (as they thought) left behind it a net surplus of stored-up wealth. Adam 
 Smith softened down the Physiocratic definition; but still he considered that 
 agricultural labour was more productive than any other. His followers discarded 
 
PRODUCTIVE LABOUR. 135 
 
 unbroken tradition compels us to regard the central notion BOOKH. 
 of the word as relating to the provision for the wants of the _ ' 
 future rather than those of the present. It is true that all ^Jo^g 
 wholesome enjoyments, whether luxurious or not, are legiti- generally 
 
 . , . . . . said to be 
 
 mate ends of action both public and private ; and it is true specially 
 that the enjoyment of luxuries affords an incentive to ex- 
 ertion, and promotes progress in many ways. But if the 
 efficiency and energy of industry are the same, the true of the fu- 
 
 J 5 * J . tore rather 
 
 interest of a country is generally advanced by the subordina- than the 
 tion of the desire for transient luxuries to the attainment of pre 
 those more solid and lasting resources which will assist 
 industry in its future work, and will in various ways tend 
 to make life larger. This general idea has been in solution, 
 as it were, in all stages of economic theory; and has been 
 precipitated by different writers into various hard and fast 
 distinctions by which certain trades have been marked off as 
 productive and certain others as unproductive. 
 
 For instance, many writers even of recent times have The work 
 adhered to Adam Smith's plan of classing domestic servants servants is 
 
 as unproductive. There is doubtless in many large houses 
 
 a superabundance of servants, some of whose energies might P roduct ive. 
 
 with advantage to the community be transferred to some 
 
 other direction : but the same is true of the greater part 
 
 of those who earn their livelihood by distilling whisky ; and 
 
 yet no economist has proposed to call them unproductive. 
 
 There is no distinction in character between the work of the 
 
 baker who provides bread for a family, and that of the cook 
 
 who boils potatoes. If the baker should be a confectioner, 
 
 or fancy baker, it is probable that he spends at least as much 
 
 of his time as the domestic cook does, on labour that is 
 
 unproductive in the popular sense of providing transitory 
 
 and unnecessary enjoyments. 
 
 this distinction ; but they have generally adhered, though with many differences 
 in points of detail, to the notion that productive labour is that which tends to 
 increase accumulated wealth ; a notion which is implied rather than stated in the 
 celebrated chapter of The Wealth of Nations which bears the title, "On the 
 Accumulation of Capital, or on Productive and Unproductive Labour." (Comp. 
 Travers Twiss, Progress of Political Economy, Sect, vi., and the discussions on 
 the word Productive in J. S. Mill's Essays, and in his Principles of Political 
 Economy.) 
 
136 PRODUCTION. CONSUMPTION. LABOUR. NECESSARIES. 
 
 BOOK u. There seems to be a way of escaping from most of these 
 
 CH * m ' ambiguities and confusions. It would indeed be unsafe to 
 
 Productive i nven t a number of new terms to correspond to the various 
 
 is a trans- 
 
 itive adjec- uses of " productive." But recollecting that it is a transitive 
 When pre- adjective, we can avoid all difficulties by the simple plan of 
 necessary considering what is the implied substantive which it governs, 
 tb implied an( j supplying that substantive explicitly. When it means 
 tive must productive of accumulated wealth in any form, let us write in 
 plied. the phrase at length and the ambiguity disappears ; when it 
 means productive of capital -either in general or only in the 
 particular form of Wage capital (to anticipate the use of 
 terms which we are just about to define), let us say so. 
 Provisional But while frequently applied in each of these senses, it 
 of produc- is still more often used to mean productive of the means of 
 production, and of lasting sources of enjoyment. Whenever 
 we use the word productive by itself, this is the sense 
 in which it is to be understood. Among the means of 
 production are included the necessaries of labour but not 
 ephemeral luxuries; and the maker of ices is thus classed 
 as unproductive whether he is working for a pastry-cook, 
 or as a private servant in a country house. But a brick- 
 layer engaged in building a theatre is classed as productive. 
 There is No doubt the dividing line between permanent and 
 
 and fast ephemeral soiirces of enjoyment cannot be drawn rigidly. 
 vi3o in But tlri s is a difficulty which exists in the nature of things 
 anc ^ cannot ^ e evaded by any device of words. We can 
 
 want an speak of an increase of tall men relatively to short, without 
 one. deciding whether all those above five feet nine inches are to 
 
 be classed as tall, or only those above five feet ten. And we 
 can speak of the increase of productive labour at the expense 
 of unproductive without fixing on any rigid, and therefore 
 arbitrary line of division between them. If such an artificial 
 line is required for any particular purpose, it must be drawn 
 explicitly for the occasion. But in fact such occasions seldom 
 or never occur. 
 
 Productive Productive consumption is commonly defined as the use 
 
 conswmp- ^ wealth in the production of further wealth. But this 
 
 definition is ambiguous. For it is sometimes taken to in- 
 
 clude everything that is actually consumed by people engaged 
 
PRODUCTIVE LABOUR AND PRODUCTIVE CONSUMPTION. 137 
 
 in productive work, even though it may not conduce at all BOOK n. 
 
 C H III 
 
 to their efficiency as workers. But productive consumption, _ ' 
 strictly so called, must be taken to include only such con- 
 sumption by productive workers as is necessary for their 
 work; under which head may be reckoned the necessary 
 consumption of children who will hereafter be productive 
 workers as well as that of adults during sickness 1 . 
 
 3. This brings us to consider the term Necessaries. Neces- 
 It is common to divide wealth into Necessaries, Comforts, things 
 
 and Luxuries ; the first class including all things required to ^jnts that 
 meet wants which must be satisfied, while the latter consist 
 
 of things that meet wants of a less urgent character. But But this 
 
 . . , . . , TT1 account is 
 
 here again there is a troublesome ambiguity. When we say ambiguous. 
 that a want must be satisfied, what are the consequences 
 which we have in view if it is not satisfied ? Do they 
 include death ? Or do they extend only to the loss of 
 strength and vigour? In other words are Necessaries the 
 things which are necessary for life, or those which are 
 necessary for efficiency ? 
 
 The term Necessaries like the term Productive has been The term 
 used elliptically, the subject to which it refers being left to sa ries is 
 be supplied by the reader ; and since the implied subject has elh P tlcal - 
 varied, the reader has often supplied one which the writer 
 did not intend, and thus misunderstood his drift. In this, 
 as in the preceding case, the chief source of confusion can be 
 
 1 All the distinctions in which the word Productive is used are very thin and 
 have a certain air of unreality. It would hardly be worth while to introduce them 
 now : but they have a long history ; and it is probably better that they should 
 dwindle gradually out of use, rather than be suddenly discarded. 
 
 The attempt to draw a hard and fast line of distinction where there is no 
 real discontinuity in nature has often done more mischief, but has perhaps 
 never led to more quaint results, than in the rigid definitions which have been 
 sometimes given of this term Productive. Some of them for instance lead to 
 the conclusion that a singer in an opera is unproductive, that the printer of the 
 tickets of admission to the opera is productive; while the usher who shows 
 people to their places is unproductive, unless he happens to sell programmes, and 
 then he is productive. Senior points out that "a cook is not said to make roast 
 meat but to dress it ; but he is said to make a pudding ..... A tailor is said to make 
 cloth into a coat, a dyer is not said to make undyed cloth into dyed cloth. The 
 change produced by the dyer is perhaps greater than that produced by the tailor, 
 but the cloth in passing through the tailor's hands changes its name; in passing 
 through the dyer's it does not : the dyer has not produced a new name, nor 
 consequently a new thing. 1 ' Pol. Econ. pp. 51 2. 
 
138 PRODUCTION. CONSUMPTION. LABOUR. NECESSARIES. 
 
 BOOK n. removed by supplying explicitly in every critical place that 
 CH ' In ' which the reader is intended to understand. 
 
 o i<j er use of the term Necessaries was limited to 
 existence, those things which were sufficient to enable the labourers, 
 efficiency, taken one with another, to support themselves and their 
 families. Adam Smith and the more careful of his followers 
 observed indeed variations in the standard of comfort at 
 different times and places : they recognized that differences 
 of climate and differences of custom make things necessary 
 in some cases, which are superfluous in others. But Adam 
 Smith's view was much influenced by that of the Physio- 
 crats, and their reasonings were based on the condition of 
 the French people in the eighteenth century, the great mass 
 of whom had no notion of any necessaries beyond those 
 which were required for mere existence. In happier times, 
 however, a more careful analysis has brought into prominence 
 the distinction between the necessaries for efficiency and the 
 necessaries for existence, and has made it evident that there 
 is for each rank of industry, at any time and place, a more or 
 less clearly defined income which is necessary for merely 
 sustaining its members; while there is another and larger 
 income which is necessary for keeping it in full efficiency 1 . 
 Account It may be true that the wages of any industrial class 
 
 must be . J > J 
 
 taken of the might have sufficed to maintain a higher efficiency, if they 
 oTpiace S had been spent with perfect wisdom. But every estimate of 
 necessaries must be relative to a given place and time ; and 
 im ^ ess tnere be a special interpretation clause to the contrary. 
 it may be assumed that the wages will be spent with just 
 
 1 Thus in the South of England population has increased during the present 
 century at a fair rate, allowance being made for migration. But the efficiency of 
 labour, which in earlier times was as high as that in the North of England, has 
 sunk relatively to the North ; so that the low-waged labour of the South is often 
 dearer than the more highly-paid labour of the North. We cannot thus say 
 whether the labourers in the South have been supplied with necessaries, unless 
 we know in which of these two senses the word is used. They have had the bare 
 necessaries for existence and the increase of numbers, but apparently they have 
 not had the necessaries for efficiency. It must however be remembered that the 
 strongest labourers in the South have constantly migrated to the North ; and that 
 the energies of those in the North have been raised by their larger share of 
 economic freedom and of the hope of rising to a higher position. See Mr Mackay 
 in Charity Organization Journal, Feb. 1891. 
 
NECESSARIES FOR EFFICIENCY. 139 
 
 that amount of wisdom, forethought, and unselfishness, which BOOK n. 
 prevails in fact among the industrial class under discussion. J _ ' 
 With this understanding we may say that the income of any 
 class in the ranks of industry is below its necessary level, Necessa- 
 when any increase in their income would in the course of 
 time produce a more than proportionate increase in their 
 efficiency. Consumption may be economized by a change of 
 habits, but any stinting of necessaries is wasteful 1 . 
 
 5 4. Some detailed study of the necessaries for efficiency niustra- 
 
 tioii NB- 
 
 of different classes of workers will have to be made, when we cessaries 
 come to inquire into the causes that determine the supply of gknied 
 efficient labour. But it will serve to give some definiteness labour - 
 to our ideas, if we consider here what are the necessaries for 
 the efficiency of an ordinary agricultural or of an unskilled 
 town labourer and his family, in England, in this generation. 
 They may be said to consist of a well-drained dwelling with 
 several rooms, warm clothing, with some changes of under- 
 clothing, pure water, a plentiful supply of cereal food, with a 
 moderate allowance of meat and milk, and a little tea, &c., 
 some education and some recreation, and lastly, sufficient 
 freedom for his wife from other work to enable her to 
 perform properly her maternal and her household duties. 
 If in any district unskilled labour is deprived of any of these There is 
 things, its efficiency will suffer in the same way as that of a ^hen any 
 horse that is not properly tended, or a steam-engine that has 
 
 an inadequate supply of coals. All consumption up to this than is 
 limit is strictly productive consumption : any stinting of this 
 consumption is not economical, but wasteful. 
 
 i If we considered an individual of exceptional abilities we should have to take 
 account of the fact that there is not likely to be the same close correspondence 
 between the real value of his work for the community and the income which he 
 earns by it, that there is in the case of an ordinary member of any industrial class. 
 And we should have to say that all his consumption is strictly productive and 
 necessary, so long as by cutting off any part of it he would diminish his efficiency 
 by an amount that is of more real value to him or the rest of the world than he 
 saved from his consumption. If a Newton or a Watt could have added a hundredth 
 part to his efficiency by doubling his personal expenditure, the increase in his 
 consumption would have been truly productive. As we shall see later on, such a 
 case is analogous to additional cultivation of rich land that bears a high rent : it 
 may be profitable though the return to it is less than in proportion to the previous 
 outlay. 
 
140 
 
 BOOK II. 
 CH. III. 
 
 Conven- 
 tional tie- 
 cessaries. 
 
 PRODUCTION. CONSUMPTION. LABOUR. NECESSARIES. 
 
 In addition, perhaps, some consumption of alcohol and 
 tobacco, and some indulgence in fashionable dress are in 
 many places so habitual, that they may be said to be 
 conventionally necessary, since in order to obtain them the 
 average man and woman will sacrifice some things which are 
 necessary for efficiency. Their wages are therefore less than 
 are practically necessary for efficiency, unless they provide 
 not only for what is strictly necessary consumption, but 
 include also a certain amount of conventional necessaries 1 . 
 
 The consumption of conventional necessaries by produc- 
 tive workers is commonly classed as productive consumption ; 
 but strictly speaking it ought not to be ; and in critical 
 passages a special interpretation clause should be added to 
 say whether or not they are included 
 
 It should however be noticed that many things which 
 are rightly described as superfluous luxuries, do yet, to some 
 extent, take the place of necessaries; and to that extent 
 their consumption is productive when they are consumed 
 by producers 2 . 
 
 1 Compare the distinction between "Physical and Political Necessaries" in 
 Sir James Steuart's Inquiry, II. xxi. 
 
 2 Thus a dish of green peas in March, costing perhaps ten shillings, is a 
 superfluous luxury : but yet it is wholesome food, and does the work perhaps of 
 three pennyworth of cabbage; or even, since variety undoubtedly conduces to 
 health, a little more than that. So it may be entered perhaps at the value of 
 fourpence under the head of necessaries, and at that of nine shillings and 
 eightpence under that of superfluities ; and its consumption may be regarded as 
 strictly productive to the extent of one-fortieth. In exceptional cases, as for 
 instance when the peas are given to an invalid, the whole ten shillings may be 
 well spent, and reproduce their own value. 
 
 For the sake of giving definiteness to the ideas it may be well to venture on 
 estimates of necessaries, rough and random as they must be. Perhaps at present 
 prices the strict necessaries for an average agricultural family are covered by 
 fifteen or eighteen shillings a week, the conventional necessaries by about five 
 shillings more. For the unskilled labourer in the town a few shillings must be 
 added to the strict necessaries. For the family of the skilled workman living 
 in a town we may take twenty-five or thirty shillings for strict necessaries, and 
 ten shillings for conventional necessaries. For a man whose brain has to undei-go 
 great continuous strain the strict necessaries are perhaps two hundred or two 
 hundred and fifty pounds a year if he is a bachelor: but more than twice as 
 much if he has an expensive family to educate. His conventional necessaries 
 depend on the nature of his calling. 
 
CHAPTER IV. 
 
 I/ 
 CAPITAL. INCOME. 
 
 5 1. IT is customary to divide wealth into that which is BOOK n. 
 
 . . CH. IV. 
 
 capital and that which is not. But there are many different - 
 purposes for which the division is wanted ; and in conse- 
 quence the term Capital has many different uses both in the 
 
 language of the market-place and in the writings of We may 
 
 _ . . not venture 
 
 economists. In fact there is no other part of economics in to invent a 
 which the temptation is so strong to invent a completely termfor 
 new set of technical terms; each of which should have a^ of 
 precise and fixed meaning, while between them they should 
 cover all the various significations which are given to the 
 one term Capital in the language of the market-place. But 
 this would throw the science out of touch with real life ; and 
 formal precision would be obtained at too great a cost. We 
 must then first seek for the central notions that underlie all 
 these various uses, and consider generally their relations 
 to one another ; and afterwards must follow the practice of 
 ordinary life in allowing ourselves some elasticity in the use 
 of the term, but taking care always to say explicitly how we 
 are using it whenever there is room for doubt. 
 
 In almost every use, the conception of capital involves Produc- 
 two fundamental attributes, that of " productiveness," and anl'pro- 
 that of " prospectiveness " or the subordination of present 
 desires to fuTure" fefloiiiehts : and these two attributes have 
 
 much in common. For, as we saw in the last chapter, that 
 labour is commonly said to be employed productively which 
 provides for wants of the future rather than the present. 
 
142 CAPITAL. INCOME. 
 
 BOOK ii. Similarly with regard to wealth : that also is commonly said 
 CH - IV ' to be employed productively, when it is devoted to providing 
 for the future rather than the present. And further these 
 two fundamental notions supplement one another, ranging 
 themselves one on either side of the problem of interest ; 
 that is, of the value of the command over ready capital. 
 This point can be touched but lightly now, for indeed to 
 touch it at all is to anticipate : but without some reference 
 to it, no true notion can be had of the inner relations of 
 the fundamental attributes . of capital. 
 
 control the The chief demand for capital arises from its productiveness, 
 
 for^t and from the services which it renders, for instance, in enabling 
 
 ont SUPply wo l t be spun and woven more easily than by unaided 
 
 hand, or in causing water to flow freely wherever it is 
 
 wanted instead of being carried laboriously in pails ; (though 
 
 there are other uses of capital, as for instance when it 
 
 is lent to a spendthrift, which cannot easily be brought 
 
 under this head). And on the other hand the supply of 
 
 capital is controlled by the fact that in order to accumulate 
 
 it, men must act prospectively : they must "wait" and 
 
 " save," they must sacrifice the present to the future. And, 
 
 as we shall see, the exchange value of the services rendered 
 
 by capital is governed in the long run by the pressure of the 
 
 eagerness of demand against the sluggishness of supply 1 . 
 
 Differences 2. The task of finding a good definition of capital is 
 
 capital however not so easy as would appear from the fact that 
 
 these two attributes of productiveness and prospectiveness 
 
 1 The connection of the productiveness of capital with the demand for it, and 
 of its prospectiveness with the supply of it has long been latent in men's minds, 
 though much overlaid by other considerations, many of which appear now to be 
 based on misconceptions. Some writers have laid more stress on the supply side 
 and others on the demand side: but the difference between them has often been 
 little more than a difference of emphasis. Those who have laid stress on the 
 productivity of capital, have not been ignorant of man's unwillingness to save and 
 sacrifice the present for the future. And on the other hand, those who have given 
 their thought mainly to the nature and extent of the sacrifice involved in this 
 postponement, have regarded as obvious such facts as that a store of the imple- 
 ments of production gives mankind a largely increased power of satisfying their 
 wants. In short there is no reason to believe that the accounts which Prof. Bb'hm- 
 Bawerk has given of the " naive productivity theories," the "use theories " &c. of 
 capital and interest would have been accepted by the older writers themselves as 
 well-balanced and complete presentations of their several positions. 
 
CAPITAL AND INCOME CORRELATIVE TERMS. 143 
 
 belong to it in all its various uses. For they belong also in BOOK n. 
 
 some degree to every form of accumulated wealth. They c ^_^- 
 both belong for instance to cooking utensils and to clothes ; 
 
 and yet when these things are being used by their owners mainly 
 
 p A. -.L i i differences 
 
 tor their own purposes, they are counted as capital only of degree. 
 by those who draw no distinction between wealth and 
 capital. To make any consistent distinction betweem them, 
 we must emphasize differences of degree. Similar differences 
 of degree will be found in the various uses of the term 
 Income; and this suggests a solution of our difficulty. 
 
 For Adam Smith said that a person's capital is that 
 part of his stock from which he expects to derive an income ; Capital 
 and in fact each use of the term capital has corresponded income. 
 more or less closely to one of the uses of the term Income. 
 The significations of the two terms have varied in breadth 
 together : in almost every use, capital has been that part of 
 a man's stock from which he expects to derive an income. 
 
 In ordinary life capital is commonly regarded from the 
 point of view of the individual ; and economists are much 
 bound by the customs of the market-place in their uses of 
 the term Individual capital. But they have a freer hand 
 in dealing witlT^ocm^ca^Ya/, that is capital regarded from 
 the point of view of the nation, or the world, or indeed any 
 social group 1 . We will begin with the former and work up 
 to the latter ; having regard throughout to the relativity of 
 capital and income. 
 
 3. In a primitive community no distinction is made income in 
 between capital and other forms of wealth : each family is use. 
 nearly self-sufficing, and provides most oj its own food and 
 clothing and even household furniture. Only a very small 
 part of the income, or comings in, of the family are in the 
 form of money ; when one thinks of their income at all one 
 reckons in the benefits which they get from their cooking 
 utensils just as much as those which they get from their 
 plough : one draws no distinction between their capital and 
 the rest of their accumulated stock, to which the cooking 
 utensils and plough alike belong 2 . 
 
 1 Compare the discussion of individual and social wealth in Chapter u. 
 
 8 This and similar facts have led some people to suppose not only that some 
 
144 
 
 CAPITAL. INCOME. 
 
 BOOK II, 
 CH. IV. 
 
 Corre- 
 sponding 
 to money- 
 income, 
 
 we have 
 
 trade 
 
 capital. 
 
 Its most 
 con- 
 spicuous 
 elements. 
 
 But with the growth of a money economy there has been 
 a strong tendency to confine the notion of income to those 
 comings in which are in the form of money; or else like 
 the free use of a house, the free coals, gas, water of some 
 employes take the place of things on which most people 
 spend a part of their money income. 
 
 In harmony with this meaning of Income, the language of 
 the market-place commonly regards a man's capital as that 
 part of his wealth which he devotes to acquiring an income 
 in the form of money ; or, more generally, to acquisition 
 (Erwerbung) by means of trade. It may be convenient 
 sometimes to speak of this as his Trade capital ; which 
 may be defined to consist of those external goods which a 
 person uses in his trade, either holding them to be sold for 
 money or applying them to produce things that are to be 
 sold for money. Among its conspicuous elements are such 
 things as the factory and the business plant of a manu- 
 facturer ; that is, his machinery, his raw material, any food, 
 clothing, and house-room that he may hold for the use of his 
 employes, and the goodwill of his business 1 . 
 
 To the things in his possession must be added those to 
 which he has a right and from which he is drawing income : 
 including loans which he has made on mortgage or in other 
 ways, and all the command over capital which he may hold 
 under the complex forms of the modern "money market." 
 On the other hand debts owed by him must be deducted 
 from his capital 2 . 
 
 parts of the modern analysis of distribution and exchange are inapplicable to a 
 primitive community ; wlfich is true : but also that there are no important parts 
 of it that are applicable; which is not true. This is a striking instance of the 
 dangers that arise from allowing ourselves to become the servants of words, 
 avoiding the hard work that is required for discovering unity of substance under- 
 lying variety of form. 
 
 1 Under this head are to be reckoned fancy ball dresses that are let out for 
 hire, but not the house in which a frugal working man lives if he happens to own 
 it himself ; ices in the hands of a pastry-cook, but not the store of wheat for his 
 own use which a man has grown on his allotment ; and not even the sewing- 
 machine with which his wife makes clothes for the family. M. Gide has used the 
 term Lucrative capital to denote that part of Trade capital which " does not 
 really serve to produce new wealth; but merely yields an income to its owner." 
 
 2 When we come to discuss the intricacies of the modern money market we 
 shall have to consider the limitations under which coined money, bank notes, bank 
 
TRADE CAPITAL. 145 
 
 4. The dominant use of the term Capital for ordinary BOOK n. 
 purposes is undoubtedly that to which the name of Trade CH ' n ' 
 capital has been given : and we may look at the causes which J h (f a U it al 
 have given it this prestige, in spite of its disadvantages. has great 
 
 T -ii prestige 
 
 Its disadvantages are indeed great and obvious. For in spite of 
 instance it compels us to regard as capital the yachts, but ^ages. 
 not the carriage, belonging to a yacht builder. If therefore 
 he had been hiring a carriage by the year, and instead 
 of continuing to do so, sold a yacht to a carriage builder 
 who had been hiring it, and bought a carriage for his own 
 use ; the result would be that the total stock of capital in the 
 country would be diminished by a yacht and a carriage. And 
 this, though nothing had been destroyed ; and though there 
 remained the same products of saving, themselves pro- 
 ductive of as great benefits to the individuals concerned and 
 to the community as before, and probably even of greater 
 benefits. 
 
 Nor can we avail ourselves here of the notion that capital Trade 
 is distinguished from other forms of wealth by its superior the'oniy Ot 
 power of giving employment to labour. For in fact, when JjJJJJjf 
 yachts and carriages are in the hands of dealers and are thus ^ hich 
 counted as capital, less employment is given to labour by a ployment 
 given amount of yachting or carnage driving than when the to 
 yachts and carriages are in private hands and are not counted 
 as capital 1 . 
 
 But such facts as these are often overlooked ; and here lies 
 a part of the explanation of the prestige of this use of the 
 term Capital. 
 
 Again, the relations between private employers and their But it does 
 employed seldom enter into the strategical and tactical 
 movements of the conflicts between employers and employed; 
 
 Market 
 
 deposits, bank credit accounts, &c. may properly be regarded as capital, firstly 
 from the point of view of the individual, and secondly from that of the com- 
 munity. 
 
 1 The employment of labour would not be increased but lessened by the 
 substitution of professional cookshops and bakeries (where all the appliances are 
 reckoned as capital) fer private kitchens (where nothing is reckoned as capital). 
 Under a professional employer, the workers may possibly have more personal 
 freedom : but they almost certainly have less material comfort, and lower wages 
 in proportion to the work they do than under the laxer regime of a private 
 employer. 
 
 M. 10 
 
146 CAPITAL. INCOME. 
 
 BOOK ii. or, as is commonly said, between capital and labour. This 
 CH ' IV " point has been emphasized by Karl Marx and others: who 
 
 and it has have avowedly made the definition of capital turn on 
 a special ... 
 place in it 1 . 
 
 But ^^h 61 "' tn ^ s use ^ capital is prominent in the Money 
 Market as well as in the Labour Market. Loans are indeed 
 made on houses and furniture, on yachts and carriages in 
 private ownership : but they are relatively rare. And Trade 
 capital is habitually connected with loans. No one hesitates 
 to borrow in order to increase the trade capital at his 
 command, when he can see a good opening for its use : and 
 for doing this he can pledge his own trade capital more 
 easily, and more regularly in the ordinary course of business 
 transactions, than he could his furniture or his private 
 carriage. Lastly, a man makes up the accounts of his trade 
 capital carefully; he allows for depreciation as a matter of 
 course : and thus he keeps his stock intact 2 . 
 
 in estimat- 5. When we pass to the social point of view we are 
 
 capital at liberty to neglect many rights of individual ownership, 
 and to lay more exclusive stress on purely economic 
 considerations. But experience shows that there is great 
 difficulty in making good use of this liberty 3 . 
 
 febtfTma Something is indeed clearly gained in matters of detail. 
 
 be neglect- For instance, mortgages and other debts between persons of 
 the same nation (or other social group) can be omitted; 
 since the entries made for them on the creditor and debtor 
 side of the national capital would cancel one another. 
 
 1 Their point of view is, that only that is capital which is a means of production 
 owned by one person (or group of persons) and used to produce things for the 
 benefit of another, generally by means of the hired labour of a third ; in such wise 
 that the first has the opportunity of plundering or exploiting the others. 
 
 2 A man who has been hiring a carriage by the year, can buy it with the 
 produce of the sale of railway stock that yields very much less interest than he 
 has paid as hire. If he lets the annual income accumulate till the carriage is 
 worn out, it will more than suffice to buy him a new one : and thus his total stock 
 
 of capital will have been increased by the change. But there is a chance that 
 he will not do this : whereas, so long as the carriage was owned by the dealer, 
 he provided for replacing it in the ordinary course of his business. 
 
 8 Kodbertus emphasized the distinction between individual rights in capital in 
 a historic-juristic sense (Kapital im historisch-rechtlicken Sinne, Kapital-vermogen, 
 Kapital-besitz) and the social view of pure capital. And this distinction has 
 been developed by Knies, Neumann, Wagner and others. 
 
SOCIAL CAPITAL. 147 
 
 Again, though the balance of usage and convenience is in BOOK n. 
 favour of reckoning rights to land as part of individual c f^J* 
 capital, it is best to put under separate heads those of the Jjj t ^ d 
 nation's resources which were made by men, and those which 
 were not ; and to separate the capital which is the result of 
 labour and saving from those things which nature has given 
 freely 1 . 
 
 But when we try to go further, and to apply clear-cut Opinions 
 principles to the line of demarcation of capital, we meet a the relative 
 great divergence of opinion ; and that divergence is the result, ^ftTchJe? 
 not of accident, but of causes which are not to be removed, attributes. 
 
 For the notion of social capital enters into many veins 
 of economic thought ; and whatever definition a writer takes 
 at starting, he finds that the various elements of which 
 capital is composed differ more or less from one another in 
 the way in which they enter into the different problems with 
 which he has successively to deal ; and he is compelled to 
 supplement his standard definition by an explanation of the 
 bearing of each several element of capital on the point at 
 issue. Thus the divergence at starting turns out to be a less But in spite 
 evil than it seemed. For ultimately there is a general con- divergence, 
 vergence ; and the reader is brought to very much the same 
 conclusion by whatever route he travels ; though it may in- 
 deed require a little trouble to discern the unity in substance, 
 underlying the differences in the words which are used by 
 various schools of economists to express their doctrines. 
 
 For instance, whatever definition of capital be taken, it there is 
 will be found to be true that a general increase of capital agreement 
 augments the demand for labour and raises wages : and 
 whatever definition be taken it is not true that all kinds of 
 capital act with equal force in this direction, or that it is 
 possible to say how great an effect any given increase in the 
 total amount of capital will have in raising wages, without 
 specially inquiring as to the particular form which the 
 increase has taken. This inquiry is the really important 
 part of the work : it has to be made, and it is made by all 
 
 1 This separation is not indeed always very easy. See Book iv. ch. n. ; Book 
 v. ch. vm., ix.; Book vi. ch. x., xi. 
 
 102 
 
148 CAPITAL. INCOME. 
 
 BOOK ii. careful writers in very much the same manner, and it comes 
 CH - IV - to the same result, whatever be the definition of capital with 
 which we have started. 
 
 We may pass quickly in review the leading notions on 
 which various writers have endeavoured to base precise 
 definitions. 
 
 Capital re- g Q jr or some purposes it is important to insist on the 
 
 mainly as notion of prospectiveness, and to regard capital as a store of 
 
 of labour things the result of human efforts and sacrifices, devoted 
 
 and saving. mam j v to securing benefits in the future rather than in the 
 
 present. But those who have tried to take their stand 
 
 definitely on this notion have found themselves on an 
 
 inclined plane : and have not reached a stable resting-place 
 
 till they have included all accumulated wealth as capital 1 . 
 
 1 It may be said that a stone house, which will last many hundred years, is 
 more truly capital than a wooden house, which on the whole gives equal ac- 
 commodation in the present, but lasts only a short time : and that costly but 
 thoroughly efficient machinery, and other plant of the Western World, are more 
 truly capital than the slight and wasteful appliances of poorer and less prospective 
 countries. But this rather helps to elucidate the notion of capital than to define 
 the term. We shall return to this point in Book in. ch. v. and Book iv. ch. vn. 
 
 It may be noted that nearly all the earlier French Economists have followed 
 in the lines laid down by the Physiocrats before Adam Smith wrote, and used the 
 term "capital" very much in the sense in which he and his immediate followers 
 used the word " stock," to include all accumulated wealth (valeurs accumnlees) ; 
 i.e. all the result of the excess of production over consumption. And although in 
 recent years they have shown a decided tendency to use the term in the narrower 
 English sense, there is at the same time a considerable movement on the part of 
 some of the profoundest thinkers in Germany and England in the direction of the 
 older and broader French definition. The Physiocrats were undoubtedly led in 
 this direction by their bias towards mathematical habits of thought ; because it 
 is possible to represent by a clear-cut mathematical formula the elements of past 
 labours that were devoted to providing for the needs of the future, each multiplied 
 by compound interest for the time during which its fruits were in abeyance. 
 This formula has great attractions, but it does not correspond closely to the 
 conditions of real life. For instance it takes no account of the different rates of 
 depreciation of different products of past labour, according as the purposes for 
 which they were originally intended have retained their ground, or have become 
 obsolete. And when corrections of this class are introduced the formula loses its 
 one great merit of simplicity combined with exactness. 
 
 It was probably Hermann's mathematical bias that inclined him to say 
 (Staatswirthschaftliche Untersuchungen, Chs. in. and v.) that capital consists of 
 goods " which are a lasting source of satisfaction that has exchange value." 
 
 Again, Walras (Elements d'Economie Politiqiie, p. 197) defines capital as 
 " every kind of social wealth which is not consumed at all, or is consumed but 
 slowly ; every utility limited in quantity, that survives the first use which is made 
 
VARIOUS DEFINITIONS OF SOCIAL CAPITAL. 149 
 
 7. Accordingly most of the attempts to define capital BOOK n. 
 from a purely economic point of view, whether in England or c f^' 
 other countries, have turned on its productivity : and have c f^^ re ~ 
 regarded social capital as a means for acquisition (Erwerbs- mainly as 
 
 . / . a means of 
 
 kapital), or as a supply of the requisites of production produc- 
 (Productions-mittel-Vorrath). But this general notion has 
 been treated in different ways. 
 
 According to the older English traditions capital consists and firstly 
 of those things which aid or support labour in production ; supporting 
 or, as has been said more recently, it consists of those things 
 
 of it ; in one word, which can be used more than once : a house, a piece of 
 furniture." 
 
 The American Astronomer, Newcomb (Principles of Political Economy, Book 
 ii. ch. v.), defines capital as "wealth desired not for its own sake, but for the sake 
 of the Sustenance {i.e. Consumption- wealth] which it will enable us to produce," 
 and proposes that we should debit a person who lives in a hired house with 
 negative capital to the amount of the value of that house. He thus carries out to 
 its logical conclusion a proposal that has often been made (as for instance by 
 Mr Macleod) with regard to the loan of capital. His plan simplifies the relation 
 in which social capital stands to individual capital ; and it avoids the difficulty, 
 which has been noticed in the text, of having to say that when a boat builder hires 
 his carriage from a carriage builder, who meanwhile hires his yacht from the boat 
 builder, the capital of each would be diminished if each were to buy the thing that 
 he has been hiring. But his plan still fails to exhibit clearly the increased pro- 
 vision for the future which is made when a durable stone house is substituted for 
 a perishable wooden one, which gave for the time equal accommodation. 
 
 The same mathematical bias has led Jevons to a very similar conclusion (see 
 in particular his " Quantitative Notions concerning Capital," and his argument 
 that " Articles in the consumer's hands are capital," in ch. vn. of his Theory of 
 Political Economy). His position is thus admirably described by M. Gide: 
 " Stanley Jevons asserts that stores of food are typical capital, and are its 
 essential and primordial manifestations whence all the other forms have sprung. 
 Indeed his premise is that the true function of capital is to support the worker 
 while waiting for the moment when his labour can give good results. This 
 definition of the function of capital necessarily requires it to exist under the shape 
 of means of subsistence, of advances. Of these, all tools, machines, railways, etc. 
 would be only derivative forms, for their production takes some time, perhaps a 
 considerable period; and hence they must have required a previous amount of 
 advances in the shape of stores of food. It is to this primary form, therefore, 
 that we have always to return." It will be seen that Prof. Bb'hm-Bawerk has 
 mistaken its drift, when he says (Positive Capital, Book i. ch. v.) that " if it were 
 correct every land would be rich in capital in proportion as its wages were high 
 and its means of subsistence cheap." 
 
 Knies defines capital as the existing stock of goods " which is ready to be 
 applied to the satisfaction of demand in the future." And Nicholson says : " The 
 line of thought suggested by Adam Smith and developed by Knies is found to lead 
 to this result: Capital is wealth set aside for the satisfaction directly or indi- 
 rectly of future needs." But the term " set aside " does not seem to give a clue 
 to a solution of the difficulties mentioned in the text. 
 
150 CAPITAL. INCOME. 
 
 without which production could not be carried on with equal 
 
 BOOK II. 
 CH. IV. 
 
 efficiency, but which are not free gifts of nature. From this 
 point of view it has been divided into Consumption capital 
 and Auxiliary capital. 
 
 C on . Consumption capital consists of goods in a form to satisfy 
 
 wants directly; that is, goods which afford a direct sus- 
 tenance to the workers, such as food, clothes, house-room, &c. 
 
 Auxiliary Auxiliary capital is so called because it consists of all 
 the goods that aid labour in production. Under this head 
 come tools, machines, factories, railways, docks, ships, &c. ; 
 and raw materials of all kinds 1 . 
 
 Unfortunately capital regarded from this point of view 
 has often been taken to include all the things which 
 employers directly or indirectly provide in payment for the 
 work of their employees Wage capital or Remuneratory 
 capital, as it is called; but yet not to include any of the 
 things needed for their own support, or that of architects, 
 engineers, and other professional men. To complete this 
 notion of capital we should include the necessaries for 
 efficiency of all classes of workers ; and ought, strictly 
 speaking, to exclude the luxuries of the manual labour 
 classes as well as of other workers. But if it had been 
 pushed to this logical conclusion, it would not have played 
 the prominent part which it did in the discussion of the 
 relations of employers and employed in the first half of the 
 century 2 . 
 
 1 See above, p. 133. 
 
 2 Of course there is a fringe of debateable ground at the margin of each 
 definition. A factory is Auxiliary capital simply ; a weaver's cottage in which he 
 plies his trade is partly Auxiliary and partly Consumption capital. The private 
 dwelling-house of a rich man engaged in business is Consumption capital to the 
 extent of that accommodation which directly contributes to the health and 
 efficiency of himself and his family: but beyond that, it is not capital at all, 
 in the use of the term which we are adopting. 
 
 Held laid stress on the relation between the definition of capital and the 
 practical problems which were then prominent. People were anxious to insist 
 that the welfare of the working classes depended on a provision of the means of 
 employment and sustenance made beforehand: and to emphasize the dangers of 
 attempting to make employment for them artificially under the extravagance of 
 the Protective system and the old Poor-law. (Held's point of view has been 
 developed with great acumen in Mr Cannan's suggestive and interesting Produc- 
 tion and Distribution, 1776 1848: though some of the utterances of the earlier 
 economists seem capable of interpretation quite as obvious as those which 
 
VARIOUS DEFINITIONS OF SOCIAL CAPITAL. 151 
 
 8. In other countries however, and especially in BOOKII. 
 
 Germany and Austria, there has been some tendency to _J _ ' 
 confine capital (from the social point of view) to that which 
 
 English writers have called Auxiliary capital, and which is mainly as a 
 
 i i T means of 
 
 now sometimes called Instrumental capital. It is argued produc- 
 that in order to keep clear the contrast between production aiding but 
 and consumption, nothing which enters directly into con- 
 sumption should be regarded as a means to production. But 
 there appears no good reason why a thing should not be 
 regarded in a twofold capacity, if it be found convenient to 
 do so 1 . 
 
 It is farther argued that those things which render 
 their services to man not directly, but through the part 
 which they play in preparing other things for his use, form a 
 compact class; because their value is derived from that of 
 the things which they help to produce. There is much to be 
 said for having a name for this group. But there is room for 
 doubt whether capital is a good name for it; and also for 
 doubt whether the group is as compact as it appears at first 
 sight 2 . 
 
 Mr Caiman attaches to them, and more consistent with the belief that they were 
 not greatly deficient in common sense.) 
 
 The following are among the chief definitions of capital by Adam Smith's 
 English followers: Ricardo says: "Capital is that part of the wealth of a 
 country which is employed in production and consists of food, clothing, tools, raw 
 materials, machinery, etc. necessary to give effect to labour." Malthus says : 
 "Capital is that portion of the stock of a country which is kept or employed with 
 a view to profit in the production and distribution of wealth." Senior says : 
 " Capital is an article of wealth, the result of human exertion, employed in the 
 production or distribution of wealth." John Stuart Mill says: "What capital 
 does for production, is to afford the shelter, protection, tools and materials which 
 the work requires, and to feed and otherwise maintain the labourers during the 
 process. Whatever things are destined for this use are capital." We shall have 
 to return to this conception of capital in connection with the so-called Wages 
 Fund doctrine. 
 
 1 An argument to this effect is given by Wagner (Grundlegung , Ed. HI. pp. 
 315 6) ; who includes Consumer's capital in his excellent and almost exhaustive 
 discussion of the subject. 
 
 2 Thus we may define instrumental goods so as to include tramways and other 
 things which derive their value from the personal services which they render ; or 
 we may follow the example of the old use of the phrase productive labour, and 
 insist that those things only are properly to be regarded as instrumental goods 
 the work of which is directly embodied in a material product. The former 
 definition brings this use of the term rather close to that discussed in the last 
 section and shares with it the demerit of vagueness. The latter is a little more 
 
152 CAPITAL. INCOME. 
 
 BOOK n. 9. Thus we finally arrive at the conclusion fore- 
 
 CH - IV - shadowed at the beginning of this chapter. There are 
 
 No one several more or less precise definitions of capital, which are 
 
 definition A . 
 
 convenient useful for certain special purposes : and there may be some- 
 pTrposes. thing to be said for inventing separate terms for each of 
 them. But there is no one rigid definition which is univer- 
 sally available. Something must be left for explanation by 
 the context. 
 
 standard Whenever capital is being discussed from the in- 
 individual , dividual point of view, it will be taken in this treatise 
 1 to mean trade capital unless the contrary is explicitly 
 1 s,tated. 
 
 Social But we shall be much occupied in considering the way 
 
 be P defined y in which the three agents of production, land (that is, 
 which &lth na t ura l agents), labour and capital, contribute to producing 
 yields the national income (or the National Dividend, as it will be 
 
 income as 
 
 commonly called later on); and the way in which this is distributed 
 
 stood. between the three agents. 
 
 Now there is a tacit, but thorough agreement among all 
 writers on economics, to treat this income in its broad out- 
 lines only, and not to trouble about petty details So far as 
 scientific considerations go, we should be quite at liberty to 
 count as part of that income all the income of benefit that 
 everyone derives from the use of his own clothes, furniture, 
 &c. If we did that, we should need to count everyone to 
 this extent as a capitalist ; arid to credit him under this head 
 with the share of the total national income which corre- 
 
 definite: but seems to make an artificial distinction where nature has made 
 none, and to be as unsuitable for scientific purposes as the old use of productive 
 labour. 
 
 Prof. Bbhm-Bawerk defines Social capital "as a group of products destined to 
 serve towards further production; or briefly a group of Intermediate products." 
 He formally excludes (Book i. ch. vi.) "dwelling houses and other kinds of 
 buildings such as serve immediately for any purpose of enjoyment or education or 
 culture," and perhaps he would exclude all things that are intermediate to the 
 performance of personal services, as distinguished from material goods ; but if so he 
 must exclude hotels, tramways, passenger ships, trains, &c. ; and perhaps even 
 plant for supplying the electric light for private dwellings; and that would deprive 
 the notion of capital of all practical interest. Further there seems no good ground 
 for excluding the public theatre while including the tramcar, which would not 
 justify the inclusion of mills engaged in making home-spun and excluding 
 those engaged in making lace. 
 
USE OF CAPITAL IN THE PROBLEM OF DISTRIBUTION. 153 
 
 spoiids to the use value of his own goods. But in ordinary BOOK n. 
 life no one ever thinks of doing this 1 . 
 
 It will be found that except in this problem of Distribu- 
 tion it is important practically seldom to define clearly the 
 limits of social capital : and that even in this problem, a 
 precise definition is needed chiefly for the purpose of securing 
 that we do not count in some parts of the true national in- 
 come twice and others not at all. 
 
 The ordinary practice of life, as exemplified in the rules of 
 the income tax commissioners, is governed by the same con- 
 siderations as that of economists in this matter. For the 
 purposes of both, it is expedient to count in everything 
 which is commonly regarded as a means of income and 
 treated in a business fashion ; even though it may happen, 
 like a dwelling-house inhabited by its owner, to yield its 
 income of comfort directly: and this partly because of its 
 intrinsic importance, and partly because the real income 
 accruing from it can easily be separated off and estimated. 
 
 In all discussions of Distribution therefore, in the present 
 treatise, capital (regarded from the social point of view) will 
 be taken to consist of those kinds of wealth (other than the 
 free gifts of nature) which yield income that is generally 
 reckoned as such in common discourse : together with similar 
 things in public ownership, such as government factories. s~ 
 
 Thus it will include all things held for trade purposes, 
 whether machinery, raw material or finished goods ; theatres 
 and hotels, home farms and houses : but not furniture or 
 clothes owned by those who use them. For the former are 
 and the latter are not commonly regarded as yielding income 
 by the world at large, as is shown by the practice of the 
 income tax commissioners. 
 
 It will be found that nearly every broad proposition which 
 is commonly made as to the relations between national 
 or social well-being and national or social capital is true 
 of capital thus defined. 
 
 There remain some minor points to be noticed firstly in 
 relation to Capital, and secondly in relation to Income. 
 
 1 As has been already intimated however the application of mathematical 
 phrases to the problem of Distribution tends towards doing it. 
 
154 CAPITAL. INCOME. 
 
 BOOK ii. 10. We may follow Mill in distinguishing Circulating 
 
 CH.JV. ca pifai "which fulfils the whole of its office in the production 
 
 Circu- j n w hich it is engaged, by a single use," from Fixed capital 
 
 Fixed " which exists in a durable shape and the return to which is 
 
 spread over a period of corresponding duration 1 ." 
 Specialized Sometimes again we have to distinguish certain kinds of 
 capital. ca pit a i as Specialized because having been designed for use in 
 
 one trade they cannot easily be diverted to another. 
 A caution Mill and others have used fixed capital sometimes in the 
 source of sense that we have retained for it, sometimes in the senses 
 nfusion. ^ na ^ we nav e given to specialized and to auxiliary capital. 
 But there is much fixed capital which is not specialized, 
 such as buildings and some kinds of machinery which are 
 adapted to many different trades : while materials of manu- 
 facture and some other kinds of circulating capital are 
 specialized. Again much fixed capital is also consumption 
 capital, as for instance workmen's cottages. 
 
 Personal We have already defined personal wealth to consist firstly 
 
 of those energies, faculties and habits which directly con- 
 tribute to making people industrially efficient, and secondly 
 of their business connections and associations of every kind. 
 All these are productive ; and therefore if they are to be 
 reckoned as wealth at all, they are also to be reckoned as 
 capital. Thus personal wealth and personal capital are 
 convertible ; and it seems best to follow here the same course 
 as in the case of wealth, and for the same reasons. That is, 
 it is best to assume that the term "capital" when taken 
 alone includes none but external goods ; but yet to raise no 
 
 1 Adam Smith's distinction between fixed and circulating capital turned on 
 the question whether the goods " yield a profit without changing masters" or not. 
 Kicardo made it turn on whether they are " of slow consumption or require to be 
 frequently reproduced;" but he truly remarks that this is "a division not essential 
 and hi which the line of demarcation cannot be accurately drawn." Mill's modifi- 
 cation of Ricardo's definitions of these terms is generally accepted by modern 
 economists. 
 
 The notion of the fixedness of capital is like to, and yet different from, the 
 mediaeval notion of capital as the caput or head of a loan. (See Ashley's History, 
 Book ii. ch. vi. ; but also Hewins' review of it in the Economic Review, vol. in. 
 pp. 396 &c.) The caput is a fixed stock of " pure capital," in Prof. Clark's phrase ; 
 for goods may " circulate " through it, as water does through a reservoir that is 
 kept at a constant height. 
 
FIXED AND CIRCULATING CAPITAL. NET INCOME. 155 
 
 objection to an occasional broad use of the term, in which it BOOK n. 
 is explicitly stated to include personal capital. H ' IV ' 
 
 11. If a person is engaged in business, he is sure to 
 have to incur certain outgoings for raw material, the hire 
 of labour &c. And, in that case, his true or Net Income is Net 
 found by deducting from his gross income " the outgoings 
 that belong to its production 1 ." 
 
 Anything which a person does for which he is paid Elements 
 directly or indirectly in money, helps to swell his money 
 income, while no services that he performs for himself are 
 
 appear 
 reckoned as adding to his nominal income, though they may in the form 
 
 3 * ''of money 
 
 be a very important part of his total real income if they are are in some 
 of a kind which people commonly pay for having done for being over- 
 them. Thus a woman who makes her own clothes or a man 
 who digs in his own garden or repairs his own house, is 
 earning income just as would the dressmaker, gardener or 
 carpenter who might be hired to do the work. 
 
 It would be a great convenience if there were two words 
 available : one to represent a person's total income and another 
 his money income, i.e. that part of his total income which 
 comes to him in the form of money. For scientific purposes 
 it would be best that the word income when occurring alone 
 should always mean total real income. But as this plan is 
 inconsistent with general usage we must, whenever there 
 is any danger of misunderstanding, say distinctly whether 
 the term is to be taken in its narrower or its broader 
 use. 
 
 12. In this connection we may introduce a term of Pro- 
 which we shall have to make frequent use hereafter. The 
 need for it arises from the fact that every occupation involves 
 other disadvantages besides the fatigue of the work required 
 in it, and every occupation offers other advantages besides 
 the receipt of money wages. The true reward which an 
 occupation offers to labour has to be calculated by deducting 
 the money value of all its disadvantages from that of all its 
 advantages ; and we may describe this 'true reward as the 
 Net Advantages of the occupation. 
 
 1 See a report of a Committee of the British Association, 1878. 
 
156 CAPITAL. INCOME. 
 
 BOOK n. Another convenient term is the Usance of wealth. It 
 
 CH ' IV ' consists of the benefits which a person derives from the owner- 
 
 Usance of ship of wealth whether he uses it as capital or not. Thus it 
 
 corre- includes the benefits which he gets from the use of his own 
 
 ^Merextot pi ano > equally with those which a piano dealer would win by 
 
 capital. letting out a piano on hire. Thus it includes, as a special 
 
 case, the money income which is derived from capital. This 
 
 income is most easily measured when it takes the form of 
 
 a payment made by a borrower for the use of a loan for, say, 
 
 a year ; it is then expressed as the ratio which that payment 
 
 bears to the loan, and is called Interest. 
 
 This is one of a group of notions of which provisional 
 definitions may conveniently be introduced here. 
 
 Profits, When a man is engaged in business, his Profits for the 
 
 year are the excess of his receipts from his business during 
 the year over his outlay for his business ; the difference be- 
 tween the value of his stock and plant at the end and at the 
 beginning of the year being taken as part of his receipts or 
 , as part of his outlay, according as there has been an increase 
 
 or decrease of value. What remains of his profits after de- 
 ducting interest on his capital at the current rate may be 
 Earnings called his Earnings of Undertaking or Management, 
 ment, The income derived from the ownership of land and other 
 
 and Rent, free gifts of nature is called Rent; the term is commonly 
 stretched, so as to include the income derived from houses 
 and other things the supply of which is limited and cannot 
 quickly be increased ; and we shall need to stretch it yet 
 further. 
 
 Social 13. Social income may be estimated by adding together 
 
 me ' the incomes of the individuals in the society in question, 
 whether it be a nation or any other larger or smaller group 
 of persons. But to reckon it directly is for most purposes 
 simplest and best. Everything that is produced in the course 
 of a year, every service rendered, every fresh utility brought 
 about is a part of the national income. 
 
 Thus it includes the benefit derived from the advice of a 
 physician, the pleasure got from hearing a professional singer, 
 and the enjoyment of all other services which one person 
 may be hired to perform for another. It includes the services 
 
SOCIAL INCOME. 157 
 
 rendered not only by the omnibus driver, but also by the BOOKH. 
 
 coachman who drives a private carriage. It includes the _J _ ' 
 services of the domestic servant who makes or mends or 
 
 cleans a carpet or a dress, as well as the results of the work income 
 
 . . , that are in 
 
 of the upholsterer, the milliner, and the dyer. danger of 
 
 We must however be careful not to count the same thing omitted. 
 twice. If we have counted a carpet at its full value, we have 
 already counted the values of the yarn and the labour that 
 were used in making it; and these must not be counted 
 again. But if the carpet is cleaned by domestic servants or 
 at steam scouring works, the value of the labour spent in 
 cleaning it must be counted in separately ; for otherwise the 
 results of this labour would be altogether omitted from 
 the inventory of those newly-produced commodities and 
 conveniences which constitute the real income of the 
 country. 
 
 Again, suppose a landowner with an annual income of 
 10,000 hires a private secretary at a salary of 500, who 
 hires a servant at wages of 50. It may seem that if the 
 incomes of all these three persons are counted in as part of 
 the net income of the country, some of it will be counted 
 twice over, and some three times. But this is not the case. 
 The landlord transfers to his secretary, in return for his 
 assistance, part of the purchasing power derived from the 
 produce of land: and the secretary again transfers part of 
 this to his servant in return for his assistance. The farm 
 produce the value of which goes as rent to the landlord, the 
 assistance which the landlord derives from the work of the 
 secretary, and that which the secretary derives from the work 
 of the servant are independent parts of the real net income 
 of the country; and therefore the 10,000 and the 500 
 and the 50 which are their money measures, must all be 
 counted in when we are estimating the income of the 
 country 1 . 
 
 14. The money income of a nation gives a measure National 
 
 f - ., , . i Xl ., . income is a 
 
 ot its economic prosperity, which, untrustworthy as it is, better mea- 
 
 1 But if the landlord makes an allowance of 500 a year to his son, that must 
 not be counted as an independent income ; because no services are rendered for it. 
 And it would not be assessed to the income tax. 
 
158 CAPITAL. INCOME. 
 
 BOOK n. is yet in some respects better than that afforded by the 
 CH " IV ' money value of its wealth. 
 
 sure of p or i ncome consists chiefly of commodities in a form to 
 
 give pleasure directly; while the greater part of national wealth 
 consists of the means of production, which are of service to 
 
 wealth. the nation only in so far as they contribute to producing com- 
 modities ready for consumption. And further, though this 
 is a minor point, consumable commodities, being more port- 
 able, have more nearly uniform prices all the world over 
 than the things used in producing them: the prices of an 
 acre of good land in Manitoba and Kent differ more than 
 those of a bushel of wheat in the two places. 
 
 But if we look chiefly at the income of a country we must 
 allow for the depreciation of the sources from which it is 
 derived. More must be deducted from the income derived 
 from a house if it is made of wood, than if it is made of stone ; 
 a stone house counts for more towards the real richness of 
 a country than a wooden house which gives equally good 
 accommodation. Again, a mine which yields for a time a 
 large income, but will be exhausted in a few years, must be 
 counted as equivalent to a field, or a fishery, which yields 
 a much smaller annual income but will yield that income 
 permanently 1 . 
 
 1 All estimates of a nation's richness based on a mere money measure are 
 necessarily misleading, chiefly for the reasons which have been indicated in 
 the chapter on wealth and the present chapter. But since they are frequently 
 made, it may be well to point out that even if we agree for any special purpose 
 to regard the richness of a nation as represented by its money income the 
 question which of two nations is richer than another is still ambiguous. Is the 
 richness of a nation to be measured by the aggregate money income of its inhabi- 
 tants or by their average income ? If the former, India is richer than Holland ; 
 if the latter, Holland is far richer than India. The latter is generally the more 
 important measure for the purposes of the student of social science, the former for 
 those of the diplomatist. If, however, we are considering a nation's power of 
 bearing a long-continued financial strain of war, we may measure its richness 
 roughly by the excess of the sum total of the incomes of its inhabitants over 
 what is required to supply them with the necessaries of life. A rough notion of 
 the economic strength of a nation, for the purpose of comparison with that of 
 others, may be got by multiplying the aggregate income of its inhabitants by their 
 average income. 
 
BOOK III. 
 
 DEMAND OR CONSUMPTION. 
 CHAPTER I. 
 
 INTRODUCTORY. 
 
 1. THE older definitions of economics described it as BOOK m. 
 
 . . CH I 
 
 the science which is concerned with the Production, the __' 
 Distribution, the Exchange, and the Consumption of Wealth. Jjjj ]J la " 
 Later experience has shown that the problems of Distri- which the 
 bution and Exchange are so closely connected, that it is Book 
 doubtful whether anything is to be gained by the attempt the re- 
 
 to keep them separate. There is however a good deal of 
 general reasoning with regard to the relation of Demand Volume. 
 and Supply which is required as a basis for the practical 
 problems of Value, and which acts as an underlying back- 
 bone, giving unity and consistency to the main body of 
 economic reasoning. Its very breadth and generality mark 
 it off from the more concrete problems of Distribution and 
 Exchange to which it is subservient ; and therefore it is put 
 together in a separate Book on "The General Theory of 
 Demand and Supply" which (together with a supplementary 
 discussion of some points of difficulty in the relation of Cost 
 of Production to Value) prepare the way for "Distribution 
 and Exchange, or Value." But first of all come "Demand 
 or Consumption," i.e. the Theory of Wants ; and " Produc- 
 tion or Supply," i.e. the Theory of the Efforts and Sacrifices 
 devoted to the satisfaction of Wants. 
 
1(50 INTRODUCTORY. 
 
 BOOK in. The latter of these two Books corresponds in general 
 CHtI " character to that discussion of Production to which a large 
 place has been given in nearly all English treatises on 
 general economics during the last two generations ; although 
 its relation to the problems of Demand and Supply has not 
 been made sufficiently clear. 
 
 Very little 2. But until recently the subject of Demand or Con- 
 sumption has been somewhat neglected 1 . For important as 
 i g the inquiry novv * turn our resources to the best account, 
 
 the subject ft j s no ^ one which lends itself, so far as the expenditure of 
 
 of Demand . 
 
 or Con- private individuals is concerned, to the methods of economics. 
 
 The common sense of a person who has had a large experience 
 
 of life will give him more guidance in such a matter than he 
 
 can gain from subtle economic analyses ; and until recently 
 
 But several economists said little on the subject, because they really had 
 
 no^to?ng- not mucn * sav ^ na * was not the common property of all 
 
 ing it into sensible people. But recently several causes have combined 
 
 greater . J 
 
 promin- to give the subject a greater prominence in economic dis- 
 cussions. 
 
 The first The first of these is the growing belief that harm was 
 
 done by Ricardo's habit of laying disproportionate stress on 
 the side of cost of production, when analysing the causes that 
 determine exchange value. For although he and his chief 
 followers were aware that the conditions of demand played as 
 important a part as those of supply in determining value, yet 
 they did not express their meaning with sufficient clearness, 
 and they have been misunderstood by all but the most 
 careful readers. 
 
 The second Secondly, the growth of exact habits of thought in eco- 
 nomics is making people more careful to state distinctly the 
 premises on which they reason. This increased care is 
 partly due to the application by some writers of mathe- 
 matical language and mathematical habits of thought. It 
 is indeed doubtful whether much has been gained by the 
 use of complex mathematical formulae. But the application 
 of mathematical habits of thought has been of great service ; 
 
 1 James Mill indeed called a large part of his Elements of Political Economy 
 by the title " Consumption," but it is really occupied almost exclusively with an 
 inquiry into the principles of Taxation. 
 
IMPORTANCE OF THE STUDY OF DEMAND. 161 
 
 for it has led people to refuse to consider a problem until they BOOK m. 
 are quite sure what the problem is ; and to insist on knowing CH ' *' 
 what is, and what is not intended to be assumed, before 
 proceeding further. This has in its turn compelled a more 
 careful analysis of all the leading conceptions of economics, 
 and especially of demand ; for the mere attempt to state 
 clearly how the demand for a thing is to be measured opens 
 up new aspects of the main problems of economics. And 
 though the theory of demand is yet in its infancy, we can 
 already see that it may be possible to collect and arrange 
 statistics of consumption in such a way as to throw light on 
 difficult questions of great importance to public well-being. 
 
 Lastly, the spirit of the age induces a closer attention The third 
 to the question whether our increasing wealth may not be ca 
 made to go further than it does in promoting the general 
 well-being; and this again compels us to examine how far 
 the exchange value of any element of wealth, whether in 
 collective or individual use, represents accurately the addi- 
 tion which it makes to happiness and well-being. 
 
 We will begin this Book with a short study of the We will 
 variety of human wants, considered in their relation to 
 human efforts and activities. For the progressive nature 
 of man is one whole. It is only temporarily and provision- efforts - 
 ally that we can with profit isolate for study the economic 
 side of his life ; and we ought to be careful to take together 
 in one view the whole of that side. There is a special need 
 to insist on this just now, because the reaction against the 
 comparative neglect of the theory of wants by Ricardo and 
 his followers shows signs of being carried to the opposite 
 extreme, and resulting in some neglect of the great truth on 
 which they insisted rightly, though too exclusively, that 
 while wants are the rulers of life among the lower animals, 
 it is to changes in the forms of efforts and activities that 
 we must turn when in search for the keynotes of the history 
 of mankind. 
 
 M. 11 
 
CHAPTER II. 
 
 WANTS IN RELATION TO ACTIVITIES. 
 
 BOOK m. 1. HUMAN wants and desires are countless in number 
 
 CH ' " and very various in kind. The uncivilized man indeed has 
 
 The wants no ^ manv more than the brute animal ; but every step in his 
 
 savage are progress upwards increases the variety of his needs together 
 
 with the variety in his methods of satisfying them. He 
 
 desires not merely larger quantities of the things he has been 
 
 accustomed to consume, but better qualities of those things ; 
 
 he desires a greater choice of things, and things that will 
 
 satisfy new wants growing up in him. 
 
 Thus though the brute and the savage alike have their 
 
 preferences for choice morsels, neither of them cares much 
 
 butcivi- for variety for its own sake. As, however, man rises in 
 
 brings civilization, as his mind becomes developed, and even his 
 
 desire for animal passions begin to associate themselves with mental 
 
 forihfown activities, his wants become rapidly more subtle and more 
 
 sake. various ; and in the minor details of life he begins to desire 
 
 change for the sake of change, long before he has consciously 
 
 escaped from the yoke of custom. The first great step in 
 
 this direction comes with the art of making a fire : gradually 
 
 he gets to accustom himself to many different kinds of food 
 
 and drink cooked in many different ways; and before long 
 
 monotony begins to become irksome to him, and he finds it 
 
 a great hardship when accident compels him to live for a 
 
 long time exclusively on one or two kinds of food. 
 
 Man's As a man's riches increase his food and drink become 
 
 fo^food more various and costly; but his appetite is limited by 
 
 is limited, na ture, and when his expenditure on food is extravagant it 
 
DESIRE FOR DISTINCTION. 163 
 
 is more often to gratify the desires of hospitality and display BOOK m. 
 
 , , -ll i CH. II. 
 
 than to indulge his own senses. _ 
 
 This brings us to remark with Senior that " Strong as is ^Jjf use 
 the desire for variety, it is weak compared with the desire hospitality 
 for distinction : a feeling which if we consider its universality, of social 
 and its constancy, that it affects all men and at all times, 
 
 of social 
 * 
 
 that it comes with us from the cradle and never leaves us craving for 
 
 distinction; 
 
 till we go into the grave, may be pronounced to be the most 
 powerful of human passions." This great half-truth is well 
 illustrated by a comparison of the desire for choice and 
 various food with that for choice and various dress. 
 
 2. That need for dress which is the result of natural it is a 
 causes varies with the climate and the season of year, and a source of 
 
 little with the nature of a person's occupations. But in dress 
 conventional wants overshadow those which are natural. dress - 
 Thus in many of the earlier stages of civilization the sump- 
 tuary mandates of Law and Custom have rigidly prescribed 
 to the members of each caste or industrial grade, the style 
 and the standard of expense up to which their dress must 
 reach and beyond which they may not go ; and part of the 
 substance of these mandates remains now, though subject to 
 rapid change. In Scotland, for instance, in Adam Smith's 
 time many persons were allowed by custom to go abroad 
 without shoes and stockings who may not do so now ; and 
 many may still do it in Scotland who might not in England. 
 Again, in England now a well-to-do labourer is expected to 
 appear on Sunday in a black coat and, in some places, in a 
 silk hat ; though these would have subjected him to ridicule 
 but a short time ago. In all the lower ranks of life there is 
 a constant increase both in that variety and expensiveness 
 which custom requires as a minimum, and in that which it 
 tolerates as a maximum; and the efforts to obtain distinc- 
 tion by dress are extending themselves throughout the lower 
 grades of English society. 
 
 But in the upper grades, though the dress of women is 
 still various and costly, that of men is simple and inexpensive 
 as compared with what it was in Europe not long ago, and is 
 to-day in the East. For those men who are most truly 
 distinguished on their own account, have a natural dislike to 
 
 112 
 
164 
 
 WANTS IN RELATION TO ACTIVITIES. 
 
 BOOK m. seem to claim attention by their dress; and they have set 
 
 !_' the fashion 1 . 
 
 Abundant p 3 House room satisfies the imperative need for shelter 
 
 house o 
 
 room is f rom the weather : but that need plays very little part in the 
 
 tessfor the effective demand for house room. For though a small but 
 
 direct* well-built cabin gives excellent shelter, its stifling atmosphere, 
 
 enjoyment, -^ necessar y uncleanliness, and its want of the decencies and 
 
 the quiet of life are great evils. It is not so much that they 
 
 cause physical discomfort as that they tend to stunt the 
 
 faculties, and limit people's higher activities. With every 
 
 increase in these activities the demand for larger house room 
 
 becomes more urgent a . 
 
 than as a And therefore relatively large and well-appointed house 
 towards room is, even in the lowest social ranks, at once a " necessary 
 au^asT f r efficiency 3 ," and the most convenient and obvious way of 
 ma . rk . f . advancing a material claim to social distinction. And even 
 
 distinction. & 
 
 in those grades in which everyone has house room sufficient 
 for the higher activities of himself and his family, a yet 
 further and almost unlimited increase is desired as a requisite 
 for the exercise of many of the higher social activities. 
 
 4. It is again the desire for the exercise and develop- 
 ment of activities, spreading through every rank of society, 
 which leads not only to the pursuit of science, literature and 
 activities. ar t f or their own sake, but to the rapidly increasing demand 
 for the work of those who pursue them as professions. 
 Leisure is used less and less as an opportunity for mere 
 
 Wants 
 
 resulting 
 
 from 
 
 scientific 
 
 aesthetic 
 
 1 A woman may display wealth, but she may not display only her wealth, by 
 her dress; or else she defeats her ends. She must also suggest some distinction 
 of character as well as of wealth : for though her dress may owe more to her dress- 
 maker than to herself, yet there is a traditional assumption that, being less busy 
 than man with external affairs, she can give more time to taking thought as to her 
 dress. Even under the sway of modern fashions, to be "well dressed" not 
 "expensively dressed" is a reasonable minor aim for those who desire to be 
 distinguished for their faculties and abilities ; and this will be still more the case 
 if the evil dominion of the wanton vagaries of fashion should pass away. For 
 to arrange costumes beautiful in themselves, various and well-adapted to their 
 purposes, is an object worthy of high endeavour ; it belongs to the same class, 
 though not to the same rank in that class, as the painting of a good picture. 
 
 2 It is true that many active minded working men prefer cramped lodgings in 
 a town to a roomy cottage in the country ; but that is because they have a strong 
 taste for those activities for which a country life offers little scope. 
 
 8 See Book II. ch. m. 6 3. 
 
DESIRE FOR EXCELLENCE FOR ITS OWN SAKE. 165 
 
 stagnation ; and there is a growing desire for those amuse- BOOK m. 
 raents, such as athletic games and travelling, which develop CH ' n ' 
 activities, rather than indulge any sensuous craving 1 . for Save? 
 
 For indeed the desire for excellence for its own sake, is Gradations 
 almost as wide in its range as the lower desire for distinction, desire f or 
 As that graduates down from the ambition of those who may excellence - 
 hope that their names will be in men's mouths in distant 
 lands and in distant times, to the hope of the country lass 
 that the new ribbon she puts on for Easter may not pass 
 unnoticed by her neighbours ; so the desire for excellence for 
 its own sake graduates down from that of a Newton, or a 
 Stradivarius, to that of the fisherman who, even when no one 
 is looking and he is not in a hurry, delights in handling his 
 craft well, and in the fact that she is well built and responds 
 promptly to his guidance. Desires of this kind exert a 
 great influence on the supply of the highest faculties and 
 the greatest inventions ; and they are riot unimportant on 
 the side of demand. For a large part of the demand for 
 the most highly skilled professional services and the best 
 work of the mechanical artisan, arises from the delight that 
 people have in the training of their own faculties, and in 
 exercising them by aid of the most delicately adjusted and 
 responsive implements. 
 
 Speaking broadly therefore, although it is man's wants in a 
 in the earliest stages of his development that give rise to state new 
 his activities, yet afterwards each new step upwards is to be 
 regarded rather as the development of new activities giving 
 rise to new wants, than that of new wants giving rise to wants, 
 new activities. 
 
 We see this clearly if we look away from healthy con- bu * n t 
 ditions of life, where new activities are constantly being 
 developed ; and watch the West Indian negro, using his new 
 freedom and wealth not to get the means of satisfying new 
 wants, but in idle stagnation that is not rest ; or again look unhealthy 
 at that rapidly lessening part of the English working classes, 
 
 1 As a minor point it may be noticed that those drinks which stimulate the 
 mental activities are largely displacing those which merely gratify the senses. 
 The consumption of tea is increasing very fast while that of alcohol is stationary ; 
 and there is in all ranks of society a diminishing demand for the grosser and more 
 immediately stupefying forms of alcohol. 
 
166 WANTS IN RELATION TO ACTIVITIES. 
 
 BOOK m. who have no ambition and no pride or delight in the growth 
 CH> "' of their faculties and activities, and spend on drink whatever 
 surplus their wages afford over the bare necessaries of a 
 squalid life. 
 
 Ti^ It is not true therefore that "the Theory of Consumption 
 
 theory of j g ^e scientific basis of economics 1 ." For much that is of 
 
 >\ Hlllo Call __ L _ __ 
 
 claim no chief interest in the science of wants, is borrowed from the 
 over the science of efforts and activities. These two supplement 
 efforts. one another; either is incomplete without the other. JBujt 
 if either, more than the other, may claim to be the inter- 
 preter of the history of man, whether on the economic side 
 or any other, it is the science of activities and not that of 
 wants; and MCulloch indicated their true relations when, 
 discussing "the Progressive Nature of Man 2 /' he said: "The 
 gratification of a want or a desire is merely a step to some 
 new pursuit. In every stage of his progress he is destined 
 to contrive and invent, to engage in new undertakings ; 
 and, when these are accomplished to enter with fresh energy 
 upon others." 
 
 From this it follows that such a discussion of demand 
 
 as is possible at this stage of our work, must be confined 
 
 i to an elementary analysis of an almost purely formal kind. 
 
 ^^ The higher study of consumption must come after, and not 
 
 before, the main body of economic analysis; and, though 
 
 it may have its beginning within the proper domain of 
 
 economics, it cannot find its conclusions there, but must 
 
 extend far beyond 3 . 
 
 /* This doctrine is laid down by Banfield, and adopted by Jevons as the key of 
 his position. It is unfortunate that here as elsewhere Jevons' delight in stating 
 his case strongly has led him to a conclusion, which not only is inaccurate, 
 but does mischief by implying that the older economists were more at fault 
 than they really were. Banfield says " the first proposition of the theory of con- 
 sumption is that the satisfaction of every lower want in the scale creates a desire 
 of a higher character." And if this were true, the above doctrine, which he bases 
 on it, would be true also. But, as Jevons points out (Theory, 2nd Ed. p. 59), it is 
 not true : and he substitutes for it the statement that the satisfaction of a lower 
 want permits a higher want to manifest itself. That is a true and indeed an 
 identical proposition : but it affords no support to the claims of the Theory of Con- 
 sumption to supremacy. 
 
 2 Political Economy, ch. n. 
 
 3 The formal classification of Wants is a task not without interest ; but it is 
 not needed for our purposes. The basis of most modern work in this direction 
 is to be found in Hermann's StaatsicirtJischaftlicke Untersuchungen, Ch. n., where 
 
NEW ACTIVITIES GIVE RISE TO NEW WANTS. 167 
 
 he classified wants as " absolute and relative, higher and lower, urgent and capable BOOK in. 
 of postponement, positive and negative, direct and indirect, general and particular, CH. n. 
 constant and interrupted, pei'manent and temporary, ordinary and extraordinary, 
 present and future, individual and collective, private and public." 
 
 Some analysis of wants and desires is to be found in the great majority of 
 French and other Continental treatises on economics even of the last generation : 
 but the rigid boundaries which English writers have ascribed to their science, 
 has excluded such discussions. And it is a characteristic fact that there is no 
 allusion to them in Bentham's Manual of Political Economy, although his profound 
 analysis of them in the Principles of Morals and Legislation and in the Table of 
 the Springs of Human Action has exercised a wide-spread influence. Hermann 
 had studied Bentham; and on the other hand Banfield, whose lectures were 
 perhaps the first ever given in an English University that owed' much directly to 
 German economic thought, acknowledges special obligations to Hermann. In 
 England the way was prepared for Jevons' excellent work on the Theory 
 of Wants, by Bentham himself ; by Senior, whose short remarks on the subject 
 are pregnant with far-reaching hints, by Banfield, and by the Australian Hearn. 
 Hearn's Plutology or Theory of the Efforts to satisfy Human Wants is at once 
 simple and profound: it affords an admirable example of the way in which 
 detailed analysis may be applied to afford a training of a very high order for the 
 young, and to give them an intelligent acquaintance with the economic conditions 
 of life, without forcing upon them any particular solution of those more difficult 
 problems on which they are not yet able to form an independent judgment. And 
 at about the same time as Jevons' Theory appeared, Prof. Carl Menger initiated the 
 subtle and interesting studies of Wants and Utilities by the Austrian school of 
 economists. 
 
CHAPTER III. 
 
 THE LAW OF DEMAND. 
 
 BOOK m. 1. WE have seen that each several want is limited, 
 c !!l!l 1 ' and that with every increase in the amount of a thing which 
 a man ^ as> ^ e eagerness of his desire to obtain more of it 
 
 Wants or diminishes ; until it yields place to the desire for some other 
 
 ing utility, thing, of which perhaps he hardly thought, so long as his 
 more urgent wants were still unsatisfied. (There is an endless 
 variety of wants, but there is a limit to each separate want) 
 This familiar and fundamental law of human nature may 
 pass by the name of the Law of Satiable Wants or the Law 
 of Diminishing Utility. 
 
 It may be written thus : 
 
 Total The Total Utility of a commodity to a person (that is, 
 
 the total benefit or satisfaction yielded to him by it) increases 
 with every increment in his stock of it, but not as fast as 
 his stock increases. If his stock of it increases at a uniform 
 rate the benefit derived from it increases at a diminishiDg 
 rate. 
 
 In other words, the additional benefit which a person 
 derives from a given increment of his stock of anything, 
 diminishes with every increase in the stock that he already 
 has. 
 
 The increment of the commodity which he is only just 
 induced to acquire (whether by his direct labour or by 
 
 Marginal purchase) may be called its Marginal Increment ; because he 
 mt ' is on the margin of doubt whether it is worth his while to 
 incur the outlay required to obtain it. And the benefit- 
 giving power, or Utility, of that increment to him may be 
 called the Marginal Utility of the commodity to him. It 
 
THE LAW OF DIMINISHING UTILITY. 169 
 
 is the marginal increment of the total utility of his whole BOOK m. 
 stock of the commodity. And thus the law may be worded: flll 1 ' 
 
 The marginal utility of a commodity to anyone dimin- 
 ishes with every increase in the amount of it he already has 1 . 
 
 There is however an implicit condition in this law which it is im- 
 should be made 'clear. It is that we do not suppose time to the con- 
 t be allowed for any alteration in the character or tastes of the character 
 
 man himself. It is therefore no exception to the law that 
 the more good music a man hears, the stronger is his taste 
 or it likely to become ; that avarice and ambition are often 
 satiable ; or that the virtue of cleanliness and the vice of 
 runkenness alike grow on what they feed upon. For in 
 ch cases our observations range over some period of time ; 
 d the man is not the same at the beginning as at the end of 
 If we take a man as he is, without allowing time for any 
 ange in his character, the marginal utility of a thing to him 
 iminishes steadily with every increase in his supply of it 2 . 
 
 2. Now let us translate this law of diminishing" Transla- 
 
 .,. 1-1, tionof the 
 
 utility into terms of price. Let us take an illustration from law into 
 the case of a commodity such as tea, which is in constant 68 J 
 demand and which can be purchased in small quantities. 
 Suppose, for instance, that tea of a certain quality is to be 
 
 1 See Note I. in the Mathematical Appendix at the end of the Volume. This 
 law holds a priority of position to the Laic of Diminishing Return from land; 
 which however has the priority in time ; since it was the first to be subjected to a 
 rigid analysis of a semi-mathematical character. And if by anticipation we borrow 
 some of its terms, we may say that the Return of pleasure which a person gets 
 from each additional Dose of a commodity diminishes till at last a Margin is 
 reached at which it is no longer worth his while to acquire any more of it. 
 
 2 It may be noticed here, though the fact is of but little practical importance, 
 that a small quantity of a commodity may be insufficient to meet a certain special 
 want ; and then there will be a more than proportionate increase of pleasure when 
 the consumer gets enough of it to enable him to attain the desired end. Thus, 
 for instance, anyone would derive less pleasure in proportion from ten pieces of 
 wall paper than from twelve, if the latter would, and the former would not, cover 
 the whole of the walls of his room. Or again a very short concert or a holiday 
 may fail of its purpose of soothing and recreating: and one of double length 
 might be of more than double total utility. This case corresponds to the fact, 
 which we shall have to study in connection with the law of diminishing return, 
 that the capital and labour already applied to any piece of land may be so in- 
 adequate for the development of its full powers, that some further expenditure on 
 it even with the existing arts of agriculture would give a more than proportionate 
 return; and in the fact that an improvement in the arts of agriculture may 
 suspend the operation of that law, we shall find an analogy to the condition just 
 mentioned in the text as implied in the law of diminishing utility. 
 
170 THE LAW OF DEMAND. 
 
 BOOK in. had at 2s. per Ib. A person might be willing to give 10s. for 
 CH> m> a single pound once a year rather than go without it alto- 
 gether ; while if he could have any amount of it for nothing 
 he would perhaps not care to use more than 30 Ibs. in the 
 year. But as it is, he buys perhaps 10 Ibs. in the year ; that 
 is to say, the difference between the happiness which he gets 
 from buying 9 Ibs. and 10 Ibs. is just enough for him to be 
 willing to pay 2s. for it : while the fact that he does not buy 
 an eleventh pound, shows that he does not think that it 
 v would be quite worth an extra 2s. to him. That is, 2s. a 
 Npound measures the utility to him of the tea which lies at the 
 margin or terminus or end of his purchases ; it measures the 
 marginal utility to him. If the price which he is just willing 
 to pay for any pound be called his Demand Price, then 2s. is 
 *D aT m in< d ki g M&rgwal Demand Price. And our law may be worded : 
 Price. An increase in the amount of a thing that a person has 
 
 will, other things being equal (i.e. the purchasing power of 
 money, and the amount of money at his command being 
 equal) diminish his marginal demand price for it. 
 Account 3. This last sentence reminds us that we have as yet 
 
 taken of taken no account of changes in the marginal utility of 
 changes money, or general purchasing power. At one and the same 
 ma?* ai time, a person's material resources being unchanged, the 
 utility of marginal utility of money to him is a fixed quantity, so that 
 the prices he is just willing to pay for two commodities are 
 to one another in the same ratio as the utility of those two 
 commodities. 
 
 ^ter ^ course a g rea ter utility will be required to induce 
 
 for the him to buy a thing if he is poor than if he is rich. We 
 
 theridi" 1 have seen 1 how a shilling is the measure of less benefit to 
 
 a rich man, than to a poor one; how a rich man in doubt 
 
 whether to spend a shilling on a single cigar, is weighing 
 
 against one another smaller benefits than a poor man, who 
 
 J- is doubting whether to spend a shilling on a supply of 
 
 ^- tobacco that will last him for a month ; and how the clerk 
 
 with 100 a year will walk into business in a heavier rain 
 
 than the clerk with 300 a year. 
 
 1 Above, p. 80. 
 
MARGINAL UTILITY AND DEMAND- PRICE. 171 
 
 But although the utility, or the benefit, that is measured BOOK m. 
 
 in the poorer man's mind by sixpence is greater than _J ' 
 
 that measured by it in the richer man's mind; yet if the 
 richer man rides a hundred times in the year and the poorer 
 man twenty times, then the utility of the hundredth ride 
 which the richer man is only just induced to take is measured 
 to him by sixpence ; and the utility of the twentieth ride 
 which the poorer man is only just induced to take is measured 
 to him by sixpence. For each of them the marginal utility 
 is measured by sixpence ; but this marginal utility is greater 
 in the case of the poorer man than in that of the richer. 
 
 In other words the richer a man becomes, the less 
 marginal utility of money to him ; every increase 
 resources increases the price which he is willing to pay for 
 any given benefit. And in the same way every diminution 
 of his resources increases the marginal utility of money to 
 him, and diminishes the price that he is willing to pay for 
 any benefit 1 . 
 
 4. When then we say that a person's demand for any- A more 
 
 ii ,1,1 -11 i <>, ,1 i definite ex- 
 
 thing increases, we mean that ne will buy more ot it than ne 
 
 r : i 
 
 is the 1 
 in his 
 
 would before at the same price, and that he will buy as much a^and of 
 of it as before at a higher price. To complete our knowledge - 
 of his demand for it, we should have to ascertain how much 
 of it he would be willing to purchase at each of the prices at 
 which it is likely to be offered; and the circumstances of 
 his demand for, say, tea can be best expressed by a list 
 of the prices which he is willing to pay; that is, by his 
 several demand prices for different amounts of it 2 . 
 Thus for instance we may find that he would buy 
 
 6 Ibs. at the price of oOd. per Ib. 
 
 7 40 
 
 8 33 
 
 9 28 
 
 10 24 
 
 11 21 
 
 12 19 
 
 13 18 
 
 1 See Note II. in the Appendix. 
 
 2 This may be called his Demand Schedule. 
 
172 
 
 THE LAW OF DEMAND. 
 
 BOOK III. 
 CH. III. 
 
 If corresponding prices were filled in for all interme- 
 
 diate amounts we should have an exact statement of his 
 
 The mean- demand 1 . 
 
 ing of the 
 
 term an We see then that a person's demand for a thing is inde- 
 
 Increase of , . , . . . -, .-, i t 
 
 Demand, terminate so long as nothing is said as to the price at which 
 the thing is to be had. There is no use in trying to measure 
 his demand as some writers have done merely by the "amount 
 he is willing to buy" or merely by the "intensity of his 
 eagerness to buy a certain amount." Nothing is gained by 
 representing a notion, which is really complex, as though it 
 were simple. Wherever precision is required, we must speak 
 of a person's demand for a thing as represented by the sche- 
 dule of the prices at which he is willing to buy different 
 amounts of it 2 . An increase in his demand for the commodity 
 
 1 Such a demand schedule may be translated, on a plan now coming into 
 familiar use, into a curve that may be called his Demand Curve. Let Ox and Oy 
 be drawn the one horizontally, the other vertically. Let an inch measured along 
 Ox represent 10 Ibs. of tea, and an inch measured along Oy represent 4Qd. 
 
 tenths of fortieths of 
 
 an inch. an inch, 
 
 take 0ij = 6, and draw m } p l = 50 
 
 \ 
 
 
 Pi 
 
 
 \ Fig. (1). 
 
 
 
 Y 
 
 
 
 
 V* 
 
 
 
 
 
 \ 
 
 % 
 
 
 
 
 
 
 
 "S-^ D 
 
 55S5SSSS 
 
 MI being on Ox and m^pi being drawn vertically from m^ ; and so for the others. 
 Then p\p 2 Ps are points on his demand curve for tea ; or as we may say 
 Demand Points. If we could find demand points in the same manner for every 
 possible quantity of tea, we should get the whole continuous curve DD' as shown 
 in the figure. 
 
 This account of the demand schedule and curve is provisional : several 
 difficulties connected with it are deferred to chapter v. 
 
 2 Thus Mill says that we must "mean by the word demand, the quantity 
 demanded, and remember that this is not a fixed quantity, but in general varies 
 according to the value." (Principles, Book in. ch. n. 4.) This account is scientific 
 in substance ; but it is not clearly expressed and it has been much misunderstood. 
 Cairnes prefers to represent "demand as the desire for commodities and services, 
 seeking its end by an offer of general purchasing power, and supply as the 
 desire for general purchasing power, seeking its end by an offer of specific com- 
 modities or services." He does this in order that he may be able to speak of a 
 
TRANSITION TO MARKET DEMAND. 173 
 
 means generally an increase throughout the whole list of prices BOOK m. 
 at which he is willing to purchase different amounts of it, c ^_^ 1 - 
 and not merely that he is willing to buy more of it at the 
 current prices 1 . 
 
 5. So far we have looked at the demand of a single Transition 
 individual. And in the particular case of such a thing as tea, demand of 
 
 the demand of a single person is fairly representative of the >e ons or 
 general demand of a whole market : for the demand for tea market. 
 is a constant one ; and, since it can be purchased in small 
 quantities, every variation in its price is likely to affect the 
 amount which he will buy. But even among those things The de- 
 
 , . , . , * r> i i i mand on 
 
 which are in constant use, there are many tor which the the part of 
 demand on the part of any single individual cannot vary dllaYfoT 1 
 continuously with every small change in price, but can move some 
 only by great leaps. For instance a small fall in the price of is discon- 
 hats or watches will not affect the action of everyone, but 
 it will induce a few persons, who were in doubt whether or 
 not to get a new hat or a new watch, to decide in favour of 
 doing so. 
 
 ratio, or equality, of demand and supply. But the quantities of two desires on 
 the part of two different persons cannot be compared directly ; their measures may 
 be compared, but not they themselves. And in fact Cairnes is himself driven to 
 speak of supply as "limited by the quantity of specific commodities offered for 
 sale, and demand by the quantity of purchasing power offered for their purchase." 
 But sellers have not a fixed quantity of commodities which they offer for sale 
 unconditionally at whatever price they can get : buyers have not a fixed quantity 
 of purchasing power which they are ready to spend on the specific commodities, 
 however much they pay for them. Account must then be taken in either case 
 of the relation between quantity and price, in order to complete Cairnes' account, 
 and when this is done it is brought back to the lines followed by Mill. He 
 says, indeed, that "Demand, as defined by Mill, is to be understood as mea- 
 sured, not, as my definition would require, by the quantity of purchasing power 
 offered in support ef the desire for commodities, but by the quantity of com- 
 modities for which such purchasing power is offered." It is true that there is 
 a great difference between the statements, " I will buy twelve eggs," and "I will 
 buy a shilling's worth of eggs." But there is no substantive difference between 
 the statement, " I will buy twelve eggs at a penny each, but only six at three 
 halfpence each," and the statement, "I will spend a shilling on eggs at a penny 
 each, but if they cost three halfpence each I will spend ninepence on them." But 
 while Cairnes' account when completed becomes substantially the same as Mill's, 
 its present form is even more misleading. (See an article by the present writer on 
 Mill's Theory of Value in the Fortnightly Review for April, 1876.) 
 
 1 We may sometimes find it convenient to speak of this as a raising of his 
 demand schedule. Geometrically it is represented by raising his demand curve, 
 or, what comes to the same thing, moving it to the right, with perhaps some 
 modification of its shape. 
 
174 THE LAW OF DEMAND. 
 
 BOOK HI. And there are many classes of things the need for which 
 ' on the part of any individual is inconstant, fitful, and 
 irregular. There can be no list of individual demand prices 
 for wedding-cakes, or the services of an expert surgeon. 
 
 And indeed the special province of the economist is the 
 study not of particular incidents in the lives of individuals 
 but of general laws relating to " the course of action that 
 may be expected under certain conditions from the mem- 
 bers of an industrial group," in so far as the motives of 
 that action are measurable by a money price; the facts 
 which he collects and applies are chiefly those in which the 
 variety and the fickleness of the individual is merged in the 
 comparatively regular aggregate of the action of a large 
 number of people. 
 But the ag- j n large markets then where rich and poor, old and 
 
 gregate de- 
 
 mandofa young, men and women, persons of all varieties of tastes, 
 perso^ auy temperaments and occupations are mingled together the 
 tmuous n peculiarities in the wants of individuals will compensate 
 show\n le 'a one ano ^ ner m a comparatively regular gradation of 'total 
 
 fall of de- demand. Every fall however slight in the price of a com- 
 mand price m. . 1 i . . 
 
 corre- modity in general use, will, other things being equal, increase 
 ^ ne total sales of it ; just as an unhealthy autumn increases 
 ^ e mortality of a large town, though many persons are 
 
 quantity uninjured by it. And therefore if we had the requisite 
 ' knowledge, we could make a list of prices at which each 
 amount of it could find purchasers in a given place during, 
 say, a year. 
 
 The total demand in the place for, say tea, is the sum of 
 the demands of all the individuals there. Some will be 
 richer and some poorer than the individual consumer whose 
 demand we have just written down ; some will have a 
 greater and others a smaller liking for tea than he has. 
 Let us suppose that there are in the place a million pur- 
 chasers of tea, and that their average consumption is equal 
 to his at each several price. Then the demand of that place 
 is represented by the same list of prices as before, if we write 
 a million pounds of tea instead of one pound 1 . 
 
 1 The demand is represented by the same curve as before, only an inch 
 measured along Ox now represents ten million pounds instead of ten pounds. And 
 
THE DEMAND OF A MARKET. 175 
 
 There is then one Law of Demand, which is common to ,BOOK m. 
 all demands, viz. that the greater the amount to be sold, the CH ' m ' 
 smaller will be the price at which it will find purchasers ; or P^ . 
 in other words, that the amount demanded increases with &\Demand. 
 fall in price, and diminishes with a rise in price. 
 
 There will not be any exact relation between the fall in 
 price and the increase of demand. A fall of one-tenth in the 
 price may increase the sales by a twentieth or by a quarter, 
 or it may double them. But as the numbers in the left- 
 hand column of the demand schedule increase, those in the 
 right-hand column will always diminish 1 . 
 
 The price will measure the marginal utility of the com- 
 modity to each purchaser : but as the purchasers are likely ' 
 to be some rich and others poor, we cannot speak of price as { 
 measuring marginal utility in general, but only with refer- 
 ence to some individual purchaser. 
 
 6. It must be remembered that the demand schedule The in- 
 gives the prices at which various quantities of a thing can <i ernan <i O f 
 be sold in a market during a given time and under given 
 conditions. If the conditions vary in any respect the figures 
 of the schedule will probably require to be changed ; and 
 this has constantly to be done when the desire for anything 
 is materially altered by a variation of custom, or by a 
 cheapening of the supply of a rival commodity, or by the 
 invention of a new one. For instance, the list of demand 
 prices for tea is drawn out on the assumption that the price 
 of coffee is known ; but a failure of the coffee harvest would 
 
 a formal definition of the demand curve for a 
 market may be given thus : The demand curve for 
 any commodity in a market during any given unit of 
 time is the locus of demand points for it. That is to 
 say, it is a curve such that if from any point P on it, 
 a straight line PM be drawn perpendicular to Ox, 
 PM represents the price at which purchasers will be 
 forthcoming for an amount of the commodity repre- 
 sented by OM . 
 
 1 That is, if a point moves along the curve away 
 
 from Oy it will constantly approach Ox. Therefore if a straight line PT be drawn 
 touching the curve at P and meeting Ox in T, the angle PTx is an obtuse angle. 
 It will be found convenient to have a short way of expressing this fact ; which may 
 be done by saying that PT is inclined negatively. Thus the one universal 
 rule to which the demand curve conforms is that it is inclined negatively through- 
 out the whole of its length. 
 
 D 
 
 \ Fig. (2). 
 
 \. 
 
176 
 
 BOOK III. 
 CH. III. 
 
 Other 
 points to 
 be post- 
 poned. 
 
 Relation 
 of the 
 following 
 to the 
 preceding 
 chapter. 
 
 THE LAW OF DEMAND. 
 
 raise the prices throughout the demand schedule for tea. 
 The demand for gas is liable to be reduced by an improve- 
 ment in electric lighting 1 ; and in the same way a fall in the 
 price of a particular kind of tea may cause it to be sub- 
 stituted for an inferior but cheaper variety. 
 
 Again, a commodity may be simultaneously demanded for 
 several uses (for instance there may be a "composite demand" 
 for leather for making shoes and .portmanteaus); the demand 
 for a thing may be conditional on there being a supply of 
 some other thing without which it would not be of much 
 service (thus there may be a "joint demand" for raw cotton 
 and cotton-spinners' labour). Again, the demand for a com- 
 modity on the part of dealers who buy it only with the 
 purpose of selling it again, though governed by the demand 
 of the ultimate consumers in the background, has some 
 peculiarities of its own. But all such points may best be 
 discussed at a later stage. 
 
 Our next step will be to consider the general character of 
 demand in the cases of some important commodities ready 
 for immediate consumption. We shall thus be continuing 
 the inquiry made in the preceding chapter as to the 
 variety and satiability of wants ; but we shall be treating 
 it from a rather different point of view, viz. that of price - 
 statistics 2 . 
 
 1 It is even conceivable, though not probable, that a simultaneous an3 pro- 
 portionate fall in the price of all teas may diminish the demand for some particular 
 kind of it ; if it happens that those whom the increased cheapness of tea leads to 
 substitute a superior kind for it are less numerous than those who are led to take 
 it in the place of an inferior kind. The question where the lines of division 
 between different commodities should be drawn must be settled by the convenience 
 of the particular question under discussion. For some purposes it may be best to 
 regard Chinese and Indian teas, or even Souchong and Pekoe teas, as different 
 commodities ; and to have a separate demand schedule for each of them. While 
 for other purposes it may be best to group together commodities as distinct as 
 beef and mutton, or even as tea and coffee, and to have a single schedule to 
 represent the demand for the two combined ; but in such a case of course some 
 convention must be made as to the number of ounces of tea which are taken as 
 equivalent to a pound of coffee. 
 
 2 A great change in the manner of economic thought has been brought about 
 during the present generation by the general adoption of semi-mathematical 
 language for expressing the relation between small increments of a commodity on 
 the one hand, and on the other hand small increments in the aggregate price that 
 will be paid for it : and by formally describing these small increments of price 
 
THE LAW OF DEMAND. 177 
 
 as measuring corresponding small increments of pleasure. The former, and by BOOK m. 
 far the more important, step was taken by Cournot (Recherckes sur les Principes CH. in. 
 Mathematiques de la Theorie des Richesses, 1838); the latter by Dupuit (De la 
 Mesure d'utilite des travaux publics in the Annales des Fonts et Chaussees, 1844), 
 and by Gossen (Entwickelwtg der Gesetze des menschlichen Verkehrs, 1854). But 
 their work was forgotten; and part of it was done over again and published 
 almost simultaneously by Jevons and by Prof. Carl Menger in 1871. Jevons 
 almost at once arrested public attention by his brilliant lucidity and in- 
 teresting style. He applied the new name Final Utility so ingeniously as 
 to enable people who knew nothing of mathematical science to get clear 
 ideas of the general relations between the small increments of two things that are 
 gradually changing in causal connection with one another. His success was 
 aided even by his faults. For under the honest belief that Eicardo and his 
 followers had rendered their account of the causes that determine value hopelessly 
 wrong by omitting to lay stress on the Law of Satiable Wants, he led many to 
 think he was correcting great errors; whereas he was really only adding very 
 important explanations. He did excellent work in insisting on a fact which is 
 none the less important, because his predecessors, and even Cournot, thought it 
 too obvious to be explicitly mentioned, viz. that the diminution in the amount of 
 a thing demanded in a market indicates a diminution in the intensity of the desire 
 for it on the part of individual consumers, whose wants are becoming satiated. But 
 he has led many of his readers into a confusion between the provinces of Hedonics 
 and Economics, by exaggerating the applications of his favourite phrases, and 
 speaking (Theory, 2nd Edn. p. 105) without qualification of the price of a thing as 
 measuring its final utility not only to an individual, which it can do, but also to 
 " a trading body" which it cannot do. [These points are developed later on in a 
 Note on Ricardo's Theory of cost of production in relation to value at the end of 
 Book V.] 
 
 Dr Carl Menger's Grundsatze der Volksivirthschaftslehre, which, though not 
 making use of mathematical language, is distinctly mathematical in tone, and 
 appears to be in some respects, though not in all, further advanced than Jevons' 
 work, and it is better balanced. A mathematical tone is even more clearly 
 pronounced, though the use of mathematical formulae is still avoided, in the 
 writings of Profs. Bohm-Bawerk, Wieser, and other members of the brilliant 
 Austrian School as well as those of Profs. Clark, Giddings, Patten, Greene and 
 other Americans. Among the many recent writers on mathematical aspects of 
 economics, special reference may be made to Prof. Walras, who was almost as 
 early in the field as Jevons and Menger, to Profs. Pantaleoni, Pareto, Edgeworth, 
 and Wicksteed, to Drs Auspitz, Lieben, Launhardt, and Fisher. 
 
 M. 12 
 
CHAPTER IV. 
 
 LAW OF DEMAND CONTINUED. ELASTICITY OF DEMAND. 
 
 BOOK III. 
 
 CH. rv. 
 
 Definitior 
 of Elasti- 
 city of de 
 
 1. WE have seen that the only universal law as to 
 a person's desire for a commodity is that it diminishes, other 
 things being equal, with every increase in his supply of that 
 commodity. But this diminution may be slow or rapid. If 
 it is slow the price that he will give for the commodity will 
 not fall much in consequence of a considerable increase in 
 his supply of it ; and a small fall in price will cause a com- 
 paratively large increase in his purchases. But if it is rapid, 
 a small fall in price will cause only a very small increase in 
 his purchases. In the former case his willingness to purchase 
 the thing stretches itself out a great deal under the action 
 of a small inducement : the elasticity of his demand, we may 
 say, is great. In the latter case the extra inducement given 
 by the fall in price causes hardly any extension of his desire 
 to purchase : the elasticity of his demand is small. 
 
 And as with the demand of one person so with that of 
 a whole market. The Elasticity of demand in a market is 
 great or small according as the amount demanded increases 
 much or little for a given fall in price, and diminishes much 
 or little for a given rise in price 1 . 
 
 1 Speaking more exactly we may say that the elasticity of demand is one, if a 
 fall of one per cent, in price will make an increase of 
 one per cent, in the amount demanded; that it is 
 two or a half, if a fall of one per cent, in price makes 
 an increase of two or one half per cent, respectively 
 in the amount demanded ; and so on. The elasticity 
 of demand can be best traced in the demand curve 
 with the aid of the following rule. Let a straight 
 line touching the curve at any point P meet Ox in T 
 and Oy in t, then the measure of the elasticity at 
 the point P is the ratio of PT to Pt. 
 
GENERAL LAW OF ELASTICITY OF DEMAND. 179 
 
 2. The price which is so high relatively to the poor BOOK m. 
 man as to be almost prohibitive, may be scarcely felt by the c ^_^' 
 rich ; the poor man for instance never tastes wine, but the ^jf^J 
 very rich man may drink as much of it as he has a fancy variation 
 for, without giving himself a thought of its cost. We shall ticity of 
 therefore get the clearest notion of the law of the elasticity 
 of demand, by considering one class of society at a time. 
 Of course there are many degrees of richness among the 
 rich, and of poverty among the poor; but for the present 
 we may neglect these minor subdivisions. 
 
 When the price of a thing is very high relatively to any 
 class, they will buy but little of it ; and in some cases 
 custom and habit may prevent them from using it freely 
 even after its price has fallen a good deal. It may still 
 remain set apart for a limited number of special occasions, or 
 for use in extreme illness, &c. But such cases, though not 
 infrequent, will not form the general rule, and anyhow as soon 
 as it has been taken into common use, any considerable fall in 
 its price will cause a great increase in the demand for it. 
 The elasticity of demand will be great for high prices, and 
 great, or at least considerable, for medium prices ; but it will 
 decline as the price falls ; and gradually fades away if the fall 
 goes so far that satiety level is reached. 
 
 This rule appears to hold with regard to nearly all com- 
 modities and with regard to the demand of every class ; save 
 only that the level at which high prices end and low 
 prices begin, is different for different classes ; and so again 
 is the level at which low prices end and very low prices 
 begin. There are however many varieties in detail ; arising 
 chiefly from the fact that there are some commodities with 
 which people are easily satiated, and others chiefly things 
 
 If PT were twice Pt, a fall of 1 per cent, in price would cause an increase of 2 
 per cent., in the amount demanded ; the elasticity of demand would be two. If 
 PT were one-third of Pt, a fall of 1 per cent, in price would cause an increase of 3^ 
 per cent, in the amount demanded; the elasticity of demand would be one-third; 
 and so on. Another way of looking at the same result is this : the elasticity at 
 the point P is measured by the ratio of PTto Pt, that is of M T to MO (PM being 
 drawn perpendicular to Om) ; and therefore the elasticity is equal to one when the 
 angle TPM is equal to the angle 0PM ; and it always increases when the angle 
 TPM increases relatively to the angle 0PM, and vice versa. See Note III. in 
 Appendix. 
 
 122 
 
180 
 
 LAW OF DEMAND CONTINUED. ELASTICITY OF DEMAND. 
 
 BOOK III. 
 CH. IV. 
 
 used for display for which their desire is almost unlimited. 
 For the latter the elasticity of demand remains considerable, 
 however low the price may fall, while for the former the 
 demand loses nearly all its elasticity as soon as a low price 
 has once been reached 1 . 
 
 1 Let us illustrate by the case of the demand for, say, green peas in a town iu 
 which all vegetables are 
 bought and sold in one 
 
 Fig. (4). 
 
 Om i = '02 in. M lPl = 1-2 in. 
 
 market. Early in the sea- 
 son perhaps 100 Ib. a day 
 will be brought to market 
 and sold at Is. per Ib., later 
 on 500 Ib. will be bought 
 and sold at Grf., later on 
 1,000 Ib. at 4d., later still 
 5,000 at 2rf., and later still 
 10,000 at l$d. Thus de- 
 mand is represented in fig. 
 (4), an inch along Ox repre- 
 senting 5,000 Ib. and an 
 inch along Oy represent- 
 
 3/2^2 = 
 
 Mtfs'- 
 
 W 4 P4 = 
 
 4 
 2 
 15 
 
 33 i 
 
 ing IQd. Then a curve through Pipy-p*,, found as shown above, will be the total 
 demand curve. But this total demand will be made up of the demands of the rich, 
 the middle class and the poor. The amounts that they will severally demand may 
 perhaps be represented by the following schedules : 
 
 At price in Number of Ibs. bought by 
 
 pence per Ib. rich middle class poor 
 
 12 100 00 
 
 6 300 200 
 
 4 500 400 100 
 
 2 800 2,500 1,700 
 
 1,000 
 
 4,000 
 
 5,000 
 
 total 
 
 100 
 
 500 
 
 1,000 
 
 5,000 
 
 10,000 
 
 Fig. (5). 
 
 f. (6). 
 
 Fig. (7). 
 
 OH * 
 
 These schedules are translated into curves fig. (5), (6), (7), showing the demands 
 of the rich, the middle class and the poor represented on the same scale as fig. (4). 
 Thus for instance AH, BK and CL each of them represents a price of 2d. and 
 is '2 inches in length; OH = '16 in. representing 800 Ib., OK = 'b in. represent- 
 ing 2,500 Ib. and OL = '34 in. representing 1,700 Ibs. while OH+OK+OL = 
 one inch i.e. = 4 in fig. (4) as they should do. This may serve as an example 
 of the way in which several partial demand curves, drawn to the same scale, can 
 
ILLUSTRATIONS. 181 
 
 3. There are some things the current prices of which BOOK m. 
 
 in this country are very low relatively even to the poorer _J * 
 
 classes ; such are for instance salt, and many kinds of savours J| 
 
 and flavours, and also cheap medicines. It is doubtful drawn 
 whether any fall in price would induce a considerable in- demand 
 crease in the consumption of these. t?cu?ar 
 
 The current prices of meat, milk and butter, wool, 
 tobacco, imported fruits, and of ordinary medical attend- 
 ance, are such that every variation in price makes a great 
 change in the consumption of them by the working classes, 
 and the lower half of the middle classes ; but the rich would 
 not much increase their own personal consumption of them 
 however cheaply they were to be had. In other words the 
 direct demand for these commodities is very elastic on the 
 part of the working and lower middle classes, though not on 
 the part of the rich. But the working class is so numerous 
 that their consumption of such things as are well within their 
 reach is much greater than that of the rich ; and therefore 
 the aggregate demand for all things of the kind is very elastic. 
 A little while ago sugar belonged to this group of com- 
 modities : but its price in England has now fallen so far as to 
 be low relatively even to the working classes, and the demand 
 for it is therefore not elastic 1 . 
 
 The current prices of wall-fruit, of the better kinds of fish 
 and other moderately expensive luxuries are such as to make 
 the consumption of them by the middle class increase much 
 with every fall in price ; in other words, the middle class 
 demand for them is very elastic : while the demands on the 
 
 be superimposed horizontally on one another to make the total demand curve 
 representing the aggregate of the partial demands. 
 
 1 We must however remember that the character of the demand schedule for 
 any commodity depends in a great measure on whether the prices of its rivals are 
 taken to be fixed or to alter with it. If we separated the demand for beef from 
 that for mutton, and supposed the price of mutton to be held fixed while that for 
 beef was raised, then the demand for beef would become extremely elastic. For any 
 slight fall in the price of beef would cause it to be used largely in the place of 
 mutton and thus lead to a very great increase of its consumption : while on the 
 other hand even a small rise in price would cause many people to eat mutton 
 to the almost entire exclusion of beef. But the demand schedule for all kinds of 
 fresh meat taken together, their prices being supposed to retain always about the 
 same relation to one another, and to be not very different from those now prevail- 
 ing in England, shows only a modern elasticity. And similar remarks apply to 
 beet root and cane sugar. Compare the first note on p. 176. 
 
182 
 
 LAW OF DEMAND CONTINUED. ELASTICITY OF DEMAND. 
 
 The de- 
 mand for 
 neces- 
 saries. 
 
 BOOK m. part of the rich and on the part of the working class is much 
 CH^IV. j egg e j as ^ Cj t h e former because it is already nearly satiated, 
 the latter because the price is still too high. 
 
 The current prices of such things as rare wines, fruit out 
 of season, highly skilled medical and legal assistance, are so 
 high that there is but little demand for them except from 
 the rich : but what demand there is, often has considerable 
 elasticity. Part of the demand for the more expensive kinds 
 of food is really a demand for the means of obtaining social 
 distinction, and is almost insatiable 1 . 
 
 4. The case of necessaries is exceptional. When the 
 price of wheat is very high, and again when it is very low, 
 the demand has very little elasticity: at all events if we 
 assume that wheat, even when scarce, is the cheapest food 
 for man ; and that, even when most plentiful, it is not con- 
 sumed in any other way. We know that a fall in the price 
 of the quartern loaf from 6d. to 4c. has scarcely any effect in 
 increasing the consumption of bread. With regard to the 
 other end of the scale it is more difficult to speak with cer- 
 tainty, because there has been no approach to a scarcity in 
 England since the repeal of the corn laws. But, availing 
 ourselves of the experience of a less happy time, we may 
 suppose that deficits in the supply of 1, 2, 3, 4, or 5 tenths 
 would cause a rise in price of 3, 8, 16, 28, or 45 tenths 
 respectively 2 . Much greater variations in prices indeed than 
 
 1 See above ch. u. 1. In April 1894, for instance, six plovers' eggs, the first 
 of the season, were sold in London at 10s. 6d. each. The following day there were 
 more, and the price fell to 5s. ; the next day to 3s. each ; and a week later to Id. 
 
 2 This is the famous estimate quoted by Gregory King. Its bearing on the 
 law of demand is admirably discussed by Lord Lauderdale (Inquiry, pp. 51 3). 
 It is represented in fig. (8) by the curve DD', 
 
 the point A corresponding to the ordinary 
 price. If we take account of the fact that . 
 where the price of wheat is very low, it may 
 be used, as it was for instance in 1834, for 
 feeding cattle and sheep and pigs and for 
 brewing and distilling, the lower part of the 
 curve would take a shape somewhat like that 
 of the dotted line in the figure. And if we 
 assume that when the price is very high, 
 cheaper substitutes can be got for it, the 
 upper part of the curve would take a shape 
 similar to that of the upper dotted line. 
 
 Fig. (8). 
 
NECESSARIES AND LUXURIES. 183 
 
 this have not been uncommon. Thus wheat sold in London BOOK m. 
 for ten shillings a bushel in 1335, but in the following year it 
 sold for ten pence. 
 
 There may be even more violent changes than this in 
 the price of a thing which is not necessary, if it is perishable 
 and the demand for it is inelastic: thus fish may be very 
 dear one day, and sold for manure two or three days later. 
 
 Water is one of the few things the consumption of which Commo- 
 we are able to observe at all prices from the very highest part 8 <>f th& 
 down to nothing at all. At moderate prices the demand for tSia o? 1 * 
 it is very elastic. But the uses to which it can be put are which is 
 capable of being completely filled : and as its price sinks 
 towards zero the demand for it loses its elasticity. Nearly 
 the same may be said of salt. Its price in England is so low 
 that the demand for it as an article of food is very inelastic : 
 but in India the price is comparatively high and the demand 
 is comparatively elastic. 
 
 The price of house-room on the other hand has never 
 fallen very low except when a locality is being deserted by 
 its inhabitants. Where the condition of society is healthy, 
 and there is no check to general prosperity, there seems 
 always to be an elastic demand for house-room, on account 
 both of the real conveniences and the social distinction 
 which it affords. The desire for those kinds of clothing 
 which are not used for the purpose of display, is satiable : 
 when their price is low the demand for them has scarcely 
 any elasticity. 
 
 The demand for things of a higher quality depends much influence 
 on sensibility : some people care little for a refined flavour uty'and $- 
 in their wine provided they can get plenty of it : others J-^te^and 
 crave a high quality, but are easily satiated. In the ordinary distastes, 
 working class districts the inferior and the better joints are 
 sold at nearly the same price : but some well-paid artisans 
 in the north of England have developed a liking for the 
 best meat, and will pay for it nearly as high a price as can 
 be got in the west end of London, where the price is kept 
 artificially high by the necessity of sending the inferior 
 joints away for sale elsewhere. Use also gives rise to 
 acquired distastes as well as to acquired tastes. Illustrations 
 
184 LAW OF DEMAND CONTINUED. ELASTICITY OF DEMAND. 
 
 BOOK III. 
 CH. IV. 
 
 which make a book attractive to many readers, will repel those 
 whose familiarity with better work has rendered them fasti- 
 dious. A person of high musical sensibility in a large town 
 will avoid bad concerts : though he might go to them gladly 
 if he lived in a small town, where no good concerts are to be 
 heard, because there are not enough persons willing to pay 
 the high price required to cover their expenses. The effective 
 demand for first-rate music is elastic only in large towns ; for 
 second-rate music it is elastic both in large and small towns, 
 influence Generally speaking those things have the most elastic 
 demand, which are capable of being applied to many different 
 uses. Water for instance is needed first as food, then for 
 cooking, then for washing of various kinds and so on. When 
 there is no special drought, but water is sold by the pailful, 
 the price may be low enough to enable even the poorer 
 classes to drink as much of it as they are inclined, while for 
 cooking they sometimes use the same water twice over, and 
 they apply it very scantily in washing. The middle classes 
 will perhaps not use any of it twice for cooking; but they 
 will make a pail of water go a good deal further for washing 
 purposes than if they had an unlimited supply at command. 
 When water is supplied by pipes, and charged at a very low 
 rate by meter, many people use as much of it even for 
 washing as they feel at all inclined to do; and when the 
 water is supplied not by meter but at a fixed annual charge, 
 and is laid on in every place where it is wanted, the use of it 
 for every purpose is carried to the full satiety limit 1 . 
 
 1 Thus the general demand of any one person for such a thing as water is the 
 aggregate (or Compound, see Book V. Ch. vi. 3) of his demand for it for each 
 use ; in the same way as the demand of a group of people of different orders of 
 wealth for a commodity, which is serviceable in only one use, is the aggregate of 
 the demands of each member of the group. Again, just as the demand of the rich 
 for peas is considerable even at a very high price, but loses all elasticity at a price 
 that is still high relatively to the consumption of the poor ; so the demand of the 
 individual for water to drink is considerable even at a very high price, but loses 
 all elasticity at a price that is still high relatively to his demand for it for the 
 purpose of cleaning up the house. And as the aggregate of a number of demands 
 on the part of different classes of people for peas retains elasticity over a larger 
 range of price than will that of any one individual, so the demand of an individual 
 for water for many uses retains elasticity over a larger range of prices than his 
 demand for it for any one use. Compare an article by Prof. J. B. Clark on A 
 Universal Law of Economic Variation in the Harvard Journal of Economics^ 
 Vol. vin. 
 
ELEMENT OF TIME. 185 
 
 5. So far we have taken no account of the difficulties BOOK m. 
 of getting exact lists of demand prices, and interpreting c ^_^ - 
 them correctly. The first which we have to consider arises J^e* 11 * 168 
 from the element of Time, the source of many of the greatest overcome ; 
 difficulties in economics. element 6 
 
 The list of demand prices represents the changes in the of Time - 
 price at which a commodity can be sold consequent on 
 changes in the amount offered for sale, other things being 
 equal. But in fact other things seldom are equal over 
 periods of time sufficiently long for the collection of full and 
 trustworthy statistics. There are always occurring disturbing 
 causes whose effects are commingled with, and cannot easily 
 be separated from, the effects of that particular cause which 
 we desire to isolate. This difficulty is aggravated by the fact 
 that in economics the full effects of a cause seldom come at 
 once, but often spread themselves out after it has ceased to 
 exist. 
 
 To begin with, the purchasing power of money is continu- Changes in 
 ally changing, and rendering necessary a correction of the chasing 
 results obtained on our assumption that money retains a 
 uniform value. This difficulty can however be overcome 
 fairly well, since we can ascertain with tolerable accuracy 
 the broader changes in the purchasing power of money. 
 
 Next come the changes in the general prosperity and in whether 
 the total purchasing power at the disposal of the community or'tem^ 
 at large. The influence of these changes is important, but P rar y- 
 perhaps less so than is generally supposed. For when the 
 wave of prosperity is descending, prices fall, and this increases 
 the resources of those with fixed incomes at the expense of 
 those whose incomes depend on the profits of business. The 
 downward fluctuation of prosperity is popularly measured 
 almost entirely by the conspicuous losses of this last class ; 
 but the statistics of the total consumption of such commodi- 
 ties as tea, sugar, butter, wool, &c. prove that the total pur- 
 chasing power of the people does not meanwhile fall very 
 fast. Still there is a fall, and the allowance to be made for 
 it must be ascertained by comparing the prices and the con- 
 sumption of as many things as possible. 
 
 Next come the changes due to the gradual growth of 
 
186 
 
 LAW OF DEMAND CONTINUED. ELASTICITY OF DEMAND. 
 
 BOOK III. 
 CH. IV. 
 
 Gradual 
 changes in 
 habits and 
 in the fa- 
 miliarity 
 with new 
 things and 
 new ways 
 of using 
 them. 
 
 Illus- 
 trations. 
 
 population and wealth. For these an easy numerical correc- 
 tion can be made when the facts are known \ 
 
 6. Next, allowance must be made for changes in fashion, 
 and taste and habit 8 , for the opening out of new uses of a 
 commodity, for the discovery or improvement or cheapening 
 of other things that can be applied to the same uses with it. 
 In all these cases there is great difficulty in allowing for the 
 time that elapses between the economic cause and its effect. 
 For time is required to enable a rise in the price of a com- 
 modity to exert its full influence on consumption. Time is 
 required for consumers to become familiar with substitutes 
 that can be used instead of it, and perhaps for producers to 
 get into the habit of producing them in sufficient quantities. 
 Time may be also wanted for the growth of habits of famili- 
 arity with the new commodities and the discovery of methods 
 of economizing them. 
 
 For instance when wood and charcoal became dear in 
 England, familiarity with coal as a fuel grew slowly, fireplaces 
 were but slowly adapted to its use, and an organized traffic in 
 
 Fig. (9). 
 
 p 
 
 V 
 
 1 When a statistical table shows the gradual growth of the consumption of 
 a commodity over a long series of years, we may want to compare the percentage 
 by which it increases in different years. This can be 
 
 done pretty easily with a little practice. But when the 
 figures are expressed in the form of a statistical diagram, 
 it cannot easily be done, without translating the diagram 
 back into figures ; and this is a cause of the disfavour in 
 which many statisticians hold the graphic method. But 
 by the knowledge of one simple rule the balance can be 
 turned, so far as this point goes, in favour of the graphic 
 method. The rule is as follows : Let the quantity of a 
 commodity consumed (or of trade carried, or of tax levied * 
 
 etc.), be measured by horizontal lines parallel to Ox, fig. 
 
 (9), while the corresponding years are in the usual manner ticked off in descending- 
 order at equal distances along Oy. To measure the rate of growth at any point P, 
 put a ruler to touch the curve at P. Let it meet Oy in t, and let N be the point 
 on Oy at the same vertical height as P : then the number of years marked off 
 along Oy by the distance Nt is the inverse of the fraction by which the amount is 
 increasing annually. That is, if Nt is 20 years the amount is increasing at the rate 
 of fa i.e. of 5 per cent, annually ; if Nt is 25 years, the increase is ^ or 4 per 
 cent, annually; and so on. See a paper by the present writer in the Jubilee 
 number of the Journal of the London Statistical /Society, June 1855 ; also Note 
 IV. in the Appendix. 
 
 2 For illustrations of the influence of fashion see articles by Miss Foley in the 
 Economic Journal, Vol. in. and Miss Heather Bigg in the Nineteenth Century, 
 Vol. xxin. 
 
ELEMENT OF TIME. 187 
 
 it did not spring up quickly even to places to which it could BOOK m. 
 be easily carried by water: the invention of processes by _lfl" 
 which it could be used as a substitute for charcoal in manu- 
 facture went even more slowly, and is indeed hardly yet com- 
 plete. Again, when in recent years the price of coal became 
 very high, a great stimulus was given to the invention of 
 economies in its use, especially in the production of iron and 
 steam ; but few of these inventions bore much practical 
 fruit till after the high price had passed away. Again, when 
 a new line of tramways or of suburban railways is opened, 
 even those who live near the line do not get into the habit 
 of making the most of its assistance at once ; and a good 
 deal more time elapses before many of those whose places of 
 business are near one end of the line change their homes so 
 as to live near the other end. Again, when petroleum first 
 became plentiful few people were ready to use it freely ; gradu- 
 ally petroleum and petroleum lamps have become familiar to 
 all classes of society : too much imfluence would therefore be 
 attributed to the fall in price which has occurred since then, 
 if it were credited with all the increase of consumption. 
 
 Another difficulty of the same kind arises from the fact Some de - 
 
 i minds can 
 
 that there are many purchases which can easily be put off for be more 
 a short time, but not for a long time. This is often the case ponecUkan 
 with regard to clothes and other things which are worn out ot " ers - 
 gradually, and which can be made to serve a little longer 
 than usual under the pressure of high prices. For instance, 
 at the beginning of the cotton famine the recorded consump- 
 tion of cotton in England was very small. This was partly 
 because retail dealers reduced their stock, but chiefly because 
 people generally made shift to do as long as they could 
 without buying new cotton goods. In 1864 however many 
 found themselves unable to wait longer; and a good deal 
 more cotton was entered for home consumption in that year, 
 though the price was then much higher, than in either of 
 the preceding years. For commodities of this kind then a 
 sudden scarcity does not immediately raise the price fully 
 up to the level, which properly corresponds to the reduced 
 supply. Similarly after the great commercial depression in 
 the United States in 1873 it was noticed that the boot trade 
 
188 LAW OF DEMAND CONTINUED. ELASTICITY OF DEMAND. 
 
 BOOK m. revived before the general clothing trade ; because there is a 
 CH " IV ' great deal of reserve wear in the coats and hats that are 
 thrown aside in prosperous times as worn out, but not so 
 much in the boots. 
 
 Difficulties 7. The above difficulties are fundamental : but there 
 
 of obtain- are others which do not lie deeper than the more or less 
 
 quLite 3 sta- inevitable faults of our statistical returns. 
 
 tistus. ^ demand schedule is supposed to present a series of 
 
 imperfec- prices at which different amounts of a commodity can find 
 
 market purchasers during a given time in a market. A perfect 
 
 Market is a district, small or large, in which there are many 
 
 buyers and many sellers all so keenly on the alert and so well 
 
 acquainted with one another's affairs that the price of a com- 
 
 modity is always practically the same for the whole of the 
 
 district. But independently of the fact that those who buy 
 
 for their own consumption, and not for the purposes of trade, 
 
 are not always on the look out for every change in the market, 
 
 there is no means of ascertaining exactly what prices are paid 
 
 in many transactions. Again the geographical limits of a 
 
 audits market are seldom clearly drawn, except when they are 
 
 finite e marked out by the sea or by custom-house barriers; and no 
 
 aries d ". countr y nas accurate statistics of commodities produced in 
 
 it for home consumption. 
 Secondly Again, there is generally some ambiguity even in such 
 
 an increase , , ,- , , , . 
 
 of dealers' statistics as are to be had. They commonly show goods as 
 apTto S De entere d for consumption as soon as they pass into the hands 
 
 dealers ' anc ^ consequently an increase of dealers' stocks 
 crease of cannot easily be distinguished from an increase of consump- 
 tion. tion. But the two are governed by different causes. A rise 
 of prices tends to check consumption ; but if the rise is ex- 
 pected to continue, it will probably, as has already been 
 noticed, lead dealers to increase their stocks 1 . 
 
 1 In examining the effects of taxation, it is customary to compare the amounts 
 entered for consumption just before and just after the imposition of the tax. But 
 this is untrustworthy. For dealers anticipating the tax lay in large stocks just 
 before it is imposed, and need to buy very little for some time afterwards. And 
 vice versa when a tax is lowered. Again, high taxes lead to false returns. For 
 instance, the nominal importation of molasses into Boston increased fif tyfold in 
 consequence of the tax being lowered by the Rockingham Ministry in 1766, from 
 6d. to Id. per gallon. But this was chiefly due to the fact that with the tax 
 at Id., it was cheaper to pay the duty than to smuggle. 
 
NOTE ON STATISTICS OF CONSUMPTION. 189 
 
 BOOK HI. 
 CH. 
 
 Next it is difficult to insure that the commodities referred 
 to are always of the same quality. After a dry summer what CH ' IV ' 
 wheat there is, is exceptionally good ; and the prices for the Changes of 
 next harvest year appear to be higher than they really are. 
 It is possible to make allowance for this, particularly now 
 that dry Californian wheat affords a standard. But it is 
 almost impossible to allow properly for the changes in quality 
 of many kinds of manufactured goods. This difficulty occurs 
 even in the case of such a thing as tea : the substitution in 
 recent years of the stronger Indian tea for the weaker Chinese 
 tea has made the real increase of consumption greater than 
 that which is shown by the statistics. 
 
 NOTE ON STATISTICS OF CONSUMPTION. 
 
 General Statistics of consumption are published by many Govern- 
 ments with regard to certain classes of commodities. But partly for 
 the reasons just indicated they are of very little service in helping us 
 to trace either a causal connection between variations in prices and 
 variations in the amounts which people will buy, or in the distribution 
 of different kinds of consumption among the different classes of the 
 community. 
 
 As regards the first of these objects, viz. the discovery of the laws 
 connecting variations in consumption consequent on variations in price, 
 there seems much to be gained by working out a hint given by Jevons 
 (Theory, pp. 11, 12) with regard to shopkeepers' books. 
 
 A shopkeeper in the working man's quarter of a manufacturing town 
 has often the means of ascertaining with tolerable accuracy the financial 
 position of the great body of his customers. He can find out how many 
 factories are at work, and for how many hours in the week, and he can 
 hear about all the important changes in the rate of wages : in fact he 
 makes it his business to do so. And as a rule his customers are quick 
 in finding out changes in the price of things which they commonly use. 
 He will therefore often find cases in which an increased consumption of 
 a commodity is brought about by a fall in its price, the cause acting 
 quickly, and acting alone without any admixture of disturbing causes. 
 Even where disturbing causes are present, he will often be able to allow 
 for their influence. For instance, he will know that as the winter comes 
 on, the prices of butter and vegetables rise ; but the cold weather makes 
 
190 NOTE ON STATISTICS OF CONSUMPTION. 
 
 BOOK in. people desire butter more and vegetables less than before : and therefore 
 CH - IV - w hen the prices of both vegetables and butter rise towards the winter, he 
 will expect a greater falling off of consumption in the case of vegetables 
 than should properly be attributed to the rise in price taken alone, but 
 a less falling off in the case of butter. If however in two neighbouring 
 winters his customers have been about equally numerous, and in receipt 
 of about the same rate of wages ; and if in the one the price of butter 
 was a good deal higher than in the other, then a comparison of his books 
 for the two winters will afford a very accurate indication of the influence 
 of changes in price on consumption. 
 
 Such a shopkeeper's book affords good opportunities for the appli- 
 cation of " the Method of Difference." It may be hoped that, as the 
 knowledge of economic science is diffused, local statistical societies will 
 do important work in this and similar directions. Above all this may 
 be hoped from the great co-operative stores. Shopkeepers who supply 
 other classes of society must occasionally be in a position to furnish 
 similar facts relating to the consumption of their customers. And if a 
 sufficient number of tables of demand by different sections of society 
 could be obtained, they would afford the means of estimating indirectly 
 the variations in total demand that would result from extreme varia- 
 tions in price, and thus attaining an end which is inaccessible by 
 any other route. For, as a general rule, the price of a commodity 
 fluctuates within but narrow limits; and therefore statistics afford 
 us no direct means of guessing what the consumption of it would 
 be, if its price were either fivefold or a fifth part of what it actually 
 is. But we know that its consumption would be confined almost 
 entirely to the rich if its price were very high; and that, if its price 
 were very low, the great body of its consumption would in most cases 
 be among the working classes. If then the present price is very high 
 relatively to the middle or to the working classes, we may be able to 
 infer from the laws of their demand at the present prices what would be 
 the demand of the rich if the price were so raised so as to be very high 
 relatively even to their means. On the other hand, if the present price 
 is moderate relatively to the means of the rich, we may be able to infer 
 from their demand what would be the demand of the working classes if 
 the price were to fall to a level which is moderate relatively to their 
 means. It is only by thus piecing together fragmentary laws of demand 
 that we can hope to get any approach to an accurate law relating to 
 widely different prices. (That is to say the general demand curve for a 
 commodity cannot be drawn with confidence except in the immediate 
 neighbourhood of the current price, until we are able to piece it together 
 out of the fragmentary demand curves of different classes of society. 
 Compare the second Section of this Chapter.) 
 
 When some progress has been made in reducing to definite law the 
 demand for commodities that are destined for immediate consumption, 
 then, but not till then, will there be use in attempting a similar task 
 
NOTE ON STATISTICS OF CONSUMPTION. 
 
 191 
 
 with regard to those secondary demands which are dependent on these 
 the demands namely for the labour of artisans and others who take 
 part in the production of things for sale; and again the demand for 
 machines, factories, railway material and other instruments of pro- 
 duction. The demand for the work of medical men, of domestic servants 
 and of all those whose services are rendered direct to the consumer is 
 similar in character to the demand for commodities for immediate con- 
 sumption, and its laws may be investigated in the same manner. 
 
 It is a very important, but also difficult task to ascertain the 
 proportions in which the different classes of society distribute their 
 expenditure between necessaries, comforts and luxuries ; between things 
 that provide only present pleasure, and those that build up stores of 
 physical and moral strength ; and lastly between those which gratify 
 the lower wants and those which stimulate and educate the higher 
 wants. Several endeavours have been made in this direction on the 
 Continent during the last fifty years ; and latterly the subject has been 
 investigated with increasing vigour not only there but also in America 
 and in England. 
 
 A single table made out by the great statistician Dr Engel for the 
 consumption of the lower, middle and working classes in Saxony in 1857, 
 may be quoted here; because it has acted as a guide and a standard 
 of comparison to later inquiries. It is as follows : 
 
 BOOK III. 
 
 CH. rv. 
 
 Items of Expenditure. 
 
 Proportions of the Expenditure of the Family of 
 
 1. 
 Workman with an 
 Income of 45/. to 601. 
 a Year. 
 
 2. 
 Workman with an 
 Income of 90 . to 
 mi. 
 
 3. 
 Middle-Class person 
 with an Income of 
 1501 to 20W. 
 
 1. Food only . . 
 2. Clothing . . . 
 3. Lodging . . . 
 4. Light and Fuel 
 5. Education . . 
 6. Legal Protection 
 7. Care of health . 
 8. Comfort and recre 
 Totals . . 
 
 ati 
 
 311 
 
 62-0 per 
 16-0 
 12-0 
 5-0 
 2-0 
 1-0 
 1-0 
 1-0 
 
 cent. 
 
 55'0 per 
 18-0 
 12-0 
 5-0 
 3-5 
 2-0 
 2-0 
 2-5 
 
 zent. 
 
 50-0 per 
 18-0 
 12-0 
 5-0 
 5-5 
 3-0 
 3-0 
 3-5 
 
 cent. 
 
 lOO'O per cent. 
 
 100-0 per cent. 
 
 lOO'O per cent. 
 
 Working-men's budgets have often been collected and compared. 
 But like all other figures of the kind they suffer from the facts that 
 those who will take the trouble to make such returns voluntarily are 
 not average men, that those who keep careful accounts are not average 
 men ; and that when accounts have to be supplemented by the memory, 
 the memory is apt to be biassed by notions as to how the money 
 ought to have been spent, especially when the accounts are put together 
 specially for another's eye. This border-ground between the provinces 
 
192 NOTE ON STATISTICS OF CONSUMPTION. 
 
 BOOK in. of domestic and public economy is one in which excellent work may 
 CH. iv. b e d one by many who are disinclined for more general and abstract 
 speculations 1 . 
 
 1 Working men's budgets were collected by Edeu at the end of the last 
 century ; and there is much miscellaneous information on the expenditure of the 
 working classes in the Reports of Commissions on Poor-relief, Factories, &c. 
 during the whole of this century. See also an article on wages and prices in the 
 Companion to the British Almanack for 1834, Workmen's Budgets in Manchester, 
 in the Statistical Journal, 18412; Tuckett's Labouring Population, 1846; 
 Sargant's Economy of the Working Classes in 1857; Reports by her Majesty's 
 Consuls On the Condition of the Working Classes in Foreign Countries, 1872 ; the 
 inquiry for the Board of Trade in 1887 ; Workmen's Budgets by Higgs in Statis- 
 tical Journal 1893; Reports of Subcommissioners on Agriculture to the Labour 
 Commission 1893, 4; some articles in Vols. iv. and v. of the Bulletin de VInstitut 
 International de Statistique, in the latter of which a compendious view is given of 
 the results of M. le Play's monumental Les Ouvriers Europeens ; while an abstract 
 of many continental inquiries is presented in a convenient form in Dr Gruber's 
 Die Haushaltung der arbeitenden Klassen. Much work has been done in the same 
 direction in the United States ; see Young's Labour in Europe and America ; and 
 the reports of various American Labour Bureaux, especially those of the United 
 States Commissioner of Labour for 1886, and 1891 ; and Prof. Falkner's intro- 
 duction to the Report on Wholesale Prices, &c. to the Senate in 1893. 
 
 The method of M. le Play is the intensive study of all the details of the 
 domestic life of a few carefully chosen families. To work it well requires a rare 
 combination of judgment in selecting cases, and of insight and sympathy in 
 interpreting them. At its best, it is the best of all : but in ordinary hands it is 
 likely to suggest more untrustworthy general conclusions, than those obtained by 
 the extensive method of collecting more rapidly very numerous observations, 
 reducing them as far as possible to statistical form, and obtaining broad averages 
 in which inaccuracies and idiosyncracies may be trusted to counteract one another 
 to some extent. 
 
 Information bearing on the subject was collected by Harrison, Petty, Cantillon 
 (whose lost Supplement seems to have contained some workmen's budgets), 
 Arthur Young, Malthus and others. Part of the work is now being taken over 
 by the younger sciences of Anthropology and Demography ; and there is much to 
 be gleaned from the Descriptive Sociology of various nations compiled under the 
 direction of Herbert Spencer; which, though too ambitious, may be of service 
 to the economist if used with care. See also Lavollee, Classes ouvridres en 
 Europe ; Barbaret, Le travail en France ; Symonds, Arts and Artisans at Home 
 and Abroad; Mayhew, London Labour ; and Charles Booth, Life and Labour in 
 London and Condition of the Aged Poor. 
 
CHAPTER V. 
 
 THE CHOICE BETWEEN DIFFERENT USES OF THE SAME 
 THING. IMMEDIATE AND DEFERRED USES. 
 
 1. THE primitive housewife finding that she has a BOOKUI. 
 limited number of hanks of yarn from the year's shearing, CH ' v ' 
 considers all the domestic wants for clothing and tries to 
 
 distribute the yarn between them in such a way as to con- person's 
 
 i i means be- 
 
 tnbute as much as possible to the family well-being. She tween the 
 
 will think she has failed if, when it is done, she has reason 
 
 to regret that she did not apply more to making, say, socks, 
 
 and less to vests. That would mean that she had mis- 
 
 calculated the points at which to suspend the making of 
 
 socks and vests respectively; that she had gone too far in 
 
 the case of vests, and not far enough in that of socks ; and 
 
 that therefore at the points at which she actually did stop, 
 
 the utility of yarn turned into socks was greater than that 
 
 of yarn turned into vests. But if, on the other hand, she hit 
 
 on the right points to stop at, then she made just so many 
 
 socks and vests that she got an equal amount of good out of 
 
 the last bundle of yarn that she applied to socks, and the last 
 
 she applied to vests. This illustrates a general principle, 
 
 which may be expressed thus : 
 
 If a person has a thing which he can put to several uses, 
 he will distribute it between these uses in such a way that 
 it has the same marginal utility in all. For if it had a 
 greater marginal utility in one use than another, he would 
 gain by taking away some of it from the second use and 
 applying it to the first 1 . 
 
 1 Our illustration belongs indeed properly to domestic production rather than 
 to domestic consumption. But that was almost inevitable; for there are very 
 
 M. 13 
 
194 CHOICE BETWEEN DIFFERENT USES. 
 
 BOOK in. One great disadvantage of a primitive economy, in which 
 
 CH - V - there is but little free exchange, is that a person may easily 
 
 But a have so much of one thing, say wool, that when he has 
 
 nTayTave applied it to every possible use, its marginal utility in each 
 
 ofone UCl use is low : and at the same time he may have so little of 
 
 SuSes 1 " some otner thing, say wood, that its marginal utility for him 
 
 and too j s verv high. Meanwhile some of his neighbours may be in 
 
 another, great need of wood, and have more wool than they can turn 
 
 to good account. If each gives up that which has for him 
 
 the lower utility and receives that which has the higher, each 
 
 will gain by the exchange. But to make such an adjustment 
 
 by barter, would be tedious and difficult. 
 
 Barter The difficulty of barter is indeed not so very great 
 
 where there are but a few simple commodities each capable 
 of being adapted by domestic work to several uses ; the 
 weaving wife and the spinster daughters adjusting rightly 
 the marginal utilities of the different uses of the wool, while 
 the husband and the sons do the same for the wood. 
 Money can 2. But when commodities have become very numerous 
 buted so as an d highly specialized, there is an urgent need for the free 
 equaTmar- use ^ mone y> or general purchasing power ; for that alone 
 ginai utm- can b e applied easily in an unlimited variety of purchases, 
 use. And in a money-economy, good management is shown by so 
 
 adjusting the margins of suspense on each line of expenditure 
 that the marginal utility of a shilling's worth of goods on 
 each line shall be the same. And this result each one will 
 attain by constantly watching to see whether there is any 
 thing on which he is spending so much that he would gain 
 by taking a little away from that line of expenditure and 
 putting it on some other line. 
 
 Hiustra- Thus for instance the clerk who is in doubt whether to 
 
 ride to town, or to walk and have some little extra indulgence 
 
 at his lunch, is weighing against one another the (marginal) 
 
 A chief utilities of two different modes of spending his money. And 
 
 domestic when an experienced housekeeper urges on a young couple 
 
 few things ready for immediate consumption which are available for many 
 different uses. And the doctrine of the Distribution of means between different 
 uses has less important and less interesting applications in the Science of 
 Demand than in that of Supply; where one particular form of it the Law of 
 Substitution will occupy us a great deal. 
 
PRESENT AND FUTURE BENEFITS. 195 
 
 the importance of keeping accounts carefully ; a chief motive BOOK in. 
 of the advice is that they may avoid spending impulsively a CH ' v ' 
 great deal of money on furniture and other things ; for, though 
 some quantity of these is really needful, yet when bought 
 lavishly they do not give high (marginal) utilities in propor- 
 tion to their cost. And when the young pair look over their 
 year's budget at the end of the. year, and find perhaps that 
 it is necessary to curtail their expenditure somewhere, they 
 compare the (marginal) utilities of different items, weighing 
 the loss of utility that would result from taking away a 
 pound's expenditure here, with that which they would lose 
 by taking it away there : they strive to adjust their parings 
 down so that the aggregate loss of utility may be a minimum, 
 and the aggregate of utility that remains to them may be a 
 
 3. The different uses between which a commodity is 
 distributed need not all be present uses ; some may be 
 present and some future. A prudent person will endeavour The 
 to distribute his means between all their several uses present O f futu"? 
 
 and future in such a way that they will have in each the 
 same marginal utility. But in estimating the present mar- resent. 
 ginal utility of a distant source of pleasure a twofold allowance 
 must be made ; firstly, for its uncertainty (this is an objective 
 property which all well-informed persons would estimate in 
 the same way); and secondly, for its difference in the value 
 to them of a distant as compared with a present pleasure 
 (this is a subjective property which different people would 
 estimate in different ways according to their individual 
 characters, and their circumstances at the time). 
 
 1 The working-class budgets which were mentioned in the Note at the end of 
 the last chapter may render most important services in helping people to dis- 
 tribute their resources wisely between different uses, so that the marginal utility 
 for each purpose shall be the same. But the vital problems of domestic economy 
 relate as much to wise action as to wise spending. The English and the American 
 housewife make limited means go a much less way towards satisfying wants than 
 the French housewife does, not because they do not know how to buy, but because 
 they cannot produce as good finished commodities out of the raw material of 
 inexpensive joints, vegetables &c., as she can. Domestic economy is often spoken 
 of as belonging to the Science of Consumption : but that is only hah* true. The 
 greatest faults in domestic economy, among the sober portion of the Anglo-Saxon 
 working-classes at all events, are faults of Production rather than of Consumption. 
 
 132 
 
196 CHOICE BETWEEN DIFFERENT USES. 
 
 BOOK m. If people regarded future benefits as equally desirable 
 CH ' V - with similar benefits at the present time, they would pro- 
 Future bably endeavour to distribute their pleasures and other 
 are"dis- satisfactions evenly throughout their lives. They would 
 at U differ- therefore generally be willing to give up a present pleasure 
 ent rates. ^ ^ ga ^ e Q an e q ua | pleasure in the future, provided they 
 could be certain of having it. But in fact human nature is 
 so constituted that in estimating the "present value" of a 
 future benefit most people generally make a second deduction 
 from its future value, in the form of what we may call a " dis- 
 count," that increases with the period for which the benefit 
 is deferred. One will reckon a distant benefit at nearly the 
 same value which it would have for him if it were present ; 
 while another who has less power of realizing the future, less 
 patience and self-control, will care comparatively little for 
 any benefit that is not near at hand. And the same person 
 will vary in his mood, being at one time impatient, and greedy 
 for present enjoyment ; while at another his mind dwells on 
 the future, and he is willing to postpone all enjoyments that 
 can conveniently be made to wait. Sometimes he is in a 
 mood to care little for anything else : sometimes he is like 
 the children who pick the plums out of their pudding to eat 
 them at once, sometimes like those who put them aside to be 
 eaten last. And, in any case, when calculating the rate at 
 which a future benefit is discounted, we must be careful to 
 make allowance for the pleasures of expectation. 
 
 Desire for The rates at which different people discount the future 
 
 sources of affect not only their tendency to save, as the term is ordi- 
 
 an J afar ent nai> ity understood, but also their tendency to buy things 
 
 ownership, which will be a lasting source of pleasure rather than those 
 
 which give a stronger but more transient enjoyment ; to buy 
 
 a new coat rather than to indulge in a drinking bout, or to 
 
 choose simple furniture that will wear well, rather than 
 
 showy furniture that will soon fall to pieces. 
 
 It is in regard to these things especially that the pleasure 
 of possession makes itself felt. Many people derive from 
 the mere feeling of ownership a stronger satisfaction than 
 they derive from ordinary pleasures in the narrower sense 
 of the term : for example, the delight in the possession of 
 
PRESENT AND FUTURE BENEFITS. 197 
 
 land will often induce people to pay for it so high a price that BOOK m. 
 it yields them but a very poor return on their investment. ' 
 There is a delight in ownership for its own sake ; and there 
 is a delight in ownership on account of the distinction it 
 yields. Sometimes the latter is stronger than the former, 
 sometimes weaker ; and perhaps no one knows himself or 
 other people well enough to be able to draw the line quite 
 certainly between the two. 
 
 4. As has already been urged, we cannot compare the But we 
 quantities of two benefits, which are enjoyed at different really 
 
 times even by the same person. When a person postpones a 
 pleasure-giving event he does not postpone the pleasure ; but 
 
 r r . . r ' of a future 
 
 he gives up a present pleasure and takes in its place another, benefit. 
 or an expectation of getting another at a future date : and 
 we cannot tell whether he expects the future pleasure to be 
 greater than the one which he is giving up, unless we know 
 all the circumstances of the case. And therefore, even 
 though we know the rate at which he discounts future 
 pleasurable events, such as spending 1 on immediate grati- 
 fications, we yet do not know the rate at which he discounts 
 future pleasures 1 . 
 
 1 In classifying some pleasures as more urgent than others, it is often for- 
 gotten that the postponement of a pleasurable event may alter the circumstances 
 under which it occurs, and therefore alter the character of the pleasure itself. For 
 instance it may be said that a young man discounts at a very high rate the 
 pleasure of the Alpine tours which he hopes to be able to afford himself when he 
 has made his fortune. He would much rather have them now, partly because 
 they would give him much greater pleasure now. 
 
 Again, it may happen that the postponement of the pleasurable event involves 
 an unequal distribution in Time of a certain good, and that the Law of Diminu- 
 tion of Marginal Utility acts strongly in the case of this particular good. For 
 instance, it is sometimes said that the pleasures of eating are specially urgent ; 
 and it is undoubtedly true that if a man goes dinnerless for six days in the week 
 and eats seven dinners on the seventh, he loses very much ; because when post- 
 poning six dinners, he does not postpone the pleasures of eating six separate 
 dinners, but substitutes for them the pleasure of one day's excessive eating. 
 Again, when a person puts away eggs for the winter he does not expect that they 
 will be better flavoured then than now ; he expects that they will be scarce, and 
 that therefore their utility Avill be higher than now. This shows the importance 
 of drawing a clear distinction between discounting a future pleasure, and dis- 
 counting the pleasure derived from the future enjoyment of a certain amount of 
 a commodity. For in the latter case we must make separate allowance for 
 differences between the marginal utilities of the commodity at the two times: 
 but in the latter this has been allowed for once in estimating the amount of the 
 pleasure ; and it must not be allowed for again. 
 
198 CHOICE BETWEEN DIFFERENT USES. 
 
 BOOK III. 
 CH. V. 
 
 We can however get an artificial measure of the rate at 
 which he discounts future benefits by making two assump- 
 tions. These are, firstly, that he expects to be about as rich 
 at the future date as he is now ; and secondly, that his capa- 
 city for deriving benefit from the things which money will 
 buy will on the whole remain unchanged, though it may have 
 increased in some directions and diminished in others. On 
 Hhese assumptions, if he is willing, but only just willing, to 
 spare a pound from his expenditure now with the certainty 
 of having (for the disposal of himself or his heirs) a guinea 
 one year hence, we may fairly say that he discounts future 
 benefits that are perfectly secure (subject only to the condi- 
 tions of human mortality) at the rate of five per -cent, per 
 annum. And on these assumptions the rate at which he 
 discounts future (certain) benefits, will be the rate at which 
 he can discount money in the money market 1 . 
 
 1 It is important to remember that, except on these assumptions there is no 
 direct connection hetween the rate of discount on the loan of money, and the rate 
 at which future pleasures are discounted. A man may be so impatient of delay 
 that a certain promise of a pleasure ten years hence will not induce him to give 
 up one close at hand which he regards as a quarter as great. And yet if he 
 should fear that ten years hence money may be so scarce with him (and its 
 marginal utility therefore so high) that half-a-crown then may give him more 
 pleasure or save him more pain than a pound now, he will save something for the 
 future even though he have to hoard it, on the same principle that he might store 
 eggs for the winter. But we are here straying into questions that are more 
 closely connected with Supply than with Demand. We shall have to consider 
 them again from different points of view in connection with the Accumulation of 
 Wealth, and later again in connection with the causes that determine the Rate of 
 Interest. 
 
 We may however consider here how to measure numerically the present value 
 of a future pleasure, on the supposition that we know, (i) its amount, (ii) the date 
 at which it will come, if it comes at all, (iii) the chance that it will come, and (iv) 
 the rate at which the person in question discounts future pleasures. 
 
 If the probability that a pleasure will be enjoyed is three to one, so that 
 three chances out of four are in its favour, the value of its expectation is three- 
 fourths of what it would be if it were certain : if the probability that it will be 
 enjoyed were only seven to five, so that only seven chances out of twelve are in its 
 favour, the value of its expectation is only seven-twelfths of what it would be if 
 the event were certain, and so on. [This is its actuarial value: but further 
 allowance may have to be made for the fact that the true value to anyone of an 
 uncertain gain is generally less than its actuarial value (see the second note on 
 p. 187).] If the anticipated pleasure is both uncertain and distant we have a two- 
 fold deduction to make from its full value. We will suppose, for instance, that a 
 person would give 10s. for a gratification if it were present and certain, but that 
 it is due a year hence, and the probability of its happening then is three to one. 
 
PRESENT AND FUTURE BENEFITS. 199 
 
 So far we have considered each pleasure singly ; but a BOOK m. 
 great many of the things which people buy are durable, i.e. CH ' v ' 
 are not consumed in a single use ; a durable good, such as 
 
 a piano, is the probable source of many pleasures, more or expected 
 less remote ; and its value to a purchaser is the aggregate ownership 
 of the value to him of all these pleasures, allowance being 
 made for their uncertainty and for their distance 1 . 
 
 Suppose also that he discounts the future at the rate of twenty per eentrper 
 annum. Then the value to him of the anticipation of jf is f x T W x 10*. i- e - 6*. 
 Compare the Introductory chapter of Jevons' Theory of Political Economy. 
 
 1 Of course this estimate is formed by a rough instinct ; and in any attempt to 
 reduce it to numerical accuracy (see Note V. in the Appendix), we must recollect 
 what has been said, in this and the preceding Section, as to the impossibility of 
 comparing accurately pleasures or other satisfactions that do not occur at the . 
 same time ; and also as to the assumption of uniformity involved in supposing the 
 discount of future pleasures to obey the exponential law. 
 
CHAPTEE VI. 
 
 BOOK m. 
 
 CH. VI. 
 
 Price and 
 Utility. 
 
 VS 'k 
 
 y 
 
 \ 
 
 Consumer^ 
 Rent 
 
 is part 
 of the 
 benefit a 
 man 
 derives 
 from his 
 
 VALUE AND UTILITY. 
 
 1. WE may now turn to consider how far the price 
 which is actually paid for a thing represents the benefit that 
 arises from its possession. This is a wide subject on which 
 economic science has very little to say, but that little is of 
 some importance. 
 
 We have already seen that the price which a person pays 
 for a thing can never exceed, and seldom comes up to that 
 which he would be willing to pay rather than go without it : 
 so that the satisfaction which he gets from its purchase 
 generally exceeds that which he gives up in paying away its 
 price ; and he thus derives from the purchase a surplus of 
 'satisfaction. The excess of the price which he would be 
 willing to pay rather than go without it, over that which he 
 actually does pay is the economic measure of this surplus 
 satisfaction : and, for reasons which will appear later on, may 
 be called (lan^^meni Rent. 
 
 It is obvious tKaTThe Consumers' Rents derived from 
 some commodities are much greater than from others. There 
 are many comforts and luxuries of which the prices are very 
 much below those which many people would pay rather than 
 go entirely without them ; and which therefore afford a very 
 great Consumers' Rent. Good instances are matches, salt, 
 a penny newspaper, or a postage-stamp. 
 
 This benefit, which he gets from purchasing at a low price 
 things which he would rather pay a high price for than go 
 without, may be called the benefit which he derives from his 
 Opportunities, or from his Environment; or, to recur to a 
 
CONSUMERS' RENT. 201 
 
 word that was in common use a few generations ago, from his BOOK m. 
 Conjuncture. Our aim in the present is to apply the notion 
 of Consumers' Bent as an aid in estimating roughly some of f "' " 
 the benefits which a person derives from his Environment or % n / UHC ' 
 his Conjuncture 1 . 
 
 2. In order to give definiteness to our notions, let us Con- 
 sumers' 
 consider the case of tea purchased for domestic consumption. Kent m 
 
 Let us take the case of a man, who, if the price of tea were the demand 
 20s. a pound, would just be induced to buy one pound an- 
 nually ; who would just be induced to buy two pounds if the 
 price were 14s., three pounds if the price were 10s., four 
 pounds if the price were 65., five pounds if the price were 
 4s., six pounds if the price were 3s., and who, the price 
 being actually 25., does purchase seven pounds. We have to 
 investigate the Consumers' Rent which he derives from his 
 power of purchasing tea at 2s. a pound. 
 
 The fact that he would just be induced to purchase one 
 pound if the price were 20s., proves that the total enjoyment or 
 satisfaction which he derives from that pound is as great as V 
 that which he could obtain by spending 20s. on other things. 
 When the price falls to 14s., he could if he chose, continue 
 to buy only one pound. He would then get for 14s. what 
 was worth to him at least 20s. ; and he will obtain a surplus 
 satisfaction worth to him at least 6s., or in other words a 
 Consumers' Rent of at least 6s. But in fact he buys a 
 second pound of his own free choice, thus showing that he 
 regards it as worth to him at least 14s. He obtains for 28s. 
 what is worth to him at least 20s. + 14s. ; i.e. 34s. His 
 surplus satisfaction is at all events not diminished by buying 
 it, but remains worth at least 6s. to him. The total utility of 
 
 1 This term is a familiar one in German Economics, and meets a need which is 
 much felt in English Economics. For opportunity and environment, the only 
 available substitutes for it, are sometimes rather misleading. By Conjunctiir, says 
 Wagner (Grundegung Ed. in. p. 387), "we understand the sum total of the 
 technical, economic, social and legal conditions ; which, in a mode of national 
 life (Volksivirthschaft) resting upon Division of Labour and Private Property, 
 especially private property in land and other material means of production 
 determine the demand for and supply of goods, and therefore their exchange 
 value: this determination being as a rule, or at least in the main, independent of 
 the will of the owner, of his activity and his remissness. 
 
202 VALUE AND UTILITY. 
 
 the two pounds is worth at least 34s., his Consumers' Rent is 
 
 BOOK III. 
 CH. VI. 
 
 at least 6s. 1 
 
 When the price falls to 10s., he might, if he chose, 
 continue to buy only two pounds ; and obtain for 20s. what 
 was worth to him at least 34s., and derive a surplus satis- 
 faction worth at least 14s. But in fact he prefers to buy a 
 third pound : and as he does this freely, we know that he 
 
 1 The first pound was probably worth to him more than 20s. All that we know 
 is that it was not worth less to him. He probably got some small surplus even on 
 that. Again, the second pound was probably worth more than 14*. to him. All 
 that we know is that it was worth at least 14s. and not worth 40s. to him. He 
 would get therefore at this stage a surplus satisfaction of at least 6s., probably a 
 little more. A ragged edge of this kind, as mathematicians are aware, always 
 exists when we watch the effects of considerable changes, as that from 20s. to 14s. 
 a pound. If we had begun with a very high price, had descended by practically 
 infinitesimal changes of a farthing per pound, and watched infinitesimal variations 
 in his consumption of a small fraction of a pound at a time, this ragged edge would 
 have disappeared. 
 
 The significance of the condition in the text that he buys the second pound of 
 his own free choice is shown by the consideration that if the price of 14s. had been 
 offered to him on the condition that he took two pounds, he would then have to 
 elect between taking one pound for 20s. or two pounds for 28*.: and then his 
 taking two pounds would not have proved that he thought the second pound worth 
 more than 8s. to him. But as it is, he takes a second pound paying 14s. uncon- 
 ditionally for it ; and that proves that it is worth at least 14*. to him. (If he can 
 get buns at a penny each but seven for sixpence, and he elects to buy seven, we 
 know that he is willing to give up his sixth penny for the sake of the sixth and the 
 seventh buns : but we cannot tell how much he would pay rather than go without 
 the seventh bun only.) 
 
 It is sometimes objected that as he increases his purchases, the urgency of his 
 need for his earlier purchases is diminished, and their utility falls ; therefore we 
 ought -^^gontinually redraw the earlier parts of our list of demand prices at a lower 
 level, as we pass along it towards lower prices (i.e. to redraw at a lower level our 
 demand curve as we pass along it to the right). But this misconceives the plan on 
 which the list of prices is made out. The objection would have been valid, if 
 the demand price set against each number of pounds of tea represented the average 
 utility of that number. For it is true that, if he would pay just 20s. for one 
 pound, and just 14s. for a second, then he would pay just 34s. for the two ; i.e. 17s. 
 each on the average. And if our list had had reference to the average prices he 
 would pay, and had set 17s. against the second pound ; then no doubt we should 
 have had to redraw the list as we passed on. For when he has bought a third 
 pound the average utility to him of each of the three will be less than that of 17s. ; 
 being in fact 14s. Sd. if, as we go on to assume, he would pay just 10s. for a third 
 pound. But this difficulty is entirely avoided on the plan of making out demand 
 prices which is here adopted ; according to which his second pound is credited, not 
 with the 17s. which represents the average value per pound of the two pounds ; 
 but with the 14s., which represents the additional utility which a second pound 
 has for him. For that remains unchanged when he has bought a third pound, of 
 which the additional utility is measured by 10s. 
 
CONSUMERS' RENT. 203 
 
 does not diminish his surplus satisfaction by doing it. He BOOK in. 
 now gets for 305. three pounds ; of which the first is worth J 
 to him at least 20s., the second at least 14s., and the third at 
 least 10s. The total utility of the three is worth at least 
 44s., his Consumers' Kent is at least 14s., and so on. 
 
 When at last the price has fallen to 2s. he buys seven 
 pounds, which are severally worth to him not less than 20, 
 14, 10, 6, 4, 3, and 2s. or 59s. in all. This sum measures 
 their total utility to him, and his Consumers' Rent is (at 
 least) the excess of this sum over the 14s. he actually does 
 pay for them, i.e. 45s. This is the excess value of the 
 satisfaction he gets from buying the tea over that which he 
 could have got by spending the 14s. in extending a little his 
 purchase of other commodities, of which he had just not 
 thought it worth while to buy more at their current prices ; 
 and any further purchases of which therefore would not yield 
 him any Consumers' Rent. In other words, he derives this 
 45s. worth of surplus enjoyment from his Conjuncture, from 
 the adaptation of the environment to his wants in the 
 particular matter of tea. If that adaptation ceased, and tea 
 could not be had at any price, he would have incurred a loss 
 of satisfaction at least equal to that which he could have got 
 by spending 45s. more on extra supplies of things that were 
 worth to him only j ust what he paid for them l . 
 
 3. In the same way if we were to neglect for the Demand of 
 moment the fact that the same sum of money represents 
 
 1 Prof. Nicholson (Principles of Political Economy, Vol. i. and Economic 
 Journal, Vol. iv.), apparently under some misapprehension as to the drift of the 
 doctrine of consumers' rent, has raised several objections to it, which have been 
 answered by Prof. Edgeworth in the same Journal. Prof. Nicholson says: " Of 
 what avail is it to say that the utility of an income of say 100 a year is worth 
 (say) 1000 a year ? " There would be no avail in saying that. But there might 
 be use, when comparing life in Central Africa with life in England, in saying that, 
 though the things which money will buy in Central Africa may on the average be 
 as cheap there as here, yet there are so many things which cannot be bought 
 there at all, that a person with a thousand a year there is not so well off as a 
 person with three or four hundred a year here. If a man pays Id. toll on a bridge, 
 which saves him an additional drive that would cost a shilling, we do not say that 
 the penny is worth a shilling, but that the penny together with the advantage 
 offered him by the bridge (the part it plays in his Conjuncture) is worth a shilling 
 for that day. Were the bridge swept away on a day on which he needed it, 
 he would be in at least as bad a position as if he had been deprived of eleven 
 pence. 
 
204 VALUE AND UTILITY. 
 
 BOOK m. different amounts of pleasure to different people, we might 
 
 CH ' VI< measure the surplus satisfaction which the sale of tea affords, 
 
 say, in the London market, by the aggregate of the sums by 
 
 which the prices shown in a complete list of demand prices 
 
 for tea exceeds its selling price l . 
 
 i Let us then consider the demand curve DD' for tea in any large market. 
 
 Let OH be the amount which is sold there at the 
 price HA annually, a year being taken as our unit 
 of time. Taking any point M in OH let us draw 
 MP vertically upwards to meet the curve in P and 
 
 cut a horizontal line through A in R. We will \ * ( 10 >- 
 
 suppose the several Ibs. numbered in the order 
 of the eagerness of the several purchasers: the 
 eagerness of the purchaser of any Ib. being mea- 
 sured by the price he is just willing to pay for 
 that Ib. The figure informs us that OM can be 
 sold at the price PM ; but that at any higher price 
 
 not quite so many Ibs. can be sold. There must be then some individual who will 
 buy more at the price PM, than he will at any higher price ; and we are to regard 
 the OMih Ib. as sold to this individual. Suppose for instance that PM represents 
 4s., and that OM represents a million Ibs. The purchaser described in the text is 
 just willing to buy his fifth Ib. of tea at the price 4s., and the OMih or millionth 
 Ib. may be said to be sold to him. If AH and therefore RM represent 2s., the 
 Consumers' Bent derived from the OMih Ib. is the excess of PM or 4s. which the 
 purchaser of that Ib. would have been willing to pay for it over RM the 2s. which 
 he actually does pay for it. Let us suppose that a very thin vertical parallelogram 
 is drawn of which the height is PM and of which the base is the distance along Ox 
 that measures the single unit or Ib. of tea. It will be convenient henceforward to 
 regard price as measured not by a mathematical straight line without thickness, 
 as PM ; but by a very thin paraUelogram, or as it may be called a thick straight 
 line, of which the breadth is in every case equal to the distance along Ox which 
 measures a unit or Ib. of tea. Thus we should say that the total satisfaction 
 derived from the OMth Ib. of tea is represented (or, on the assumption made in 
 the last paragraph of the text is measured) by the thick straight line MP ; 
 that the price paid for this Ib. is represented by the thick straight line MR 
 and the Consumers' Rent derived from this Ib. by the thick straight line RP. 
 Now let us suppose that such thin parallelograms, or thick straight lines, are 
 drawn for all positions of M between and H, one for each Ib. of tea. The 
 thick straight lines thus drawn, as MP is, from Ox up to the demand curve 
 will each represent the aggregate of the satisfaction derived from a Ib. of tea ; 
 and taken together thus occupy and exactly fill up the whole area DOHA. 
 Therefore we may say that the area DOHA represents the aggregate of the satis- 
 faction derived from the consumption of tea. Again, each of the straight lines 
 drawn, as MR is, from Ox upwards as far as AC represents the price that actually 
 is paid for a Ib. of tea. These straight lines together make up the area COHA ; 
 and therefore this area represents the total price paid for tea. Finally each 
 of the straight lines drawn as RP is from AC upwards as far as the demand 
 curve, represents the Consumers' Rent derived from the corresponding Ib. of tea. 
 These straight lines together make up the area DC A ; and therefore this area 
 represents the total Consumers' Rent that is derived from tea when the price is 
 
THIS ANALYSIS MERELY GIVES FORM TO FAMILIAR NOTIONS. 205 
 
 This analysis, with its new names and elaborate machinery, BOOK m. 
 appears at first sight laboured and unreal. But on closer 
 study it will be found to introduce no new difficulties and to f^fysis 
 make no new assumptions ; but only to bring to light ^^JJ ly 
 difficulties and assumptions that are latent in the common definite 
 
 , , ... , i expression 
 
 language of the market-place. For in this, as in other cases, to familiar 
 the apparent simplicity of popular phrases veils a real com- n( 
 plexity, and it is the function of analysis to bring .out that 
 latent complexity ; to face it ; and to reduce it as far as 
 possible : so that in later stages we may handle firmly 
 difficulties that could not be grasped with a good grip by the 
 vague thought and language of ordinary life. 
 
 It is a common saying in ordinary life that the real value 
 of things to us is not gauged by the price we pay for them : 
 that, though we spend for instance much more on tea than 
 on salt ; yet salt is of greater real value to us ; and that this 
 would be clearly seen, if we were entirely deprived of it. 
 This line of argument implies that we cannot trust the / 
 marginal utility of a commodity to indicate its total utility : 
 for though, when a person spends sixpence on a quarter of a 
 pound of tea instead of on a stone of salt, he does so because 
 he prefers the tea : yet he would not prefer the tea if he did 
 not know that he could easily get whatever salt he needed 
 for his more urgent requirements. And if an attempt were 
 made to give this vague saying greater definiteness, the 
 ordinary course would be to estimate first the price that 
 people would pay for a small quantity of tea, rather than go 
 without it ; and next what they would pay for further sup- 
 plies, if it became a little more plentiful ; and next what they 
 
 AH. But it must be repeated that this geometrical measurement is only an 
 aggregate of the measures of benefits which are not all measured on the same 
 scale except on the assumption just made in the text. Unless that assumption is 
 made the area only represents an aggregate of satisfactions, the several amounts of 
 which are not exactly measured. On that assumption only, its area measures the 
 volume of the total net satisfaction derived from the tea by its various purchasers. 
 The notion of an exact measurement of Consumers' Rent was published by 
 Dupuit in 1844. But his work was forgotten; and the first to publish a clear 
 analysis of the relation of total to marginal (or final) utility in the English 
 language was Jevons in 1871, when he had not read Dupuit. The notion of Con- 
 sumers' Rent was suggested to the present writer by a study of the mathematical 
 aspects of demand and utility under the influence of Cournot, von Thiinen and 
 Bentham. 
 
206 VALUE AND UTILITY. 
 
 BOOK in. would pay for further supplies, and so on : and the whole 
 CH - VI ' would be added up. And then the like would be done for 
 salt, and the two would be compared. The process would be 
 the same as in our analysis ; but it would remain vague ; or 
 if an attempt were made to be definite and exact, there 
 would be much waste of labour in the absence of appropriate 
 phrases and machinery 1 . 
 
 Allowance In any such reasoning in ordinary life it would be 
 made assumed that a pound's worth of gratification to one English- 
 necessary man might be taken as equivalent with a pound's worth to 
 for differ- ano ther, " to start with," and " until cause to the contrary 
 sensibility ; were shown." But every one would know that this was a 
 reasonable course only on the supposition that the consumers 
 of tea and those of salt belonged to the same classes of 
 people ; and included people of every variety of temperament 2 , 
 and for A much more important point practically is that a 
 
 of wealth'- pound's worth of satisfaction to an ordinary poor man is a 
 much greater thing than a pound's worth of satisfaction to 
 an ordinary rich man : and if instead of comparing tea and 
 salt, which are both used largely by all classes, we compared 
 either of them with champagne or pineapples, the correction 
 
 1 The outlines of this notion are given in the following passage from Harris 
 On Coins 1757, which was followed closely by Adam Smith ; while the analysis 
 was carried further by Ricardo (see below, Note at the end of Book v.). Harris 
 says (p. 5), "Things in general are valued, not according to their real uses in 
 supplying the necessities of men; but rather in proportion to the land, labour 
 and skill that are requisite to produce them. It is according to this proportion 
 nearly, that things or commodities are exchanged one for another ; and it is by the 
 said scale, that the intrinsic values of most things are chiefly estimated. Water 
 is of great use, and yet ordinarily of little or no value ; because in most places, 
 water flows spontaneously in such great plenty, as not to be withheld within the 
 limits of private property ; but all may have enough, without other expense than 
 that of bringing or conducting it, when the case so requires. On the other hand, 
 diamonds being veiy scarce, have upon that account a great value, though they 
 are but little use." 
 
 2 There might conceivably be persons of high sensibility who would suffer 
 specially from the want of either salt or tea : or who were generally sensitive, and 
 would suffer more from the loss of a certain part of their income than others in 
 the same station of life. But it would be assumed that such differences between 
 individuals might be neglected, since we were considering in either case the 
 average of large numbers of people ; though of course it might be necessary to 
 consider whether there were some special reason for believing, say, that those who 
 
 .. laid most store by tea were a specially sensitive class of people. If it could, then 
 a separate allowance for this would have to be made before applying the results of 
 economical analysis to practical problems of ethics or politics. 
 
THIS ANALYSIS MERELY GIVES FORM TO FAMILIAR NOTIONS. 207 
 
 to be made on this account would be more than important : BOOK HI. 
 it would change the whole character of the estimate. In 
 earlier generations many statesmen, and even some econo- 
 mists, neglected to make adequate allowance for considerations 
 of this class, especially when constructing schemes of tax- 
 ation ; and their words or deeds seemed to imply a want of 
 sympathy with the sufferings of the poor ; though more often 
 they were due simply to want of thought. 
 
 On the whole however it happens that by far the greater but it is 
 number of the events with which economics deals, affect in nee dedin 
 
 about equal proportions all the different classes of society ; so 
 
 that if the money measures of the happiness caused by two! groups of 
 
 J I people. 
 
 events are equal, there is not in general any very great 
 difference between the amounts of the happiness in the two 
 cases. And it is on account of this fact that the exact 
 measurement of the Consumers' Rent in a market has 
 already much theoretical interest, and may become of high 
 practical importance. 
 
 It will be noted however that the demand prices of each 
 commodity, on which our estimates of its total utility and 
 consumers' rent are based, assume that other things remain 
 equal, while its price rises to scarcity value : and when the 
 total utilities of two commodities which contribute to the~~~7" 
 same purpose are calculated on this plan, we cannot say that I 
 the total utility of the two together is equal to the sum of \ 
 the total utilities of each separately 1 . /* 
 
 1 Some ambiguous phrases in earlier editions appear to have suggested to 
 some readers the opposite opinion. But the task of adding together the total 
 utilities of all commodities, so as to obtain the aggregate of the total utility of all 
 wealth, is beyond the range of any but the most elaborate mathematical formulae. 
 An attempt to treat it by them some years ago convinced the present writer that 
 even if the task be theoretically feasible, the result would be encumbered by so 
 many hypotheses as to be practically useless. 
 
 Attention has already (pp. 176, 181) been called to the fact that for some 
 purposes such things as tea and coffee must be grouped together as one com- 
 modity: and it is obvious that, if tea were inaccessible, people would increase 
 their consumption of coffee, and vice versa. The loss that people would suffer 
 from being deprived both of tea and coffee would be greater than the sum of ^\ 
 their losses from being deprived of either alone : agd therefore the total utility of I 
 tea and coffee is greaterjhanjlie sum of the total utility of tea calculated-oil the I 
 supposition that people can have recourse to coffee^aHd that of-cuflee cal^Ulttted^/ 
 on a like supposition as to te*h J iu1Tdifnculty^ can be theoretically evaded by 
 grouping the two "rival" commodities together under a common demand schedule. 
 
208 
 
 VALUE AND UTILITY. 
 
 BOOK III. 
 CH. VI. 
 
 It is 
 seldom 
 necessary 
 to take 
 account of 
 changes in 
 the pur- 
 
 command 
 of money. 
 
 We can 
 seldom 
 obtain a 
 complete 
 list of 
 demand 
 
 4. The substance of our argument would not be 
 affected if we took account of the fact that, the more a person 
 spends on anything the less power he retains of purchasing 
 more of it or of other things, and the greater is the value of 
 money to him ; (in technical language every fresh expenditure 
 incjreasesthe marginal value of money ixTKim). But though 
 its sub^nce^wouW notHS^altered, its form would be made 
 more intricate without any corresponding gain ; for there 
 are very few practical problems, in which the corrections to 
 be made under this head would be of any importance 1 . 
 
 There are however some exceptions. For instance, as Mr 
 Giffen has pointed out, a rise in the price of bread makes so 
 large a drain on the resources of the poorer labouring families 
 and raises so much the marginal utility of money to them, that 
 they are forced to curtail their consumption of meat and the 
 more expensive farinaceous foods : and, bread being still the 
 cheapest food which they can get and will take, they consume 
 more, and not less of it. But such cases are rare ; when they 
 are met with they must be treated separately. 
 
 It has already been remarked that we cannot guess at all 
 accurately how much of anything people would buy at 
 prices very different from those which they are accustomed 
 to pay for it : or in other words, that the demand prices for 
 
 On the other hand, if we have calculated the total utility of fuel with reference 
 to the fact that without it we could not obtain hot water to obtain the beverage tea 
 from tea leaves, we should count something twice over if we added to that utility 
 the total utility of tea leaves, reckoned on a similar plan. Other aspects of these 
 two difficulties are examined in Book V. ch. vi. 
 
 Prof. Patten has insisted on the latter of them in various writings, and in 
 particular in some suggestive articles in Vol. in. of the Annals of the American 
 Academy. His own attempt to express the aggregate utility of all forms of 
 wealth is ingenious: but does not appear to take account of all the difficulties 
 of the task. 
 
 1 In mathematical language the neglected elements would generally belong to 
 the second order of small quantities ; and the legitimacy of the familiar scientific 
 method by which they are neglected would have seemed beyond question, had not 
 Prof. Nicholson challenged it. A short reply to him has been given by Prof. 
 Edgeworth in the Economic Journal for March 1894; and a fuller reply by Sig. 
 Barone in the Giornale degli Economisti for Sept. 1884 ; of which some account is 
 given by Mr Sanger in the Economic Journal for March 1895. 
 
 As is indicated in Note vi. in the appendix, formal account could be taken of 
 changes in the marginal utility of money, if it were desired to do so; and if we 
 attempted to add together the total utilities of all commodities, we- should be bound 
 to do so. 
 
LIMITATIONS AND EXTENSIONS. 209 
 
 it would be for amounts very different from those which are BOOK m. 
 
 commonly sold. Our list of demand prices is therefore _! " 
 
 highly conjectural except in the neighbourhood of the njJa s : we 
 customary price ; and the best estimates we can form of the often need 
 whole amount of the utility of anything are liable to large 
 error. But this difficulty is not important practically. For 
 the chief applications of the doctrine of consumers' rent are 
 concerned with such changes in it as would accompany 
 changes in the price of the commodity in question in the 
 neighbourhood of the customary price : that is, they require 
 us to use only that information with which we are fairly 
 well supplied. These remarks apply with special force to 
 necessaries 1 . 
 
 5. There remains another class of considerations which Elements 
 are apt to be overlooked in estimating the dependence of 
 well-being upon material wealth. Not only does a person's 
 happiness often depend more on his own physical, mental looked, 
 and moral health than on his external conditions : but even 
 among these conditions many that are of chief importance 
 
 1 The notion of consumers' rent may help us a little now; and, when our 
 statistical knowledge is further advanced, it may help us a great deal, to decide 
 how much injury would be done to the public by an additional tax of Bd. a pound 
 on tea, or by an addition of ten per cent, to the freight charges of a railway : and 
 the value of the notion is but little diminished by the fact that it would not help 
 us much to estimate the loss that would be caused by a tax of 30s. a pound on tea, 
 or a tenfold rise in freight charges. 
 
 Reverting to our last diagram, we may express this by saying that, if A is the 
 point on the curve corresponding to the amount that is wont to be sold in the 
 market, data can be obtained sufficient for drawing the curve with tolerable 
 correctness for some distance on either side of A ; though the curve can seldom 
 be drawn with any approach to accuracy right up to D. But this is practically 
 unimportant, because in the chief practical applications of the theory of value, we 
 should seldom make any use of a knowledge of the whole shape of the demand 
 curve if we had it. We need just what we can get, that is a fairly correct know- 
 ledge of its shape in the neighbourhood of A. We seldom require to ascertain the 
 total area DC A ; it is sufficient for most of our purposes to know the changes in 
 this area that would be occasioned by moving A through small distances along the 
 curve in either direction. Nevertheless it will save trouble to assume provision- 
 ally, as in pure theory we are at liberty to do, that the curve is completely drawn. 
 
 There is however a special difficulty in estimating the whole of the utility of 
 commodities some supply of which is necessary for life. If any attempt is made 
 to do it, the best plan is perhaps to take that necessary supply for granted, and 
 estimate the total utility only of that part of the commodity which is in excess of 
 this amount. But we must recollect that the desire for anything is much 
 dependent on the difficulty of getting substitutes for it. (See Note VI. in 
 Appendix.) 
 
 M. 14 
 
210 VALUE AND UTILITY. 
 
 BOOK m. for his real happiness are apt to be omitted from an inventory 
 CH - VI " of his wealth. Some are free gifts of nature ; and these 
 might indeed be neglected without great harm if they were 
 always the same for everybody ; but in fact they vary much 
 from place to place. More of them however are elements of 
 collective wealth which are often omitted from the reckoning 
 of individual wealth; but which become important when 
 we compare different parts of the modern civilized world, 
 and even more important when we compare our own age 
 with earlier times. 
 
 So-called Collective action for the purposes of securing common 
 
 assoda- er8 ' well-being, as for instance in lighting and watering the streets, 
 tions w j]i OCCUDV us much towards the end of our inquiries. 
 
 belong to " J * 
 
 the subject Cooperative associations for the purchase of things for 
 auction. personal consumption have made more progress in England 
 than elsewhere : but those for purchasing the things wanted 
 for trade purposes by farmers and others, have until lately 
 been backward in England. Both kinds are sometimes 
 described as Consumers' associations; but they are really 
 associations for economizing effort in certain branches of 
 business, and belong to the subject of Production rather 
 than Consumption. 
 
 We are | 6. When we speak of the dependence of well-being on 
 
 cerned n material wealth, we of course refer to the flow or stream 
 
 f well-being as measured by the flow or stream of incoming 
 rather wealth and the consequent power of using and consuming it. 
 posses- A person's stock of wealth yields by its usance and in other 
 ways an income of happiness : but there is little direct con- 
 nection between the aggregate amount of that stock and his 
 aggregate happiness. And it is for that reason that we have 
 throughout this and preceding chapters spoken of the rich, 
 the middle classes and the poor as having respectively large, 
 medium and small incomes not possessions 1 . 
 
 Ber- In accordance with a suggestion made by Daniel Ber- 
 
 sugges- 8 nouilli, we may perhaps suppose that the satisfaction which 
 
 a person derives from his income may be regarded as 
 
 commencing when he has enough to support life and after- 
 
 wards as increasing by equal amounts with every equal 
 
 1 See Note VIE. in the Appendix. 
 
BROADER ASPECTS OF THE UTILITY OF WEALTH. 211 
 
 successive percentage that is added to his income ; and vice BOOK m. 
 versa for loss of income 1 . 
 
 But after a time new riches often lose a great part of The edge 
 their charms. Partly this is the result of familiarity ; which m' 
 makes people cease to derive much pleasure from accustomed 
 comforts and luxuries, though they suffer greater pain from arit y- 
 their loss. Partly it is due to the fact that with increased 
 riches there often comes either the weariness of age, or at 
 least an increase of nervous strain ; and perhaps even habits of 
 living that lower physical vitality, and diminish the capacity 
 for pleasure. 
 
 In every civilized country there have been some followers The value 
 of the Buddhist doctrine that a placid serenity is the highest 
 
 1 That is to say, if 30 represent necessaries, a person's satisfaction from his 
 income will begin at that point ; and when it has reached 40, an additional 1 
 will add a tenth to the 10 which represents its happiness-yielding power. But if 
 his income were 100, that is 70 above the level of necessaries, an additional 7 
 would be required to add as much to his happiness as 1 if his income were 40: 
 while if his income were 10,030, an additional 1000 would be needed to produce 
 an equal effect (compare Note VIH. in the Appendix). Of course such estimates 
 are very much at random, and unable to adapt themselves to the varying circum- 
 stances of individual life. As we shah" see later, the systems of taxation which are 
 now most widely prevalent follow generally on the lines of Bernouilli's suggestion. 
 Earlier systems took from the poor very much more than would be in accordance 
 with that plan; while the systems of graduated taxation, which are being 
 foreshadowed in several countries, are in some measure based on the assumption 
 that the addition of one per cent, to a very large income adds less to the 
 well-being of its owner than an addition of one per cent, to smaller incomes 
 would, even after Bernouilli's correction for necessaries has been made. 
 
 It may be mentioned in passing that from the general law that the utility to 
 anyone of an additional 1 diminishes with the number of pounds he already has, 
 there follow two important practical principles. The first is that gambling 
 involves an economic loss, even when conducted on perfectly fair and even terms. 
 For instance, a man who having 600 makes a fair even bet of 100, has now an 
 expectation of happiness equal to half that derived from 700, and half that 
 derived from 500 ; and this is less than the certain expectation of the happiness 
 derived from 600, because by hypothesis the difference between the happiness 
 got from 600 and 500 is greater than the difference between the happiness got 
 from 700 and 600. (Compare Jevons, I. c. Ch. iv. and see Note IX. in the 
 Appendix.) The second principle, the direct converse of the first, is that a 
 theoretically fair insurance against risks is always an economic gain. But of 
 course every insurance office, after calculating what is a theoretically fair 
 premium, has to charge in addition to it enough to pay profits on its own capital, 
 and to cover its own expenses of working, among which are often to be reckoned 
 very heavy items for advertising and for losses by fraud. The question whether 
 it is advisable to pay the premium which insurance officers practically do charge, 
 is one that must be decided for each case on its own merits. 
 
 142 
 
212 
 
 VALUE AND UTILITY. 
 
 BOOK III. 
 CH. VI. 
 
 i 
 
 The excel- 
 lence of a 
 moderate 
 income ob- 
 tained by 
 moderate 
 work. 
 
 Expendi- 
 ture for 
 the sake 
 of display. 
 
 ideal of life ; that it is the part of the wise man to root out 
 of his nature as many wants and desires as he can ; that real 
 riches consist not in the abundance of goods but in the 
 ucity of wants. At the other extreme are those who 
 maintain that the growth of new wants and desires is always 
 beneficial because it stimulates people to increased exertions. 
 They seem to have made the mistake, as Mr Herbert Spencer 
 says ; of supposing that life is for working, instead of working 
 for life 1 . 
 
 The truth seems to be that as human nature is consti- 
 tuted, man rapidly degenerates unless he has some hard work 
 to do, some difficulties to overcome ; and that some strenuous 
 exertion is necessary for physical and moral health. The 
 fulness of life lies in the development and activity of as many 
 and as high faculties as possible. There is intense pleasure 
 in the ardent pursuit of any aim, whether it be success in 
 business, the advancement of art and science, or the improve- 
 ment of the condition of one's fellow-beings. The highest 
 constructive work of all kinds must often alternate between 
 periods of over-strain and periods of lassitude and stagnation ; 
 but for ordinary people, for those who have no strong am- 
 bitions, whether of a lower or a higher kind, a moderate income 
 earned by moderate and fairly steady work offers the best 
 opportunity for the growth of those habits of body, mind, 
 and spirit in which alone there is true happiness. 
 
 There is some misuse of wealth in all ranks of society. 
 And though, speaking generally, we may say that every 
 increase in the wealth of the working classes adds to the 
 fulness and nobility of human life, because it is used chiefly 
 in the satisfaction of real wants ; yet even among the artisans 
 in England, and perhaps still more in new countries, there 
 are signs of the growth of that unwholesome desire for wealth 
 as a means of display which has been the chief bane of the 
 well-to-do classes in every civilized country. Laws against 
 luxury have been futile ; but it would be a gain if the moral 
 sentiment of the community could induce people to avoid 
 all sorts of display of individual wealth. There are indeed 
 
 1 See his lecture on the Oonpd of Relaxation. 
 
WISDOM IN THE PURSUIT AND USE OF WEALTH. 213 
 
 true and worthy pleasures to be got from wisely ordered BOOKIU. 
 magnificence : but they are at their best when free from any c ^_^' 
 taint of personal vanity on the one side and envy on the ^f erior 
 other ; as they are when they centre round public buildings, nobility of 
 public parks, public collections of the fine arts, and public lective 
 games and amusements. So long as wealth is applied to private use 
 provide for every family the necessaries of life and culture, of wealth - 
 and an abundance of the higher forms of enjoyment for col- 
 lective use, so long the pursuit of wealth is a noble aim ; and 
 the pleasures which it brings are likely to increase with 
 the growth of those higher activities which it is used 
 to promote. 
 
 When the necessaries of life are once provided, everyone The 
 should seek to increase the beauty of things in his possession purchaser 
 rather than their number or their magnificence. An im- the pro- 8 
 provement in the artistic character of furniture and clothing flucer - 
 trains the higher faculties of those who make them, and is a 
 source of growing happiness to those who use them. But if We thus 
 
 approach 
 
 instead of seeking for a higher standard of beauty, we spend the fringe 
 
 , i j of broad 
 
 our growing resources on increasing the complexity ana in- inquiries, 
 tricacy of our domestic goods, we gain thereby no true benefit, ^^ 
 no lasting happiness. The world would go much better if deferred, 
 everyone would buy fewer and simpler things, and would 
 take trouble in selecting them for their real beauty ; being 
 careful of course to get good value in return for his outlay, 
 but preferring to buy a few things made well by highly paid 
 labour rather than many made badly by low paid labour. 
 But we are exceeding the proper scope of the present Book ; 
 the discussion of the influence on general well-being which is 
 exerted by the mode in which each individual spends his 
 income is one of the more important of those applications of 
 economic science to the art of living which will find their 
 place at the end of this treatise. 
 
BOOK IV. 
 
 THE AGENTS OF PRODUCTION. 
 LAND, LABOUR, CAPITAL AND ORGANIZATION. 
 
 CHAPTER I. 
 
 INTRODUCTORY. 
 
 BOOK iv. l. THE agents of production are commonly classed as 
 ' Land, Labour and Capital. By Land is meant the material 
 of h proluc- S an( * the forces which Nature gives freely for man's aid, in land 
 be classed an< ^ wa * er > ^ n au ' an( ^ light and heat. By Labour is meant 
 under all the economic work of man, whether with the hand or the 
 heads, head : but such labour with the head as does not tend directly 
 or indirectly to promote material production is left out of 
 account, so long as we are confining our attention to pro- 
 duction in the common and natural sense of the term 1 . By 
 Capital is meant all stored-up provision for the production of 
 material goods, and for the attainment of those benefits 
 which are commonly reckoned as part of income, 
 capital has Capital consists in a great part of knowledge and organi- 
 zation : and of this some part is private property and other 
 part is not. The distinction between the public and private 
 property in knowledge and organization is of great and 
 growing importance: in some respects of more importance 
 than that between public and private property in material 
 things : it cannot be fully examined bill a much later stage 
 in our inquiry : but something has to be said of it in the 
 present Book. And partly for that reason it seems best 
 
 1 Labour is classed as economic when it is " undergone partly or wholly with 
 a view to some good other than the pleasure directly derived from it." See p. 134 
 and footnote. 
 
RELATIONS BETWEEN THE AGENTS OF PRODUCTION. 215 
 
 sometimes to reckon Organization apart as a distinct Agent BOOK iv. 
 of production. 
 
 In a sense there are only two agents of production, but for 
 Nature and Man. Capital and Organization are the result purposes 
 of the work of man aided by nature, and directed by his UI 
 power of forecasting the future and his willingness to make 
 provision for it. If the character and powers of nature and 
 of man be given, the growth of wealth and knowledge and 
 organization follow from them as effect from cause. But on 
 the other hand man is himself largely formed by his surround- 
 ings, in which nature plays a great part : and thus from 
 every point of view man is the centre of the problem of 
 Production as well as that of Consumption ; and also of that 
 further problem of the relations between the two, which goes 
 by the twofold name of Distribution and Exchange. 
 
 The growth of mankind in numbers, in health and Man both 
 strength, in knowledge, ability, and in richness of character an( j an 
 is the end of all our studies : but it is an end to which a f^ uc t f ion 
 economics can do no more than contribute some important 
 elements. In its broader aspects therefore the study of this 
 growth belongs to the end, if to any part of a treatise on 
 economics : but does not properly belong even there. Mean- 
 while we cannot avoid taking account of the direct agency of 
 man in production, and of the conditions which govern his 
 efficiency as a producer. And on the whole it is perhaps 
 the most convenient course, as it certainly is that most in 
 accordance with English tradition, to include some account 
 of the growth of population in numbers and character as a 
 part of the general discussion of Production 1 . 
 
 1 The objections to the English practice are well stated by Prof. Wagner 
 (Harvard Journal of Economics, Vol. v. pp. 332 3) ; but nothing much is gamed 
 by a compact and thorough treatment of Population, unless it is on a scale which 
 would make the treatise far too long for English readers. In the present work 
 the simpler aspects of agriculture are treated early ; partly on account of their 
 historical connection with the doctrine of population ; partly to make way for a 
 gradual development of the notion of industrial organization in the remainder of 
 the Book. In the great treatise edited, and for the greater part written by Prof. 
 Wagner, Agriculture (Agranvesen und Agrarpolitik} by Prof. Buchenberger fills 
 a large volume, the second of the whole treatise. The first volume is given 
 to Foundations ( Grundlegung) ; the first hah* of it being occupied with Fun- 
 damental Notions and Method; the second with Population, Industrial Organi- 
 zation and the economic aspects of the State. 
 
216 INTRO D UCTOR Y. 
 
 BOOK iv. 2. It is not possible at this stage to do more than 
 
 CH " *' indicate very slightly the general relations between Demand 
 
 Pr - V hesis al an d Supply, between Consumption and Production. But it 
 
 of demand ma y b e W ell, while the discussion of utility and value is 
 
 ' fresh in our minds, to take a short glance at the relations 
 
 between value and the disutility or discommodity that has 
 
 to be overcome in order to obtain those goods which have 
 
 value because they are at once desirable and difficult of 
 
 attainment. All that can be said now must be provisional ; 
 
 and may even seem rather to raise difficulties than to solve 
 
 them : but there will be an advantage in having before us a 
 
 map, in however slight and broken outline, of the ground to 
 
 be covered. 
 
 ordinary While demand is based on the desire to obtain com- 
 
 labour 
 
 being modities, supply depends mainly on the overcoming of the 
 foriiins- unwillingness to undergo "discommodities." These fall gene- 
 lon ' rally under two heads : labour, and the sacrifice involved in 
 putting off consumption. It must suffice here to give a 
 sketch of the part played by ordinary labour in supply. It 
 will be seen hereafter that remarks similar, though not quite 
 the same, might have been made about the work of manage- 
 ment and the sacrifice which is involved (sometimes, but not 
 always) in that waiting which is involved in accumulating 
 the means of production. 
 
 The The discommodity of labour may arise from bodily or 
 
 modities of mental fatigue, or from its being carried on in unhealthy 
 
 various! surroundings, or with unwelcome associates, or from its 
 
 occupying time that is wanted for pastime, or for social or 
 
 intellectual pursuits. But whatever be the form of the 
 
 discommodity, its intensity nearly always increases with the 
 
 severity and the duration of labour. 
 
 as are its Of course much exertion is undergone for its own sake, 
 
 motives. f . . . 
 
 as tor instance in mountaineering, m playing games and in 
 the pursuit of literature, of art, and of science ; and much 
 hard work is done under the influence of a desire to benefit 
 others. But the chief motive to most labour, in our use of 
 the term, is the desire to obtain some material advantage ; 
 which in the present state of the world appears generally in 
 the form of the gain of a certain amount of money. It is 
 
FORECAST OF ANALOGIES BETWEEN UTILITY AND COST. 21 7 
 
 true that even when a man is working for hire he often finds BOOK iv. 
 pleasure in his work : but he generally gets so far tired _ _' 
 before it is done that he is glad when the hour for stopping 
 arrives. Perhaps after he has been out of work for some time, 
 he might, as far as his immediate comfort is concerned, rather 
 work for nothing than not work at all ; but he will probably 
 prefer to store up his strength till he can get paid for his 
 work. In most occupations ever that part of the work which 
 affords him more pleasure than pain must as a rule be paid 
 for at the same rate as the rest ; the price of the whole there- 
 fore is determined by that part of the labour which he gives 
 most unwillingly, and is on the verge of refusing to give ; or 
 as we may say by the Marginal disutility of labour 1 . 
 
 As with every increase in the amount of a commodity Marginal 
 offered for sale, its marginal utility falls ; and as with every 
 fall in the marginal utility, there is a fall in the price that can 
 be got for the whole of the commodity, and not for the last 
 part only ; so it is with regard to the supply of labour. On Labour's 
 the one hand if a person makes the whole of his purchases at surplus" 1 
 
 the price which he would be just willing to pay for his 
 last purchases, he gains a Surplus or Rent of satisfaction 
 on his earlier purchases ; since he gets them for less than sumer's 
 he would have paid rather than go without them. And on 
 the other hand, if the price paid to him for doing any work 
 is an adequate reward for that part which he does most 
 unwillingly ; and if, as generally happens, the same payment 
 is given for that part of the work which he does less unwill- 
 ingly and at less real cost to himself; then from that part he 
 obtains a Producer's Surplus or Rent. 
 
 The unwillingness of anyone already in an occupation to Though 
 increase his exertions depends, under ordinary circumstances, labour is 
 on fundamental principles of human nature which economists 
 have to accept as ultimate facts. As Jevons remarks 2 , there 
 is often some resistance to be overcome before setting to 
 work. Some little painful effort is often involved at starting ; 
 but this gradually diminishes to zero, and is succeeded by 
 
 1 See above p. 84 ; also Note X. in the Appendix. 
 
 2 Theory of Political Economy, Ch. v. This doctrine has been emphasized and 
 developed in much detail by Austrian and American economists. 
 
218 INTRODUCTORY. 
 
 BOOK iv. pleasure ; which increases for a while until it attains a certain 
 CH-I ' low maximum ; after which it diminishes to zero, and is suc- 
 ceeded by increasing weariness and craving for relaxation and 
 change. In intellectual work, however, the pleasure and ex- 
 citement, after they have once set in, often go on increasing 
 till progress is stopped of necessity or by prudence. Every- 
 one in health has a certain store of energy on which he can 
 draw, but which can only be replaced by rest ; so that if 
 his expenditure exceed his income for long, his health 
 becomes bankrupt ; and employers often find that in cases 
 of great need a temporary increase of pay will induce their 
 workmen to do an amount of work which they cannot long 
 keep up, whatever they are paid for it. One reason of this 
 is that with every increase in the hours of labour beyond a 
 certain limit the need for relaxation and the craving for it 
 increase, at all events among those who are in a healthy 
 condition. The marginal disutility of labour increases ; partly 
 because, as the time left for rest and other activities dimi- 
 nishes, the marginal utility of free time increases. 
 the Subject to these and some other qualifications, it is 
 
 broadly true that the exertions which any set of workers 
 
 ?s overned w ^ ma> ke, rise or fall with a rise or fall in the remuneration 
 by the which is offered to them. As the price required to attract 
 
 price to be . L * 
 
 got for it. purchasers for any given amount of a commodity, was called 
 the Demand price for that amount ; so the price required to 
 call forth the exertion necessary for producing any given 
 
 Supply amount of a commodity, may be called the Supply price for 
 that amount. And if for the moment we assumed that 
 production depended solely upon the exertions of a certain 
 number of workers, already in existence and trained for their 
 work, we should get a list of supply prices (a Supply Sche- 
 dule) corresponding to the list of demand prices (or Demand 
 Schedule) which we have already considered. This list 
 would set forth theoretically in one column of figures various 
 amounts of exertion and therefore of production ; and in a 
 parallel column the prices which must be paid to induce the 
 available workers to put forth these amounts of exertion. 
 
 Forecasts But this simple method of treating the supply of labour 
 of any kind, and consequently the supply of goods made by 
 
ILLUSTRATION FROM THE CASE OF ORDINARY LABOUR. 219 
 
 that labour, assumes that the number of those who are BOOKIV. 
 
 CH. I. 
 
 qualified for it is fixed ; and that assumption can be made !_' 
 
 only for short periods of time. In the long run the supply relations of 
 of labour in any trade is adapted more or less closely to the demand 
 demand for it : parents bring up their children to the most 
 advantageous occupations to which they have access ; that is 
 to those that offer the best reward, in wages and other 
 advantages, in return for labour that is not too severe in 
 quantity or character, and for skill that is not too hard to be 
 acquired. But this adjustment between demand and supply 
 can never be perfect ; fluctuations of demand may make it 
 much greater or much less for a while, even for many years, 
 than would have been just sufficient to induce parents to 
 select that trade rather than some other of the same class 
 for their children. Although therefore the reward to be had 
 for any kind of work at any time does stand in some relation 
 to the difficulty of acquiring the necessary skill combined 
 with the exertion, the disagreeableness, the waste of leisure, 
 etc. involved in the work itself; yet this correspondence is 
 liable to great disturbances. The study of these disturbances 
 is a difficult task ; and it will occupy us much in later stages 
 of our work, and especially in the fifth and sixth Books. 
 But the present Book is mainly descriptive and raises few 
 difficult problems 1 . 
 
 1 It may be observed, however, that this income of labour, together with a 
 similar income of capital, varying as it does with changes in opportunity or 
 conjuncture, will be called hereafter a Quasi-rent ; and that it is of a different 
 nature from that permanent surplus discussed earlier in this section and corre- 
 sponds rather to the income derived from land in a new country, which sometimes 
 gives the settler a better reward than he had expected. 
 
CHAPTER II. 
 
 THE FERTILITY OF LAND. 
 
 BOOK IV. 
 CH. II. 
 
 The notion 
 that land 
 is a free 
 gift of na- 
 ture while 
 the pro- 
 duce of 
 land is due 
 to man's 
 work is a 
 loose one : 
 but there 
 is a truth 
 under- 
 lying it. 
 
 1. THE requisites of production are commonly spoken 
 of as land, labour and capital : those material things which 
 owe their usefulness to human labour being classed under 
 capital, and those which owe nothing to it being classed as 
 land. The distinction is obviously a loose one : for bricks 
 are but pieces of earth slightly worked up ; and the soil of 
 old settled countries has for the greater part been worked 
 over many times by man, and owes to him its present form. 
 There is however a scientific principle underlying the dis- 
 tinction. While man has no power of creating matter, he 
 creates utilities by putting things into a useful form 1 ; and 
 the utilities made by him can be increased in supply if there 
 is an increased demand for them : they have a supply price. 
 But there are other utilities over the supply of which he has 
 no control, they are given as a fixed quantity by nature and 
 have therefore no supply price. The term " land " has been 
 extended by economists so as to include the permanent 
 sources of these utilities * ; whether they are found in land, 
 as the term is commonly used, or in seas and rivers, in sun- 
 shine and rain, in winds and waterfalls. 
 
 When we have inquired what it is that marks off land 
 from those material things which we regard as products 
 
 1 See Book n. Chapter iii. 
 
 2 In Kicardo's famous phrase "the original or indestructible properties of the 
 soil." Von Thiinen, in a noteworthy discussion of the basis of the theory of rent, 
 and of the positions which Adam Smith and Ricardo took with regard to it, 
 speaks of "Der Boden an sich"; a phrase which unfortunately cannot be trans- 
 lated, but which means the soil as it would be by itself, if not altered by the 
 action of man (Der IsoUrte Staat, i. i. 5). 
 
MECHANICAL AND CHEMICAL CONDITIONS OF FERTILITY. 221 
 
 of the land, we shall find that the fundamental attribute of BOOK iv. 
 
 land is its extension. The right to use a piece of land gives ' 
 
 command over a certain space a certain part of the earth's 
 surface. The area of the earth is fixed : the geometric re- 
 lations in which any particular part of it stands to other 
 parts are fixed. Man has no control over them ; they are 
 wholly unaffected by demand ; they have no cost of pro- 
 duction, there is no supply price at which they can be 
 produced. 
 
 The use of a certain area of the earth's surface is a 
 primary condition of anything that man can do; it gives 
 him room for his own actions, with the enjoyment of the 
 heat and the light, the air and the rain which nature assigns 
 to that area ; and it determines his distance from, and in a 
 great measure his relations to, other things and other persons. 
 We shall find that it is this property of " land " which, though 
 as yet insufficient prominence has been given to it, is the 
 ultimate cause of the distinction which all writers on econo- 
 mics are compelled to make between land and other things. 
 It is the foundation of much that is most interesting and 
 most difficult in economic science. 
 
 Some parts of the earth's surface contribute to production 
 chiefly by the services which they render to the navigator : 
 others are of chief value to the miner ; others though this 
 selection is made by man rather than by nature to the 
 builder. But when the productiveness of land is spoken of 
 our first thoughts turn to its agricultural use. 
 
 2. To the agriculturist an area of land is the means of 
 supporting a certain amount of vegetable, and perhaps ulti- 
 mately of animal, life. For this purpose the soil must have 
 certain mechanical and chemical qualities. 
 
 Mechanically, it must be so far yielding that the fine Mechanical 
 roots of plants can push their way freely in it ; and yet it of'fertmty. 
 must be firm enough to give them a good hold. It must not 
 err as some sandy soils do by affording water too free a pas- 
 sage : for then it will often be dry, and the plant food will be 
 washed away almost as soon as it is formed in the soil or put 
 into it. Nor must it err, as stiff clays do, by not allowing 
 the water a fairly free passage. For constant supplies of 
 
222 THE FERTILITY OF LAND. 
 
 BOOK iv. fresh water, and of the air that it brings with it in its journey 
 CH ' "' through the soil, are essential : they convert into plant food 
 the minerals and gases that otherwise would be useless or 
 even poisonous. The action of fresh air and water and of 
 frosts are nature's tillage of the soil ; and even unaided they 
 will in time make almost any part of the earth's surface 
 fairly fertile if the soil that they form can rest where it is, 
 and is not torn away down-hill by rain and torrents as soon 
 as it is formed. But man gives great aid in this mechanical 
 preparation of the soil. The chief purpose of his tillage is to 
 help nature to enable the soil to hold plant roots gently but 
 firmly, and to enable the air and water to move about freely 
 in it. Even when he manures the ground he has this me- 
 chanical preparation in view. For farmyard manure benefits 
 clay soils by subdividing them and making them lighter and 
 more open, no less than by enriching them chemically ; while 
 to sandy soils it gives a much needed firmness of texture, and 
 helps them, mechanically as well as chemically, to hold the 
 materials of plant food which would otherwise be quickly 
 washed out of them. 
 
 Chemical Chemically the soil must have the inorganic elements 
 
 of fertility. that tne P lant wan ts in a form palatable to it. The greater 
 part of the bulk of the plant is made up of so-called " organic 
 compounds"; that is, compounds of carbon chiefly with 
 oxygen, hydrogen and nitrogen 1 ; and of these it obtains by 
 far the greater part from air and water. Only a small frac- 
 tion (somewhere about a twentieth on an average) of its dry 
 bulk consists of mineral matter that it cannot get except 
 from the soil. And as most soils have given them by nature 
 at least some small quantities of all the mineral substances 
 that are necessary for plant life, they can support some sort 
 of vegetation without human aid. Often however they have 
 but very scanty provision of one or two necessary elements ; 
 phosphoric acid, potash and lime being those of which the 
 
 1 They are called organic, not because they really are organized, but because 
 they are found in vegetable and animal organisms ; and because at one time 
 chemists thought that none of them could be made except as a process of organic 
 growth. But Liebig showed that it was a mistake to suppose that plants can 
 absorb organized matter. It must become unorganized before it can be plant 
 food. 
 
MAN'S ACTION ON THE SOIL. 223 
 
 supplies are most apt to run short. It may indeed happen BOOK iv. 
 that the deficient food is one of which some kinds of plants ^1^' 
 require only a little, and then there may be a fairly good 
 growth of just those plants ; but such cases are rare ; and the 
 vegetation generally is poor and thin whenever the soil is 
 deficient in one of the mineral constituents of plant life. If 
 however it be well provided in other respects, and in a good 
 condition mechanically, there is an opportunity for man to 
 make a great change with but little labour. He can then 
 turn a barren into a very fertile soil by adding a small quan- 
 tity of just those things that are needed ; using in most 
 cases either lime in some of its many forms, or those artificial 
 manures which modern chemical science has provided in 
 great variety. 
 
 Again, these special manures are of the highest import- Manures, 
 ance to supply particular mineral elements of plant food of 
 which the soil is robbed by the animal and vegetable products 
 which are sold away from the land. It is true that the soil 
 itself has often large " dormant " stores of many of these 
 things. They are dormant because they are not in a fit 
 chemical and mechanical condition to be consumed by the 
 plant. To bring them into that condition and make them 
 " active " food, they must be well plied with oxygen and 
 carbonic acid gas. This may be effected by proper tillage, 
 eve a the subsoil being forced to give up its stores of dor- 
 mant food, if it has them ; and in that case the land may be 
 kept fertile with very little aid from special manures, parti- 
 cularly if it receives a general return of its lost constituents 
 in the form of farmyard manure 1 . 
 
 1 Farmyard manure contains everything that plant life wants, but in un- 
 equal proportions. It has the advantage of aiding the distribution over the 
 whole of the soil of small particles of everything that the plant wants : each 
 rootlet in contact with decaying vegetable matter finds ready to it all that it 
 needs ; nothing is left out. But the mineral elements form only a small part of 
 farmyard manure. The great bulk of it, exclusive of water, consists of organic 
 compounds. The plant draws its chief supply of these, and can in case of neces- 
 sity get all, from the atmosphere ; though it prefers to obtain some through its 
 roots. The supply of mineral elements in the soil is therefore of primary im- 
 portance: its supply of nitrogen is the chief chemical factor of its "condition," 
 that is, of its readiness to meet any immediate demand on it ; while its supplies of 
 phosphoric acid, potash and lime are the chief chemical factors of its permanent 
 fertility. But the organic compounds in farmyard manure and other decaying 
 
224 
 
 BOOK IV. 
 CH. II. 
 
 Man's 
 power of 
 altering 
 the cha- 
 racter of 
 the soil. 
 
 THE FERTILITY OF LAND. 
 
 3. By all these means the fertility of the soil can be 
 brought under man's control. He can by sufficient labour 
 make almost any land bear large crops. He can prepare the 
 soil mechanically and chemically for whatever crops he 
 intends to grow next. He can adapt his crops to the nature 
 of the soil and to one another; selecting such a rotation that 
 each will leave the land in such a state, and at such a time of 
 year, that it can be worked up easily and without loss of time 
 into a suitable see<^be*d for the coming crop 1 . He can even 
 
 vegetable matter in the soil are of great use even in this respect j.f*or they work 
 the dormant mineral plant food in the soil up into an active form, and hold stores 
 of it ready for the plant. Certain crops absorb an exceptionally large amount of 
 certain minerals and these may happen not to come back in manure to the 
 particular land from which they are taken; and of course any such special 
 deficiency cannot be made good by farmyard manure without giving the soil more 
 than it wants of some other things. Lime for instance sometimes runs short ; 
 and potash is often in great demand on sandy soils, particularly when root crops 
 are grown on them. But the most important case is that of phosphoric acid. 
 Of this the soil has scarcely ever any large quantity; while plants, particularly 
 cereals, require a good deal of it. In fact it is believed that there is very little 
 near the surface of the ground which has not already been many times absorbed 
 into vegetable and thence into animal life ; and it has nearly always to be sup- 
 plied by special manures to land that is required to grow continuous heavy 
 crops, particularly of cereals. Farmyard manure generally contains little of it 
 unless the cattle have been fed largely on grain. Human excrements are rich in 
 it : and are of great assistance in this way to most peasant proprietors ; but our 
 modern habit of washing sewage out to sea makes the use of artificial manures 
 much more necessary than it was. There is however at last, after many dis- 
 appointments, some prospect of a remedy for this waste. 
 
 1 The basis of most of the modern English rotations is the Norfolk course, 
 which was adapted by Mr Coke (Lord Leicester) to enable light, and so-called 
 "poor," soils to bear good wheat crops. The first crop on his plan is turnips: 
 they do not require to be sown till May or June ; and therefore the winter and 
 spring following the wheat crop, with which the preceding rotation closes, can 
 be spent in tilling, cleaning and manuring. In the spring of the second year 
 barley and clover are sown together : in the third year the clover is consumed : 
 the land can be ploughed up in time for autumn-sown wheat, which finds the 
 soil strengthened mechanically by the clover roots and improved chemically by 
 the nitrogen which these venturesome explorers have brought up from the 
 subsoil. On these lines an immense variety of rotations have been adapted 
 to various soils and conditions of farming, many of them extending over six or 
 seven years. (A list of the chief of them is given in the Memoir of the Agri- 
 culture of England and Wales prepared by the Royal Agricultural Society of 
 England for the International Agricultural Congress 1878. Pages 316 354.) 
 At present rather more than half the cultivated land of the United Kingdom is 
 in permanent pasture ; and of the rest, one-half is in corn crops, rather less than 
 a quarter in green crops, chiefly roots, and rather more than a quarter hi clover 
 and grasses under rotation. In England the permanent pasture is proportion- 
 ately less and the corn crops are greater than in Ireland and Scotland. 
 
ORIGINAL AND ARTIFICIAL PROPERTIES OF LAND. 225 
 
 permanently alter the nature of the soil by draining it, or BOOK iv. 
 by mixing with it other soil that will supplement its defici- 
 encies 1 . 
 
 All these changes are likely to be carried out more ex- 
 tensively and thoroughly in the future than in the past. But 
 even now the greater part of the soil in old countries owes 
 much of its character to human action; all that lies just 
 below the surface has in it a large element of capital, the 
 produce of man's past labour : the inherent, or indestructible, 
 properties of the soil, the free gifts of nature, have been 
 largely modified ; partly robbed and partly added to by the 
 work of many generations of men. 
 
 But it is different with that which is above the surface. 
 Every acre has given to it by nature an annual income of 
 heat and light, of air and moisture ; and over these man has 
 but little control. He may indeed alter the climate a little 
 by extensive drainage works or by planting forests, or cutting 
 them down 2 . But, on the whole, the action of the sun and 
 the wind and the rain are an annuity fixed by nature for each 
 plot of land. Ownership of the land gives possession of this 
 annuity : and it also gives the space required for the life and 
 action of vegetables and animals ; the value of this space 
 being much affected by its geographical position. 
 
 We may then continue to use the ordinary distinction original 
 between the original or inherent properties, which the land gcfafpro- 
 derives from nature, and the artificial properties which it Pities of 
 
 land. 
 
 owes to human action ; provided we remember that the first 
 include the space-relations of the plot in question, and the 
 annuity that nature has given it of sunlight and air and 
 
 1 Hitherto this has been done only on a small scale ; chalk and lime, clay and 
 marl have been but thinly spread over the fields; a completely new soil has 
 seldom been made except in gardens and other favoured spots. But it is 
 possible, and even as some think probable, that at some future time the 
 mechanical agencies used in making railways and other great earthworks may be 
 applied on a large scale to creating a rich soil by mixing two poor soils with 
 opposite faults. (See Mr Scott Burn's Directory for the Improvement of Landed 
 Property, p. 239.) As it is, when the subsoil is known to contain important 
 elements which the surface soil has lost, or perhaps has never had, the enter- 
 prising owner will stir it deeply so that the air and fresh water may act on it, 
 and after a time bring some of it up to mix with the surface soil. 
 
 2 See in particular "The Influence of Trees on Climate and Productiveness" 
 in Appendix I. to the Report of the Indian Famine Commission, 1881. 
 
 M. 15 
 
226 
 
 THE FERTILITY OF LAND. 
 
 BOOK IV. 
 CH. II. 
 
 rain ; and that in many cases these are the chief of the in- 
 herent properties of the soil. It is chiefly from them that the 
 ownership of agricultural land derives its peculiar signifi- 
 cance, and the Theory of Rent its special character 1 . But 
 
 1 There is some interest in the attempt to distinguish that part of the value 
 of land which is the result of man's labour, from that which is due to the original 
 bounty of nature. Part of its value is caused by highways and other general 
 improvements that were made for the general purposes of the country, and are 
 not a special charge on its agriculture. Counting these in, List, Carey, Bastiat 
 and others contend that the expense of bringing laud from the state in which 
 man found it to its present condition would exceed the whole value it has now ; 
 and hence they argue that all of its value is due to man's labour. Their facts 
 may be disputed ; but they are really not relevant to their conclusions. What is 
 wanted for their argument is that the present value of land should not exceed the 
 expense, in so far as it can properly be charged to agricultural account, of 
 bringing the land from the state in which man found it to a condition in which 
 it would be as fertile and generally useful for agricultural purposes as it now is. 
 Many of the changes wrought in it were made to suit agricultural methods that 
 are long since obsolete ; and some of them even deduct from, rather than add to, 
 the value of the land. And further, the expenses of making the change must 
 be the net expenses after adding indeed interest on the gradual outlay, but also 
 after deducting the aggregate value of the extra produce which has, from first 
 to last, been attributable to the improvement. The value of land in a well- 
 peopled district is generally much greater than these expenses, and often many 
 tunes as great. 
 
 The following table, taken from the above-quoted Memoir of the Royal 
 Agricultural Society, shows the investments of capital per acre on four typical 
 English farms: 
 
 
 
 Cost of 
 
 
 
 
 
 
 
 
 farm 
 
 
 
 Leaving 
 
 
 
 
 Total 
 value. 
 
 buildings 
 and 
 
 Fencing 
 and local 
 
 Drainage. 
 
 for value 
 of land in 
 
 Tenant's 
 capital. 
 
 Rent. 
 
 
 
 labourers' 
 
 roads. 
 
 
 its natural 
 
 
 
 
 
 cottages. 
 
 
 
 condition. 
 
 
 
 
 . s. 
 
 . s. 
 
 . s. d. 
 
 . s. 
 
 . s. d. 
 
 . s. d. 
 
 . s. 
 
 Dairy farm... 
 
 75 
 
 12 15 
 
 2 10 
 
 5 
 
 54 15 
 
 12 
 
 2 10 
 
 Mixed arable 
 
 
 
 
 
 
 
 
 and pasture 
 
 45 
 
 8 
 
 200 
 
 
 
 35 
 
 12 
 
 1 10 
 
 Ditto upland 
 
 30 
 
 6 7 
 
 100 
 
 
 
 22 13 
 
 10 
 
 1 
 
 Pasture farm 
 
 94 10 
 
 7 
 
 1 13 4 
 
 
 
 85 16 8 
 
 12 
 
 3 3 
 
 But the fall in all agricultural values which had begun before 1878, when 
 the Memoir was written, has continued at an increasing rate since then, and 
 there are many who think that the rise in the value of English land during the 
 past generation is a bare return to the capital invested in permanent improve- 
 ments ; that is, they think there has been no rise in the real value of the original 
 properties of the soil for agricultural purposes. M. Leroy Beaulieu (Repartition 
 des Richesses, Ch. n.) holds that this has been the case at all events in Belgium 
 and France; and Mr Pell supports a similar opinion with regard to England by 
 some instructive statistical instances (see an Article on The Making of the Land 
 in England in Vol. xxm. of the Journal of the Eoyal Agricultural Society). The 
 values of the f anns in the United States were $6,645,000,000 in 1860 ; they rose to 
 
THE DOMESTICATION OF PLANTS AND ANIMALS. 227 
 
 the question how far the fertility of any soil is due to the BOOKIV. 
 
 original properties given to it by nature, and how far to the _ ! ' 
 
 changes in it made by man, cannot be fully discussed without 
 taking account of the kind of produce raised from it. 
 
 4. Human agency can do much more to promote the The origi- 
 growth of some crops than of others. At one end of the Ses count 
 scale are forest trees ; an oak well planted and with plenty 
 of room has very little to gain from man's aid : there is no 
 way of applying labour to it so as to obtain any considerable cases 
 
 XT i J.T. i -j * 1 in others. 
 
 return. JN early the same may be said ot the grass on some 
 rich river bottoms which are endowed with a rich soil and 
 good natural drainage; wild animals feeding off this grass 
 without man's care will farm it nearly as well as he does; 
 and much of the richest farm land in England (paying 
 a rent of 6 an acre and upwards) would give to unaided 
 nature almost as great a return as is got from it now 1 . 
 Next comes land which, though not quite so rich, is still 
 kept in permanent pasture ; and after this comes arable 
 land on which man does not trust to nature's sowing, but 
 prepares for each crop a seed bed to suit its special wants, 
 sows the seed himself and weeds away the rivals to it. The 
 seeds which he sows are selected for their habit of quickly 
 maturing and fully developing just those parts which are 
 most useful to him ; and though the habit of making this 
 selection carefully is only quite modern, and is even now far 
 from general, yet the continued work of thousands of years 
 has given him plants that have but little resemblance to 
 their wild ancestors 2 . Lastly, the kinds of produce which 
 
 $7,500,000,000 (estimated in gold) in 1870, and to $10,197,000,000 in 1880. But as 
 General Walker points out (Tenth Census, Vol. vn.p. 23), " It is a familiar feature 
 of paper money inflations that real estate, especially rural real estate, seldom 
 begins to rise so early or continues to rise so long as the prices of commodities." 
 Allowing therefore for only half the premium on gold he gets the value for 1870 at 
 $8,250,000,000: and thus arrives at an increase of about 24% in each of the two 
 decades. 
 
 1 Of course wherever the grass is mown, manure should be returned. It 
 has moreover recently been found that manuring permanent pasture enriches 
 it for a long time to come; for then the richest and finest grasses find within 
 their reach as much food as they can consume, and are thus able to beat out of 
 the field the poorer and coarser sorts. 
 
 2 Perhaps it is not unreasonable to hope that in time plants may be obtained 
 every part of which will serve an important purpose. Just as in the Arctic 
 
 152 
 
228 
 
 THE FERTILITY OF LAND. 
 
 BOOK iv. 
 
 in any 
 extra re- 
 dttionai ad 
 
 minishes 
 
 sooner or 
 
 later. 
 
 owe most to man's labour and care are the choicer kinds of 
 fruits, flowers and vegetables, and of animals, particularly 
 those which are used for improving their own breeds. For 
 while nature left to herself would select those that are best 
 able to take care of themselves and their offspring, man 
 selects those which will provide him most quickly with the 
 largest supplies of the things he most wants ; and many 
 of the choicest products could not hold their own at all 
 without his care. 
 
 Thus various then are the parts which man plays in 
 aiding nature to raise the different kinds of agricultural 
 produce. In each case he works on till the extra Return got 
 by extra capital and labour has so far diminished that it will 
 no longer remunerate him for applying them. Where this 
 limit is soon reached he leaves nature to do nearly all the 
 work ; where his share in the production has been great, it 
 is because he has been able to work far without reaching 
 this limit. We are thus brought to consider the Law of 
 Diminishing Return. 
 
 regions every fragment of the reindeer's body is turned to account, so it may 
 become possible to use as food, or for some other important purpose, both root 
 and leaves, both stem and fruit of our plants. At present we eat the root of the 
 potato, but the rest of the plant is useless except as food for other plants: 
 we eat the leaves of the cabbage, but root and stalk are useless. The wood 
 of the beech tree, the wood and the fruit of the pear tree are turned to good 
 account: but their leaves are left to decay. Possibly (as Mr Moore Ede has 
 suggested to me) chemical science may enable us to use as food many of those 
 vegetable materials which we now throw away. 
 
CHAPTEE III. 
 
 THE FERTILITY OF LAND. CONTINUED. THE LAW OF 
 DIMINISHING RETURN. 
 
 1. THE Law of Diminishing Return may be provi- BOOK iv. 
 sionally stated thus : ' 
 
 An increase in the capital and labour applied in the cul- 
 tivation of land causes in general a less than proportionate of the Law, 
 increase in the amount of produce raised, unless it happens 
 to coincide with an improvement in the arts of agriculture. 
 
 We learn from history and by observation that every which is 
 
 . .. , . , founded on 
 
 agriculturist in every age and dime desires to have the use general 
 of a good deal of land ; and that when he cannot get it ex P erience - 
 freely, he will pay for it, if he has the means. If he thought 
 that he would get as good results by applying all his capital 
 and labour to a very small piece, he would not pay for any 
 but a very small piece. 
 
 When land that requires no clearing is to be had for ?^jj y 
 nothing, everyone uses just that quantity which he thinks cultivated, 
 will give his capital and labour the largest return. His extra cap i_ 
 cultivation is " extensive," not " intensive." He does not aim 
 
 at getting many bushels of corn from any one acre, for then give an In- 
 
 9 creasing 
 
 he would cultivate only a few acres. His purpose is to get as Return 
 
 11-1 j-j. c J until a 
 
 large a total crop as possible with a given expenditure ot seed max imum 
 and labour; and therefore he sows as many acres as he can b *en reach- 
 manage to bring under a light cultivation. Of course he may ^j.^ J 
 go too far : he may spread his work over so large an area that will di- 
 
 i j i i_ minish 
 
 he would gain by concentrating his capital and labour on a agaui> 
 smaller space ; and under these circumstances if he could get 
 command over more capital and labour so as to apply more to 
 each acre, the land would give him an Increasing Return] 
 
230 THE FERTILITY OF LAND. 
 
 BOOK iv. that is, an extra return larger in proportion than it gives to 
 cn^ra. j^ s p resen t expenditure. But if he has made his calculations 
 rightly, he is using just so much ground as will give him the 
 highest return ; and he would lose by concentrating his capital 
 and labour on a smaller area. If he had command over more 
 capital and labour and were to apply more to his present 
 land, he would gain less than he would by taking up more 
 land ; he would get a Diminishing Return, that is, an extra 
 return smaller in proportion than he gets for the last applica- 
 tions of capital and labour that he now makes, provided of 
 course that there is meanwhile no perceptible improvement 
 in his agricultural skill. As his sons grow up they will have 
 more capital and labour to apply to land ; and in order to avoid 
 obtaining a Diminishing Return, they will want to cultivate 
 more land. But perhaps by this time all the neighbouring 
 land is already taken up, and in order to get more they must 
 buy it or pay a rent for the use of it, or migrate where they 
 can get it for nothing. 
 
 Were it This tendency to a Diminishing Return was the cause of 
 
 every farm- Abraham's parting from Lot 1 , and of most of the migrations 
 savTmost f which history tells. And wherever the right to cultivate 
 
 b* ? * r i ent ^ anc ^ * s mucn m request, we may be sure that the tendency 
 ing all his to a Diminishing Return is in full operation. Were it not 
 labour to a for this tendency every farmer could save nearly the whole of 
 d. n ^ s ren * ^7 gi y i n g U P a ll but a small piece of his land, and 
 bestowing all his capital and labour on that. If all the 
 capital and labour which he would in that case apply to it, 
 gave as good a return in proportion as that which he now 
 applies to it, he would get from that plot as large a produce 
 as he now gets from his whole farm ; and he would make a 
 net gain of all his rent save that of the little plot that he 
 retained. 
 
 It may be conceded that the ambition of farmers often 
 leads them to take more land than they can properly manage : 
 and indeed almost every great authority on agriculture from 
 Arthur Young downwards, has inveighed against this mis- 
 take. But when they tell a farmer that he would gain by 
 
 1 " The land was not able to bear them, that they might dwell together : for 
 their substance was great, so that they could not dwell together." Genesis xiii. 6. 
 
THE LAW IS BASED ON GENERAL EXPERIENCE. 231 
 
 applying his capital and labour to a smaller area, they do not BOOK iv. 
 necessarily mean that he would get a larger gross produce. c ^_^' 
 It is sufficient for their argument that the saving in rent 
 would more than counterbalance any probable diminution of 
 the total returns that he got from the land. If a farmer 
 pays a fourth of his produce as rent, he would gain by con- 
 centrating his capital and labour on less land, provided the 
 extra capital and labour applied to each acre gave anything 
 more than three-fourths as good a return in proportion, as he 
 got from his earlier expenditure. 
 
 Again, it may be granted that much land, even in a improved 
 country as advanced as England, is so unskilfully cultivated ^ay enable 
 
 that it could be made to give more than double its present al and 
 gross produce if twice the present capital and labour were labour to be 
 
 T i *i4 11 TT TI i 1 profitably 
 
 applied to it skilfully. V ery likely those are right who applied. 
 maintain that if all English farmers were as able, wise and 
 energetic as the best are, they might profitably apply twice 
 the capital and labour that is now applied. Assuming rent 
 to be one-fourth of the present produce, they might get seven 
 hundredweight of produce for every four that they now get : 
 it is conceivable that with still more improved methods they 
 might get eight hundredweight, or even more. But this 
 does not prove that, as things are, further capital and labour 
 could obtain from land an Increasing Return. The fact 
 remains that, taking farmers as they are with the skill and 
 energy which they actually have, we find as the result of 
 universal observation that there is not open to them a short 
 road to riches by giving up a great part of their land, by 
 concentrating all their capital and labour on the remainder, 
 and saving for their own pockets the rent of all but that 
 remainder. The reason why they cannot do this is told in 
 the Law of Diminishing Return. 
 
 It is important to remember that the Return to capital The Law 
 and labour of which the Law speaks, is measured by the to the 
 
 amount of the produce raised independently of any changes 3^^* of 
 that may meanwhile take place in the price of produce ; such, duce not 
 for instance, as might occur if a new railway had been made 
 in the neighbourhood, or a new town population had grown 
 up close by. Such changes will be of vital importance when 
 
232 THE FERTILITY OF LAND. 
 
 BOOK iv. we come to draw inferences from the Law of Diminishing 
 Return, and particularly when we discuss the pressure of 
 increasing population on the means of subsistence. But 
 they have no bearing on the Law itself, because that has to 
 do not with the value of the produce raised, but only with 
 its amount. 
 
 We may now state distinctly the limitations which were 
 implied under the words " in general " in our provisional 
 statement of the Law. The Law is a statement of a 
 tendency which may indeed be held in check for a time by 
 improvements in the arts of production and by the fitful 
 course of the development of the full powers of the soil ; but 
 which must ultimately become irresistible if the demand for 
 produce should increase without limit. Our final statement 
 of the Law may then be divided into two parts, thus : 
 Final Although an improvement in the arts of agriculture may 
 
 of a theLaw. raise the rate of return which land generally affords to any 
 given amount of capital and labour; and although the 
 capital and labour already applied to any piece of land 
 may have been so inadequate for the development of its full 
 powers, that some further expenditure on it even with the 
 existing arts of agriculture would give a more than propor- 
 tionate return; yet these conditions are rare in an old 
 country : and, except when they are present, the application 
 of increased capital and labour to land will add a less than 
 proportionate amount to the produce raised, unless there be 
 meanwhile an increase in the skill of the individual cultivator. 
 Secondly, whatever may be the future developments of the 
 arts of agriculture, a continued increase in the application 
 of capital and labour to land must ultimately result in a 
 diminution of the extra produce which can be obtained by a 
 given extra amount of capital and labour. 
 
 A Dose of 2. Making use of a term suggested by James Mill, we 
 kbour! and mav regard the capital and labour applied to land as con- 
 sisting of equal successive Doses 1 . As we have seen, the 
 return to the first few doses may perhaps be small and a 
 greater number of doses may get a larger proportionate 
 
 1 Some difficulties in the interpretation of this term are considered in a Note 
 at the end of the chapter. 
 
FINAL STATEMENT OF THE LAW. 233 
 
 return ; the return to successive doses may even in ex- BOOK iv. 
 ceptional cases alternately rise and fall. But our law states _! _ ' 
 that sooner or later (it being always supposed that there is 
 meanwhile no change in the arts of cultivation) a point will 
 be reached after which all further doses will obtain a less 
 proportionate return than the preceding doses. 
 
 The dose which only just remunerates the cultivator may Marginal 
 
 ,-,, -77 11 i dose, mar- 
 
 be said to be the marginal dose, and the return to it the gi 
 
 marginal return. If there happens to be in the neighbour- 
 hood land that is cultivated but only just pays its expenses, 
 and so gives no surplus for rent, we may suppose this dose 
 applied to it. We can then say that the dose applied to it 
 is applied to land on the margin of cultivation, and this 
 way of speaking has the advantage of simplicity. But it is 
 not necessary for the argument to suppose that there is any 
 such land : what we want to fix our minds on is the return 
 to the marginal dose : whether it happens to be applied 
 to poor land or to rich does not matter ; all that is necessary 
 is that it should be the last dose which can profitably be 
 applied to that land 1 . 
 
 When we speak of the marginal, or the " last " dose ap- The margi- 
 plied to the land, we do not mean the last in time, we mean no t neces- 
 
 that dose which is on the margin of profitable expenditure ; 
 that is, which is applied so as just to give the ordinary returns time 
 to the capital and labour of the cultivator, without affording 
 any surplus. To take a concrete instance, we may suppose a 
 farmer to be thinking of sending the hoers over a field once 
 more; and after a little hesitation he decides that it is 
 worth his while, but only just worth his while to do it. The 
 dose of capital and labour spent on doing it, is then the last 
 dose in our present sense, though there are many doses still 
 to be applied in reaping the crop. Of course the return to 
 this last dose cannot be separated from the others ; but we 
 ascribe to it all that part of the produce which we believe 
 would not have been produced if the farmer had decided 
 against the extra hoeing 2 . 
 
 1 Eicardo was well aware of this: though he did not emphasize it enough. 
 Those opponents of his doctrine who have supposed that it has no application to 
 places where all the land pays a rent, have mistaken the nature of his argument. 
 
 2 An illustration from recorded experiments may help to make clearer the 
 
234 
 
 THE FERTILITY OF LAND. 
 
 BOOK IV. 
 CH. III. 
 
 Surplus 
 Produce. 
 
 Since the return to the dose on the margin of cultivation 
 just remunerates the cultivator, it follows that he will be 
 just remunerated for the whole of his capital and labour by 
 as many times the marginal return as he has applied doses 
 in all. Whatever he gets in excess of this is the Surplus 
 Produce of the land. This surplus is retained by the culti- 
 vator if he owns the land himself 1 . 
 
 notion of the Return to a marginal dose of capital and labour. The Arkansas 
 Experimental Station (see The Times, 18 Nov. 1889) reported that four plots 
 of an acre each were treated exactly alike except in the matter of ploughing and 
 harrowing, with the f oil o whig result : 
 
 Plot. 
 
 Cultivation. 
 
 Crop yields 
 bushels per 
 
 
 
 acre. 
 
 1 
 
 Ploughed once 
 
 16 
 
 2 
 
 Ploughed once and harrowed once . . . 
 
 
 3 
 
 Ploughed twice and harrowed once . . . 
 
 2l| 
 
 4 
 
 Ploughed twice and harrowed twice . . 
 
 23! 
 
 This would show that the dose of capital and labour applied in harrowing 
 a second time an acre which had already been ploughed twice gave a Return 
 of 1^ bushels. And if the value of these bushels, after allowing for expenses 
 of harvesting, &c. just replaced that dose with profits, then that dose was a 
 marginal one ; even though it was not the last hi point of time, since those spent 
 on harvesting must needs come later. 
 
 1 Let us seek a graphical illustration. If on any given field there were 
 expended a capital of 50, a certain amount of produce would be raised from it : 
 a certain amount larger than the former would be raised if there were expended 
 on it a capital of 51. The difference between these two amounts may be 
 regarded as the produce due to the fifty-first pound; and if we suppose the 
 capital to be applied in successive doses of 1 each we may speak of this 
 difference as the produce due to the fifty-first dose. Let the doses be represented 
 in order by successive equal divisions of the line OD. 
 Let there now be drawn from the division of this line 
 representing the fifty-first dose M, a line MP at right 
 angles to OD, in thickness equal to the length of one A 
 of the divisions, and such that its length represents the 
 amount of the produce due to the fifty-first dose. 
 Suppose this done for each separate division up to that 
 corresponding to the last dose which it is found profit- 
 able to put on the land. Let this last dose be the 110th 
 
 at D, and DO the corresponding return that only just remunerates the farmer. 
 The extremities of such lines will lie on a curve APC. The gross produce will 
 be represented by the sum of these lines: i.e., since the thickness of each line 
 is equal to the length of the division on which it stands, by the area ODCA. 
 Let COH be drawn parallel to DO, cutting PM in G ; then MG is equal to CD ; 
 and since DC just remunerates the farmer for one dose, MG will just remunerate 
 him for another: and so for all the portions of the thick vertical lines cut off 
 
 A' 
 
 Fig. (11). 
 
THE CULTIVATOR'S SURPLUS PRODUCE. 235 
 
 (This Surplus Produce may, under certain conditions, BOOKIV. 
 become the rent which the owner of the land can exact from c f^ I> 
 the tenant for its use. But, as we shall see hereafter, the JJfjJJjf*** 1 
 full rent of a farm in an old country is made up of three 
 elements : the first being due to the value of the soil as it 
 was made by Nature ; the second to improvements made in 
 it by man ; and the third, which is often the most important 
 of all, to the growth of a dense and rich population, and 
 to facilities of communication by public roads, railroads, &c.) 
 
 In an old country it is seldom possible to discover what Ricardo 
 was the original state of the land before it was first culti- his atten- 
 vated. The results of some of man's work are for good and c ircum- 
 evil fixed in the land ; they cannot be distinguished from ^"JJ S of 
 the results of nature's work, but must be counted with country, 
 them. The line of division between nature's work and 
 man's work is blurred, and must be drawn more or less 
 arbitrarily. But for most purposes it is best to regard the 
 first difficulties of coping with nature as pretty well con- 
 quered before we begin to reckon the farmer's cultivation. 
 Thus the returns that we count as due to the first doses of 
 capital and labour are generally the largest of all, and the 
 tendency of the return to diminish shows itself at once. 
 Having English agriculture chiefly in view, we may fairly 
 take, as Ricardo did, this as the typical case 1 . 
 
 between OD and HO. Therefore the sum of these, that is, the area ODCH, 
 represents the share of the produce that is required to remunerate him; while 
 the remainder, AHOCPA, is the Surplus Produce, which under certain conditions 
 becomes the rent, 
 
 1 That is, we may substitute (fig. 11) the dotted line BA' for BA and regard 
 A'BPC as the typical curve for the return to capital and labour applied in 
 English agriculture. No doubt crops of wheat and some other annuals cannot be 
 raised at all without some considerable labour. But natural grasses which sow 
 themselves will yield a good return of rough cattle to scarcely any labour. 
 
 It has already been noticed (Book in. ch. in. 1), the law of Diminishing 
 Return bears a close analogy to the law of Demand. The return which land gives 
 to a dose of capital and labour may be regarded as the price which land offers for 
 that dose. Land's return to capital and labour is, so to speak, her effective demand 
 for them : her return to any dose is her demand price for that dose, and the list 
 of returns that she will give to successive doses may thus be regarded as her 
 demand schedule: but to avoid confusion we shall call it her " Return Schedule." 
 Corresponding to the case of the land in the text is that of a man who may be 
 willing to pay a larger proportionate price for a paper that would cover the whole 
 of the walls of his room than for one that would go only half way ; and then his 
 
236 
 
 THE FERTILITY OF LAND. 
 
 BOOK IV. 
 CH. III. 
 
 The sche- 
 dule of na- 
 ture's re- 
 turn to in- 
 creased ap- 
 plications 
 of capital 
 and labour 
 shows 
 great va- 
 riety of de- 
 tail, ac- 
 cording to 
 the char- 
 acter of 
 the land 
 and of the 
 crops rais- 
 ed from it. 
 
 But the 
 order of re- 
 lative fer- 
 tility of 
 different 
 pieces of 
 land may 
 change 
 with 
 circum- 
 stances. 
 
 3. Let us next inquire on what depends the rate of 
 diminution or of increase of the returns to successive doses of 
 capital and labour. We have seen that there are great varia- 
 tions in the share of the produce which man may claim as 
 the additional result of his own work over what unaided 
 nature would have produced ; and that man's share is much 
 larger with some crops and soils and methods of cultivation 
 than with others. Thus broadly speaking it increases as we 
 pass from forest to pasture land, from pasture to arable, and 
 from plough land to spade land ; and this is because the rate 
 of diminution of the return is as a rule greatest in forests, 
 rather less in pasture, still less in arable land, and least of all 
 in spade land. 
 
 There is no absolute measure of the richness or fertility 
 of land. Even if there be no change in the arts of production, 
 a mere increase in the demand for produce may invert the 
 order in which two adjacent pieces of land rank as regards 
 fertility. The one which gives the smaller produce, when 
 both are uncultivated, or when the cultivation of both is 
 equally slight, may rise above the other and justly rank as 
 the more fertile when both are cultivated with equal tho- 
 roughness. In other words, many of those lands which are 
 the least fertile when cultivation is merely extensive, become 
 among the mos.t fertile when cultivation is intensive. For 
 instance, self-drained pasture land may give a return large 
 in proportion to a very slight expenditure of capital and 
 labour, but a rapidly diminishing return to further expendi- 
 ture : as population increases it may gradually become pro- 
 fitable to break up some of the pasture and introduce a 
 mixed cultivation of roots and grains and grasses ; and then 
 
 demand schedule would at one stage show an increase and not a diminution of 
 demand price for an increased quantity. But in the aggregate demand of many 
 individuals these unevennesses destroy one another; so that the aggregate 
 demand schedule of a group of people always shows the demand price as falling 
 steadily with every increase in the amount offered. In the same way, by grouping 
 together many pieces of land we might obtain a Keturn Schedule that would show 
 a constant diminution for every increase of capital and labour applied. But it is 
 more easy to ascertain, and in some ways more important to take note of, the 
 variations of individual demand in the case of plots of land than in the case of 
 people. And therefore our typical return schedule is not drawn out so as to show 
 as even and uniform a diminution of return as our typical demand schedule does 
 of demand price. 
 
ORDER OF FERTILITY CHANGES WITH CIRCUMSTANCES. 
 
 237 
 
 the return to further doses of capital and labour may dimmish BOOK 
 
 .... CH. I 
 
 less quickly 1 . 
 
 Other land makes poor pasture, but will give more or 
 less liberal returns to a great deal of capital and labour 
 applied in tilling and in manuring it ; its returns to the 
 early doges are not very high, but they dimmish slowly 2 . 
 
 Again, other land is marshy. It may, as did the fens of 
 East England, produce little but osiers and wild fowl. Or, 
 as is the case in many tropical districts, especially on the 
 American Continent, it may be prolific of vegetation, but so 
 shrouded with malaria that it is difficult for man to live 
 there, and still more to work there. In such cases the re- 
 turns to capital and labour are at first small, but as drainage 
 progresses, they increase; afterwards perhaps they again 
 fall off 3 . But when improvements of this kind have once 
 
 1 This case is illustrated by fig. 12; for when produce 
 has risen in real value in the ratio of OH' to OH (so that the 
 amount required to remunerate the farmer for a dose of capital 
 and labour has fallen from OH to OH',} the Surplus Produce 
 rises only to AH'C', which is not very much greater than its 
 old amount AHC. 
 
 2 This case is represented in fig. 13, when a similar 
 change in the price of produce makes the new Surplus H 
 Produce AH'C' about three times as large as the old Sur- H' 
 plus, AHC. 
 
 Fig. (12). 
 
 Fig. (13). 
 
 \c- 
 
 D' 
 
 Fig. (14). 
 
 p 
 
 D' D 
 
 3 This case is represented in fig. 14. The earliest 
 doses of capital and labour applied to the land give so 
 poor a return, that it would not be worth while to 
 apply them unless it were intended to carry the culti- 
 vation further. But later doses give an increasing 
 return which culminates at P, and afterwards di- 
 minishes. If the price to be got for produce is so low 
 that an amount OH" is required to remunerate the 
 
 cultivator for a dose of capital and labour, it will then be only just profitable to 
 cultivate the land. For then cultivation will be carried as far as D" ; there will 
 be a deficit on the earlier doses represented by the area H"AE", and a surplus on 
 the later doses represented by the area E"PC" : and as these two are about equal, 
 the cultivation of the land so far will only just pay its way. But if the price of 
 produce rises till OH is sufficient to remunerate the cultivator for a dose of capital 
 and labour, the deficit on the earlier doses will sink to HAE, and the surplus on 
 the later doses will rise to EPC: the net surplus (the true rent in case the land is 
 hired out) will be the excess of EPC over HAE. Should the price rise further 
 till OH 1 is sufficient to remunerate the cultivator for a dose of capital and labour, 
 
238 THE FERTILITY OF LAND. 
 
 BOOK iv. been made, the capital invested in the soil cannot be re- 
 CH.JII. move( j . the early history of the cultivation is not repeated ; 
 and the produce due to further applications of capital and 
 labour conforms to the Law of Diminishing Return 1 . 
 
 Similar though less conspicuous changes may occur on 
 land already well cultivated. For instance, without being 
 marshy, it may be in need of a little drainage to take off 
 the stagnant water from it, and to enable fresh water and 
 air to stream through it. Or the subsoil may happen to be 
 naturally richer than the soil at the surface : or again, though 
 not itself rich, it may have just those properties in which 
 the surface soil is deficient, and then a thorough system of 
 deep steam-ploughing may permanently change the character 
 of the land. 
 
 Thus we need not suppose that when the return to extra 
 capital and labour has begun to diminish, it will always 
 continue to do so. Improvements in the arts of production 
 may, it has always been understood, raise generally the 
 return which can be got by any amount of capital and 
 labour; but this is not what is meant here. The point is 
 that, independently of any increase in his knowledge, and 
 using only those methods with which he has long been 
 familiar, a farmer finding extra capital and labour at his 
 command, may sometimes obtain an increasing return even 
 at a late stage in his cultivation. His return may diminish 
 and then increase and then diminish again; and yet again 
 increase when he is in a position to carry out some further 
 extensive change 2 . 
 
 It has been well said that as the strength of a chain is 
 that of its weakest link, so fertility is limited by that element 
 
 this net surplus will rise to the very large amount represented by the excess of 
 E'PC' over H'AE'. 
 
 1 In such a case as this the earlier doses are pretty sure to be sunk in the land; 
 and the actual rent paid, if the land is hired out, will then include profits on them 
 in addition to the Surplus Produce or true rent thus shown. Of course provision 
 can be made in the diagrams for the returns due to the landlord's capital. 
 
 Fig. (15). 
 
 2 This case was represented by fig. 11. But more ex- A 
 treme instances, of the kind represented by fig. 15, are not 
 very rare. 
 
FAVOURITE SOILS OF EARLY SETTLERS. 239 
 
 in which it is most deficient. Those who are in a hurry, will BOOK iv. 
 reject a chain which has one or two very weak links, however _! _ ' 
 strong the rest may be ; and prefer to it a much slighter 
 chain that has no flaw. But if there is heavy work to be 
 done, and they have time to make repairs, they will set the 
 larger chain in order, and then its strength will exceed that 
 of the other. In this we find the explanation of much that 
 is apparently strange in agricultural history. 
 
 The first settlers in a new country generally avoid land Land 
 which does not lend itself to immediate cultivation. They 
 are often repelled by the very luxuriance of natural vegeta- 
 
 tion, if it happens to be of a kind that they do not want, settlers is 
 They do not care to plough land that is at all heavy, how- that which 
 
 ever rich it might become if thoroughly worked. They will 
 have nothing to do with water-logged land. They generally 
 select light land which can easily be worked with a double farme . rs > 
 
 * especially 
 
 plough, and then they sow their seed broadly, so that the when good 
 plants when they grow up may have plenty of light and air, have grown 
 and may collect their food from a wide area. Jhem" 
 
 When America was first settled, many farming operations 
 that are now done by horse machinery were still done by 
 hand ; and though now the farmers have a strong preference 
 for flat prairie land, free from stumps and stones, where their 
 machines can work easily and without risk, they had then 
 no great objection to a hill-side. Their crops were light in 
 proportion to their acreage, but heavy in proportion to the 
 capital and labour expended in raising them. 
 
 We cannot then call one piece of land more fertile than Thus any 
 another till we know something about the skill and enter- 
 prise of its cultivators, and the amount of capital and labour 
 at their disposal ; and till we know whether the demand for 
 
 . . stances of 
 
 produce is such as to make intensive cultivation profitable the place 
 with the resources at their disposal. If it is, those lands will 
 be the most fertile which give the highest average returns to 
 a large expenditure of capital and labour ; but if not, those 
 will be the most fertile which give the best returns to the 
 first few doses. The term fertility has no meaning except 
 with reference to the special circumstances of a particular 
 time and place. 
 
240 
 
 THE FERTILITY OF LAND. 
 
 BOOK iv. 
 
 Other 
 change in 
 
 different 
 
 pieces 01 
 land. 
 
 But even when so limited there is some uncertainty as 
 to the usage of the term. Sometimes attention is directed 
 chiefly to the power which land has of giving adequate 
 returns to intensive cultivation and so bearing a large total 
 produce per acre ; and sometimes to its power of yielding a 
 large surplus produce or rent, even though its gross produce 
 is not very large : thus in England now rich arable land is 
 very fertile in the former sense, rich meadow in the latter. 
 For many purposes it does not matter which of these senses 
 of the term is understood : in the few cases in which it does 
 matter, an interpretation clause must be supplied in the 
 context 1 . 
 
 4. But further, the order of fertility of different soils 
 is liable to be changed by changes in the methods of culti- 
 va ti n an d in the relative values of different crops. Thus 
 w hen at the end of last century Mr Coke showed how to 
 grow wheat well on light soils by preparing the way with 
 clover, they rose relatively to clay soils; and now though 
 they are still sometimes called from old custom " poor, " some 
 of them have a higher value, and are really more fertile, 
 than much of the land that used to be carefully cultivated 
 while they were left in a state of nature. 
 
 Again, the increasing demand in Central Europe for wood 
 to be used as fuel and for building purposes, has raised 
 the value of the pine-covered mountain slopes relatively to 
 almost every other kind of land. But in England this rise 
 has been prevented by the substitution of coal for wood as 
 fuel, and of iron for wood as a material for ship-building, 
 and lastly by England's special facilities for importing wood. 
 
 1 If the price of produce is such that an amount of it OH (figs. 12, 13, 14) 
 is required to pay the cultivator for one dose of capital and labour, the cultivation 
 will be carried as far as Z>; and the produce raised, AODC will be greatest in 
 fig. 12, next greatest in fig. 13, and least in fig. 14. But if the demand for 
 agricultural produce so rises that OH ' is enough to repay the cultivator for a 
 dose, the cultivation will be carried as far as D', and the produce raised will 
 be AOD'C', which is greatest in fig. 14, next in fig. 13, and least in fig. 12. 
 The contrast would have been even stronger if we had considered the surplus 
 produce which remains after deducting what is suflicient to repay the cultivator, 
 and which becomes under some conditions the rent of the land. For this is AHC 
 in figs. 12 and 13 in the first case and AH'C' in the second ; while in fig. 14 it 
 is in the first case the excess of AODC PA over ODCH, i.e. the excess of PEG 
 over AHE ; and in the second case the excess of PE'C 1 over AH'E'. 
 
VARIATIONS IN RELATIVE VALUE OF DIFFERENT SOILS. 241 
 
 Again, the cultivation of rice and jute often gives a very BOOKIV. 
 
 high value to lands that are too much covered with water _! ' 
 
 to bear most other crops. And again, since the repeal of the 
 Corn Laws the prices of meat and dairy produce have risen 
 in England relatively to that of corn. Those arable soils 
 that would grow rich forage crops in rotation with corn, rose 
 relatively to the cold clay soils; and permanent pasture re- 
 covered part of that great fall in value relatively to arable 
 land, which had resulted from the growth of population 1 . 
 
 Independently of any change in the suitability of the As a rule 
 prevailing crops and methods of cultivation for special soils, sofls^Se* 
 there is a constant tendency towards equality in the value {j^ to" 
 
 of different soils. In the absence of any special cause to the richer 
 the contrary, the growth of population and wealth will make sure of 
 the poorer soils gain on the richer. Land that was at one 
 time entirely neglected is made by much labour to raise 
 rich crops ; its annual income of light and heat and air, 
 is probably as good as those of richer soils : while its faults 
 can be much lessened by labour 2 . Conversely, the depression 
 
 1 Mr Rogers (Six Centuries oj Work and Wages, p. 73) calculates that while 
 rich meadow had about the same value, estimated in corn five or six centuries 
 ago as it has now, the value estimated in corn of arable land has increased about 
 fivefold in the same time. This is partly due to the great importance of hay at a 
 time when roots and other modern kinds of winter food for cattle were unknown. 
 
 2 Thus we may compare two pieces of land represented in figs. 16 and 17, with 
 regard to which the Law of 
 
 Diminishing Return acts in a A | Fig- (16). 
 
 similar way, so that their pro- ^S- (I?)- 
 
 duce curves have similar shapes, _^S 
 
 but the former has a higher fer- J Pxc* H , 
 
 tility than the other for all de- *" 
 
 grees of intensity of cultivation. 1 -4 g? c 
 
 The value of the land may gene- 
 rally be represented by its surplus produce or rent, which is in each case 
 represented by AHC when OH is required to repay a dose of capital and labour ; 
 and by AH'C' when the growth of numbers and wealth have made OH' sufficient. 
 It is clear that AH'C' in fig. 17 bears a more favourable comparison with AH'C' 
 in fig. 16 than does AHC in fig. 17 with AHC in fig. 16. In the same way, though 
 not to the same extent, the total produce AOD'C' in fig. 17 bears a more favour- 
 able comparison with AOD'C' in fig. 16, than does AODC in fig. 17 with AODC 
 in fig. 16. (Prof. Wicksteed argues ingeniously (Coordination of Laws of Distri- 
 bution, pp. 51-2) that rent may be negative. Of course taxes may absorb rent : 
 but land which will not reward the plough will grow trees or rough grass. See 
 above, p. 235.) 
 
 M. Leroy Beaulieu (Repartition des Richesses, chap, n.) has collected several 
 facts illustrating this tendency of poor lands to rise in value relatively to rich. He 
 
 M. 16 
 
242 THE FERTILITY OF LAND. 
 
 BOOK iv. of English agriculture, through which we are now passing 
 CH ' m ' in consequence of American competition, is lowering the 
 value of poor lands relatively to that of rich lands of the 
 same character; and especially it is lowering the values of 
 those lands which return good crops to a very high cultiva- 
 tion; but which quickly relapse into a poor condition, unless 
 a great deal of capital and labour is constantly spent on them, 
 absotate nO ^" S t * iere * s no ^solute standard for fertility, so there is 
 standard of none of good cultivation. The best cultivation in the richest 
 fivation. parts of the Channel Islands, for instance, involves a lavish 
 expenditure of capital and labour on each acre : for they are 
 near good markets and have a monopoly of an equable and 
 early climate. If left to nature the land would not be very 
 fertile, for though it has many virtues, it has two weak links 
 (being deficient in phosphoric acid and potash). But, partly 
 by the aid of the abundant seaweed on its shores, these links 
 can be strengthened, and the chain thus becomes exception- 
 ally strong. Intense, or as it is ordinarily called in England 
 "good" cultivation, will thus raise 100 worth of early 
 potatoes from a single acre. But an equal expenditure per 
 acre by the fanner in Western America would ruin him; 
 relatively to his circumstances it would not be good, but 
 bad cultivation. 
 
 Ricardo's 5. Ricardo's statement of the Law of Diminishing 
 
 of & the law Return was inexactly worded. It is however probable that 
 
 cm-ateiy C * ne inaccuracy was due not to careless thinking but only to 
 
 worded, careless writing. There are strong reasons for holding that 
 
 he had not overlooked the conditions which were necessary 
 
 to make the law true ; he seems here, as elsewhere, to have 
 
 made the great error of taking for granted that his readers 
 
 would supply those conditions which were present in his own 
 
 mind. In any case he would have been justified in thinking 
 
 that these conditions were not of great importance in the 
 
 peculiar circumstances of England at the time at which he 
 
 quotes from M. H. Passy the following figures, showing the rental in francs per 
 hectare (2 acres) of five classes of land in several communes of the Departemeiits 
 de 1'Eure et de 1'Oise in 1829 and 1852 respectively: 
 
 Class I. Class II. Class III. Class IV. Class V. 
 A.D. 1829 58 48 34 20 8 
 
 A.D. 1852 80 78 60 50 40 
 
GOOD CULTIVATION A RELATIVE TERM. 243 
 
 wrote, and for the special purposes of the particular practical BOOK iv. 
 
 problems he had in view. Of course he could not anticipate ' 
 
 the great series of inventions which were about to open up 
 new sources of supply, and, with the aid of free trade, to 
 revolutionize English agriculture ; but the agricultural 
 history of England and other countries might have led him 
 to lay greater stress on the probability of a change 1 . 
 
 He stated that the first settlers in a new country invari- Ricardo 
 
 J said that 
 
 ably chose the richest lands, and that as population increased, the richest 
 poorer and poorer soils were gradually brought under culti- cultivate? 
 vation, speaking carelessly as though there were an absolute f^true^n 8 
 standard of fertility. But as we have already seen, where * he t e - n j e h 
 land is free, everyone chooses that which is best adapted for meant it : 
 his own purpose, and that which will give him, all things 
 considered, the best return for his capital and labour. He 
 looks out, therefore, for land that can be cultivated at once, 
 and passes by land that has any weak links in the chain of 
 its elements of fertility, however strong it may be in some 
 other links. But besides having to avoid malaria, he must 
 think of his communication with his markets and the base 
 of his resources ; and in some cases the need for security 
 against the attacks of enemies and wild beasts outweighs all 
 
 1 Had he done this, he would have helped his readers to supply the premises 
 that were present in his own mind: if they do that they will find nothing of 
 importance hi his statement of the law of diminishing return, or in his deduc- 
 tions from it, which is not true as far as it goes. As Roscher says (Political 
 Economy, Sect. CLV.), "In judging Ricardo, it must not be forgotten that it was 
 not his intention to write a text-book on the science of Politieal Economy, but 
 only to communicate to those versed in it the result of his researches in as brief 
 a manner as possible. Hence he writes so frequently making certain assump- 
 tions, and his words are to be extended to other cases only after due considera- 
 tion, or rather re-written to suit the changed case." The followers of Rieardo 
 have accepted John Stuart Mill's re-statement of the law in which the conditions 
 necessary to make it exact were introduced. Nevertheless these conditions are 
 habitually ignored even now by some critical writers: they persist in putting 
 forward what they call refutations of the law, but what are really either argu- 
 ments that these conditions ought not to be overlooked or else attacks on 
 inferences or deductions that have been made rightly or wrongly from it. For 
 instance, some people have inferred from the law of diminishing return that 
 the English people now would be better off if their numbers did not increase so 
 fast. This doctrine is a fair matter for argument ; and some of those who have 
 denied it have thought that they were denying the law of diminishing return. 
 But really they were denying something quite different from it. The truth of the 
 law has probably never been questioned by any one who has interpreted it right. 
 
 162 
 
244 THE FERTILITY OF LAND. 
 
 BOOK iv. other considerations. It is therefore not to be expected that 
 CH ' m ' the lands which were first chosen, should turn out always to 
 be those which ultimately come to be regarded as the most 
 fertile. Ricardo did not consider this point, and thus laid 
 himself open to attacks by Carey arid others, which, though 
 for the greater part based on a misinterpretation of his posi- 
 tion, have yet some solid substance in them. 
 
 but it is apt Qf course it often happens that soils which an English 
 understood, farmer would regard as poor, are cultivated before neighbour- 
 by Carey, ing s il s which he would regard as rich. The facts on which 
 the law of diminishing return is based lead us a priori to 
 expect such cases to occur sometimes. Their occasional 
 occurrence is not inconsistent, as some foreign writers have 
 supposed, with the general tenor of Ricardo's doctrines: on 
 the contrary, many of these cases really afford instructive 
 illustrations of those doctrines when rightly understood ; 
 though some of them are to be explained, as has already 
 been said, by the necessity of providing for military safety. 
 By insisting on such facts as these Carey did nothing to 
 invalidate the statement that the returns which a farmer 
 will get by applying extra doses of capital and labour to land 
 already well cultivated will be less than those which he got 
 for the earlier doses, other things being equal ; that is, there 
 being no change in his methods of cultivation, in his markets, 
 or in the other conditions by which he is surrounded. The 
 practical importance of his doctrine lies in its bearing on the 
 conditions under which the growth of population tends to 
 cause increased pressure on the means of subsistence 1 . 
 
 1 Carey claims to have proved that "in every quarter of the world cultivation 
 has commenced on the sides of the hills where the soil was poorest, and where the 
 natural advantages of situation were the least. With the growth of wealth and 
 population, men have been seen descending from the high lands bounding the 
 valley on either side, and coming together at its feet." (Principles of Social 
 Science, Chap. iv. 4.) He had been brought up in the tenets of Eicardo, by a 
 father who had emigrated from Ireland to America, and he began to write as an 
 advocate of Free Trade ; but after a while he was struck by the facts that the soil 
 of New England is nearly the poorest in America; and that whenever he saw 
 ruined houses and the traces of abandoned cultivation he found the soil exception- 
 ally barren. This set him to inquire into the history of the occupation of the 
 earth's surface ; and he has collected a great mass of evidence in support of his 
 proposition that the general progress of cultivation has been from lands which 
 would be regarded as poor in an old and settled country, to those which would be 
 
CAREY'S MISUNDERSTANDINGS OF RICARDO'S DOCTRINE. 245 
 
 6. Ricardo, and the economists of his time generally, BOOK iv. 
 were too hasty in deducing this inference from the law of _J _ ' 
 diminishing return ; and they did not allow enough for the JM* shown 
 increase of strength that comes from organization. But in that Ricar- 
 fact every farmer is aided by the presence of neighbours derrated 
 whether agriculturists or townspeople 1 . Even if most of advantag 
 them are engaged like himself in agriculture, they gradually 
 
 supply him with good roads, and other means of communi- lation offer 
 
 F J to agricul- 
 
 cation : they give him a market in which he can buy at ture, 
 reasonable terms what he wants, necessaries, comforts and 
 luxuries for himself and his family, and all the various 
 requisites for his farm work : they surround him with know- 
 ledge : medical aid, instruction and amusement are brought 
 to his door ; his mind becomes wider, and his efficiency is in 
 many ways increased. And if the neighbouring market town 
 expands into a large industrial centre, his gain is much 
 
 regarded as rich. He has even argued that whenever a thickly peopled country is 
 laid waste, " whenever population, wealth, and the power of association decline, it 
 is the rich soil that is abandoned by men who fly again to the poor ones " (2b. 
 ch. v. 3) ; the rich soils being rendered difficult and dangerous by the rapid 
 growth of jungles which harbour wild beasts and banditti, and perhaps by 
 malaria. 
 
 His facts are drawn chiefly from warm if not tropical regions ; and with regard 
 to them his conclusions are perhaps true in the main. But much of the apparent 
 attractiveness of tropical countries is delusive : they would give a very rich return 
 to hard work, but hard work in them is impossible. A cool refreshing breeze is as 
 much a necessary of vigorous life, as food itself. Food can be imported but fresh 
 air cannot ; land that offers plenty of food but whose climate destroys energy, is 
 not more productive of the raw material of human well being, than land that 
 supplies less food but has an invigorating climate. 
 
 Again, the importance of many of Carey's facts diminishes on investigation. 
 The choice of New England by the early settlers was an accident ; houses on the 
 hills were often, in early times as they are now, the homes of those who cultivate 
 the rich but unhealthy valleys a few miles off. Passing down the Missouri Valley 
 to St Louis some years ago, the present writer saw it bearing everywhere crops of 
 unsurpassed richness, but the farmers' houses were on the river bluffs several 
 miles away. It may be said that this explanation may account for the absence of 
 houses in comparatively narrow river valleys, but not in broad rich plains. If, 
 however, we follow the maps which show the distribution of population in the 
 United States at each successive census, we find that broad river valleys, such as 
 those of the Lower Mississippi and the Lower Red River, were as a rule peopled 
 in advance of the neighbouring uplands. 
 
 A well-balanced account of Mr Carey's position is given by Mr Levermore in 
 the Political Science Quarterly, Vol. v. 
 
 1 In a new country an important form of this assistance is to enable him 
 to venture on rich land that he would have otherwise shunned, through fear of 
 enemies or of malaria. 
 
246 THE FERTILITY OF LAND. 
 
 BOOK iv. greater. All his produce is worth more ; some things which 
 fl^l 1 ' he used to throw away fetch a good price. He finds new 
 openings in dairy farming and market gardening, and with a 
 larger range of produce he makes use of rotations that keep 
 his land always active without denuding it of any one of the 
 elements that are necessary for its fertility. 
 
 Of the way in which organization promotes production, 
 particularly in manufactures, we shall have to speak here- 
 after. But we have already seen enough to be sure that 
 even as regards agriculture the law of diminishing return 
 does not apply to the total capital and labour spent in a 
 district as sharply as to that on a single farm. Even when 
 cultivation has reached a stage after which each succes- 
 sive dose applied to a field would get a less return than 
 the preceding dose, it may be possible for an increase in the 
 population to cause a more than proportional increase in the 
 means of subsistence. It is true that the evil day is only 
 and this deferred : but it is deferred. The growth of population, if 
 portant not checked by other causes, must ultimately be checked by 
 thTac- 0n tne difficulty of obtaining raw produce ; but in spite of the 
 ^ aw ^ diminishing return, the pressure of population on the 
 means of subsistence may be restrained for a long time to 
 come by the opening up of new fields of supply, by the 
 cheapening of railway and steamship communication, and by 
 the growth of organization and knowledge. 
 The value J n the following chapters we shall have much to say 
 
 of fresh air, J 
 
 light, about the evil effects of local congestions of population in 
 beautiful making it difficult to get fresh air and light, and in some 
 scenery. cases fresh water. Again, natives of New England who 
 have gone to the fertile plains of the West, would often be 
 willing to barter part of their heavy crops for the pure water 
 which the barren granite soil of their old homes supplied ; 
 and even in England there are many places, particularly at 
 the sea-side which are kept poor by the want of drinking 
 water. Again, the natural beauties of a place of fashionable 
 resort have a direct money value which cannot be over- 
 looked ; but it requires some effort to realize the true value 
 to men, women and children of being able to stroll amid 
 beautiful and various scenery. 
 
CAREY'S ADDITIONS TO RICARDO'S DOCTRINE. 247 
 
 7. As has already been said the land in economic BOOK iv. 
 phrase includes rivers and the sea. In river-fisheries, the ' 
 extra return to additional applications of capital and labour jjjj f j" 
 shows a rapid diminution. As to the sea, opinions differ, fisheries. 
 Its volume is vast, and fish are very prolific ; and some think 
 that a practically unlimited supply can be drawn from the sea 
 by man without appreciably affecting the numbers that 
 remain there ; or in other words, that the law of diminishing 
 return scarcely applies at all to sea-fisheries, that the 
 schedule of the sea's return to additional capital and 
 labour shows no signs of any appreciable diminution. On 
 the other hand it is contended that modern methods of 
 fishing, especially trawling, destroy much spawn ; and that 
 experience shows a falling-off in the productiveness of those 
 fisheries that have been vigorously worked. The question is 
 important, for there is no doubt that the future population of 
 the world will be appreciably affected as regards both quan- 
 tity and quality, by the available supply of fish. 
 
 The produce of mines again, among which may be A mine 
 reckoned quarries and brickfields, is said to conform to the g i ve a di- 
 
 law of diminishing return ; but this statement is misleading. 
 It is true that we find continually increasing difficulty in 
 obtaining a further supply of minerals, except in so far as we farm does. 
 obtain increased power of nature's stores through improve- 
 ments in the arts of mining, and through better knowledge of 
 the contents of the earth's crust ; and there is no doubt that, 
 other things being equal, the continued application of capital 
 and labour to mines will result in a diminishing rate of yield. 
 But this yield is not a net yield, like the return of which we 
 speak in the law of diminishing return. That return is part 
 of a constantly recurring income, while the produce of mines 
 is merely a giving up of their stored-up treasures. The 
 produce of the field is something other than the soil ; for the 
 field, properly cultivated, retains its fertility. But the 
 produce of the mine is part of the mine itself 1 . 
 
 i For the rate of growth of minerals in the earth is so slow, that it may almost 
 be neglected. It has indeed been asserted that the earth is producing petroleum 
 fast by using for the purpose some of its internal heat. If this were true, it would 
 have a great influence on the future of the world ; but there seems to be no good 
 ground for hoping that it is. 
 
248 
 
 THE FERTILITY OF LAND. 
 
 BOOK IV. 
 CH. III. 
 
 But build- 
 ing land 
 does give a 
 diminish- 
 ing return 
 of con- 
 venience as 
 increased 
 capital is 
 spent on it. 
 
 To put the same thing in another way, the supply of 
 agricultural produce and of fish is a perennial stream; 
 mines are as it were nature's reservoir. The more nearly a 
 reservoir is exhausted, the greater is the labour of pumping 
 from it ; but if one man could pump it out in ten days, ten 
 men could pump it out in one day : and when once empty, it 
 would yield no more. So the mines that are being opened 
 this year might just as easily have been opened many years 
 ago : if the plans had been properly laid in advance, and the 
 requisite specialized capital and skill got ready for the work, 
 ten years' supply of coal might have been raised in one year 
 without any increased difficulty ; and when a vein had once 
 given up its treasure, it could produce no more. This 
 difference is illustrated by the fact that the rent of a mine is 
 calculated on a different principle from that of a farm. The 
 farmer contracts to give back the land as rich as he found it : 
 a mining company cannot do this ; and while the farmer's 
 rent is reckoned by the year, mining rent consists chiefly of 
 " royalties " which are levied in proportion to the stores that 
 are taken out of nature's storehouse 1 . 
 
 On the other hand, services which land renders to man 
 in giving him space and light and air in which to live 
 and work, do conform strictly to the law of diminishing 
 return. It is advantageous to apply a constantly increasing 
 capital to land that has any special advantages of situation, 
 natural or acquired. Buildings tower up towards the sky ; 
 natural light and ventilation are supplemented by artificial 
 means, and the steam lift reduces the disadvantages of the 
 highest floors ; and for this expenditure there is a return of 
 extra convenience, but it is a diminishing return. However 
 great the ground rent may be, a limit is at last reached after 
 which it is better to pay more ground rent for a larger area 
 than to go on piling up storey on storey any further ; just as 
 
 1 As Eicardo says, Principles, Chap, n., "The compensation given (by the 
 lessee) for the mine or quarry is paid for the value of the coal or stone which can 
 be removed from them, and has no connection with the original or indestructible 
 powers of the land." But both he and others seem sometimes to lose sight of these 
 distinctions in discussing the law of diminishing return in its application to mines. 
 Especially is this the case in Ricardo's criticism of Adam Smith's theory of rent. 
 Principles, Chap. xxrv. 
 
THE RETURN FROM FISHERIES AND MINES. 249 
 
 CH. III. 
 
 the farmer finds that at last a stage is reached at which more BOOK iv. 
 intensive cultivation will not pay its expenses, and it is 
 better to pay more rent for extra land, than to face the 
 diminution in the return which he would get by applying 
 more capital and labour to his old land 1 . From this it results 
 that the theory of ground rents is substantially the same as 
 that of farm rents. This and similar facts will presently 
 enable us to simplify and extend the theory of value as given 
 by Ricardo and Mill. 
 
 NOTE ox THE LAW OF DIMINISHING RETURN. 
 
 There has been a long controversy as to the authorship of the law of Ricardo, 
 diminishing return. As has been already observed, the fundamental t ^ 
 idea, which it expresses, has been the common property of every one Turgot. 
 who has had experience of agriculture, whether arable or pastoral, since 
 the world began. What economists did for the law a century ago, was 
 not to discover it ; but to give it defmiteness, and to deduce inferences 
 from it ; which, if sometimes too hasty, yet contained important elements 
 of suggestive and constructive truth. So far as these inferences go un- 
 doubtedly the first place must be assigned to Ricardo : while Mr Cannan 
 has shown that Turgot can claim priority over Anderson, Ricardo and 
 other English writers in the clear statement of the law. In some ob- 
 servations written about 1768 (Oeuvres, ed. Daire, Vol. I. pp. 420-1) he 
 says : " Granting that where ordinary good cultivation prevails, the 
 annual advances bring in 250 to the hundred, it is more than probable 
 that if the advances were increased by degrees from this point up to that 
 at which they would bring in nothing, each increment would be less and 
 less fruitful. In this case the fertility of the earth would be like a spring 
 which is forced to bend by being loaded with a number of equal weights 
 in succession... This comparison is not perfectly exact; but it is suffi- 
 cient to show how, when the soil approaches near to returning all that 
 it can produce, a very great expense may augment the production very 
 
 1 Of course the return to capital spent in building increases for the earlier 
 doses. Even where laud can be had for almost nothing, it is cheaper to build 
 houses two stories high than one ; and hitherto it has been thought cheapest to 
 build factories about four stories high. But a belief is growing up in America, 
 that where laud is not very dear factories should be only two stories high, partly 
 in order to avoid the evil effects of vibration, or of the expensive foundations and 
 walls required to prevent it in a high building : that is, it is found that the return 
 of accommodation diminishes perceptibly after the capital and labour required to 
 raise two stories have been spent on the land. 
 
250 
 
 THE FERTILITY OF LAND. 
 
 BOOK IV. 
 CH. III. 
 
 Difficulties 
 of measur- 
 ing off 
 equal 
 
 amounts of 
 capital and 
 labour, 
 
 and of 
 
 reducing 
 
 various 
 
 produce 
 
 to a 
 
 common 
 
 unit. 
 
 little... Seed thrown on a soil naturally fertile but totally unprepared 
 would be an advance almost entirely lost. If it were once tilled the 
 produce would be greater ; tilling it a second, a third time, might not 
 merely double and triple, but quadruple or decuple the produce, which 
 will thus augment in a much larger proportion than the advances in- 
 crease, and that up to a certain point, at which the produce will be as 
 great as possible compared with the advances. Past this point if the 
 advances be still increased, the produce will still increase, but less, and 
 always less and less." 
 
 Turgot, like practical agriculturists, implicitly refers to successive 
 applications of capital and labour. He assumes things to be measured 
 by their money prices, and implicitly regards a dose of capital and 
 labour as the outlay of the equivalent of a certain sum of money dis- 
 tributed, according to the convenience of the case, between the earnings 
 of labour of different kinds (including that of management), the price 
 of seed and other materials, the cost of repair and replacement of 
 machinery, etc., and lastly, interest on all the capital employed. This 
 assumption may fairly be made when we are confining our attention 
 to one place, and time, and method of cultivation. 
 
 But this resource fails us if we want to bring to a common standard 
 the productiveness of lands in distant times or places. We shall then 
 have to fall back on rough, and more or less arbitrary modes of mea- 
 surement, which make no aim at numerical precision, but will yet 
 suffice for the broader purposes of history. This difficulty is closely 
 connected with that of finding a common standard of purchasing 
 power, which we shall have to discuss later on. But it has some 
 features peculiar to itself. For one thing there are great variations in 
 the relative amounts of capital and labour that enter into a dose. 
 Interest on capital is generally a much less ^important item in back- 
 ward than in advanced stages of agriculture ; in spite of the fact that 
 the rate of interest is generally much lower in the latter. For most 
 purposes however it is probably best to take as a common standard a 
 day's unskilled labour of given efficiency. We thus regard the dose as 
 made up of so much labour of different kinds, and such charges for the 
 use and replacement of capital, as will together make up the value of, 
 say, ten days' such labour ; the relative proportions of these elements 
 and their several values in terms of such labour being fixed according 
 to the special circumstances of each problem. 
 
 A similar difficulty is found in comparing the returns obtained by 
 capital and labour applied under different circumstances. So long as 
 the crops are of the same kind, the quantity of one return can be 
 measured off against that of another : but when they are of different 
 kinds they cannot be compared till they are reduced to a common 
 measure of value. When, for instance, it is said that land would give 
 better returns to the capital and labour expended on it with one crop 
 or rotation of crops than with another, the statement must be under- 
 
NOTE ON THE LAW OF DIMINISHING RETURN. 251 
 
 stood to hold only on the basis of the prices at the time : much error BOOK iv. 
 has arisen from losing sight of this limitation. CH - m - 
 
 In the case of land cultivated on a system of rotating crops, we 
 must take the whole period of rotation together, reckoning for the land 
 being in the same condition at the beginning and the end of the 
 rotation, and counting on the one hand all the capital and labour 
 applied during the whole period, and on the other the aggregate returns 
 of all the crops. 
 
 It must be remembered that the return due to a dose of capital Different 
 and labour is not here taken to include the value of the capital itself. J^Jf ods of 
 For instance, if part of the capital on a farm consists of two year old keeping 
 oxen, then the returns to a year's capital and labour will include not y? 8 ^ class 
 the full weight of these oxen at the end of the year, but only the thing as 
 addition that has been made to it during the year. Again, when a ca P^ a l or 
 farmer is said to work with a capital of 10 to the acre, this includes but each 
 
 the value of everything that he has on the farm. As has been already mus * ^ e , 
 
 >.,,,,, J consistent 
 
 explained, however, a dose of capital and labour applied to a farm, w ith itself. 
 
 does not include the whole value of the fixed capital, such as ma- 
 chinery and horses, but only the value of their use after allowing 
 for depreciation and repairs ; though it does include the whole value 
 of the circulating capital, such as seed. 
 
 But although this is the method of measuring capital which is most 
 generally adopted by economists, and the one which is to be taken for 
 granted if nothing is said to the contrary ; there are yet some excep- 
 tional cases in which it is best to adopt another. Sometimes it is con- 
 venient to speak as though all the capital applied were circulating 
 capital applied at the beginning of the year or during it : and in that 
 case everything that is on the farm at the end of the year is part of the 
 produce. Thus, young cattle are regarded as a sort of raw material 
 which is worked up in the course of time into fat cattle ready for the 
 butcher. The farm implements may even be treated in the same way, 
 their value at the beginning of the year being taken as so much circu- 
 lating capital applied to the farm, and at the end of the year as so 
 much produce. This plan enables us to avoid a good deal of repetition 
 of conditioning clauses as to depreciation, etc., and to save the use of 
 words in many ways. It is often the best plan for general reasonings 
 of an abstract character, particularly if they are expressed in a mathe- 
 matical form. 
 
CHAPTER IV. 
 
 THE GROWTH OF POPULATION. 
 
 P r0( iuction of wealth is but a means to the 
 sustenance of man ; to the development of his activities 
 and pro- physical, mental, and moral ; and the satisfaction of his wants. 
 But yet, as has already been observed 1 , man himself is the 
 chief means of the production of that wealth of which he is 
 the ultimate aim ; and it seems best to make at this stage 
 some study of the growth of population in numbers and in 
 strength and in character. 
 
 The growth In the animal and vegetable world the growth of numbers 
 among * ra is governed by the tendency of individuals to propagate their 
 governed 18 s P ec i es on tne OIie hand, and on the other hand by the strug- 
 by present gi e f or ftf e which thins out the young before they arrive at 
 
 conditions; . * 
 
 among maturity. In the human race alone the conflict of these two 
 affected opposing forces is complicated by other influences. On the 
 
 one nan ci regard for the future induces many individuals to 
 forecast! control their natural impulses ; sometimes with the purpose 
 of the of worthily discharging their duties as parents ; sometimes, 
 as for instance at Rome under the Empire, for mean motives. 
 And on the other hand society exercises pressure on the 
 individual by religious, moral and legal sanctions, sometimes 
 with the object of quickening, and sometimes with that of 
 retarding, the growth of population. 
 
 blemsof' The stud y of the g rowtn of populatior is often spoken of 
 
 population as though it were a modern one. [But in a more or less 
 
 than civili- vague form it has occupied the attention of thoughtful men 
 
 on * in all ages of the world. To its influence often unavowed, 
 
 i Book rv. Ch. i. 8 1. 
 
HISTORY OF THE DOCTRINE OF POPULATION. 25S 
 
 sometimes not even clearly recognized, we can trace a great BOOK iv. 
 part of the rules, customs and ceremonies that have been CB - vr ' 
 enjoined in the Eastern and Western world by law-givers, by 
 moralists, and those nameless thinkers, whose far-seeing 
 wisdom has left its impress on national habits. Among 
 vigorous races, and in times of great military conflict, they 
 aimed at increasing the supply of males capable of bearing 
 arms ; and in the higher stages of progress they have 
 inculcated a great respect for the sanctity of human life ; 
 but in the lower stages, they have encouraged and even 
 compelled the ruthless slaughter of the infirm and the aged, 
 and sometimes of a certain proportion of the female children. 
 
 In ancient Greece and Rome, with the safety-valve of the Fiuctua- 
 power of planting colonies, and in the presence of constant opinion on 
 war, an increase in the number of citizens was regarded as a courage- 
 
 source of public strength ; and marriage was encouraged by 
 public opinion, and in many cases even by legislation : though families. 
 thoughtful men were even then aware that action in the 
 contrary sense might be necessary if the responsibilities of 
 parentage should ever cease to be burdensome 1 . In later 
 times there may be observed, as Roscher says 2 , a regular ebb 
 and flow of the opinion that the State should encourage the 
 growth of numbers. It was in full flow in England under 
 the first two Tudors, but in the course of the sixteenth cen- 
 tury it slackened and turned ; and it began to ebb, when the 
 abolition of the celibacy of the religious orders, and the more 
 settled state of the country had had time to give a percept- 
 ible impetus to population ; the effective demand for labour 
 having meanwhile been diminished by the increase of sheep 
 runs, and by the collapse of that part of the industrial system 
 which had been organized by the monastic establishments. 
 
 1 Thus Aristotle (Politics, n. 6) objects to Plato's scheme for equalizing pro- 
 perty and abolishing poverty on the ground that it would be unworkable unless 
 the State exercised a firm control over the growth of numbers. And as Professor 
 Jowett points out, Plato himself was aware of this (see Laws v. 740: also 
 Aristotle, Politics, vn. 16). The population of Greece is said to have declined 
 from the seventh century B.C., and that of Rome from the third. (See Zumpt, 
 Bevofkertmg im Alterthum quoted by Riimelin in Schonberg's Handbuch. Comp. 
 also Hume's essay on The populousness of ancient nations.) 
 
 2 Political Economy, 254. 
 
254 GROWTH OF POPULATION. 
 
 CH. IV. 
 
 BOOK iv. Later on the growth of population was checked by that rise 
 in the standard of comfort which took effect in the general 
 adoption of wheat as the staple food of Englishmen during 
 the first half of the eighteenth century. At that time there 
 were even fears, which later inquiries showed to be unfound- 
 ed, that the population was actually diminishing. Petty 1 had 
 forestalled some of Carey's and Wakefield's arguments as to 
 the advantages of a dense population. Child had argued 
 that " whatever tends to the depopulating of a country tends 
 to the impoverishment of it ;" and that " most nations in the 
 civilized parts of the world, are more or less rich or poor pro- 
 portionably to the paucity or plenty of their people, and not 
 to the sterility or fruitfulness of their land' 2 ." And by the 
 time that the world-struggle with France had attained its 
 height, when the demands for more and more troops were 
 ever growing, and when manufacturers were wanting more 
 men for their new machinery ; the bias of the ruling classes 
 was strongly flowing in favour of an increase of population. 
 So far did this movement of opinion reach that in 1796 Pitt 
 declared that a man who had enriched his country with a 
 number of children had a claim on its assistance. An act, 
 passed amid the military anxieties of 1806, which granted 
 exemptions from taxes to the fathers of more than two 
 children born in wedlock, was repealed as soon as Napoleon 
 had been safely lodged in St Helena 3 . 
 
 1 He argues that Holland is richer than it appears to be relatively to France, 
 because its people have access to many advantages that cannot be had by those who 
 live on poorer land, and are therefore more scattered. " Rich land is better than 
 coarse land of the same Rent." Political ArithmeticTc, Ch. i. 
 
 2 Discourse on Trade, Chap. x. Harris, Essay on Coins, pp. 32 3, argues to a 
 similar effect, and proposes to " encourage matrimony among the lower classes by 
 giving some privileges to those who have children " &c. 
 
 8 " Let us," said Pitt," "make relief, in cases where there are a large number of 
 children, a matter of right and an honour, instead of a ground for opprobrium and 
 contempt. This will make a large family a blessing and not a curse, and this will 
 draw a proper line of distinction between those who are able to provide for 
 themselves by labour, and those who after having enriched their country with a 
 number of children have a claim on its assistance for their support." Of course he 
 desired "to discourage relief where it was not wanted." Napoleon the First had 
 offered to take under his own charge one member of any family which contained 
 seven male children : and Louis XIV., his predecessor in the slaughter of men, had 
 exempted from public taxes all those who married before the age of 20 or had 
 more than ten legitimate children. A comparison of the rapid increase in the 
 
HISTORY OF THE DOCTRINE OF POPULATION. 255 
 
 2. But during all this time there had been a growing BOOK iv. 
 feeling among those who thought most seriously on social _J _ ' 
 
 problems, that an inordinate increase of numbers, whether 
 it strengthened the State or not, must necessarily cause recent eco- 
 great misery : and that the rulers of the State had no right The Phy- 
 to subordinate individual happiness to the aggrandizement 
 of the State. In France in particular a reaction was caused, 
 as we have seen, by the cynical selfishness with which the 
 Court and its adherents sacrificed the well-being of the 
 people for the sake of their own luxury and military glory. 
 If the humane sympathies of the Physiocrats had been able to 
 overcome the frivolity and harshness of the privileged classes 
 of France, the eighteenth century would probably not have 
 ended in tumult and bloodshed, the march of freedom in 
 England would not have been arrested, and the dial of 
 progress would have been more forward than it is by the 
 space of at least a generation. As it was, but little attention 
 was paid to Quesnay's guarded but forcible protest : " one 
 should aim less at augmenting the population than at 
 increasing the national income, for the condition of greater 
 comfort which is derived from a good income, is preferable to 
 that in which a population exceeds its income and is ever in 
 urgent need of the means of subsistence 1 ." 
 
 population of Germany with that of France was a chief motive of the order of the 
 French Chamber in 1885 that education and board should be provided at the public 
 expense for every seventh child in all necessitous families. In 1890 the Academic 
 des Sciences was much occupied with similar proposals, of which one may be noted 
 as characteristic of our Age: it would give to the father of a family two, three, or 
 four votes according to its size. 
 
 1 The Physiocratic doctrine with regard to the tendency of population to 
 increase up to the margin of subsistence may be given in Turgot's words : the 
 employer " since he always has his choice of a great number of working men, will 
 choose that one who will work most cheaply. Thus then the workers are com- 
 pelled by mutual competition to lower their price ; and with regard to every kind 
 of labour the result is bound to be reached and it is reached as a matter of fact 
 that the wages of the worker are limited to that which is necessary to procure his 
 subsistence." (Stir la formation et la distribution des richesses, vi.) 
 
 Similarly Sir James Steuart says, Inquiry (Bk. i. Ch. in.), "The generative 
 faculty resembles a spring loaded with a weight, which always exerts itself in 
 proportion to the diminution of resistance: when food has remained some time 
 without augmentation or diminution, generation will carry numbers as high as 
 possible ; if then food comes to be diminished the spring is overpowered ; the force 
 of it becomes less than nothing, inhabitants will diminish at least in proportion to 
 the overcharge. If, on the other hand, food be increased, the spring which stood 
 
256 GROWTH OF POPULATION. 
 
 BOOK iv. Adam Smith said but little on the question of population, 
 CH^IV. ^ indeed he wrote at one of the culminating points of the 
 
 Smith prosperity of the English working classes ; but what he does 
 say is wise and well balanced and modern in tone. Accepting 
 the Physiocratic doctrine as his basis, he corrected it by 
 insisting that the necessaries of life are not a fixed and 
 determined quantity, but have varied much from place to 
 place and time to time ; and may vary more 1 . But he did 
 not work out this hint fully. And there was nothing to 
 lead him to anticipate the second great limitation of the 
 Physiocratic doctrine, which has been made prominent in our 
 time by the carriage of wheat from the centre of America 
 to Liverpool for less than what it used to cost to carry it 
 across England. 
 
 The eight- The eighteenth century wore on to its close and the next 
 
 eenth cen- . , . . /> , i i 
 
 tury ended century began ; year by year the condition of the working 
 classes in England became more gloomy. A.n astonishing 
 series of bad harvests 2 , a most exhausting war 3 , a change in 
 the methods of industry that dislocated old ties combined 
 with an injudicious poor law to bring the working classes 
 into the greatest misery they have ever suffered, at all events 
 since the beginning of trustworthy records of English social 
 history 4 . And to crown all, well-meaning enthusiasts, chiefly 
 under French influence, were proposing communistic schemes 
 
 at 0, will begin to exert itself in proportion as the resistance diminishes ; people 
 will begin to be better fed ; they will multiply, and in proportion as they increase 
 in numbers the food Avill become scarce again." Sir James Steuart was much 
 under the influence of the Physiocrats, and was indeed in some respects imbued 
 with Continental rather than English notions of government: and his artificial 
 schemes for regulating population seem very far off from us now. See his Inquiry, 
 Bk. i. Ch. xii., " Of the great advantage of combining a well-digested Theory and 
 a perfect Knowledge of Facts witli the practical Part of Government in order to- 
 make a People multiply." 
 
 1 See Wealth of Nations, Bk. i. Ch. vm. and Bk. v. Ch. n. See also supra , 
 Bk. n. Ch. rv. 
 
 2 The average price of wheat in the decade 1771-1780 in which Adam Smith 
 wrote was 34s. Id. ; in 1781-1790 it was 37s. Id. ; in 1791-1800 it was 63s. Gd. ; in 
 1801-1810 it was 83s. lid. ; and in 1811-1820 it was 87s. 6d. 
 
 3 Early in the present century the Imperial taxes for the greater part war 
 taxes amounted to one-fifth of the whole income of the country ; whereas now 
 they are not much more than a twentieth, and even of this a great part is spent 
 on education and other benefits which Government did not then afford. 
 
 4 See below 7 and above Bk. i. Ch. in. 5, 6. 
 
MALTHUS. 257 
 
 which would enable people to throw on society the whole BOOKIV. 
 responsibility for rearing their children 1 . CH^TV. 
 
 Thus while the recruiting sergeant and the employer of 
 labour were calling for measures tending to increase the 
 growth of population, more far-seeing men began to inquire 
 whether the race could escape degradation if the numbers 
 continued long to increase as they were then doing. Of 
 these inquirers the chief was Malthus, and his Essay on the Malthus. 
 Principle of Population is the starting point of all modern 
 speculations on the subject. 
 
 3. Malthus' reasoning consists of three parts, which His ar s u - 
 must be kept distinct. The first relates to the supply of three 
 labour. By a careful study of facts he proves that every The first. 
 people, of whose history we have a trustworthy record, has 
 been so prolific that the growth of its numbers would have 
 been rapid and continuous if it had not been checked either 
 by a scarcity of the necessaries of life, or some other cause, 
 that is, by disease, by war, by infanticide, or lastly by volun- 
 tary restraint. 
 
 His second position relates to the demand for labour. The 
 Like the first it is supported by facts, but by a different set se 
 of facts. He shows that up to the time at which he wrote 
 no country (as distinguished from a city, such as Rome or 
 Venice) had been able to obtain an abundant supply of the 
 necessaries of life after its territory had become very thickly 
 peopled. The produce which Nature returns to the work of 
 man is her effective demand for population: and he shows 
 that up to this time a rapid increase in population when 
 already thick had not led to a proportionate increase in this 
 demand' 2 . 
 
 1 Especially Godwin in his Inquiry concerning Political Justice (1792). It is 
 interesting to compare Malthus' criticism of this Essay (Bk. in. Ch. 11.) with 
 Aristotle's comments on Plato's Republic (see especially Politics, n. 6). 
 
 2 But many of his critics suppose him to have stated their position much less 
 unreservedly than he did; they have forgotten such passages as this: "From a 
 review of the state of society in former periods compared with the present I should 
 certainly say that the evils resulting from the principle of population have rather 
 diminished than increased, even under the disadvantage of an almost total igno- 
 rance of their real cause. And if we can indulge the hope that this ignorance 
 will be gradually dissipated, it does not seem unreasonable to hope that they will 
 be still further diminished. The increase of absolute population, which will of 
 
 M. 17 
 
258 GROWTH OF POPULATION. 
 
 BOOK iv. Thirdly, he draws the conclusion that what had been in 
 CH " IV ' the past, was likely to be in the future ; and that the growth 
 The third. Q f p p u ] a tion would be checked by poverty or some other 
 cause of suffering unless it were checked by voluntary re- 
 straint. He therefore urges people to use this restraint, 
 and, while leading lives of moral purity, to abstain from 
 very early marriages 1 . 
 
 course take place, will evidently tend but little to weaken this expectation, as 
 everything depends on the relative proportions between population and food, and 
 not on the absolute number of the people. In the former part of this work it 
 appeared that the countries which possessed the fewest people often suffered the 
 most from the effects of the principle of population." Essay, Bk. iv. Ch. xn. 
 
 1 In the first edition of his essay, 1798, Malthus gave his argument without any 
 detailed statement of facts, though from the first he regarded it as needing to be 
 treated hi direct connection with a study of facts ; as is shown by his having told 
 Pryme (who afterwards became the first Professor of Political Economy at 
 Cambridge) " that his theory was first suggested to his mind in an argumentative 
 conversation which he had with his father on the state of some other countries " 
 (Pryme's Recollections, p. 66). American experience showed that population if 
 unchecked would double at least once in twenty-five years. He argued that a 
 doubled population might, even in a country as thickly peopled as England was 
 with its seven million inhabitants, conceivably though not probably double the 
 subsistence raised from the English soil : but that labour doubled again would not 
 suffice to double the produce again. " Let us then take this for our rule, though 
 certainly far beyond the truth ; and allow that the whole produce of the Island 
 might be increased every twenty-five years [that is with every doubling of the 
 population] by a quantity of subsistence equal to that which it at present 
 produces" ; or in other words, in an arithmetical progression. His desire to make 
 himself clearly understood made him, as Wagner says in his excellent introduc- 
 tion to the study of Population (Grundlegung, Ed. in. p. 453), "put too sharp a 
 point on his doctrine, and formulate it too absolutely." Thus he got into the 
 habit of speaking of population as capable of increasing in an arithmetical ratio : 
 and many writers, including even so acute a critic as Mr Carman (Production and 
 Distribution 17761848, p. 143), think that he attached importance to the phrase 
 itself: whereas it was really only a short way of stating the utmost that he 
 thought any reasonable person could ask him to concede. What he meant, stated 
 in modern language, was that the Law of Diminishing Return, which underlies 
 the whole of his argument, would begin to operate sharply after the produce of the 
 island had been doubled. Doubled labour might give doubled produce: but 
 quadrupled labour would hardly treble it: octupled labour would not quad- 
 ruple it. 
 
 In the second edition, 1803, he based himself on so wide and careful a statement 
 of facts as to claim a place among the founders of historical economics ; he softened 
 and explained away many of the " sharp points " of his old doctrine, though he did 
 not abandon (as was implied in earlier editions of this work) the use of the phrase 
 " arithmetical ratio." In particular he took a less despondent view of the future 
 of the human race; and dwelt on the hope that moral restraint might hold 
 population in check, and that "vice and misery," the old checks, might thus be 
 kept in abeyance. Francis Place, who was not blind to his many faults, wrote in 
 1822 an apology for him, excellent in tone and judgment. Good accounts of his 
 
MALTHUS. 259 
 
 His position with regard to the supply of population, BOOKIV. 
 
 with which alone we are directly concerned in this chapter, _J _ ' 
 remains substantially valid. The changes which the course 
 
 of events has introduced into the doctrine of population aff ect the 
 relate chiefly to the second and third steps of his reasoning, his second 
 We have already noticed that the English economists of the 
 earlier half of this century overrated the tendency of an 
 increasing population to press upon the means of subsistence ; 
 and it was not Malthus' fault that he could not foresee the 
 great developments of steam transport by land and by sea, 
 which have enabled Englishmen of the present generation to 
 obtain the products of the richest lands of the earth at 
 comparatively small cost. 
 
 But the fact that he did not foresee these changes makes 
 the second and third steps of his argument antiquated in 
 form; though they are still in a great measure valid in 
 substance. It remains true that unless the checks on the 
 growth of population in force at the end of the nineteenth 
 century are on the whole increased (they are certain to 
 change their form in places that are as yet imperfectly 
 civilized) it will be impossible for the habits of comfort 
 prevailing in Western Europe to spread themselves over the 
 whole world and maintain themselves for many hundred 
 years. But of this more hereafter 1 . 
 
 4. The growth in numbers of a people depends firstly 
 
 work are given in Prof. Nicholson's Political Economy, Book i. Ch. xn., Dr Bonar's 
 Malthiis and his Work, and Mr Cannan's book just mentioned. Prof. Ashley has 
 edited in a convenient form leading passages of his first and second editions. 
 
 1 Taking the present population of the world at one and a half thousand 
 millions; and assuming that its present rate of increase (about 8 per 1000 
 annually, see Mr Kavenstein's paper before the British Association in 1890) will 
 continue, we find that in less than two hundred years it will amount to six 
 thousand millions ; or at the rate of about 200 to the square mile of fairly fertile 
 land (Mr Kavenstein reckons 28 million square miles of fairly fertile land, and 14 
 millions of poor grass lands. The first estimate is thought by many to be too 
 high : but, allowing for this, if the less fertile land be reckoned in for what it is 
 worth, the result will be about thirty million square miles as assumed above). 
 Meanwhile there will probably be great improvements in the arts of agriculture ; 
 and, if so, the pressure of population on the means of subsistence may not be 
 much felt, even hi two hundred years. But if the same rate of increase be 
 continued till the year 2400, the population will then be 1000 for every mile of 
 fairly fertile land : and, so far as we can see now, the diet of such a population 
 must needs be in the main vegetarian. 
 
 172 
 
260 GROWTH OF POPULATION. 
 
 BOOK iv. on the Natural Increase, that is, the excess of their births 
 CHjIY ' over their deaths ; and secondly on migration. 
 
 The number of births depends chiefly on habits relating 
 
 to marriage, the early history of which is full of instruction : 
 
 but we must confine ourselves here to the conditions of 
 
 marriage in modern civilized countries. 
 
 Marriage The age of marriage varies with the climate. In warm 
 
 affected ' . . 
 
 by the climates where child bearing begins early, it ends early, in 
 
 ite ' colder climates it begins later and ends later 1 ; but in every 
 
 case the longer marriages are postponed beyond the age that 
 
 is natural to the country, the smaller is the birth-rate ; the 
 
 age of the wife being of course much more important in 
 
 and the this respect than that of the husband 2 . Given the climate, 
 
 difficulty 
 
 of support- the average age of marriage depends chiefly on the ease with 
 
 family, which young people can establish themselves, and support 
 
 a family according to the standard of comfort that prevails 
 
 among their friends and acquaintances; and therefore it is 
 
 different in different stations of life. 
 
 Middle I n the middle classes a man's income seldom reaches its 
 
 marry late maximum till he is forty or fifty years old ; and the expense 
 skilled of bringing up his children is heavy and lasts for many years. 
 '^ ne ar ti san earns- nearly as much at twenty-one as he ever 
 does, unless he rises to a responsible post, but he does not 
 earn much before he is twenty-one: his children are likely 
 to be a considerable expense to him till about the age of 
 fifteen ; unless they are sent into a factory, where they may 
 pay their way at a very early age; and lastly the labourer 
 earns nearly full wages at eighteen, while his children begin 
 
 1 Of course the length of a generation has itself some influence on the growth 
 of population. If it is 25 years in one place and 20 in another ; and if in each 
 place population doubles once in two generations during a thousand years, the in- 
 crease will be a million-fold in the first place, but thirty million-fold in the second. 
 
 2 Dr Ogle (Statistical Journal, Vol. 53) calculates that if the average age of 
 marriage of women in England were postponed five years, the number of children 
 to a marriage, which is now 4'2 would fall to 3'1. Prof. Korb'si, basing himself on 
 the facts of the relatively warm climate of Buda Pest, finds 18 20 the most 
 prolific age for women, 24 26 that for men. But he concludes that a slight 
 postponement of weddings beyond these ages is advisable mainly on the ground 
 that the vitality of the children of women under 20 is generally small. See 
 Proceedings of Congress of Hygiene and Demography, London 1892, and Statistical 
 Journal, Vol. 57. Compare also the International Statistics at the end of this 
 chapter. 
 
MARRIAGE-RATE. 261 
 
 CH. IV. 
 
 to pay their own expenses very early. In consequence, the BOOK iv. 
 average age at marriage is highest among the middle classes : 
 it is low among the artisans and lower still among the un- 
 skilled labourers 1 . 
 
 Unskilled labourers, when not so poor as to suffer actual 
 want and not restrained by any external cause, have seldom, 
 if ever, shown a lower power of increase than that of doubling 
 in thirty years ; that is, of multiplying a million-fold in six 
 hundred years, a billion- fold in twelve hundred : and hence it 
 might be inferred a priori that their increase has never gone 
 on without restraint for any considerable time. This in- 
 ference is confirmed by the teaching of all history. Through- 
 out Europe during the Middle Ages, and in some parts of 
 it even up to the present time, unmarried labourers have 
 usually slept in the farmhouse or with their parents ; while 
 a married pair have generally required a house for them- 
 selves: when a village has as many hands as it can well 
 employ, the number of houses is not increased, and young 
 people have to wait as best they can. 
 
 1 The term marriage in the text must be taken in a wide sense so as to include 
 not only legal marriages, but all those informal unions which are sufficiently 
 permanent in character to involve for several years at least the practical responsi- 
 bilities of married life. They are often contracted at an early age, and not uufre- 
 quently lead up to legal marriages after the lapse of some years. For this reason 
 the average age at marriage in the broad sense of the term, with which alone we 
 are here concerned, is below the average age at legal marriage. The allowance 
 to be made on this head for the whole of the working classes is probably con- 
 siderable ; but it is very much greater in the case of unskilled labourers than of 
 any other class. The following statistics must be interpreted in the light of 
 this remark, and of the fact that all English industrial statistics are vitiated 
 by the want of sufficient care in the classification of the working classes in our 
 official returns. The Registrar-General's forty-ninth Annual Report states that 
 in certain selected districts the returns of marriages for 1884 5 were examined 
 with the following results ; the number after each occupation being the average 
 age of bachelors in it at marriage, and the following number, in brackets, being 
 the average age of spinsters who married men of that occupation : Miners 24*06 
 (22-46); Textile hands 24'38 (23'43) ; Shoemakers, Tailors 24'92 (24'31); Artisans 
 25-35 (23-70); Labourers 25'56 (23'66) ; Commercial Clerks 26-25 (24'43); Shop- 
 keepers, Shopmen 26'67 (24'22) ; Farmers and sons 29*23 (26'91) ; Professional and 
 Independent Class 31-22 (26'40). 
 
 Dr Ogle, in the paper already referred to, shows that the marriage -rate is 
 greatest generally in those parts of England in which the percentage of those women 
 between 15 and 25 years of age who are industrially occupied is the greatest. This 
 is no doubt due, as he suggests, partly to the willingness of men to have their money 
 incomes supplemented by those of their wives ; but it may be partly due also to an 
 excess of women of a marriageable age in those districts. 
 
262 GROWTH OF POPULATION. 
 
 BOOK iv. There are many parts of Europe even now in which custom 
 CH ' IV ' exercising the force of law prevents more than one son in 
 Hm- gach f am ily from marrying; he is generally the eldest, but 
 early mar- m some places the youngest : if any other son marries he 
 stationary must leave the village. When great material prosperity and 
 tricts. dlJ the absence of all extreme poverty are found in old-fashioned 
 corners of the Old World, the explanation generally lies in 
 some such custom as this with all its evils and hardships 1 . 
 It is true that the severity of this custom may be tempered 
 by the power of migration ; but in the Middle Ages the free 
 movement of the people was hindered by stern regulations. 
 The free towns indeed often encouraged immigration from 
 the country : but the rules of the gilds were in some respects 
 almost as cruel to people who tried to escape from their 
 old homes as were those enforced by the feudal lords them- 
 selves 2 . 
 
 The 5. In this respect the position of the hired agricultural 
 
 S^ten* 6 labourer has changed very much. The towns are now always 
 
 prIseS 0ng P en to nim and nis cnildren ; and if ne betakes himself to 
 proprie- the New World he is likely to succeed better than any other 
 class of emigrants. But on the other hand the gradual rise 
 in the value of land and its growing scarcity is tending to 
 check the increase of population in some districts in which 
 the system of peasant properties prevails, in which there 
 is not much enterprise for opening out new trades or for 
 emigration, and parents feel that the social position of their 
 children will depend on the amount of their land. They 
 incline to limit artificially the size of their families and 
 to treat marriage very much as a business contract, seeking 
 always to marry their sons to heiresses. Mr Francis Galton 
 has pointed out that, though the families of English peers 
 are generally large, the habit of marrying the eldest son to 
 
 1 A typical instance is that of the valley Jachenau in the Bavarian Alps. 
 There the custom is rigidly enforced : and there are scarcely any small cottages 
 in the valley. Aided by a great recent rise in the value of their woods, with regard 
 to which they have pursued a farseeing policy, the inhabitants live prosperously 
 in large houses, the younger brothers and sisters acting as servants in their old 
 homes or elsewhere. They are of a different race from the work-people in the 
 neighbouring valleys, who live poor and hard lives, but seem to think that the 
 Jachenau purchases its material prosperity at too great a cost. 
 
 2 See e.g. Rogers, Six. Centuries, pp. 1067. 
 
BIRTH-RATE. 263 
 
 an heiress, who is presumably not of a fertile stock, and BOOKIV. 
 sometimes dissuading the younger sons from marriage, has CH ' IV ' 
 led to the extinction of a great many peerages ; and in like 
 manner among the French peasants this habit combined 
 with their preference for small families keeps their numbers 
 almost stationary. 
 
 On the other hand there seem to be no conditions more but not 
 favourable to the rapid growth of numbers than those of American 
 the agricultural districts of new countries. Land is to be farmers - 
 had in abundance, railways arid steamships carry away the 
 produce of the land and bring back in exchange implements 
 of advanced types, and many of the comforts and luxuries of 
 life. The " farmer," as the peasant proprietor is called in 
 America, finds therefore that a large family is not a burden, 
 but an assistance to him. He and they live healthy out-of- 
 door lives; there is nothing to check but everything to 
 stimulate the growth of numbers. The natural increase is 
 aided by immigration ; and thus, in spite of the fact that 
 some classes of the inhabitants of large cities in America are, 
 it is said, reluctant to have many children, the population 
 has increased sixteen-fold in the last hundred years 1 . 
 
 1 The extreme prudence of peasant proprietors under stationary conditions 
 was noticed by Malthus; see his account of Switzerland (Essay, Bk. n. Ch. v.). 
 Adam Smith remarked that poor Highland women frequently had twenty children 
 of whom not more than two reached maturity (Wealth of Nations, Bk. i. 
 Ch. YIII.) ; and the notion that want stimulated fertility was insisted on by 
 Doubleday, True Law of Population. See also Sadler, Law of Population. 
 Malthus' remark, that the reproductive power is less in barbarous than in 
 civilized races, has been extended by Darwin to the animal and vegetable kingdom 
 generally. Mr Herbert Spencer seems to think it probable that the progress of 
 civilization will of itself hold the growth of population completely in check. 
 
 Mr Charles Booth (Statistical Journal, 1893) has divided London into 27 
 districts (chiefly Registration districts) ; and arranged them hi order of poverty, 
 of overcrowding, of high birth-rate and of high death-rate. He finds that the four 
 orders are generally the same. The excess of birth-rate over death-rate is lowest in 
 the very rich and the very poor districts. 
 
 Mr Brownell (Annals of American Academy, Vol. v.) has shown that the birth- 
 rate is generally highest in those parts of America in which population is scanty ; 
 that it decreases generally with an increase of agricultural wealth, and even more 
 generally with an increase of manufacturing wealth, and with an increase in the 
 number of deaths from nervous diseases. There are many exceptions, some of 
 which can be explained away by the race differences, which are so disturbing an 
 element in American Statistics. (Possibly also the fashion of describing diseases 
 as nervous may not spread as fast in the rural as in the urban parts of America.) 
 But on the whole the facts seem to support Mr Herbert Spencer's position. 
 
264 GROWTH OF POPULATION. 
 
 BOOK iv. On the whole it seems proved that the birth-rate is 
 
 _J ' generally lower among the well-to-do than among those who 
 
 conclusion ma ke little expensive provision for the future of themselves 
 and their families, and who live an active life : and that 
 fecundity is diminished by luxurious habits of living. 
 Probably it is also diminished by severe mental strain ; 
 that is to say, given the natural strength of the parents, 
 their expectation of a large family is diminished by a great 
 increase of mental strain. Of course those who do high 
 mental work, have as a class more than the average of 
 constitutional and nervous strength ; and Dr Galton has 
 shown that they are not as a class unprolific. But they 
 commonly marry late. 
 
 Population 6. The growth of population in England has a more 
 iand ng clearly defined history than that in the United Kingdom, and 
 we shall find some interest in noticing its chief movements. 
 
 In Belgium also race differences are disturbing : but the figures arranged by 
 M. Leroy Beaulieu (Statistical Journal for 1891, p. 377) show that the birth-rate is 
 highest in those provinces in which wages and education are lowest. 
 
 The movements of the population of France have been studied with exceptional 
 care: and the last great work on the subject by M. Levasseur, La Population 
 Franqaise, is a mine of valuable information as regards other nations besides 
 France. Montesquieu, reasoning perhaps rather a priori, accused the law of 
 primogeniture which ruled in his time in France of reducing the number of 
 children in a family: and le Play brought the same charge against the law 
 of compulsory division. M. Levasseur (I.e. Vol. in. pp. 171 7) calls attention to 
 the contrast; and remarks that Malthus' expectations of the effect of the 
 Civil Code on population were hi harmony with Montesquieu's rather than 
 le Play's diagnosis. But in fact the birth-rate varies much from one part of 
 France to another. It is generally lower where a large part of the population 
 owns land than where it does not. If however the Departments of France be 
 arranged in groups in ascending order of the property left at death (valeurs 
 successorales par tete d 1 habitant), the corresponding birth-rate descends almost 
 uniformly, being 23 per hundred married women between 15 and 50 years for the 
 ten Departments in which the property left is 48 57 fr. ; and 13'2 for the Seine, 
 where it is 412 fr. And in Paris itself the arrondissements inhabited by the well- 
 to-do show a smaller percentage of families with more than two children than the 
 poorer arrondissements show. There is much interest in the careful analysis 
 which M. Levasseur gives of the connection between economic conditions and 
 birth-rate ; his general conclusion being that it is not direct but indirect, through 
 the mutual influence of the two on manners and the habit of life (mceurs). He 
 appears to hold that, however much the decline in the numbers of the French 
 relatively to surrounding nations (see the tables at the end of this chapter) 
 may be regretted from the political and military points of view, there is much 
 good mixed with the evil in its influences on material comfort and even social 
 progress. 
 
ENGLAND IN THE MIDDLE AGES. 265 
 
 The restraints on the increase of numbers during the BOOKIV. 
 
 Middle Ages were the same in England as elsewhere. In ' 
 
 England as elsewhere the religious orders were a refuge J^aaie 
 to those for whom no establishment in marriage could be Ages. 
 provided ; and religious celibacy while undoubtedly acting in 
 some measure as an independent check on the growth of 
 population, is in the main to be regarded rather as a method 
 in which the broad natural forces tending to restrain popu- 
 lation expressed themselves, than as an addition to them. 
 Infectious and contagious diseases, both endemic and epi- 
 demic, were caused by dirty habits of life which were even 
 worse in England than in the South of Europe ; and famines 
 by the failures of good harvests and the difficulties of com- 
 munication ; though this evil was less in England than else- 
 where. 
 
 Country life was, as elsewhere, rigid in its habits ; young 
 people found it difficult to establish themselves until some 
 other married pair had passed from the scene and made 
 a vacancy in their own parish; for migration to another 
 parish was seldom thought of by an agricultural labourer 
 under ordinary circumstances. Consequently whenever plague 
 or war or famine thinned the population, there were always 
 many waiting to be married, who filled the vacant places ; 
 and, being perhaps younger and stronger than the average of 
 newly married couples, had larger families 1 . 
 
 There was however some movement even of agricultural 
 labourers towards districts which had been struck more 
 heavily than their neighbours by pestilence, by famine or the 
 sword. Moreover artisans were often more or less on the 
 move, and this was especially the case with those who were 
 engaged in the building trades, and those who worked in 
 metal and wood ; though no doubt the " wander years " were 
 chiefly those of youth, and after these were over the wanderer 
 was likely to settle down in the place in which he was born. 
 Again, there seems to have been a good deal of migration on 
 the part of the retainers of the landed gentry, especially of 
 the greater barons who had seats in several parts of the 
 
 1 Thus we are told that after the Black Death of 1349 most marriages were 
 very fertile (Rogers, History of Agriculture and Prices, Vol. i. p. 301). 
 
266 GROWTH OF POPULATION. 
 
 BOOK iv. country. And lastly, in spite of the selfish exclusiveness 
 CH ' IV ' which the gilds developed as years went on, the towns 
 offered in England as elsewhere a refuge to many who could 
 get no good openings for work and for marriage in their own 
 homes. In these various ways some elasticity was intro- 
 duced into the rigid system of medieval economy; and 
 population was able to avail itself in some measure of the 
 increased demand for labour which came gradually with the 
 growth of knowledge, the establishment of law and order, and 
 the development of oceanic trade 1 . 
 
 Settlement In the latter half of the seventeenth and the first half of 
 the eighteenth century the central government exerted itself 
 to hinder the adjustment of the supply of population in 
 different parts of the country to the demand for it by Settle- 
 ment Laws, which made any one chargeable to a parish who 
 had resided there forty days, but ordered that he might be 
 sent home by force at any time within that period 2 . Land- 
 
 1 There is no certain knowledge to be had as to the density of population in 
 England before the eighteenth century. Prof. Rogers while agreeing with Mr 
 Seebohm that the Black Death of 1349 destroyed one-half of the population, is 
 inclined to take considerably lower estimates than Mr Seebohm's for the whole of 
 the Middle Ages and to think that population doubled during the seventeenth 
 century. (History of Agriculture and Prices, I. pp. 55 &c., iv. pp. 132 &c., vi. 
 pp. 782 &c.) Nevertheless Mr Seebohm's estimates (Fortnightly Review, Vol. vn. 
 N. S.) probably give us a fairly trustworthy general view. The figures in square 
 brackets are "merely conjectural." 
 
 Agricultural. Non-agricultural. Total. 
 
 1086 1^ millions \ million 2 millions 
 
 1348 3 1 4 
 
 1377 1 i 2 
 
 1500 [2fl , [ |1 [3] 
 
 1630 [3 ] [1 ] [4] 
 
 1700 [3J1 [2 ] 5J 
 
 If we are to trust Harrison (Description of England, Bk. n. Ch. xvi.), the 
 muster of men able for service in 1574 amounted to 1,172,674. 
 
 The Black Death was England's only very great calamity. She was not, like 
 the rest of Europe, liable to devastating wars, such as the Thirty Years' War, 
 which destroyed more than half the population of Germany, a loss which it 
 required a full century to recover. (See Rumeiin's instructive article on Bevol- 
 Tcerungslehre in Schbnberg's Handbnch.) 
 
 2 Adam Smith is justly indignant at this. (See Wealth of Nations, Bk. i. 
 Ch. x. Part n. and Book iv. Ch. n.) The Act recites (14 Charles II. c. 12, 
 A.D. 1662) that "by reason of some defects in the law, poor people are not 
 restrained from going from one parish to another, and thereby do endeavour to 
 settle themselves in those parishes where there is the best stock, the largest 
 
ENGLAND IN THE EIGHTEENTH CENTURY. 267 
 
 lords and farmers were so eager to prevent people from BOOKIV. 
 getting a " settlement " in their parish that they put great c ^_^' 
 difficulties in the way of building cottages, and sometimes S1 ^ tll of 
 even razed them to the ground. In consequence the agricul- population 
 tural population of England was stationary during the hun- in the 
 
 dred years ending with 1760; while the manufactures were giving in 
 not yet sufficiently developed to absorb large numbers. This hai/oftte 
 retardation in the growth of numbers was partly caused by, eighteenth 
 and partly a cause of, a rise in the standard of living ; a chief 
 element of which was an increased use of wheat in the place 
 of inferior grains as the food of the common people 1 . 
 
 From 1760 onwards those who could not establish them- changes 
 selves at home found little difficulty in getting employment second 
 in the new manufacturing or mining districts, where the half- 
 demand for workers often kept the local authorities from 
 enforcing the removal clauses of the Settlement Act. To 
 these districts young people resorted freely, and the birth- 
 rate in them became exceptionally high ; but so did the 
 death-rate also; the net result being a fairly rapid growth 
 of population. At the end of the century, when Malthus 
 wrote, the Poor Law again began to influence the age of 
 marriage ; but this time in the direction of making it unduly 
 early. The sufferings of the working classes caused by a 
 series of famines and by the French War made some measure 
 of relief necessary ; and the need of large bodies of recruits 
 for the army and navy was an additional inducement to 
 tender-hearted people to be somewhat liberal in their allow- 
 ances to a large family, with the practical effect of making 
 the father of many children often able to procure more 
 indulgences for himself without working than he could have 
 
 wastes or commons to build cottages, and the most woods for them to burn and 
 
 destroy: etc." and it is therefore ordered "that upon complaint made within 
 
 forty days after any such person or persons coming, so as to settle as aforesaid, 
 
 in any tenement under the yearly value of ten pounds it shall be lawful for 
 
 any two justices of the Peace to remove and convey such person or persons to 
 
 such parish where he or they were last legally settled." Several Acts purporting 
 to soften its harshness had been passed before Adam Smith's time ; but they had 
 been ineffective. In 1795 however it was ordered that no one should be removed 
 until he became actually chargeable. 
 
 1 Some interesting remarks on this subject are made by Eden, History of the 
 Poor, I. pp. 560 4. 
 
268 
 
 GROWTH OF POPULATION. 
 
 BOOK IV. 
 CH. IV. 
 
 Since the 
 reform of 
 the poor 
 law the 
 growth 
 of popula- 
 tion has 
 been fairly 
 steady. 
 
 got by hard work if he had been unmarried or had only a 
 small family. Those who availed themselves most of this 
 bounty were naturally the laziest and meanest of the people, 
 those with least self-respect and enterprise. So although 
 there was in the manufacturing towns a fearful mortality, 
 particularly of infants, the quantity of the people increased 
 fast ; but its quality improved little, if at all, till the passing 
 of the New Poor Law in 1834. Since that time the rapid 
 growth of the town population has, as we shall see in the 
 next chapter, tended to increase mortality, but this has been 
 counteracted by the growth of temperance, of medical know- 
 ledge, of sanitation and of general cleanliness. Emigration 
 has increased, the age of marriage has been slightly raised 
 and a somewhat less proportion of the whole population are 
 married; but, on the other hand, the ratio of births to a 
 marriage has risen 1 ; with the result that population has 
 been growing very nearly steadily 2 . Let us examine the 
 course of recent changes a little more closely. 
 
 1 But this increase in the figures shown is partly due to improved registration 
 of births. (Fan-, Vital Statistics, p. 97.) 
 
 2 The following tables show the growth of the population of England and 
 Wales from the beginning of last century. The figures for the last century are 
 computed from the registers of births and deaths, and the poll and hearth tax 
 returns : those since 1801 from Census returns. It will be noticed that the numbers 
 increased nearly as much in the twenty years following 1760 as in the preceding 
 sixty years. The pressure of the great war and the high price of corn is shown 
 in the slow growth between 1790 and 1801 ; and the effects of indiscriminate poor 
 law allowances, in spite of greater pressure, is shown by the rapid increase in the 
 next ten years, and the still greater increase when that pressure was removed in 
 the decade ending 1821. The third column shows the percentage which the increase 
 during the preceding decade was of the population at the beginning of that 
 decade. 
 
 Year 
 
 Population 
 OOOs omitted 
 
 Increase 
 per cent. 
 
 Year 
 
 Population 
 OOOs omitted 
 
 Increase 
 per cent 
 
 1700 
 
 5,475 
 
 
 1801 
 
 8,892 
 
 2'5 
 
 10 
 
 5,240 
 
 -4-9* 
 
 11 
 
 10,164 
 
 14-3 
 
 20 
 
 5,565 
 
 6-2 
 
 21 
 
 12,000 
 
 18-1 
 
 30 
 
 5,796 
 
 4-1 
 
 31 
 
 13,897 
 
 15-8 
 
 40 
 
 6,064 
 
 4-6 
 
 41 
 
 15,909 
 
 14-5 
 
 50 
 
 6,467 
 
 6-6 
 
 51 
 
 17,928 
 
 12-7 
 
 60 
 
 6,736 
 
 4-1 
 
 61 
 
 20,066 
 
 11-9 
 
 70 
 
 7,428 
 
 10-3 
 
 71 
 
 22,712 
 
 13-2 
 
 80 
 
 7,953 
 
 7-1 
 
 81 
 
 25,974 
 
 14-4 
 
 90 
 
 8,675 
 
 9-1 
 
 91 
 
 29,002 
 
 11-7 
 
 * Decrease. 
 The great growth of emigration during recent years makes it important to 
 
ENGLAND IN THE NINETEENTH CENTURY. . 269 
 
 7. Early in this century, when wages were low and BOOK iv. 
 " CH rv 
 
 wheat was dear, the working classes generally spent more 
 than half their income on bread : and consequently a rise in 
 the price of wheat diminished marriages very much among 
 
 them: that is, it diminished very much the number of marriage 
 
 _>..,,. c rate varied 
 
 marriages by banns. But it raised the income or many w ith the 
 
 members of the well-to-do classes, and therefore often in- j-J 
 creased the number of marriages by license 1 . Since however harvest. 
 these were but a small part of the whole, the net effect 
 was to lower the marriage -rate 2 . But as time went on, the Later on 
 price of wheat fell and wages rose, till now the working 
 classes spend on the average less than a quarter of 
 
 incomes on bread ; and in consequence the variations of tions pre- 
 
 dominated. 
 commercial prosperity have got to exercise a preponderating 
 
 influence on the marriage-rate 3 . 
 
 correct the figures for the last three decades so as to show the "natural increase," 
 viz. that due to the excess of births over deaths. 
 
 Decade 
 ending 
 
 mean annual 
 birthrate per 
 1000 
 
 mean annual 
 deathrate per 
 1000 
 
 average an- 
 nual natural 
 increment per 
 thousand 
 
 average an- 
 nual actual 
 increment per 
 thousand 
 
 net emigra- 
 tion in thou- 
 sands 
 
 1861 
 
 34-15 
 
 22-25 
 
 12-61 
 
 11-93 
 
 122 
 
 71 
 
 35-24 
 
 22-50 
 
 13-58 
 
 13-19 
 
 79 
 
 81 
 
 35-35 
 
 21-27 
 
 15-09 
 
 14-36 
 
 164 
 
 91 
 
 
 
 13-97 
 
 11-66 
 
 601 
 
 The last column is obtained by comparing the census returns with those of 
 births and deaths ; for there is no independent record of the net emigration from 
 England and Wales. The following figures show the gross emigration (OOOs 
 omitted) from the United Kingdom in the decades ending with the years named 
 
 Decade 
 ending 
 
 emigration 
 
 Decade 
 ending 
 
 emigratio 
 
 1831 
 
 247, 
 
 1871 
 
 1,967, 
 
 1841 
 
 703, 
 
 1881 
 
 2,228, 
 
 1851 
 
 1,685, 
 
 1891 
 
 3,572, 
 
 1861 
 
 2,287, 
 
 
 
 The net emigration from the United Kingdom during the two last of these 
 decades was 1,480,000, and 1,747,000 respectively. 
 
 1 See Dr Farr's 17th Annual Keport for 1854 as Registrar-General, or the 
 abstract of it in Vital Statistics (pp. 725). 
 
 2 For instance, representing the price of wheat in shillings and the number of 
 marriages in England and Wales in thousands, we have for 1801 wheat at 119 and 
 marriages at 67, for 1803 wheat at 59 and marriages at 94 ; for 1805 the numbers 
 are 90 and 80, for 1807 they are 75 and 84, for 1812 they are 126 and 82, for 1815 
 they are 66 and 100, for 1817 they are 97 and 88, for 1822 they are 45 and 99. 
 
 3 Since 1820 the average price of wheat has seldom exceeded 60s. and never 
 75s. : and the successive inflations of commerce which culminated and broke in 1826, 
 1836 9, 1848, 1856, 1866 and 1873 exercised an influence on the marriage-rate 
 
270 
 
 GROWTH OF POPULATION. 
 
 BOOK IV. 
 CH. IV. 
 
 The price 
 of wheat 
 and the 
 marriage- 
 rate now 
 sometimes 
 fall toge- 
 ther. 
 
 Since 1873 though the average real income of the 
 population of England has indeed been increasing, its rate 
 of increase has been less than in the preceding years, and 
 meanwhile there has been a continuous fall of prices, and 
 consequently a continuous fall in the money-incomes of 
 many classes of society. Now people are governed in their 
 calculations as to whether they can afford to marry or not, 
 more by the money income which they expect to be able 
 to get, than by elaborate calculations of changes in its pur- 
 chasing power. And therefore the standard of living among 
 the working classes has been rising rapidly, perhaps more 
 rapidly than at any other time in English history : their 
 household expenditure measured in money has remained 
 about stationary, and measured in goods has increased very 
 fast. The English marriage-rate fell from 8*8 per 1000 in 
 1873, to 7*1 in 1886 ; the lowest rate that has occurred since 
 civil registration began. It has since risen to 7 '8 in 1891 
 and fallen to 7'4 in 1893. 
 
 Meanwhile the price of wheat has also fallen very much, 
 and a marked fall in the marriage-rate for the whole country 
 has often accompanied a marked fall in the price of wheat. 
 The statistics even seem to suggest that this is not a merely 
 casual coincidence; but that the price of bread is now so 
 low that a further fall in its price does not perceptibly and 
 at once affect the marriage-rate among the population at 
 large ; and that its more rapid influence in checking marriages 
 among the agricultural population and those directly de- 
 
 about equal with changes in the price of corn. When the two causes act together 
 the effects are very striking : thus between 1829 and 1834, there was a recovery of 
 prosperity accompanied by a steady fall in the price of wheat and marriages rose 
 from a hundred and four to a hundred and twenty-one thousand. The marriage- 
 rate rose again rapidly between 1842 and 1845 when the price of wheat was a 
 little lower than in the preceding years, and the business of the country was 
 reviving; and again under similar circumstances between 1847 and 1853 and 
 between 1862 and 1865. 
 
 A comparison of the marriage-rate with the harvests in Sweden for the years 
 1749 to 1883 is given by Sir Rawson Rawson in the Statistical Journal for 
 December 1885. The harvest does not declare itself till part of the year's tale 
 of marriages is made up; and further the inequalities of harvests are to some 
 extent compensated for by the storage of gram; and therefore the individual 
 harvest figures do not correspond closely with the marriage-rate. But when 
 several good or bad harvests come together, the effect in increasing or diminish- 
 ing the marriage-rate is very clearly marked. 
 
ENGLAND IN THE NINETEENTH CENTURY. 271 
 
 pendent on them is sufficient to lower the average marriage- BOOK iv. 
 rate for the kingdom 1 . Again, it must be remembered that CH ' IV ' 
 those alternate inflations and contractions of credit which 
 more chiefly govern the fluctuations in the employment, and 
 therefore in the marriage-rate of the people, tend to raise 
 and lower respectively general prices, and the price of wheat 
 among others, though less than most others 2 . 
 
 There is much to be learnt from the history of population Scotland. 
 in Scotland and in Ireland. In the lowlands of Scotland 
 a high standard of education, the development of mineral 
 resources, and close contact with their richer English neigh- 
 bours have combined to afford a great increase of average 
 income to a rapidly increasing population. On the other 
 hand, the inordinate growth of population in Ireland before Ireland, 
 the potato-famine in 1847, and its steady diminution since 
 that time, will remain for ever landmarks in economic history. 
 
 NOTE ON INTERNATIONAL VITAL STATISTICS. 
 
 The adjoining tables show the main movements of population in 
 some of the chief countries of the world. [They are compiled chiefly 
 from figures arranged by Signor Bodio in Movimento del Stato Civile, 
 Confronti Internazionali, 1884, and Bulletin de Vlnstitut International 
 de Statistique, Vol. vn. ; while the last three columns are taken mainly 
 from M. Levasseur's La Population Francaise, in. 240 1. See also 
 his diagram on p. 248.] 
 
 Comparing the habits of different nations with the aid of the 
 adjoining tables, we find that in the Teutonic countries of Central and 
 Northern Europe, the age of marriage is kept late, partly in consequence 
 of the early years of manhood being spent in the army ; but that it has 
 been very early in Kussia, where, at all events under the old regime^ 
 the family group insisted on the son's bringing a wife to help in the 
 work of the household as early as possible, even if he had to leave her 
 for a time and go to earn his living elsewhere. In the United Kingdom 
 
 1 But the statistical problem suggested by a comparison of marriage-rates and 
 prices of wheat, as for instance in the Reports of the Registrar-General, is not so 
 simple as it appears ; and it may be questioned whether its true solution has yet 
 been reached. 
 
 2 Statistics of exports are among the best indications of commercial prosperity ; 
 and in the article already quoted, Dr Ogle has shown a correspondence between 
 the marriage-rate and the exports per head. Compare diagrams in Vol. n. p. 12 
 of Levasseur's La Population Franqaise ; and with regard to Massachusetts by 
 Mr Willcox in the Political Science Quarterly, Vol. vm. pp. 7682. 
 
272 
 
 NOTE ON 
 
 BOOK IV. 
 CH. IV. 
 
 
 1 
 
 2 
 
 3 
 
 4 
 
 5 
 
 
 Marriages per 
 
 Percentage 
 of bride- 
 
 Percentage 
 of brides 
 
 Births per 
 
 Births 
 
 
 1000 living 
 
 grooms not 
 
 not over 
 
 1000 living. 
 
 to a 
 
 Countries. 
 
 
 over 25 years. 
 
 20 years. 
 
 
 marriage 
 
 
 1865 
 
 1887 
 
 1865 
 
 1887 
 
 1865 
 
 1887 
 
 1865 
 
 1887 
 
 1865 
 
 
 to 83. 
 
 to 91. 
 
 to 83. 
 
 to 91. 
 
 to 83. 
 
 to 91. 
 
 to 83. 
 
 to 91. 
 
 to 83. 
 
 
 8'3- 
 
 
 39-3 
 
 
 24-0 
 
 
 38*7 
 
 
 4-7 
 
 England & Wales 
 
 8-1- 
 
 7-5 
 
 51-3 
 
 45-6 
 
 14-4 
 
 11-1 
 
 35-1- 
 
 31-3 
 
 4-3 
 
 Scotland . 
 
 7-2- 
 
 6-6 
 
 42-3 
 
 38-2 
 
 13-4 
 
 11-6 
 
 34-7- 
 
 31'1 
 
 4'8 
 
 
 4-8- 
 
 4-4 
 
 32-6 
 
 33-6 
 
 13-5 
 
 11-8 
 
 26-4- 
 
 22-8 
 
 5'5 
 
 Sweden 
 
 6-5 + 
 
 6-0 
 
 23-3 
 
 26-8 
 
 5-6 
 
 6-4 
 
 30-2- 
 
 28-4 
 
 4-6 
 
 Holland 
 
 8'0 - 
 
 7'0 
 
 26'6 
 
 31-0 
 
 
 10-? 
 
 35'9 
 
 33 -4 
 
 4*5 
 
 
 7'2- 
 
 7-2 
 
 22-6 
 
 27-0 
 
 6-4 
 
 8-9 
 
 31'5- 
 
 29-3 
 
 4*4 
 
 
 7-8- 
 
 7-3 
 
 27-0 
 
 27-3 
 
 21-2 
 
 20-5 
 
 25-4- 
 
 23-0 
 
 3'3 
 
 Prussia 
 
 8-6- 
 
 8-1 
 
 
 
 10-3 
 
 8-1 
 
 38'8- 
 
 37-2 
 
 45 
 
 Saxony ... 
 
 9-2- 
 
 9-3 
 
 34'7 
 
 39-0 
 
 10-7 
 
 7-6 
 
 42-4 - 
 
 41-8 
 
 4-6 
 
 
 8'5- 
 
 7-0 
 
 18-9 
 
 29-4 
 
 6-4 
 
 10-7 
 
 39'5 + 
 
 35'9 
 
 4-7 
 
 Switzerland 
 
 7-4- 
 
 7-1 
 
 26-5 
 
 27-3 
 
 8-8 
 
 7-2 
 
 30-2- 
 
 27-7 
 
 4-1 
 
 Austria 
 
 8'4- 
 
 7-7 
 
 
 
 18-1 
 
 17-3 
 
 38-4 + 
 
 38-0 
 
 4'5 
 
 
 10 - 3- 
 
 8-6 
 
 31-7 
 
 
 36'0 
 
 36-7 
 
 43-0 + 
 
 42'8 
 
 4-2 
 
 
 7*3 
 
 5-6 
 
 38-4 
 
 41-9 
 
 
 
 33-9- 
 
 36-3 
 
 4*6 
 
 Ttalv 
 
 7'7 + 
 
 7*7 
 
 26'0 
 
 
 16-9 
 
 23*4 
 
 36'8- 
 
 37'6 
 
 4'8 
 
 Russia 
 
 9-4- 
 
 
 68-5 
 
 64-1 
 
 58-0 
 
 56-3 
 
 49-4 + 
 
 
 5-3 
 
 United States 
 
 
 
 
 
 
 
 
 
 
 
 
 Massachusetts ... 
 
 9-4- 
 
 9-3 
 
 40-0 
 
 37-5 
 
 18-9 
 
 16-1 
 
 25-7- 
 
 25-8 
 
 2-7 
 
 and America there is no compulsory service, and men marry early. In 
 France, contrary to general opinion, early marriages on the part of men 
 are not rare ; while on the part of women they are more common than 
 in any country for which we have statistics, except the Sclavonic coun- 
 tries (among which we may reckon Hungary), where they are much the 
 highest. 
 
 The marriage-rate is generally highest where the number of early 
 marriages is the greatest ; and so also is the fecundity of marriages. 
 But there are some striking exceptions. Thus the number of children 
 to a marriage is exceptionally low in France, and even lower in Massa- 
 chusetts, though the age of marriage is not particularly high in either 
 of these countries ; and it is not very low in Sweden, where very few 
 women marry under twenty. 
 
 The marriage-rate, the birth-rate and the death-rate are diminishing 
 in almost every country ; in spite of the unexpected fact that the 
 percentage of bridegrooms who are not over twenty-five years of 
 age is increasing in nearly every country, for which the figures are 
 given. (The exceptions are Great Britain, Eussia and Massachusetts. 
 Nearly the same is true of the percentage of bridegrooms not over thirty 
 years of age ; see Bulletin de Statistique, Vol. vn. p. 16.) The percentage 
 of brides who are not over twenty years of age seems to be on the whole 
 nearly stationary, though it is falling rapidly in some countries, and 
 notably in the United Kingdom : and the same seems to be true of 
 those who are not over twenty-five. 
 
INTERNATIONAL VITAL STATISTICS. 
 
 273 
 
 6 
 
 7 
 
 8 
 
 9 
 
 
 
 
 Annual 
 
 
 
 Deaths per 
 1000 living. 
 
 Deaths 
 percent- 
 
 percentage 
 increase 
 
 Population in millions 
 (partly estimated). 
 
 
 
 age 
 
 1860 to 1880. 
 
 
 Countries. 
 
 
 under 
 
 
 
 
 1865 
 
 
 five years 
 
 
 
 
 
 
 
 to 83. 
 
 1890. 
 
 of age. 
 
 natural. 
 
 actual. 
 
 1801. 
 
 1840. 
 
 1890. 
 
 
 28-1 - 
 
 
 32-3 
 
 10-6 
 
 _ 
 
 175-0 
 
 250-6 
 
 360-9 
 
 Europe 
 
 21-4 - 
 
 19-5 
 
 24-9 
 
 13-7 
 
 13-2 
 
 8-9 
 
 15-7 
 
 28-8 
 
 England & Wales 
 
 21-4- 
 
 19-7 
 
 23-1 
 
 13'3 
 
 10-2 
 
 1-6 
 
 2-6 
 
 4-0 
 
 Scotland 
 
 17-8 + 
 
 18-2 
 
 16-5 
 
 8-6 
 
 -6-9* 
 
 ? 
 
 8-0 
 
 4-7 
 
 Ireland 
 
 18-9- 
 
 17-1 
 
 22-2 
 
 11-3 
 
 7-7 
 
 2-8 
 
 3-1 
 
 4-8 
 
 Sweden 
 
 24-6- 
 
 20-5 
 
 
 
 11-3 
 
 10-2 
 
 2-0 
 
 2-9 
 
 4-5 
 
 Holland 
 
 22-4- 
 
 20-8 
 
 25-3 
 
 9-1 
 
 8-4 
 
 
 
 4-1 
 
 6-1 
 
 Belgium 
 
 23-8- 
 
 22-8 
 
 25-8 
 
 1-6 
 
 2-5 
 
 33-1 
 
 34-1 
 
 38-5 
 
 France 
 
 26-5 - 
 
 24-2 
 
 32'4 
 
 12-3 
 
 9-4 
 
 8-7 
 
 15-1 
 
 29-9 
 
 Prussia 
 
 29-0- 
 
 26-9 
 
 
 
 13-4 
 
 14-9 
 
 
 
 
 
 3-5- 
 
 Saxony 
 
 30-6 + 
 
 27-3 
 
 39-3 
 
 8'9 
 
 7-1 
 
 
 
 
 
 5-6 
 
 Bavaria 
 
 23-1- 
 
 20-9 
 
 24-9 
 
 7-1 
 
 6-2 
 
 1-8 
 
 2-2 
 
 2-9 
 
 Switzerland 
 
 31-0- 
 
 38-2 + 
 
 29-4 
 32-0 
 
 39-0 
 
 7'4 
 4-8 
 
 7-7 
 4-8 
 
 I- 25-8 
 
 35-8 
 
 41-0 
 
 Austria 
 Hungary 
 
 29-1- 
 
 
 
 
 
 4-8 
 
 3-3 
 
 11-0 
 
 12-0 
 
 17-2 
 
 Spain 
 
 29-1- 
 
 26-4 
 
 37-8 
 
 7-7 
 
 6-8 
 
 
 
 
 
 30-2 
 
 Italy 
 
 35-7- 
 
 
 42-3 
 
 13-7 
 
 12-9 
 
 35-0 
 
 54-6 
 
 98-6 
 
 Bussia 
 
 
 
 
 
 
 
 
 
 23-6 
 
 5-4 
 
 17-1 
 
 62-6 
 
 United States 
 
 19-2 + 
 
 
 
 27-9 
 
 6-5 
 
 18-7 
 
 4 
 
 7 
 
 12-2 
 
 Massachusetts 
 
 The general mortality is high where the birth-rate is high. For 
 instance, both are high in Russia and Hungary ; both are low in Sweden, 
 France and Massachusetts. 
 
 In France and in Massachusetts the "natural" increase is very 
 small ; but there is an excess of immigration over emigration, which 
 raises the actual rate of increase. In all other countries of Europe 
 except France, Saxony and Austria proper, emigration exceeds immigra- 
 tion : the natural rate of increase is greater than the actual. 
 
 In comparing the aggregates of population shown in the last three 
 tables, it must be recollected that the areas of Russia and the United 
 States were much larger in 1890 than in 1801, those of Prussia and the 
 Austrian Empire rather larger : while that of France was much smaller ; 
 for in 1801 it had included Belgium, and part of Germany and Italy. 
 
 The signs + and in the first column of division 1 indicate that 
 the corresponding figures for the last five years of the period were 
 respectively greater or less than those for the first five years of the 
 period 1865 1883 ; that is, that the marriage-rate was tending to- 
 increase or to diminish ; and similarly for divisions 4 and 6. It will be 
 noted that they generally point in the same direction as the subsequent 
 changes shown by the second columns of those divisions. 
 
 The groups of years for which the figures are collected differ slightly in 
 some cases from those given at the heads of the various columns. 
 
 M. 
 
 18 
 
CHAPTER V. 
 
 THE HEALTH AND STRENGTH OF THE POPULATION. 
 
 BOOK iv. 1. WE have next to consider the conditions on which 
 
 CH> v ' depend health and strength, physical, mental and moral. 
 
 The basis They are the basis of industrial efficiency, on which the 
 
 dustrial production of material wealth depends ; while conversely the 
 
 chief importance of material wealth lies in the fact that, 
 
 when wisely used, it increases the health and strength, 
 
 physical, mental and moral of the human race. 
 
 Physical In many occupations industrial efficiency requires little 
 
 else than physical vigour ; that is, muscular strength, a good 
 
 constitution and energetic habits. In estimating muscular, 
 
 or indeed any other kind of strength for industrial purposes, 
 
 we must take account of the number of hours in the day, 
 
 of the number of days in the year, and the number of years 
 
 in the lifetime, during which it can be exerted. But with 
 
 this precaution we can measure a man's muscular exertion 
 
 by the number of feet through which his work would raise a 
 
 pound weight, if it were applied directly to this use ; or in 
 
 other words by the number of " foot pounds " of work that 
 
 he does 1 . 
 
 1 This measure can be applied directly to most kinds of navvies' and porters' 
 work, and indirectly to many kinds of agricultural work. In a controversy 
 that was waged after the great agricultural lock-out as to the relative efficiency 
 of unskilled labour in the South and North of England, the most trustworthy 
 measure was found in the number of tons of material that a man would load into 
 a cart in a day. Other measures have been found in the number of acres reaped 
 or mown, or the number of bushels of corn reaped &c. : but these are unsatisfac- 
 tory, particularly for comparing different conditions of agriculture: since the 
 implements used, the nature of the crop and the mode of doing the work all vary 
 widely. Thus nearly all comparisons between mediaeval and modern work and 
 
GENERAL CONDITIONS OF HEALTH AND STRENGTH. 275 
 
 Although the power of sustaining great muscular exertion BOOK iv. 
 seems to rest on constitutional strength and other physical ' 
 conditions, yet even it depends also on force of will, and 
 strength of character. Energy of this kind, which may 
 perhaps be taken to be the strength of the man, as distiri- strength, 
 guished from that of his body, is moral rather than physical ; 
 but yet it depends on the physical condition of nervous 
 strength. This strength of the man himself, this resolution, 
 energy and self-mastery, or in short this "vigour" is the 
 source of all progress : it shows itself in great deeds, in great 
 thoughts and in the capacity for true religious feeling 1 . 
 
 Vigour works itself out in so many forms, that no simple 
 measure of it is possible. But we are all of us constantly 
 estimating vigour, and thinking of one person as having more 
 " backbone," more " stuff in him," or as being " a stronger 
 man " than another. Business men even in different trades, 
 and University men even when engaged in different studies, 
 
 wages based on the wages of reaping, mowing &c. are valueless until we have 
 found means to allow for the effects of changes in the methods of agriculture. It 
 costs for instance less labour than it did to reap by hand a crop that yields a 
 hundred bushels of corn ; because the implements used are better than they were : 
 but it may not cost less labour to reap an acre of corn ; because the crops are 
 heavier than they were. 
 
 In backward countries, particularly where there is not much use of horses or 
 other draught animals, a great part of men's and women's work may be measured 
 fairly well by the muscular exertion involved in it. But in England less than 
 one-sixth of the industrial classes are now engaged on work of this kind ; while 
 the force exerted by steam-engines alone is more than twenty times as much as 
 could be exerted by the muscles of all Englishmen. 
 
 1 This must be distinguished from nervousness, which, as a rule, indicates a 
 general deficiency of nervous strength ; though sometimes it proceeds from 
 nervous irritability or want of balance. A man who has great nervous strength 
 in some directions may have but little in others ; the artistic temperament in par- 
 ticular often develops one set of nerves at the expense of others: but it is the 
 weakness of some of the nerves, not the strength of the others, that leads to 
 nervousness. The most perfect artistic natures seem not to have been nervous : 
 Leonardo da Vinci and Shakespeare for example. The term "nervous strength" 
 corresponds in some measure to Heart in Dr Engel's great division of the elements 
 of efficiency into (a) Body, (b) Reason, and (c) Heart (Leib, Verstand und Herz), 
 and he classifies activities according to the permutations a, ab, ac, abc, acb ; b, 6a, 
 be, bca, bac; c, ca, cb, cab, cba: the order in each case being that of relative im- 
 portance, and a letter being omitted where the corresponding element plays only a 
 very small part. 
 
 In the war of 1870 Berlin University students, who seemed to be weaker 
 than the average soldier, were found to be able to bear fatigue better. 
 
 182 
 
276 HEALTH AND STRENGTH. 
 
 BOOK iv. get to estimate one another's strength very closely. It soon 
 CH ' v becomes known if less strength is required to get a "first 
 
 class " in one study than another. 
 
 The influ- 2. In discussing the growth of numbers a little has 
 
 climate, been said incidentally of the causes which determine length 
 
 of life: but they are in the main the same as those which 
 
 determine constitutional strength and vigour, and they will 
 
 occupy our attention again in the present chapter. 
 
 The first of these causes is the climate. In warm countries 
 we find early marriages and high birth-rates, and in conse- 
 quence a low respect for human life : this has probably been 
 the cause of a great part of the high mortality that is gener- 
 ally attributed to the insalubrity of the climate l . 
 
 Vigour depends partly on race qualities : but these, so 
 far as they can be explained at all, seern to be chiefly due to 
 climate 2 . 
 
 The neces- 3. Climate has also a large share in determining the 
 
 life. necessaries of life ; the first of which is food. Much depends 
 
 on the proper preparation of food; and a skilled housewife 
 
 1 A warm climate impairs vigour. It is not altogether hostile to high 
 intellectual and artistic work : but it prevents people from being able to endure 
 very hard exertion of any kind for a long tune. More sustained hard work can be 
 done in the cooler half of the temperate zone than anywhere else ; and most of all 
 in places such as England and her counterpart New Zealand, where sea-breezes 
 keep the temperature nearly uniform. The summer heats and winter colds of 
 many parts of Europe and America, where the mean temperature is moderate, 
 have the effect of shortening the year for working purposes by about two months. 
 Extreme and sustained cold is found to dull the energies, partly perhaps it causes 
 people to spend much of their time in close and confined quarters : inhabitants of 
 the Arctic regions are generally incapable of long-continued severe exertion. 
 In England popular opinion has insisted that a "warm Yule-tide makes a fat 
 churchyard;" but statistics prove beyond question that it has the opposite 
 effect: the average mortality is highest in the coldest quarter of the year, and 
 higher in cold winters than in warm. But in warm climates the autumn is 
 generally the most unhealthy part of the year. In India moisture is more hurtful 
 to health and strength than either heat or cold : while the dry cold of Colorado, 
 Canada and the Alps is often beneficial to those who are well fed, clothed and 
 housed. 
 
 2 Race history is a fascinating but disappointing study for the economist : for 
 conquering races generally incorporated the women of the conquered ; they often 
 carried with them many slaves of both sexes during their migrations, and slaves 
 were less likely than freemen to be killed in battle or to adopt a monastic life. In 
 consequence nearly every race had much servile, that is mixed blood in it : and as 
 the share of servile blood was largest in the industrial classes, a race history of 
 industrial habits seems impossible. 
 
FOOD AND OTHER MATERIAL NECESSARIES. 277 
 
 with ten shillings a week to spend on food will often do more BOOK iv. 
 for the health and strength of her family than an unskilled CH ' v ' 
 one with twenty. The great mortality of infants among the 
 poor is largely due to the want of care and judgment in 
 preparing their food ; and those who do not entirely succumb 
 to this want of motherly care often grow up with enfeebled 
 constitutions. 
 
 In all ages of the world except the present, want of food Scarcity 
 has caused wholesale destruction of the people. Even in creases 
 London in the seventeenth and eighteenth centuries the mortallt y ; 
 mortality was eight per cent, greater in years of dear corn 
 than in years of cheap corn 1 . But gradually the effects of 
 increased wealth and improved means of communication 
 are making themselves felt nearly all over the world ; the 
 severity of famines is mitigated even in such a country 
 as India ; and they are unknown in Europe and in the 
 New World. In England now want of food is scarcely 
 ever the direct cause of death : but it is a frequent cause 
 of that general weakening of the system which renders it 
 unable to resist disease ; and it is a chief cause of industrial 
 inefficiency. 
 
 We have already seen that the necessaries for efficiency 
 vary with the nature of the work to be done, but we must 
 now examine this subject a little more closely. 
 
 As regards muscular work in particular there is a close 
 connection between the supply of food that a man has, and 
 and his available strength. If the work is intermittent, as thatTowers 
 that of some dock labourers, a cheap but nutritious grain V1 ^ our - 
 diet is sufficient. But for very heavy continuous strain such 
 as is involved in puddlers' and the hardest navvies' work, 
 food is required which can be digested and assimilated even 
 when the body is tired. This quality is still more essential 
 in the food of the higher grades of labour, whose work 
 involves great nervous strain ; though the quantity required 
 by them is generally small. 
 
 After food, the next necessaries of life and labour, are Clothing, 
 clothing, house-room and firing. When they are deficient, a nd firing. 
 
 1 This was proved by Farr, who eliminated disturbing causes by an instructive 
 statistical device ( Vital Statistics, p. 139). 
 
278 HEALTH AND STRENGTH. 
 
 BOOK iv. the mind becomes torpid, and ultimately the physical con- 
 CH ' v ' stitution is undermined. When clothing is very scanty, it is 
 generally worn night and day; and the skin is allowed to 
 be enclosed in a crust of dirt. A deficiency of house-room, 
 or of fuel, causes people to live in a vitiated atmosphere 
 which is injurious to health and vigour; and not the least 
 of the benefits which English people derive from the cheap- 
 ness of coal, is the habit, peculiar to them, of having well- 
 ventilated rooms even in cold weather. Badly-built houses 
 with imperfect drainage cause diseases which even in their 
 slighter forms weaken vitality in a wonderful way ; and over- 
 crowding leads to moral evils which diminish the numbers 
 and lower the character of the people. 
 
 Best. Rest is as essential for the growth of a vigorous popu- 
 
 lation as the more material necessaries of food, clothing, &c. 
 Overwork of every form lowers vitality, but anxiety, worry, 
 and excessive mental strain have a fatal influence in under- 
 mining the constitution, in impairing fecundity and diminish- 
 ing the vigour of the race. 
 
 Hopeful- 4. Next come three closely allied conditions of vigour, 
 
 dom'and namely, hopefulness, freedom, and change. All history is 
 change. fa^ o f ^he record of inefficiency caused in varying degrees 
 by slavery, serfdom, and other forms of civil and political 
 oppression and repression. Freedom and hope increase not 
 only man's willingness but also his power for work ; physi- 
 ologists tell us that a given exertion consumes less of the 
 store of nervous energy if done under the stimulus of plea- 
 sure than of pain : and without hope there is no enterprise. 
 Security of person and property are two conditions of this 
 hopefulness and freedom ; but security always involves re- 
 straints on freedom, and it is one of the most difficult prob- 
 lems of civilisation to discover how to obtain the security 
 which is a condition of freedom without too great a sacrifice 
 of freedom itself. Changes of work, of scene, and of personal 
 associations bring new thoughts, call attention to the im- 
 perfections of old methods, stimulate a " divine discontent," 
 and in every way develop creative energy. 
 
 In all ages colonies have been apt to outstrip their 
 mother countries in vigour and energy. This has been due 
 
HOPE, FREEDOM AND CHANGE. 279 
 
 partly to the abundance of land and the cheapness of neces- BOOK iv. 
 saries at their command ; partly to that natural selection of _!_' 
 the strongest characters for a life of adventure, and partly to 
 physiological causes connected with the mixture of races: 
 but perhaps the most important cause of all is to be found 
 in the hope, the freedom and the changefulness of their lives 1 . 
 
 Freedom so far has been regarded as freedom from The influ- 
 external bonds. But that higher freedom, which comes of mothers, 
 self-mastery, is an even more important condition for the 
 highest work. The elevation of the ideals of life on which 
 this depends, is due on the one side to political and economic 
 causes, and on the other to personal and religious influences ; 
 among which the influence of the mother in early childhood 
 is supreme. 
 
 5 5. Bodily and mental health and strength are much and of 
 
 n 11 o ,11 P , i occupation. 
 
 influenced by occupation . At the beginning ot this century 
 
 1 By converse with others who come from different places, and have different 
 customs, travellers learn to put on its trial many a habit of thought or action 
 which otherwise they would have always acquiesced in as though it were a law of 
 nature. Moreover, a shifting of places enables the more powerful and original 
 minds to find full scope for their energies and to rise to important positions: 
 whereas those who stay at home are often over much kept in their places. Few 
 men are prophets in their own land ; neighbours and relations are generally the 
 last to pardon the faults and to recognize the merits of those who are less docile 
 and more enterprising than those around them. It is doubtless chiefly for this 
 reason that in almost every part of England a disproportionately large share of 
 the best energy and enterprise is to be found among those who were born 
 elsewhere. 
 
 But change may be carried to excess ; and when population shifts so rapidly, 
 that a man is always shaking himself loose from his reputation, he loses some of 
 the best external aids to the formation of a high moral character. The extreme 
 hopefulness and restlessness of those who wander to new countries lead to much 
 waste of effort in half acquiring technical skill, and half finishing tasks which are 
 speedily abandoned in favour of some new occupation. 
 
 2 The rate of mortality is low among ministers of religion and schoolmasters ; 
 among the agricultural classes, and in some other industries such as those of 
 wheelwrights, shipwrights and coal-miners. It is high in lead and tin mining, in 
 file-making and earthenware manufacture. But neither these nor any other 
 regular trade show as high a rate of mortality as is found among London general 
 labourers and costermongers ; while the highest of all is that of servants in inns. 
 Such occupations are not directly injurious to health, but they attract those who 
 are weak in physique and in character and they encourage irregular habits. A 
 good account of the influence of occupation on death-rates is given in the sup- 
 plement to the forty-fifth (1885) Annual Report of the Registrar- General, pp. 
 xxv. to Ixiii. See also Farr's Vital Statistics, pp. 392 411, Mr Humphreys' paper 
 on Class Mortality Statistics in the Statistical Journal for June, 1887, and the 
 literature of the Factory Acts generally. 
 
280 
 
 HEALTH AND STRENGTH. 
 
 BOOK IV. 
 CH. V. 
 
 Influence 
 of town 
 life. 
 
 the conditions of factory work were needlessly unhealthy arid 
 oppressive for all, and especially for young children. But 
 Factory and Education Acts have removed the worst of these 
 evils from factories ; though many of them still linger about 
 domestic industries and the smaller workshops. 
 
 The higher wages, the greater intelligence, and the better 
 medical facilities of townspeople should cause infant mortality 
 to be much lower among them than in the country. But it 
 is generally higher, especially where there are many mothers 
 who neglect their family duties in order to earn money wages. 
 
 6. In almost all countries there is a constant migration 
 towards the towns 1 . The large towns and especially London 
 absorb the very best blood from all the rest of England ; the 
 most enterprising, the most highly gifted, those with the 
 highest physique and the strongest characters go there to 
 find scope for their abilities. But by the time their children 
 and children's children have grown up without healthy play, 
 and without fresh air, there is often little trace left of their 
 original vigour. 
 
 1 Davenant (Ballance of Trade, A.D. 1699, p. 20), following Gregory King, proves 
 that according to official figures London has an excess of deaths over births of 
 2000 a year, but an immigration of 5000; which is more than half of what he 
 calculates, by a rather risky method, to be the true net increase of the population 
 of the country. He reckons that 530,000 people live in London, 870,000 in the 
 other cities and market towns, and 4,100,000 in villages and hamlets. Compare 
 these figures with the census of 1891 ; where we find London with a population 
 of over 4,000,000, five more towns with an average of over 400,000 and fifty- six 
 more ranging from 250,000 down to 50,000 with an average of 100,000. Nor is 
 this all : for many suburbs whose population is not counted in, are often really 
 parts of the big towns ; and in some cases the suburbs of several adjacent towns 
 run into one another, making them all into one gigantic, though rather scattered 
 town. The suburbs of Liverpool are growing so fast at the expense of the city, 
 that its actual increase is less than its excess of births over deaths; those who go 
 out from it exceed in numbers those who emigrate into it, as was shown by 
 Mr Cannan in the Economic Journal, vol. iv. A suburb of Manchester is counted 
 as a large town with 200,000 inhabitants ; and the same is true of West Ham, a 
 suburb of London. 
 
 Similar changes are taking place elsewhere. Thus the population of Paris has 
 grown twelve times as fast during the present century as that of France. The 
 towns of Germany are increasing at the expense of the country by one half per 
 cent, of the population yearly. In the United States there was in 1800 no town 
 with more than 75,000 inhabitants; and now there are three with more than 
 1,000,000 each, and thirteen more with above 200,000 each. More than a third 
 of the population of Victoria are collected in Melbourne. 
 
 We shall presently need to discuss the causes of the growth of great cities, 
 
THE INFLUENCE OF TOWN LIFE. 281 
 
 It is sometimes urged that the death-rate in some large BOOK iv. 
 towns, and especially in London, is not as high as might have 
 been anticipated if town life is really injurious to health and 
 vigour. But this argument seems untrustworthy, partly 
 because many of the town influences which lower vigour, do 
 not much affect mortality ; and partly because the majority 
 of immigrants into the towns are in the full strength of 
 youth, and of more than average energy and courage ; while 
 young people whose parents live in the country generally go 
 home when they become seriously ill 1 . 
 
 It is not to be concluded from this that the race is 
 degenerating physically, nor even that its nervous strength 
 is on the whole decaying. On the contrary the opposite is 
 plainly true of those boys and girls who are able to enter 
 freely into modern outdoor amusements, who frequently 
 spend holidays in the country and whose food, clothing and 
 medical care are abundant, and governed by the best 
 
 especially in English speaking countries. On the growth of modern cities generally 
 see Longstaff's Studies in Statistics and Levasseur's La Population Franqaise, 
 Book ii. ch. xv. 
 
 It must be recollected that the characteristics of town life increase in intensity 
 for good and for evil with every increase in the size of a town, and its suburbs. 
 Fresh country air has to pass over many more sources of noisome vapour before 
 it reaches the average Londoner than before it reaches the average inhabitant of a 
 small town. The Londoner has generally to go far before he can reach the freedom 
 and the restful sounds and sights of the country. London therefore with 4,000,000 
 inhabitants adds to the urban character of England's life far more than a hundred 
 times as much as a town of 40,000 inhabitants. 
 
 1 The mortality of females in London between the ages of fifteen and 
 thirty-five is, chiefly for this reason, abnormally low. If however a town has a 
 stationary population its vital statistics are more easily interpreted ; and selecting 
 Coventry as a typical town, Mr Galton has calculated that the adult children of 
 artisan townsfolk are little more than half as numerous as those of labouring 
 people who live in healthy country districts. When a place is decaying, the young 
 and strong and hearty drift away from it ; leaving the old and the infirm behind 
 them, and consequently the birth-rate is generally low. On the other hand, a 
 centre qf industry that is attracting population is likely to have a very high 
 birth-rate, because it has more than its share of people in the full vigour of life. 
 This is especially the case in the coal and iron towns, partly because they do not 
 suffer, as the textile towns do, from a deficiency of males; and partly because 
 miners as a class marry early. In some of them, though the death-rate is high, 
 the excess of the birth-rate over it exceeds 20 per thousand of the population. 
 The death-rate is generally highest in towns of the second order, chiefly because 
 their sanitary arrangements are not yet as good as those of the very largest 
 towns. 
 
282 
 
 HEALTH AND STRENGTH. 
 
 BOOK iv. 
 
 
 Nature left 
 tends to 
 
 but man 
 has inter- 
 fered. 
 
 modern knowledge 1 . But until quite recently the children of 
 the working classes in large towns have had a bad time : 
 and it is doubtful whether the recent diminution of their 
 hours of labour, the advances of sanitation and medical 
 science, improvement of their food and clothing, of their 
 education and even in some cases their playgrounds quite 
 makes up for the evils inherent in town life 2 . 
 
 7. And there are yet other causes for anxiety. For 
 there is some partial arrest of that selective influence of 
 struggle and competition which in the earlier stages of 
 civilization caused those who were strongest and most 
 vigorous to leave the largest progeny behind them; and 
 to which, more than any other single cause, the progress of 
 the human race is due. In the later stages of civilization 
 the rule has indeed long been that the upper classes marry 
 late, and in consequence have fewer children than the 
 working classes : but this has been compensated for by the 
 fact that among the working classes themselves the old rule 
 has held ; and the vigour of the nation that is tending to be 
 damped out among the upper classes is thus replenished by 
 the fresh stream of strength that is constantly welling up 
 
 1 See an excellent article by Prof. Clifford Allbutt in the Contemporary Review, 
 Feb. 1895. Prof. Haycraft (Darwinism and Race Progress) argues in the opposite 
 direction. He lays just stress on the dangers to the human race which would 
 result from a diminution of those diseases, such as phthisis and scrofula, which 
 attack chiefly people of weak constitution, and thus exercise a selective influence 
 on the race, unless it were accompanied by corresponding improvements in 
 other directions. But phthisis does not kill all its victims; there is some net 
 gain in a diminution of its power of weakening them. 
 
 2 There is therefore no better use for public and private money than in 
 providing public parks and playgrounds in large cities, in contracting with 
 railways to increase the number of the workmen's trains run by them, and in 
 helping those of the working classes who are willing to leave the large towns to do 
 so, and to take their industries with them ; while money spent on reducing the 
 cost of living in large towns by building workmen's houses at a loss or in other 
 ways, is likely to do almost as much harm as good, and sometimes even more. If 
 the numbers of the working classes in the large towns are reduced to those whose 
 work must be carried on there, the scarcity of their labour will enable them to 
 command high wages ; and therefore if sanitary laws and rules against overcrowd- 
 ing are rigidly enforced, and space enough is secured to provide opportunities of 
 healthy play for their children, those who live in large towns will have a better 
 chance of leaving a healthy progeny behind them; and meanwhile some check 
 will be given to the migration from the country to the towns. See an article on 
 Where to House the London Poor by the present writer in the Contemporary 
 Review, Feb. 1884. 
 
NATURAL AND ARTIFICIAL SELECTION. 283 
 
 from below. But in France for a long time, and recently in BOOK iv. 
 
 America, and England, some of the abler and more intelligent * 
 
 of the working class population have shown signs of a dis- 
 inclination to have large families; and this is a source of 
 danger. 
 
 Thus there are increasing reasons for fearing, that while 
 the progress of medical science and sanitation is saving 
 from death a continually increasing number of the children 
 of those who are feeble physically and mentally ; many of 
 those who are most thoughtful and best endowed with 
 energy, enterprise and self-control are tending to defer their 
 marriages and in other ways to limit the number of children 
 whom they leave behind them. The motive is sometimes 
 selfish, and perhaps it is best that hard and frivolous people 
 should leave but few descendants of their own type. But 
 more often it is a desire to secure a good social position 
 for their children. This desire contains many elements 
 that fall short of the highest ideals of human aims, and 
 in some cases, a few that are distinctly base; but after 
 all it has been one of the chief factors of 'progress, and those 
 who are affected by it include many of those whose children 
 would probably be among the best and strongest of the race 1 . 
 
 1 It has already been noticed that the celibacy of the religious orders probably 
 did not affect the growth of numbers very much : it gave a particular direction to 
 the forces tending to keep that growth in check, but it probably did not add much 
 to their effects. Its main influence was not on the quantity but on the quality of 
 the population. "Whenever a man or woman was possessed of a gentle nature 
 that fitted him or her to deeds of charity, to meditation, to literature or to art, the 
 social condition of the time was such that they had no refuge elsewhere than in 
 
 the bosom of the Church. But the Church chose to preach and enact celibacy 
 
 She practised those arts which breeders would use who aimed at creating fero- 
 cious, churlish, and stupid natures. No wonder that club law prevailed for 
 centuries in Europe." Meanwhile by her persecutions of those who were "the 
 most fearless, truthseeking, and intelligent in their modes of thought and therefore 
 the most suitable parents of a high civilisation, she put a strong check, if not a 
 direct stop, to their progeny." (Galton, Hereditary Genius, p. 356.) 
 
 In modern times the same evil on a larger scale was seen in the Southern 
 States of America, where manual work became disgraceful to the white man ; so 
 that if unable to have slaves himself he led a paltry degenerate life, and seldom 
 married. Again, on the Pacific Slope, there were at one time just grounds for 
 fearing that all but highly skiUed work would be left to the Chinese ; and that the 
 white men would live in an artificial way in which a family became a great 
 expense. In this case Chinese lives would have been substituted for American, 
 and the average quality of the human race would have been lowered. 
 
284 HEALTH AND STRENGTH. 
 
 BOOK iv. It must be remembered that the members of a large 
 
 CH>V - family educate one another, they are usually more genial 
 
 The state an( j bright often more vigorous in every way than the 
 
 gains much ...... 
 
 from large members of a small family. Partly, no doubt, this is because 
 
 healthy their parents were of unusual vigour ; and for a like reason 
 
 children, ^ e y m their turn are likely to have large and vigorous 
 
 families. The progress of the race is due to a much greater 
 
 extent than appears at first sight to the descendants of a few 
 
 exceptionally large and vigorous families. 
 
 But on the other hand there is no doubt that the parents 
 can often do better in many ways for a small family than a 
 The evils large one. Other things being equal, an increase in the 
 number of children who are born causes an increase of infan- 
 tile mortality; and that is an unmixed evil. The birth of 
 children who die early from want of care and adequate means 
 is a useless strain to the mother and an injury to the rest of the 
 family 1 . And though these evils may be reduced within small 
 compass by those parents who are exceptionally good man- 
 agers ; yet example is always more potent than precept, and 
 habits of prudence will not spread among the people, so long as 
 the natural leaders of the people marry early and have larger 
 families than they can expect to bring up well if they should 
 meet with any considerable misfortunes in their own career 2 . 
 Practical 8. There are other considerations of which account 
 
 ' ought to be taken ; but so far as the points discussed in this 
 chapter are concerned, it seems primd facie advisable that 
 people should not bring children into the world till they can 
 see their way to giving them at least as good an education 
 both physical and mental as they themselves had ; and that 
 
 1 The extent of the infant mortality that arises from preventable causes may 
 be inferred from the facts that while the annual death-rate of children under five 
 years of age is only about two per cent, in the families of peers and is less than 
 three per cent, for the whole of the upper classes, it is between six and seven per 
 cent, for the whole of England. For the upper classes the expectation of life at 
 birth is 53 years, and at ten years of age it is 52 years: but for the whole of 
 England the expectation of life at birth is only 41 years, while at ten years of age, 
 instead of being lower, it rises to 47 years. (See Mr Humphreys' paper in the 
 Statistical Journal for June, 1883.) 
 
 2 On the other hand M. Leroy Beaulieu says that in France the parents of but 
 one or two children are apt to indulge them, and be over-careful about them to the 
 detriment of their boldness, enterprise and endurance. (See Statistical Journal, 
 Vol. 54, pp. 3789.) 
 
PRACTICAL CONCLUSION. 285 
 
 it is best to marry moderately early provided there is sufficient BOOK iv. 
 self-control to keep the family within the requisite bounds ' v ' 
 without transgressing moral laws. The general adoption of 
 these principles of action, combined with an adequate provi- 
 sion of fresh air and of healthy play for our town populations, 
 could hardly fail to cause the strength and vigour of the race 
 to improve. And we shall presently find reasons for believing 
 that if the strength and vigour of the race improves, the 
 increase of numbers will not for a long time to come cause a 
 diminution of the average real income of the people. 
 
 Thus then the progress of knowledge, and in particular The sway- 
 of medical science, the ever-growing activity and wisdom of fro of the 
 Government in all matters relating to health, and the increase goo d and 
 of material wealth, all tend to lessen mortality and to increase evi1 ' 
 health and strength, and to lengthen life. On the other hand, 
 vitality is lowered and the death-rate raised by the rapid 
 increase of town life, and by the tendency of the higher 
 strains of the population to marry later and to have fewer 
 children than the lower. If the former set of causes were 
 alone in action, but so regulated as to avoid the danger of 
 over-population, it is probable that man would quickly rise 
 to a physical and mental excellence superior to any that 
 the world has yet known ; while if the latter set acted un- 
 checked, he would speedily degenerate. 
 
 As it is, the two sets hold one another very nearly in The former 
 balance, the former slightly preponderating. While the 
 population of England is growing nearly as fast as ever, rate> 
 those who are out of health in body or mind are certainly 
 not an increasing part of the whole ; and the rest are much 
 better fed and clothed, and with a few exceptions are 
 stronger than they were 1 . 
 
 1 The old English Life Table, based on the figures of the years 183854, shows 
 one-half of the males dying before they are 45, and of the females before they are 
 47, while the New Table, based on the figures of 187180, raises these ages to 47 
 and 52 respectively. The death-rate is much lower than it was in the earlier 
 years of life, though higher in the later years : and of the total number of years 
 added to life by the greater longevity, two-thirds fall within the most important 
 period of 25 to 65 years of age. See Supplement to the 45th Annual Report of the 
 Registrar-General ; and Mr Humphreys' paper in the Statistical Journal for June, 
 1883. On the comparative length of life in different countries, see Dr Bodio's 
 work already referred to, and Dr Perozzo's Sulla Classificazione per Eta, &c. 
 
CHAPTER VI. 
 
 INDUSTRIAL TRAINING. 
 
 BOOK IV. 
 CH. VI. 
 
 The form 
 
 which 
 
 natural 
 
 vigour 
 
 takes 
 
 depends 
 
 largely on 
 
 training. 
 
 The defects 
 of our own 
 age are 
 apt to be 
 overesti- 
 mated. 
 
 1. HAVING discussed the causes which determine the 
 growth of a numerous and vigorous population, we have next 
 to consider the training that is required to develop its indus- 
 trial efficiency. 
 
 The natural vigour that enables a man to attain great 
 success in any one pursuit would generally have served him 
 in good stead in almost any other. But there are exceptions. 
 Some people, for instance, seem to be fitted from birth for an 
 artistic career, and for no other ; and occasionally a man of 
 great practical genius is found to be almost devoid of artistic 
 sensibility. But a race that has great nervous strength 
 seems generally able, under favourable conditions, to develop 
 in the course of a few generations ability of almost any kind 
 that it holds in specially high esteem. A race that has 
 acquired vigour in war or in the ruder forms of industry 
 sometimes gains intellectual and artistic power of a high 
 order very quickly ; and nearly every literary and artistic 
 epoch of classical and mediaeval times has been due to a 
 people of great nervous strength, who have been brought 
 into contact with noble thoughts before they have acquired 
 much taste for artificial comforts and luxuries. 
 
 The growth of this taste in our own age has prevented 
 us from taking full advantage of the opportunities our largely 
 increased resources give us of consecrating the greater part 
 of the highest abilities of the race to the highest aims. But 
 perhaps the intellectual vigour of the age appears less than 
 it really is, in consequence of the growth of scientific pursuits. 
 
UNSKILLED LABOUR A RELATIVE TERM. 287 
 
 For in art and literature success is often achieved while genius BOOK iv. 
 still wears the fascinating aspect of youth ; but in modern C ^JZ' 
 science so much knowledge is required for originality, that 
 before a student can ma.ke his mark in the world, his mind 
 has often lost the first bloom of its freshness ; and further the 
 real value of his work is not often patent to the multitude as 
 that of a picture or poem generally is 1 . In the same way 
 the solid qualities of the modern machine-tending artisan 
 are rated more cheaply than the lighter virtues of the medi- 
 aeval handicraftsman. This is partly because we are apt to 
 regard as commonplace those excellences which are common 
 in our own time ; and to overlook the fact that the term 
 " unskilled labourer " is constantly changing its meaning. 
 
 2. Very backward races are unable to keep on at any Skilled and 
 kind of work for a long time ; and even the simplest forms of Sour. 6 
 what we regard as unskilled work is skilled work relatively 
 to them ; for they have not the requisite assiduity, and 
 they can acquire it only by a long course of training. 
 But where education is universal, an occupation may fairly 
 be classed as unskilled, though it requires a knowledge of 
 reading and writing. Again, in districts in which manufac- Skill with 
 tures have long been domiciled, a habit of responsibility, of are f ami- 
 carefulness and promptitude in handling expensive machinery Jftendo 
 and materials becomes the common property of all ; and then n ? fc rec - 
 
 r r j nize as 
 
 much of the work of tending machinery is said to be entirely ski11 - 
 mechanical and unskilled, and to call forth no human faculty 
 that is worthy of esteem. But in fact it is probable that not 
 one- tenth of the present populations of the world have the 
 mental and moral faculties, the intelligence, and the self- 
 control that are required for it : perhaps not one-half could 
 
 1 In this connection it is worth while to notice that the full importance of an 
 epoch-making idea is often not perceived in the generation in which it is 
 made: it starts the thoughts of the world on a new track, but the change of 
 direction is not obvious until the turning-point has been left some way behind. 
 In the same way the mechanical inventions of every age are apt to be underrated 
 relatively to those of earlier times. For a new discovery is seldom fully effective 
 for practical purposes till many minor improvements and subsidiary discoveries 
 have gathered themselves around it : an invention that makes an epoch is very 
 often a generation older than the epoch which it makes. Thus it is that each 
 generation seems to be chiefly occupied in working out the thoughts of the 
 preceding one ; while the full importance of its own thoughts is as yet not clearly 
 
288 INDUSTRIAL TRAINING. 
 
 BOOK iv. be made to do the work well by steady training for two 
 CH^VI. g enera ti ons> Even of a manufacturing population only a small 
 part are capable of doing many of the tasks that appear at 
 first sight to be entirely monotonous. Machine-weaving, for 
 instance, simple as it seems, is divided into higher and lower 
 grades ; and most of those who work in the lower grades have 
 not "the stuff in them" that is required for weaving with 
 several colours. And the differences are even greater in 
 industries that deal with hard materials, wood, metals, or 
 ceramics. 
 
 Mere Some kinds of manual work require long-continued 
 
 skUHs practice in one set of operations, but these cases are not 
 
 portanoe ' ver y common, and they are becoming rarer : for machinery is 
 
 to^eneral cons * ant ly taking over work that requires manual skill of this 
 
 intern- kind. It is indeed true that a general command over the 
 
 vigour of use of one's fingers is a very important element of industrial 
 
 tel ' efficiency ; but this is the result chiefly of nervous strength, 
 
 and self-mastery. It is of course developed by training, but 
 
 the greater part of this may be of a general character and 
 
 not special to the particular occupation ; just as a good 
 
 cricketer soon learns to play tennis well, so a skilled artisan 
 
 can often move into other trades without any great and 
 
 lasting loss of efficiency. 
 
 Manual skill that is so specialized that it is quite in- 
 capable of being transferred from one occupation to another 
 is becoming steadily a less and less important factor in 
 production. Putting aside for the present the faculties of 
 artistic perception and artistic creation, we may say that 
 what makes one occupation higher than another, what makes 
 the workers of one town or country more efficient than those 
 of another, is chiefly a superiority in general sagacity and 
 energy which is not specialized to any one trade. 
 
 To be able to bear in mind many things at a time, to 
 have everything ready when wanted, to act promptly and 
 show resource when anything goes wrong, to accommodate 
 oneself quickly to changes in details of the work done, to be 
 steady and trustworthy, to have always a reserve of force 
 which will come out in emergency, these are the qualities 
 which make a great industrial people. They are not peculiar 
 
GENERAL AND SPECIALIZED ABILITY. 289 
 
 to any occupation, but are wanted in all ; and if they cannot BOOK iv. 
 always be easily transferred from one trade to other kindred c ^_^ 1 - 
 trades, the chief reason is that they require to be supple- 
 mented by some knowledge of materials and familiarity with 
 special processes. 
 
 We may then use the term general ability to denote General 
 those faculties and that general knowledge and intelligence *f ze d^ ec 
 which are in varying degrees the common property of all ablllt v- 
 the higher grades of industry : while that manual dexterity 
 and that acquaintance with particular materials and pro- 
 cesses which are required for the special purposes of 
 individual trades may be classed as specialized ability. 
 
 3. General ability depends largely on the surroundings The causes 
 of childhood and youth. In this the first and far the most mme the* 
 
 powerful influence is that of the mother 1 . Next comes the 
 influence of the father, of other children, and in some cases a bilit y- 
 of servants 2 . As years pass on the child of the working man The home. 
 learns a great deal from what he sees and hears going on 
 around him; and when we inquire into the advantages for 
 starting in life which children of the well-to-do classes have 
 over those of artisans, and which these in their turn have 
 over the children of unskilled labourers, we shall have to 
 consider these influences of home more in detail. But at 
 present we may pass to consider the more general influences 
 of school education. 
 
 Little need be said of general education ; though the School. 
 influence even of that on industrial efficiency is greater than 
 
 1 According to Mr Gallon the statement that all great men have had great 
 mothers goes too far : but that shows only that the mother's influence does not 
 outweigh all others ; not that it is not greater than any one of them. He says that 
 the mother's influence is most easily traceable among theologians and men of 
 science, because an earnest mother leads her child to feel deeply about great 
 things ; and a thoughtful mother does not repress, but encourages that childish 
 curiosity which is the raw material of scientific habits of thought. 
 
 * There are many fine natures among domestic servants. But those who live 
 in very rich houses are apt to get self-indulgent habits, to overestimate the im- 
 portance of wealth, and generally to put the lower aims of life above the higher, in 
 a way that is not common with independent working people. The company in 
 which the children of some of our best houses spend much of their time, is less 
 ennobling than that of the average cottage. Yet in these very houses, no servant 
 who is not specially qualified is allowed to take charge of a young pointer or 
 a young horse. 
 
 M. 19 
 
290 INDUSTRIAL TRAINING. 
 
 BOOK iv. it appears. It is true that the children of the working 
 c ^l^' classes must very often leave school, when they have but 
 learnt the elements of reading, writing, arithmetic and draw- 
 ing ; and it is sometimes argued that part of the little time 
 spent on these subjects would be better given to practical 
 work. But the advance made during school-time is im- 
 portant not so much on its own account, as for the power 
 of future advance which a school education gives. Reading 
 and writing afford the means of that wider intercourse 
 which leads to breadth and elasticity of mind, and which is 
 enabling the working man of to-day to be as capable a 
 citizen as was the country gentleman of last century 1 . 
 Thefunc- The absence of a careful general education for the 
 liberal children of the working classes, has been hardly less detri- 
 lucation. men ^ a i industrial progress than the narrow range of 
 the old grammar-school education of the middle classes. 
 Till recently indeed it was the only one by which the 
 average schoolmaster could induce his pupils to use their 
 minds in anything higher than the absorption of knowledge. 
 It was therefore rightly called liberal, because it was the 
 best that was to be had. But it failed in its aim of 
 familiarizing the citizen with the great thoughts of antiquity ; 
 it was generally forgotten as soon as school-time was over ; 
 and it raised an injurious antagonism between business and 
 culture. Now however the advance of knowledge is enabling 
 us to use science and art to supplement the curriculum of 
 the grammar-school, and to give to those who can afford 
 it an education that develops their best faculties, and starts 
 them on the track of thoughts which will most stimulate the 
 higher activities of their minds in after-life. 
 
 But while a truly liberal general education adapts the 
 mind to use its best faculties in business and to use business 
 itself as a means of increasing culture, it does not concern 
 itself with the details of particular trades. That task is left 
 for technical education. 
 
 1 It is true that learning to spell does not educate the faculties to any consider- 
 able extent, and that the time spent on it is nearly wasted. If spelling and pro- 
 nunciation could be brought into harmony in the English language, as they are in 
 most other languages, children would, it has been estimated, be able to read 
 fluently a year earlier than they can now. 
 
TECHNICAL EDUCATION. 291 
 
 4. Technical education has in like manner raised its aims BOOK iv. 
 
 CH VI 
 
 in recent years. It used to mean little more than imparting ' 
 
 that manual dexterity and that elementary knowledge of 
 machinery and processes which an intelligent lad quickly 
 picks up for himself when his work has begun ; though if he 
 has learnt it beforehand, he can perhaps earn a few shillings 
 more at starting than if he had been quite ignorant. But 
 such so-called education does not develop faculties; it 
 rather hinders them from being developed. A lad, who has 
 picked up the knowledge for himself has educated himself by 
 so doing; and he is likely to make better progress in the 
 future than one who has been taught in a school of this old- 
 fashioned kind. Technical education is however outgrowing 
 its mistakes; and is aiming, firstly, at giving a general 
 command over the use of eyes and fingers 1 (though there 
 are signs that this work is being taken over by general 
 education, to which it properly belongs); and secondly at 
 imparting artistic skill and knowledge, and methods of in- 
 vestigation, which are useful in particular occupations, but 
 are seldom properly acquired in the course of practical work 1 . 
 
 1 As Mr Nasmyth says, if a lad having dropped two peas at random on a table, 
 can readily put a third pea midway in a line between them, he is on the way to 
 become a good mechanic. Command over eye and hand is gained in the ordinary 
 English games, no less than in the playful work of the Kinder-garten. Drawing 
 has always been on the border line between work and play. 
 
 2 Continental systems of technical education give habits of order, assiduity and 
 docility, they store the mind with useful information ; and the German system, in 
 particular, has produced a race of men who are better fitted in some respects to 
 do the work required of the middle ranks of industry than any that the world has 
 ever seen. Aided by their knowledge of modern languages German clerks, com- 
 mercial agents and scientific advisers are gaining ground in many countries, 
 partly no doubt because they have more energy than most of their countrymen 
 who have stayed at home. They also make excellent administrators under 
 Government, and that is a chief reason why business under the control of Govern- 
 ment compares so much more favourably with that under private management 
 in Germany than in England. But the balance of evidence seems to show that 
 the German system, excellent as it is in many ways, is not in all respects well 
 suited for developing that daring energy and restless enterprise which go to the 
 root of the hardest difficulties. For this purpose the existing English system 
 is already superior in some respects ; and its deficiencies, though still great, are 
 rapidly being filled up. 
 
 On the whole we may say that at present England is very much behindhand 
 as regards the provision for the commercial as well as the technical education 
 of the proprietors and principal managers of industrial works; but that, chiefly 
 through the influence of the Science and Art Department of South Kensington, 
 
 192 
 
292 
 
 INDUSTRIAL TRAINING. 
 
 BOOK rv. 
 
 CH. VI. 
 
 The aims 
 of English 
 education 
 reform. 
 
 Appren- 
 ticeships, 
 their past, 
 
 According to the best English opinions, technical educa- 
 tion for the higher ranks of industry should keep the aim of 
 developing the faculties almost as constantly before it as 
 general education does. It should rest on the same basis 
 as a thorough general education, but should go on to work 
 out in detail special branches of knowledge for the benefit of 
 particular trades 1 . Our aim should be to add the scientific 
 training in which the countries of Western Europe are ahead 
 of us to that daring and restless energy and those practical 
 instincts, which seldom flourish unless the best years of 
 youth are spent in the workshop; recollecting always that 
 whatever a youth learns for himself by direct experience in 
 well-conducted works, teaches him more and stimulates his 
 mental activity more than if it were taught him by a master 
 in a technical school with model instruments 2 . 
 
 The old apprenticeship system is not exactly suited to 
 modern conditions and it has fallen into disuse ; but a sub- 
 elementary (or lower secondary) scientific and technical education covers a wider 
 area in this than in any other country. Unfortunately, however, these advantages 
 are prevented from being turned to the best account by the still backward condi- 
 tion of our elementary schools. Compare Sir Bernhard Samuelson's Preface to 
 Mr Montague's excellent summary of the Report of the Commission on Technical 
 Education. 
 
 1 See the Report 1884 of the Commissioners on Technical Instruction, Vol. i. 
 pp. 506, 514, also the opinions of Sir Lowthian Bell, Prof. Huxley, Dr Siemens 
 and others in Vol. m. of the Report, also Scott Russell's Technical Education. 
 See also the various publications of the National Association for the Promotion of 
 Technical Education. One of the weakest points of technical education is that it 
 does not educate the sense of proportion and the desire for simplicity of detail. 
 The English, and to an even greater extent, the Americans, have acquired in 
 actual business the faculty of rejecting intricacies in machinery and processes, 
 which are not worth what they cost, and practical instinct of this kind often 
 enables them to succeed in competition with Continental rivals who are much 
 better educated. 
 
 2 A good plan is that of spending the six winter months of several years after 
 leaving school in learning science in College, and the six summer months as 
 articled pupils in large workshops. The present writer introduced this plan several 
 years ago at University College, Bristol, and it has also been adopted in Japan. 
 (See the Report above quoted, Vol. m. p. 140.) But it has practical difficulties 
 which can be overcome only by the cordial and generous co-operation of the 
 heads of large firms with the College authorities. Another excellent plan is that 
 adopted in the school attached to the works of Messrs Mather and Platt at 
 Manchester. " The drawings made in the school are of work actually in progress 
 in the shops. One day the teacher gives the necessary explanations and calcula- 
 tions, and the next day the scholars see, as it were on the anvil, the very thing 
 which has been the subject of his lecture." 
 
TECHNICAL EDUCATION. APPRENTICESHIPS. 293 
 
 stitute for it is wanted. Within the last few years many of BOOK iv. 
 
 the ablest manufacturers have begun to set the fashion of _J ' 
 
 making their sons work through every stage in succession of 
 the business they will ultimately have to control; but this 
 splendid education can be had only by a few. So many and 
 various are the branches of any great modern industry that 
 it would be impossible for the employers to undertake, as 
 they used to do, that every youth committed to their care 
 should learn all ; and indeed a lad of ordinary ability would 
 be bewildered by the attempt. But it does not seem impracti- and their 
 cable to revive the apprenticeship system in a modified form 1 , future. 
 
 The great epoch-making inventions in industry came inventions 
 till recently almost exclusively from England. But now j^^* 
 other nations are joining in the race. The excellence of countries - 
 the common schools of the Americans, the variety of their 
 lives, the interchange of ideas between different races among 
 them, and the peculiar conditions of their agriculture have 
 developed a restless spirit of inquiry ; while technical educa- 
 tion is now being pushed on with great vigour 2 . On the 
 other hand, the diffusion of scientific knowledge among the 
 middle and even the working classes of Germany, combined 
 
 1 The employer binds himself to see that the apprentice is thoroughly taught 
 in the workshop all the subdivisions of one great division of his trade, instead of 
 letting him learn only one of these subdivisions, as too often happens now. The 
 apprentice's training would then often be as broad as if he had been taught the 
 whole of the trade as it existed a few generations ago ; and it might be supple- 
 mented by a theoretical knowledge of all branches of the trade, acquired in a 
 technical school. Something resembling the old apprenticeship system has recently 
 come into vogue for young Englishmen who desire to learn the business of farming 
 under the peculiar conditions of a new country : and there are some signs that the 
 plan may be extended to the business of farming in this country, for which it is in 
 many respects admirably adapted. But there remains a great deal of education 
 suitable to the farmer and to the farm-labourer which can best be given in agricul- 
 tural colleges and dairy schools. 
 
 Meanwhile many great agencies for the technical education of adults are being 
 rapidly developed, such as public exhibitions, trade associations and congresses, 
 and trade journals. Each of them has its own work to do ; in agriculture and 
 some other trades the greatest aid to progress is perhaps found in public shows ; 
 but those industries which are more advanced and in the hands of persons of 
 studious habits owe more to the diffusion of practical and scientific knowledge by 
 trade journals, which, aided by changes in the methods of industry and also in its 
 social conditions, are breaking up trade secrets and helping men of small means 
 in competition with their richer rivals. 
 
 2 The splendid Massachusetts Institute of Technology is under the direction of 
 the economist, General Walker. 
 
294 
 
 INDUSTRIAL TRAINING. 
 
 BOOK IV. 
 CH. VI. 
 
 A high 
 education 
 will in- 
 crease the 
 efficiency 
 of the 
 lower 
 grades of 
 industry 
 indirectly 
 rather 
 than 
 directly. 
 
 Much of 
 the best 
 natural 
 ability in 
 the nation 
 is born 
 
 with their familiarity with modern languages and their 
 habits of travelling in pursuit of instruction, has enabled 
 them to keep up with English and American mechanics and 
 to take the lead in many of the applications of chemistry to 
 business 1 . 
 
 5. It is true that there are many kinds of work 
 which can be done as efficiently by an uneducated as 
 by an educated workman: and that the higher branches 
 of education are of little direct use except to employers 
 and foremen and a comparatively small number of artisans. 
 But a good education confers great indirect benefits even 
 on the ordinary workman. It stimulates his mental activity ; 
 it fosters in him a habit of wise inquisitiveness ; it makes 
 him more intelligent, more ready, more trustworthy in his 
 ordinary work ; it raises the tone of his life in working hours 
 and out of working hours ; it is thus an important means 
 towards the production of material wealth ; at the same time 
 that, regarded as an end in itself, it is inferior to none of 
 those which the production of material wealth can be made 
 to subserve. 
 
 We must however look in another direction for a part, 
 perhaps the greater part, of the immediate economic gain 
 which the nation may derive from an improvement in 
 the general and technical education of the mass of the 
 people. We must look not so much at those who stay 
 in the rank and file of the working classes, as at those 
 who rise from a humble birth to join the higher ranks 
 of skilled artisans, to become foremen or employers, to 
 advance the boundaries of science, or possibly to add to 
 the national wealth in art and literature. 
 
 The laws which govern the birth of genius are in- 
 scrutable. It is probable that the percentage of children 
 of the working classes who are endowed with natural 
 abilities of the highest order is riot so great as that of the 
 
 1 The heads of almost every progressive firm on the Continent have carefully 
 studied processes and machinery in foreign lands. The English are great 
 travellers ; but partly perhaps on account of their ignorance of other languages 
 they seem hardly to set enough store on the technical education that can be 
 gained by the wise use of travel. See the Report quoted above, Vol. i. p. 281 and 
 passim. 
 
LATENT GENIUS AMONG THE WORKING CLASSES. 295 
 
 children of people who have attained or have inherited BOOKIV. 
 a higher position in society. But since the manual labour c ^^' 
 classes are four or five times as numerous as all other am 1 n - g tlie 
 
 working 
 
 classes put together, it is not unlikely that more than half classes, and 
 the best natural genius that is born into the country belongs runs to 
 to them ; and of this a great part is fruitless for want of W 
 opportunity. There is no extravagance more prejudicial 
 to the growth of national wealth than that wasteful negli- 
 gence which allows genius that happens to be born of 
 lowly parentage to expend itself in lowly work. No change 
 would conduce so much to a rapid increase of material 
 wealth as an improvement in our schools, and especially those 
 of the middle grades, provided it is combined with an 
 extensive system of scholarships, which will enable the clever 
 son of a working man to rise gradually from school to school 
 till he had the best theoretical and practical education which 
 the age can give. 
 
 To the abilities of children of the working classes may 
 be ascribed the greater part of the success of the free 
 towns in the Middle Ages and of Scotland in recent times. 
 Even within England itself there is a lesson of the same 
 kind to be learnt : progress is most rapid in those parts of 
 the country in which the greatest proportion of the leaders 
 of industry are the sons of working men. For instance, the 
 beginning of the manufacturing era found social distinctions 
 more closely marked and more firmly established in the South 
 than in the North of England. In the South something of a 
 spirit of caste has held back the working men and the sons 
 of working men from rising to posts of command ; and the 
 old established families have been wanting in that elasticity 
 and freshness of mind which no social advantages can supply, 
 and which comes only from natural gifts. This spirit of 
 caste, and this deficiency of new blood among the leaders of 
 industry, have mutually sustained one another ; and there 
 are not a few towns in the South of England whose decadence 
 within living memory can be traced in a great measure to 
 this cause. 
 
 6. Education in art stands on a somewhat different Education 
 footing from education in hard thinking : for while the latter m 
 
296 INDUSTRIAL TRAINING. 
 
 BOOK iv. nearly always strengthens the character, the former not 
 
 CH^VI. un f re q uen tly fails to do this. Nevertheless the development 
 
 of the artistic faculties of the people is in itself an aim 
 
 of the very highest importance, and is becoming a chief 
 
 factor of industrial efficiency. 
 
 We are here concerned almost exclusively with those 
 branches of art which appeal to the eye. For though 
 literature and music contribute as much and more to the 
 fulness of life, yet their development does not directly affect, 
 and does not depend upon, the methods of business, the 
 processes of manufacture and the skill of artisans. 
 Among The artisan of Europe in the Middle Ages, and of eastern 
 
 who 9 66 countries now, has perhaps obtained credit for more origin- 
 theLrhabits a ^J than ne nas rea % possessed. Eastern carpets, for 
 slowly, instance, are full of grand conceptions : but if we examine 
 guided a great many examples of the art of any one place, 
 matured selected perhaps from the work of several centuries s we 
 instincts, O ft en find very little variety in their fundamental ideas. 
 In fact every designer in a primitive age is governed 
 by precedent : only very daring people depart from it ; 
 even they do not depart far, and their innovations 
 are subjected to the test of experience, which, in the 
 long run, is infallible. For though the crudest and most 
 ridiculous fashions in art and in literature will be accepted 
 by the people for a time at the bidding of their social 
 superiors, nothing but true artistic excellence has enabled 
 a ballad or a melody, a style of dress or a pattern of 
 furniture to retain its popularity among a whole nation 
 for many generations together. Those innovations, then, 
 which were inconsistent with the true spirit of art were 
 suppressed, and those that were on the right track were 
 retained, and became the starting-point for further pro- 
 gress; and thus traditional instincts played a great part 
 in preserving the purity of the industrial arts in Oriental 
 countries, and to a less extent in medieval Europe. But 
 in the modern era of rapid changes some caused by 
 fashion and some by the beneficial movements of indus- 
 trial and social progress everyone feels free to make a 
 new departure, everyone has to rely in the main on his 
 
ARTISTIC DESIGN. 297 
 
 own resources : there is no slowly matured public criticism BOOK iv. 
 
 . j r CH. VI. 
 
 to guide him. 
 
 But this is not the only, perhaps not the chief dis- a nd often 
 advantage under which artistic design labours in our own J*^^ 
 age. There is no good reason for believing that the children snare * 
 of ordinary workmen in the Middle Ages had more power of genius, 
 artistic origination than those of ordinary village carpenters 
 or blacksmiths of to-day ; but if one among ten thousand 
 happened to have genius, it found vent in his work and 
 was stimulated by the competition of the gilds and in 
 other ways. But the modern artisan is apt to be occupied 
 in the management of machinery ; and though the faculties 
 which he develops may be more solid and may help more 
 in the long run towards the highest progress of the human 
 race, than did the taste and fancy of his mediaeval pre- 
 decessor, yet they do not contribute directly towards the 
 progress of art. And if he should find in himself a higher 
 order of ability than among his fellows, he will probably 
 endeavour to take a leading part in the management of a 
 trades-union or some other society, or to collect together a 
 little store of capital and to rise out of that trade in which 
 he was educated. These are not ignoble aims ; but his 
 ambition would perhaps have been nobler and more fruitful 
 of good to the world, if he had stayed in his old trade and 
 striven to create works of beauty which should live after he 
 had gone. 
 
 It must however be admitted that he would have great But in 
 difficulties in doing this. The shortness of the time which ^me 
 we allow ourselves for changes in the arts of decoration is tle signis 
 
 almost 
 
 scarcely a greater evil than the width of the area of the world limited to 
 over which they are spread ; for that causes a further distrac- profession ; 
 tion of the hasty and hurried efforts of the designer, by com- 
 pelling him to be always watching the world movements of 
 the supply of and demand for art products. This is a task 
 for which the artisan, who works with his own hands, 
 is not well fitted ; and in consequence now-a-days the 
 ordinary artisan finds it best to follow and not to lead. 
 Even the supreme skill of the Lyons weaver shows itself 
 now almost exclusively in an inherited power of delicate 
 
298 INDUSTRIAL TRAINING. 
 
 BOOK iv. manipulation, and fine perception of colour, that enable 
 CH^VI. ki m ^ Q carry out perfectly the ideas of professional designers, 
 which is Increasing wealth is enabling people to buy things of all 
 
 pay court kinds to suit the fancy, with but a secondary regard to their 
 to fashion. p Owers o f wearing ; so that in all kinds of clothing and furni- 
 ture it is every day more true that it is the pattern which 
 sells the things. And, so great is the hold which French 
 taste has on the average consumer, that many English manu- 
 facturers who hold their own against the world would, it is 
 said, be driven out of the market if they had to depend on 
 English patterns. This is however partly due to the fact that 
 Paris having got the lead in fashions, a Parisian design is 
 likely to be in harmony with the coming fashions and to sell 
 better than a design of equal intrinsic worth from elsewhere 1 . 
 It is probably true, though opinion is still somewhat 
 divided on the subject, that schools of artistic design are not 
 so urgently needed in England, as a more efficient and cheaper 
 system of popular education in art proper. For in this re- 
 spect perhaps more than any other, the child of the English 
 workman has less opportunities than his continental rivals, 
 and especially those of France. If we could secure that all 
 who have a natural turn for it should receive a fairly good 
 education in art proper, the applications of art to design and 
 decoration might perhaps be left pretty much to take care of 
 themselves 2 . 
 
 1 French designers find it best to live in Paris : if they stay for long out of 
 contact with the central movements of fashion they seem to fall behindhand. 
 Most of them have been educated as artists, but have failed of their highest 
 ambition. It is only in exceptional cases, as for instance for the Sevres china, 
 that those who have succeeded as artists find it worth their while to design. 
 Englishmen can, however, hold their own in designing for Oriental markets, and 
 there is evidence that the English are at least equal to the French in originality, 
 though they are inferior in quickness in seeing how to group forms and colours so 
 as to obtain an effective result. (See the Report on Technical Education, Vol. i. 
 pp. 256, 261, 324, 325 and Vol. in. pp. 151, 152, 202, 203, 211 and passim.) It is 
 probable that the profession of the modern designer has not yet risen to the best 
 position which it is capable of holding. For it has been to a disproportionate 
 extent under the influence of one nation ; and that nation is one whose works in 
 the highest branches of art have seldom borne to be transplanted. They have 
 indeed often been applauded and imitated at the time by other nations, but 
 they have as yet seldom struck a key-note for the best work of later generations. 
 
 2 The highest branches of art escape indeed many of the disadvantages under 
 which artistic design labours in our modern age. For he who designs a picture 
 
EDUCATION AS A NATIONAL INVESTMENT. 299 
 
 Technical education then, though it cannot add much BOOKIV. 
 directly to the supply of genius in art, any more than it can ' ' 
 in science or in business, can yet save much natural artistic 
 genius from running to waste ; and it is called on to do this 
 all the more because the training that was given by the older 
 forms of handicraft can never be revived on a large scale. 
 
 7. We may then conclude that the wisdom of ex- Education 
 pending public and private funds on education is not to be f n vest nal 
 measured by its direct fruits alone. It will be profitable as ment > 
 a mere investment, to give the masses of the people much 
 greater opportunities than they can generally avail them- 
 selves of. For by this means many, who would have died 
 unknown, are enabled to get the start needed for bringing 
 out their latent abilities. And the economic value of one 
 great industrial genius is sufficient to cover the expenses of 
 the education of a whole town ; for one new idea, such as 
 Bessemer's chief invention, adds as much to England's pro- 
 ductive power as the labour of a hundred thousand men. 
 Less direct, but not less in importance, is the aid given to 
 production by medical discoveries such as those of Jenner 
 or Pasteur, which increase our health and working power; 
 and again by scientific work such as that of mathematics or 
 biology, even though many generations may pass away before 
 it bears visible fruit in greater material well-being. All that 
 is spent during many years in opening the means of higher 
 education to the masses would be well paid for if it called 
 out one more Newton or Darwin, Shakespeare or Beethoven. 
 
 There are few practical problems in which the economist 
 has a more direct interest than those relating to the princi- 
 ples on which the expense of the education of children should 
 be divided between the State and the parents. But we 
 
 executes it with his own hands; there is not in painting nor even in sculpture 
 that divorce between design and technical familiarity with the material which is 
 so great an obstacle to the progress of our metal and wood work. 
 
 But the painters themselves have put on record in the portrait-galleries the 
 fact that in mediaeval times, and even later, their art attracted a larger share of 
 the best intellect than it does now ; when the ambition of youth is tempted by the 
 excitement of modern business, when its zeal for imperishable achievements finds 
 a noble field in the romantic discoveries of modern science, and, lastly, when a 
 great deal of excellent talent is insensibly diverted from high aims by the ready 
 pay to be got by hastily writing half-thoughts for periodical literature. 
 
300 INDUSTRIAL TRAINING. 
 
 BOOK iv. must now consider the conditions that determine the power 
 CH ' VI ' and the will of the parents to bear their share of the 
 
 expense, whatever it may be. 
 
 and a duty Most parents are willing enough to do for their children 
 what their own parents did for them ; and perhaps even 
 to go a little beyond it if they find themselves among 
 neighbours who happen to have a rather higher standard. 
 But to do more than this requires, in addition to the moral 
 qualities of unselfishness and a warmth of affection that 
 are perhaps not rare, a certain habit of mind which is as yet 
 not very common. It requires the habit of distinctly rea- 
 lizing the future, of regarding a distant event as of nearly 
 the same importance as if it were close at hand (discounting 
 the future at a low rate of interest) ; this habit is at once a 
 chief product and a chief cause of civilization, and is seldom 
 fully developed except among the middle and upper classes 
 of the more cultivated nations. 
 
 Mobility g 8 < Parents generally bring up their children to occu- 
 
 grades and pations in their own grade, and therefore the total supply of 
 
 within 11- i , 
 
 grades. labour in any grade in one generation is in a great measure 
 determined by the numbers in that grade in the preceding 
 generation, yet within the grade itself there is greater mobi- 
 lity. If the advantages of any one occupation in it rise above 
 the average, there is a quick influx of youth from other 
 occupations into the grade. The vertical movement from one 
 grade to another is seldom very rapid or on a very large 
 scale ; but, when the advantages of a grade have risen rela- 
 tively to the difficulty of the work required of it, many small 
 streams of labour, both youthful and adult, will begin to flow 
 towards it ; and though none of them may be very large, they 
 will together have a sufficient volume to satisfy before long 
 the increased demand for labour in that grade. 
 
 Provisional We must defer to a later stage a fuller discussion of the 
 ' obstacles which the conditions of any place and time oppose 
 to the free mobility of labour, and also of the inducements 
 which they offer to anyone to change his occupation or to 
 bring up his son to an occupation different from his own. 
 But we have seen enough to conclude that, other things being 
 equal, an increase in the earnings that are to be got by labour 
 
MOBILITY BETWEEN GRADES AND WITHIN GRADES. 301 
 
 increases its rate of growth ; or, in other words, a rise in its BOOK iv. 
 demand price increases the supply of it. If the state of CH ' VI ' 
 knowledge, and of social and domestic habits be given ; then 
 the numbers, if not vigour of the people as a whole, and in a 
 yet greater degree the numbers of any trade in particular, 
 may be said to have a supply price in this sense, that there 
 is a certain level of the demand price which will keep them 
 stationary ; that a higher price would cause them to increase, 
 and that a lower price would cause them to decrease 1 . 
 
 1 Mill was so much impressed by the difficulties that beset a parent in the 
 attempt to bring up his son to an occupation widely different in character from his 
 own, that he said : " So complete, indeed, has hitherto been the separation, so 
 strongly marked the line of demarcation, between the different grades of labourers, 
 as to be almost equivalent to an hereditary distinction of caste ; each employment 
 being chiefly recruited from the children of those already employed in it, or in 
 employments of the same rank with it in social estimation, or from the children 
 of persons who, if originally of a lower rank, have succeeded in raising themselves 
 by their exertions. The liberal professions are mostly supplied by the sons of 
 either the professional or the idle classes: the more highly skilled manual 
 employments are filled up from the sons of skilled artisans or the class of 
 tradesmen who rank with them: the lower classes of skilled employments are 
 in .a similar case ; and unskilled labourers, with occasional exceptions, remain 
 from father to son in their pristine condition. Consequently the wages of each 
 class have hitherto been regulated by the increase of its own population, rather than 
 that of the general population of the country." But he goes on, " The changes, 
 however, now so rapidly taking place in usages and ideas are undermining all 
 these distinctions." 
 
 His prescience has been vindicated by the progress of change since he wrote. 
 The broad lines of division which he pointed out have been almost obliterated by 
 the rapid action of those causes which, as we saw earlier in the chapter, are 
 reducing the amount of skill and ability required in some occupations and 
 increasing it in others. We cannot any longer regard different occupations as 
 distributed among four great planes; but we may perhaps think of them as 
 resembling a long flight of steps of unequal breadth, some of them being so broad 
 as to act as landing stages. Or even better still we might picture to ourselves two 
 flights of stairs, one representing the "hard-handed industries" and the other 
 "the soft-handed industries"; because the vertical division between these two is 
 in fact as broad and as clearly marked as the horizontal division between any two 
 grades. 
 
 Mill's classification had lost a great 'part of its value when Cairnes adopted it 
 (Leading Principles, p. 72). A classification more suited to our existing conditions 
 is offered by Mr Giddings (Political Science Quarterly, Vol. n. pp. 6971). It is 
 open to the objection that it draws broad lines of division where Nature has made 
 no broad lines ; but it is perhaps as good as any division of industry into four 
 grades can be. His divisions are (i) automatic manual labour, including common 
 labourers and machine tenders ; (ii) responsible manual labour, including those who 
 can be entrusted with some responsibility and labour of self -direction ; (iii) auto- 
 matic brain voorkers, such as bookkeepers, and (iv) responsible brain workers, 
 including the superintendents and directors. 
 
CHAPTER VII. 
 
 THE GROWTH OF CAPITAL AND OTHER FORMS OF WEALTH. 
 
 BOOK IV. 
 CH. VII. 
 
 Forms of 
 
 wealth 
 
 among 
 
 barbarous 
 
 peoples. 
 
 Forms of 
 wealth in 
 early 
 stages of 
 civiliza- 
 tion. 
 
 1. THE earliest forms of wealth were probably imple- 
 ments for hunting and fishing, and personal ornaments ; and, 
 in cold countries, clothing and huts 1 . During this stage the 
 domestication of animals began ; but at first they were pro- 
 bably cared for chiefly for their own sake, because they were 
 beautiful, and it was pleasant to have them ; they were, like 
 articles of personal ornament, desired because of the immedi- 
 ate gratification to be derived from their possession rather 
 than as a provision against future needs 2 . Gradually the 
 herds of domesticated animals increased ; and during the 
 pastoral stage they were at once the pleasure and the pride 
 of their possessors, the outward emblems of social rank, and 
 by far the most important store of wealth accumulated as a 
 provision against future needs. 
 
 As numbers thickened and the people settled down to 
 agriculture, cultivated land took the first place in the inven- 
 tory of wealth ; and that part of the value of the land which 
 was due to improvements (among which wells held a con- 
 spicuous place) became the chief element of capital, in the 
 
 1 A short but suggestive study of the growth of wealth in its early forms, and 
 of the arts of life, is given in Tylor's Anthropology. 
 
 2 Bagehot (Economic Studies, pp. 163 5) after quoting the evidence which 
 Mr Galton has collected on the keeping of pet animals by savage tribes, points 
 out that we find here a good illustration of the fact that however careless a savage 
 race may be for the future, it cannot avoid making some provision for it. A bow, 
 a fishing-net, which will do its work well in getting food for to-day, must be of 
 service for many days to come : a horse or a canoe that will carry one well to-day, 
 must be a stored-up source of many future enjoyments. The least provident of 
 barbaric despots may raise a massive pile of buildings, because it is the most 
 palpable proof of his present wealth and power. 
 
EARLY FORMS OF WEALTH. 303 
 
 narrower sense of the term. Next in importance came houses, BOOK iv. 
 domesticated animals, and in some places boats and ships ; - ' 
 but the implements of production, whether for use in agri- 
 culture or in domestic manufactures, remained for a long 
 time of little value. In some places, however, precious stones 
 and the precious metals in various forms became early a 
 leading object of desire and a recognized means of hoarding 
 wealth ; while, to say nothing of the palaces of monarchs, a 
 large part of social wealth in many comparatively rude civili- 
 zations took the form of edifices for public purposes, chiefly 
 religious, and of roads and bridges, of canals and irrigation 
 works. For many thousands of years these remained the Until 
 chief forms of accumulated wealth. In towns indeed houses there was 
 and household furniture took the first place, and stocks of of expen- 
 the more expensive of raw materials counted for a good deal ; 
 but though the inhabitants of the towns had often more capital, 
 wealth per head than those of the country, their total numbers 
 were small ; and their aggregate wealth was very much less 
 than that of the country. During all this time the only trade 
 that used very expensive implements was the trade of carry- 
 ing goods by water: the weaver's looms, the husbandman's 
 ploughs and the blacksmith's anvils were of simple construc- 
 tion and were of little account beside the merchant's ships. 
 But in the eighteenth century England inaugurated the era 
 of expensive implements. 
 
 The implements of the English farmer had been rising But in 
 slowly in value for a long time ; but the progress was quick- y^s they 
 ened in the eighteenth century. After a while the use first J^sed 
 of water power and then of steam power caused the rapid very fast, 
 substitution of expensive machinery for inexpensive hand 
 tools in one department of production after another. As in 
 earlier times the most expensive implements were ships and 
 in some cases canals for navigation and irrigation, so now 
 they are the means of locomotion in general ; railways and 
 tramways, canals, docks and ships, telegraph and telephone 
 systems and water- works : even gas-works might almost come 
 under this head, on the ground that a great part of their 
 plant is devoted to distributing the gas. After these come 
 mines and iron and chemical works, ship-building yards, 
 
304 GROWTH OF CAPITAL. 
 
 BOOK iv. printing-presses, and other large factories full of expensive 
 
 CH. VII. , . 
 
 machinery. 
 
 On whichever side we look we find that the progress and 
 diffusion of knowledge are constantly leading to the adoption 
 of new processes and new machinery which economize human 
 effort on condition that some of the effort is spent a good 
 while before the attainment of the ultimate ends to which it 
 is directed. It is not easy to measure this progress exactly, 
 because many modern industries had no counterpart in ancient 
 times. But let us compare the past and present conditions 
 of the four great industries the products of which have not 
 changed their general character : viz. agriculture, the build- 
 ing, the cloth-making, and the carrying trades. In the first 
 two of these hand work still retains an important place : but 
 even in them there is a great development of expensive 
 machinery. Compare for instance the rude implements of 
 an Indian Ryot even of to-day with the equipment of a pro- 
 gressive Lowland farmer 1 ; and consider the brickmaking, 
 mortar-making, sawing, planing, moulding and slotting ma- 
 chines of a modern builder, his steam cranes and his electric 
 light. And if we turn to the textile trades, or at least to 
 those of them which make the simpler products, we find each 
 operative in early times content with implements the cost of 
 which was equivalent to but a few months of his labour ; 
 while in modern times it is estimated that for each man, 
 woman and child employed there is a capital in plant alone 
 of about 200, or say the equivalent of five years' labour. 
 
 1 The farm implements for a first class Ryot family, including six or seven 
 adult males, are a few light ploughs and hoes chiefly of wood, of the total value of 
 about 13 rupees (Sir G. Phear, Aryan Village, p. 233) or the equivalent of their 
 work for about a month; while the value of the machinery alone on a well 
 equipped large modern arable fai-m amounts to 3 an acre (Equipment of the 
 Farm, edited by J. C. Morton) or say a year's work for each person employed. 
 They include steam-engines, trench, subsoil and ordinary ploughs, some to be 
 worked by steam and some by horse power; various grubbers, harrows, rollers, 
 clod-crushers, seed and manure drills, horse hoes, rakes, hay-making, mowing and 
 reaping machines, steam or horse threshing, chaff cutting, turnip cutting, hay- 
 pressing machines and a multitude of others. Meanwhile there is an increasing 
 use of silos and covered yards, and constant improvements in the fittings of the 
 dairy and other farm buildings, all of which give great economy of effort in the 
 long run, but require a larger share of it to be spent in preparing the way for the 
 direct work of the farmer in raising agricultural produce. 
 
MODERN FORMS OF WEALTH. 305 
 
 Again the cost of a steam-ship is perhaps equivalent to the BOOK iv. 
 labour for ten years or more of those who work her ; while ^_ ' 
 a capital of about 900,000,000 invested in railways in 
 England and Wales is equivalent to the work for perhaps 
 twenty years of the 300,000 people employed on them. 
 
 2. As civilization has progressed, man has always been And they 
 
 j i j j I are likely 
 
 developing new wants, and new and more expensive ways to continue 
 of gratifying them. The rate of progress has sometimes been 
 slow, and occasionally there has even been a great retrograde 
 movement ; but now we are moving on at a rapid pace that 
 grows quicker every year ; and we cannot guess where it will 
 stop. On every side further openings are sure to offer them- 
 selves, all of which will tend to change the character of our 
 social and industrial life, and to enable us to turn to account 
 vast stores of capital in providing new gratifications and new 
 ways of economizing effort by expending it in anticipation of 
 distant wants. There seems to be no good reason for be- 
 lieving that we are anywhere near a stationary state in 
 which there will be no new important wants to be satisfied ; 
 in which there will be no more room for profitably investing 
 present effort in providing for the future, and in which the 
 accumulation of wealth will cease to have any reward. The 
 whole history of man shows that his wants expand with the 
 growth of his wealth and knowledge 1 . 
 
 1 For instance, improvements which have recently been made in some American 
 cities indicate that by a sufficient outlay of capital each house could be supplied 
 with what it does require, and relieved of what it does not, much more effectively 
 than now, so as to enable a large part of the population to live in towns and yet 
 be free from many of the present evils of town life. The first step is to make 
 under all the streets large tunnels, in which many pipes and wires can be laid 
 side by side, and repaired when they get out of order, without any interruption 
 of the general traffic and without great expense. Motive power, and possibly 
 even heat, might then be generated at great distances from the towns (hi some 
 cases in coal-mines), and laid on wherever wanted. Soft water and spring water, 
 and perhaps even sea water and ozonized air, might be laid on in separate pipes 
 to nearly every house; while steam-pipes might be used for giving warmth in 
 winter, and compressed air for lowering the heat of summer ; or the heat might 
 be supplied by gas of great heating power laid on in special pipes, while light 
 was derived from gas specially suited for the purpose or from electricity; and 
 every house might be in electric communication with the rest of the town. All 
 unwholesome vapours, including those given off by any domestic fires which were 
 still used, might be carried away by strong draughts through long conduits, to 
 be purified by passing through large furnaces and thence away through huge 
 
 M. 20 
 
306 GROWTH OF CAPITAL. 
 
 BOOK iv. And with the growth of openings for the investment of 
 
 C ^_^ I- capital there is a constant increase in that surplus of produc- 
 
 And mean- ^ Q over fa e necessa ries of life, which gives the power to save. 
 
 while there 
 
 has been When the arts of production were rude, there was very little 
 
 and proba- A T , . 
 
 biy will be surplus, except where a strong ruling race kept the subject 
 ?ncrease e in masses hard at work on the bare necessaries of life, and 
 to aecumu- where the climate was so mild that those necessaries were 
 late. small and easily obtained. But every increase in the arts 
 
 of production, and in the capital accumulated to assist and 
 support labour in future production, increased the surplus 
 out of which more wealth could be accumulated. After a 
 time civilization became possible in temperate and even in 
 cold climates; the increase of material wealth was possible 
 under conditions which did not enervate the worker, and did 
 not therefore destroy the foundations on which it rested 1 . 
 Thus from step to step wealth and knowledge have grown, 
 and with every step the power of saving wealth and extend- 
 ing knowledge has increased. 
 
 The slow 3. The habit of distinctly realizing the future and 
 
 develoV providing for it has developed itself slowly and fitfully in the 
 habit of the course f man ' s history. Travellers tell us of tribes who 
 providing m ight double their resources and enjoyments without in- 
 future, creasing their total labour, if they would only apply a little 
 in advance the means that lie within their power and their 
 knowledge ; as, fo$ instance, by fencing in their little plots of 
 vegetables against the intrusion of wild animals. 
 
 But even this apathy is perhaps less strange than the 
 wastefulness that 'is found now among some classes in our 
 own country. Ca3es are not rare of men who alternate be- 
 tween earning two or three pounds a week and being reduced 
 to the verge of starvation : the utility of a shilling to them 
 when they are in employment is less than that of a penny 
 when they are out of it, and yet they never attempt to make 
 
 chimneys into the higher air. To carry out such a scheme in the towns of 
 England would require the outlay of a much larger capital than has been absorbed 
 by our railways. This conjecture as to the ultimate course of town improvement 
 may be wide of the truth ; but it serves to indicate one of very many ways in 
 which the experience of the past foreshadows broad openings for investing present 
 effort in providing the means of satisfying our wants in the future. 
 1 Comp. Bk. I. Ch. n. 
 
SLOW AND FITFUL GROWTH OF HABITS OF SAVING. 307 
 
 provision for the time of need 1 . At the opposite extreme BOOKIV. 
 
 there are misers, in some of whom the passion for saving _! " 
 
 borders on insanity; while, even among peasant proprietors 
 and some other classes, we meet not unfrequently with people 
 who carry thrift so far as to stint themselves of necessaries, 
 and to impair their power of future work. Thus they lose 
 every way: they never really enjoy life; while the income 
 which their stored- up wealth brings them is less than they 
 would have got from the increase of their earning power, if 
 they had invested in themselves the wealth that they have 
 accumulated in a material form. 
 
 In India, and to a less extent in Ireland, we find people 
 who do indeed abstain from immediate enjoyment and save 
 up considerable sums with great self-sacrifice, but spend all 
 their savings in lavish festivities at funerals and marriages. 
 They make intermittent provision for the near future, but 
 scarcely any permanent provision for the distant future : the 
 great engineering works by which their productive resources 
 have been so much increased, have been made chiefly with 
 the capital of the much less self-denying race of Englishmen. 
 
 Thus the causes which control the accumulation of wealth 
 differ widely in different countries and different ages. They 
 are not quite the same among any two races, and perhaps 
 not even among any two social classes in the same race. 
 They depend much on social and religious sanctions ; and it 
 is remarkable how, when the binding force of custom has 
 been in any degree loosened, differences of personal character 
 will cause neighbours brought up under like conditions to 
 differ from one another more widely and more frequently in 
 their habits of extravagance or thrift than in almost any 
 other respect. 
 
 4. The thriftlessness of early times was in a great Security as 
 
 / a condition 
 
 measure due to the want of security that those who made of saving, 
 provision for the future would enjoy it : only those who were 
 already wealthy were strong enough to hold what they had 
 saved ; the laborious and self-denying peasant who had heaped 
 up a little store of wealth only to see it taken from him by a 
 
 1 They "discount" future benefits (comp. Book III. ch. v. 3) at the rate of 
 many thousands per cent, per annum. 
 
 202 
 
308 
 
 GROWTH OF CAPITAL. 
 
 BOOK IV. 
 CH. VII. 
 
 The 
 
 growth of 
 a money 
 economy 
 gives new 
 tempta- 
 tions to 
 extrava- 
 gance 
 
 stronger hand, was a constant warning to his neighbours to 
 enjoy their pleasure and their rest when they could. The 
 border country between England and Scotland made little 
 progress so long as it was liable to incessant forays ; there 
 was very little saving by the French peasants in the last 
 century when they could escape the plunder of the tax- 
 gatherer only by appearing to be poor, or by Irish cottiers, 
 who, on many estates, even a generation ago, were compelled 
 to follow the same course in order to avoid the landlords' 
 claims of exorbitant rents. 
 
 Insecurity of this kind has nearly passed away from the 
 civilized world. But we are still suffering in England from 
 the effects of the Poor-law which ruled at the beginning of 
 the century, and which introduced a new form of insecurity 
 for the working classes. For it arranged that part of their 
 wages should, in effect, be given in the form of poor relief; 
 and that this should be distributed among them in inverse 
 proportion to their industry and thrift and forethought, so 
 that many thought it foolish to make provision for the future. 
 The traditions and instincts which were fostered by that evil 
 experience are even now a great hindrance to the progress of 
 the working classes; and the principle which nominally at 
 least underlies the present Poor-law, that the State should 
 take account only of destitution and not at all of merit, acts 
 in the same direction though with less force. 
 
 Insecurity of this kind also is being diminished: the 
 growth of enlightened views as to the duties of the State 
 and of private persons towards the poor, is tending to make 
 it every day more true that those who have helped them- 
 selves and endeavoured to provide for their own future will 
 be cared for by society better than the idle and the thought- 
 less. But the progress in this direction remains slow, and 
 there remains much to be done yet. 
 
 5. The growth of a money-economy and of modern 
 habits of business does indeed hinder the accumulation of 
 wealth by putting new temptations in the way of those who 
 are inclined to live extravagantly. In old times if a man 
 wanted a good house to live in he must build it himself; 
 now he finds plenty of good houses to be hired at a rent. 
 
MOTIVES OF SAVING. 309 
 
 Formerly, if he wanted good beer he must have a good brew- BOOK iv. 
 house, now he can buy it more cheaply and better than he c ^_^ 1 ' 
 could brew it. Now he can borrows books from a library 
 instead of buying them ; and he can even furnish his house 
 before he is ready to pay for his furniture. Thus in many 
 ways the modern systems of buying and selling, and lending 
 and 'borrowing, together with the growth of new wants, lead 
 to new extravagances, and to a subordination of the interests 
 of the future to those of the present. 
 
 But on the other hand, a money-economy increases the but also a 
 variety of the uses between which a person can distribute tainty that 
 his future expenditure. A person who in a primitive state 
 of society stores up some things against a future need, may 
 
 find that after all he does not need those things as much wanted in 
 as others which he has not stored up ; arid there are many 
 future wants against which it is impossible to provide 
 directly by storing up goods. But he who has stored up 
 capital from which he derives a money income can buy what 
 he will to meet his needs as they arise 1 . 
 
 Again, modern methods of business have brought with And it has 
 them opportunities for the safe investment of capital in such 
 ways as to yield a revenue to persons who have no good 
 opportunity of engaging in any business, not even in that business to 
 of agriculture, where the land will under some conditions act full fruits 
 as a trustworthy savings-bank. These new opportunities 
 have induced some people who would not otherwise have 
 attempted it to put by something for their own old age. And, 
 what has had a far greater effect on the growth of wealth, 
 it has rendered it far easier for a man to provide a secure 
 income for his wife and children after his death: for, after 
 all, family affection is the main motive of saving. 
 
 6. There are indeed some who find an intense pleasure A few 
 in seeing their hoards of wealth grow up under their hands, save for 
 with scarcely any thought for the happiness that may be 
 got from its use by themselves or by others. They are 
 prompted partly by the instincts of the chase, by the desire 
 to outstrip their rivals ; by the ambition to have shown ability 
 
 1 Comp. Book III. Ch. v. 2. 
 
310 GROWTH OF CAPITAL. 
 
 BOOK iv. in getting the wealth, and to acquire power and social position 
 CH^VII. ^ fa possession. And sometimes the force of habit, started 
 when they were really in need of money, has given them, by 
 a sort of reflex action, an artificial and unreasoning pleasure 
 but the in amassing wealth for its own sake. But were it not for the 
 motive of family affections, many who now work hard and save carefully, 
 saving is wou ld no t exert themselves to do more than secure a comfort- 
 affection, able annuity for their own lives ; either by purchase from an 
 insurance company, or by arranging to spend every year, after 
 they had retired from work, part of their capital as well as 
 all their income. In the one case they would leave nothing 
 behind them : in the other only provision for that part of 
 their hoped-for old age, from which they had been cut off by 
 death. That men labour and save chiefly for the sake of 
 their families and not for themselves, is shown by the fact 
 that they seldom spend, after they have retired from work, 
 more than the income that comes in from their savings, 
 preferring to leave their stored-up wealth intact for their 
 families ; while in this country alone twenty millions a year 
 are saved in the form of insurance policies and are available 
 only after the death of those who save them. 
 
 A man can have no stronger stimulus to energy and 
 enterprise than the hope of rising in life, and leaving his 
 family to start from a higher round of the social ladder than 
 that on which he began. It may even give him an over- 
 mastering passion which reduces to insignificance the desire 
 for ease, and for all ordinary pleasures, and sometimes even 
 destroys in him the finer sensibilities and nobler aspira- 
 tions. But, as is shown by the marvellous growth of wealth 
 in America during the present generation, it makes him a 
 mighty producer and accumulator of riches ; unless indeed 
 he is in too great a hurry to grasp the social position which 
 his wealth will give him : for his ambition may then lead him 
 into as great extravagance as could have been induced by an 
 improvident and self-indulgent temperament. 
 
 The greatest savings are made by those who have been 
 brought up on narrow means to stern hard work, who have 
 retained their simple habits, in spite of success in business, and 
 who nourish a contempt for showy expenditure and a desire 
 
SOURCES OF SAVING. 311 
 
 to be found at their death richer than they had been thought BOOK iv. 
 to be. This type of character is frequent in the quieter parts __! _ ' 
 of old but vigorous countries, and it was very common among 
 the middle classes in the rural districts of England for more 
 than a generation after the pressure of the great French war 
 and the heavy taxes that lingered in its wake. 
 
 7. Next, as to the sources of accumulation. The power The source 
 
 i ! [> . of accumu- 
 
 to save depends on an excess or income over necessary ex- i a tion is 
 
 penditure ; and this is greatest among the wealthy. In this 
 country, most of the larger incomes, but only a few of the 
 smaller, are chiefly derived from capital. And, early in the rived from 
 present century, the commercial classes in England had a 
 much more saving habits than either the country gentlemen 
 oj the working classes. These causes combined to make 
 English economists of the last generation regard savings as 
 made almost exclusively from the profits of capital. 
 
 But even in modern England rent and the earnings of or rent, the 
 
 r i i i_- j i earnings 
 
 proiessional men aria hired workers are an important source of profes- 
 of accumulation : and they have been the chief source of it 
 in all the earlier stages of civilization 1 . Moreover, the middle 
 and especially the professional classes have always denied 
 themselves much in order to invest capital in the education 
 of their children ; while a great part of the wages of the 
 working classes is invested in the physical health and strength 
 of their children. The older economists took too little account 
 of the fact that human faculties are as important a means of 
 production as any other kind of capital ; and we may conclude, 
 in opposition to them, that any change in the distribution of 
 wealth which gives more to the wage receivers and less to 
 the capitalists is likely, other things being equal, to hasten 
 the increase of material production, and that it will not per- 
 ceptibly retard the storing-up of material wealth. Of course 
 other things would not be equal if the change were brought 
 about by violent methods which gave a shock to public 
 security. But a slight and temporary check to the accumu- 
 lation of material wealth need not necessarily be an evil, 
 even from a purely economic point of view, if, being made 
 quietly and without disturbance, it provided better oppor- 
 
 1 Comp. Principles of Political Economy, by Richard Jones. 
 
312 GROWTH OF CAPITAL. 
 
 BOOK iv. tunities for the great mass of the people, increased their 
 
 _J ' efficiency, and developed in them such habits of self-respect 
 
 as to result in the growth of a much more efficient race 
 of producers in the next generation. For then it might do 
 more in the long-run to promote the growth of even material 
 wealth than great additions to our stock of factories and 
 steam-engines. 
 
 The public A people among whom wealth is well distributed, and 
 a who have high ambitions, are likely to accumulate a great 
 deal f public property ; arid the savings made in this form 
 alone by some well-to-do democracies form no inconsiderable 
 part of the best possessions which our own age has inherited 
 
 Co-opera- from its predecessors. The growth of the co-operative move- 
 ment in all its many forms, of building societies, friendly 
 societies, trades unions, of working men's savings-banks &c., 
 shows that, even so far as the immediate accumulation of 
 material wealth goes, the resources of the country are not, as 
 the older economists assumed, entirely lost when they are 
 spent in paying wages 1 . 
 
 We must 8. Having looked at the development of the methods 
 
 mindthe ^ saving and the accumulation of wealth, we may now return 
 
 airead to ^ a * ana ty s i s f ^ ne relations between present and deferred 
 made of pleasures, which we began from another point of view in our 
 
 the distri- ' 
 
 butionofa study of Demand . 
 
 between ^ We there saw that anyone who has a stock of a com- 
 
 deferred and m dity which is applicable to several uses will endeavour to 
 
 uses. distribute it between them all in such a way, that if he had 
 
 thought he could increase his happiness by transferring some 
 
 of it from one use to another he would have done so ; and that 
 
 therefore, if he has made his distribution rightly, he stopped 
 
 in applying it to each several use at such a point that he 
 
 got an equal amount of good out of his last, or marginal, appli- 
 
 1 It must however be admitted that what passes by the name of public 
 property is often only nothing more than private wealth borrowed on a mortgage 
 of future public revenues. Municipal gas-works for instance are not generally 
 the results of public accumulations. They were built with wealth saved by 
 private persons, and borrowed on public account. 
 
 2 Book HI. ch. v. 
 
CHOICE BETWEEN PRESENT AND DEFERRED BENEFITS. 313 
 
 cation i.e. on the application that he was only just induced BOOKIV. 
 
 to make of it to each separate use : or in other words, he _J ' 
 
 distributes it between the different uses in such a way that 
 it has the same marginal utility in each. 
 
 We saw, further, that the principle remains the same 
 whether all the uses are present, or some are present and 
 others deferred : but that in this latter case some new con- 
 siderations enter, of which the chief are that the deferring of 
 a, pleasure necessarily introduces some uncertainty as to its 
 ever being enjoyed ; and secondly, that, as human nature is 
 constituted, a present pleasure is generally, though not always, 
 preferred to a pleasure that is expected to be equal to it, and 
 is as certain as anything can be in human life. 
 
 A prudent person who thought that he would derive A person 
 equal pleasures from equal means at all stages of his life, 
 would perhaps endeavour to distribute his means equally over 
 his whole life : and if he thought that there was a danger present 
 
 . ' (. , , pleasures 
 
 that his power of earning income at a future date would to future, 
 run short, he would certainly save some of his means for?"apsno 
 a future date. He would do this not only if he thought ^f^ 
 that his savings would increase in his hands, but even me .a ns by 
 
 waiting. 
 
 if he thought they would diminish. He would put by 
 a few fruit and eggs for the winter, because they would 
 then be scarce, though they would not improve by keeping. 
 If he did not see his way to investing his earnings in trade 
 or on loan, so as to derive interest or profits from them, he 
 would follow the example of some of our own forefathers 
 who accumulated small stores of guineas which they carried 
 into the country, when they retired from active life. They 
 reckoned that the extra gratification which they could get 
 by spending a few more guineas while money was coming 
 in fast, would be of less service to them than the comfort 
 which those guineas would buy for them in their old age. 
 The care of the guineas cost them a great deal of trouble ; 
 and no doubt they would have been willing to pay some 
 small charge to anyone who would have relieved them from 
 the trouble without occasioning them any sort of risk. 
 
 We can therefore imagine a state of things in which Some 
 stored-up wealth could be put to but little good use ; in which 
 
314 GROWTH OF CAPITAL. 
 
 BOOK iv. many persons wanted to make provision for their own future ; 
 
 _J ' while but few of those who wanted to borrow goods, were 
 
 o offer good security for returning them, or equivalent 
 
 ably be goods, at a future date. In such a state of things the post- 
 
 made even c -*-.-, 
 
 if interest ponement of, and waiting for enjoyments would be an action 
 
 negative; that incurred a penalty rather than reaped a reward : 
 by handing over his means to another to be taken care of, a 
 person could only expect to get a sure promise of something 
 less, and not of something more than that which he lent : 
 the rate of interest would be negative 1 . 
 
 but it is Such a state of things is conceivable. But it is also con- 
 
 equally 
 
 true that ceivable, and almost equally probable, that people may be so 
 would be anxious to work that they will undergo some penalty as a 
 
 condition of obtaining leave to work. For, as deferring the 
 alt consumption of some of his means is a thing which a prudent 
 
 for it. person would desire on its own account, so doing some work 
 is a desirable object on its own account to a healthy person. 
 Political prisoners, for instance, generally regard it as a favour 
 to be allowed to do a little work. And human nature being 
 what it is, we are justified in speaking of the interest on capital 
 
 We may as the reward of the sacrifice involved in the waiting for the 
 
 therefore 
 
 caiiinte- enjoyment of material resources, because few people would 
 
 rest the ' . * 
 
 reward of save much without reward ; just as we speak ot wages as 
 tmg ' the reward of labour, because few people would work hard 
 without reward 2 . 
 
 abstinence ^ e sacr ^ ce ^ P^sent pleasure for the sake of future, 
 has been called abstinence by economists. But this term has 
 been misunderstood : for the greatest accumulators of wealth 
 are very rich persons, some of whom live in luxury, and cer- 
 tainly do not practise abstinence in that sense of the term in 
 which it is convertible with abstemiousness. What econo- 
 mists meant was that, when a person abstained from consum- 
 ing anything which he had the power of consuming, with the 
 purpose of increasing his resources in the future, his absti- 
 
 1 The suggestion that the rate of interest may conceivably become a negative 
 quantity has been discussed by Prof. Foxwell in a paper on Some Social Aspects of 
 Banking, read before the Bankers' Institute in January, 1886. 
 
 2 A Producer's Surplus or Eent is yielded by those waitings which need little 
 or no reward, but are yet rewarded at the market rate, as it is by labour in a like 
 case. See above, p. 217. But we must return to this point. 
 
THE REWARD OF WAITING. 315 
 
 nence from that particular act of consumption increased the BOOK iv. 
 
 accumulation of wealth. Since, however, the term is liable ' 
 
 to be misunderstood, we may with advantage avoid its use, 
 and say that the accumulation of wealth is generally the 
 result of a postponement of enjoyment, or of a waiting for it 1 . 
 
 The " demand price " of accumulation, that is the future 
 pleasure which his surroundings enable a person to obtain 
 by working and waiting for the future, takes many forms : 
 but the substance is always the same. The extra pleasure 
 which a peasant who has built a weather-proof hut derives 
 from its usance while the snow is drifting into those of his 
 neighbours who have spent less labour on building theirs, is 
 the price earned by his working and waiting : and is similar 
 in all fundamental respects to the interest which the retired 
 physician derives from the capital he has lent to a factory or 
 a mine to enable it to improve its machinery. And on 
 account of the numerical definiteness of the form in which 
 it is expressed, we may take this interest to be the type 
 of and to represent the usance of wealth in other forms. 
 
 It matters not for our immediate purpose whether the 
 power over the enjoyment for which the person waits, was 
 earned by him directly by labour, which is the original source 
 of nearly all enjoyment ; or was acquired by him from others, 
 by exchange or by inheritance, by legitimate trade or by un- 
 scrupulous forms of speculation, by spoliation or by fraud : 
 the only points with which we are just now concerned are 
 that the growth of wealth involves in general a deliberate 
 waiting for a pleasure which a person has (rightly or wrongly) 
 the power of commanding in the immediate present, and that 
 his willingness so to wait depends on his habit of vividly 
 realizing the future and providing for it. 
 
 9. But let us look more closely at the statement that, as Thegreater 
 human nature is constituted, an increase in the future pleasure 
 
 1 Karl Marx and his followers have found much amusement in contemplating 
 the accumulations of wealth which result from the abstinence of Baron Rothschild, 
 which they contrast with the extravagance of a labourer who feeds a family of 
 seven on seven shillings a week ; and who, living up to his full income, practises 
 no economic abstinence at all. The argument that it is Waiting rather than 
 Abstinence, which is rewarded by Interest and is a factor of production, was given 
 by Prof. Macvane in the Harvard Journal of Economics for July, 1887. 
 
316 GROWTH OF CAPITAL. 
 
 BOOK iv. which can be secured by a present given sacrifice will in general 
 
 CH^VII. j ncreage tne amoun t of present sacrifice that people will make. 
 
 sacrifice Suppose, for instance, that villagers have to get timber for 
 
 the greater building their cottages from the forests; the more distant these 
 
 be the are, the smaller will be the return of future comfort got by 
 
 ing ' each day's work in fetching the wood, the less will be their 
 
 future gain from the wealth accumulated probably by each 
 
 day's work: and this smallness of the return of future pleasure, 
 
 to be got at a given present sacrifice, will tend to prevent them 
 
 from increasing the size of their cottages ; and will perhaps 
 
 diminish on the whole the amount of labour they spend in 
 
 but not getting timber. But this rule is not without exception. For, 
 
 if custom has made them familiar with cottages of only one 
 
 fashion, the further they are from the woods, and" the smaller 
 
 the usance to be got from the produce of one day's work, the 
 
 more days' work will they give. 
 
 So the And similarly if a person expects, not to use his wealth 
 
 rate of himself, but to let it out on interest, the higher the rate of 
 
 interest the higher his reward for saving. If the rate of 
 i n t eres t on S( > un d investments is 4 per cent., and he gives up 
 100 worth of enjoyment now, he may expect an annuity of 
 4 worth of enjoyment : but he can expect only 3 worth, 
 if the rate is 3 per cent. And a fall in the rate of interest will 
 generally lower the margin at which a person finds it just 
 not worth while to give up present pleasures for the sake of 
 those future pleasures that are to be secured by saving some 
 of his means. It will therefore generally cause people to 
 consume a little more now, and to make less provision for 
 future enjoyment. But this rule is not without exception. 
 but there For indeed Sir Josiah Child remarked two centuries 
 
 ceptions to a g> tnat * n countries in which the rate of interest is high, 
 the rule, merchants "when they have gotten great wealth, leave 
 trading " and lend out their money at interest, " the gain 
 thereof being so easy, certain and great ; whereas in other 
 countries where interest is at a lower rate, they continue 
 merchants from generation to generation, and enrich them- 
 selves and the state." And it is as true now, as it was then, 
 that many men retire from business when they are yet 
 almost in the prime of life, and when their knowledge of 
 
THE REWARD OF WAITING. 317 
 
 men and things might enable them to conduct their busi- BOOKIV. 
 
 ness more efficiently bhan ever. Again, as Mr Sargant has _! ' 
 
 pointed out, if a man has decided to go on working and 
 saving till he has provided a certain income for his old age, 
 or for his family after his death, he will find that he has to 
 save more if the rate of interest is low than if it is high. 
 Suppose, for instance, that he wishes to provide an income of 
 400 a year on which he may retire from business, or to 
 insure 400 a year for his wife and children after his death : 
 if then the current rate of interest is 5 per cent., he need only 
 put by 8,000, or insure his life for 8,000 ; but if it is 4 per 
 cent., he must save 10,000, or insure his life for 10,000. 
 
 It is then possible that a continued fall in the rate of But in 
 interest may be accompanied by a continued increase in the exceptions, 
 yearly additions to the world's capital. But none the less is 
 it true that a fall in the distant benefits to be got by a 
 given amount of working and waiting for the future does make 
 
 i ,1 11 T i ii 1-1 i saving less 
 
 tend on the whole to dimmish the provision which people than it 
 make for the future ; or in more modern phrase, that a fall 
 in the rate of interest tends to check the accumulation of 
 wealth. For though with man's growing command over the 
 resources of nature, he may continue to save much even with 
 a low rate of interest ; yet while human nature remains as it 
 is every fall in that rate is likely to cause many more people 
 to save less than to save more than they would otherwise 
 have done. 
 
 The causes which govern the accumulation of wealth 
 and its relation to the rate of interest have so many points 
 of contact with various parts of economic science that the 
 study of them cannot easily be brought together in one part 
 of our inquiry. Something needed to be said of them before 
 going further ; but we must return to them again and discuss 
 them from a more advanced standpoint when we treat of 
 Demand and Supply in relation to Capital. Meanwhile we 
 may sum up provisionally the results of the present chapter. 
 
 10. The accumulation of wealth is governed by a 
 great variety of causes : by custom, by habits of self-control 
 and realizing the future, and above all by the power of 
 family affection. Security is a necessary condition for it, 
 
318 GROWTH OF CAPITAL. 
 
 BOOK iv. and the progress of knowledge and intelligence furthers it 
 
 CH. VII 
 
 in many ways. 
 
 A rise in the rate of interest, or demand price, for saving 
 tends to increase the volume of saving. For in spite of 
 the fact that a few people who have determined to secure 
 an income of a certain fixed amount for themselves or their 
 family will save less with a high rate of interest than with a 
 low rate, it is a nearly universal rule that a rise in the rate 
 increases the desire to save ; and it often increases the power 
 to save, or rather it is often an indication of an increased 
 efficiency of our productive resources : but the older econo- 
 mists went too far in suggesting that a rise of interest (or of 
 profits) at the expense of wages always increased the power 
 of saving : they forgot that from the national point of view 
 the investment of wealth in the child of the working man is 
 as productive as its investment in horses or machinery. 
 
 It must however be recollected that the annual invest- 
 ment of wealth is a small part of the already existing stock, 
 and that therefore the stock would not be increased per- 
 ceptibly in any one year by even a considerable increase in 
 the annual rate of saving. 
 
 NOTE ON THE STATISTICS OF THE GROWTH OF WEALTH. 
 
 The statistical history of the growth of wealth is singularly poor and 
 misleading. This is partly due to difficulties inherent in any attempt 
 to give a numerical measure of wealth which shall be applicable to 
 different places and times, partly to the absence of systematic attempts 
 to collect the necessary facts. The Government of the United States 
 does indeed ask for returns of every person's property ; and though the 
 results thus obtained are not very satisfactory, yet they are probably 
 the best we have. 
 
 Estimates of the wealth of other countries have to be based almost 
 exclusively on estimates of income, which are capitalized at various 
 numbers of years' purchase ; this number being chosen with reference 
 (i) to the general rate of interest current at the time, (ii) to the extent 
 to which the income derived from the use of wealth in any particular 
 form is to be credited (a) to the permanent income-yielding power of the 
 wealth itself ; and (6) to either the labour spent in applying it, or the 
 
STATISTICAL NOTE. 319 
 
 using up of the capital itself. This last head is specially important in BOOK iv. 
 the case of ironworks which depreciate rapidly, and still more in the CH - vn - 
 case of such mines as are likely to be speedily exhausted ; both must 
 be capitalized at only a few years' purchase. On the other hand, the 
 income-yielding power of land is likely to increase ; and where that is 
 the case, the income from land has to be capitalized at a great number 
 of years' purchase (which may be regarded as making a negative 
 provision under the head of ii. 6). 
 
 Land, houses, and live stock are the three forms of wealth which have 
 been in the first rank of importance always and everywhere. But land 
 differs from other things in this, that an increase in its value is often 
 chiefly due to an increase in its scarcity; and is therefore a measure 
 rather of growing wants, than of growing means of meeting wants. 
 Thus the land of the United States in 1880 counted as of about equal 
 value with the land of the United Kingdom, and about half that of 
 France. Its money value was insignificant a hundred years ago ; and 
 if the density of population two or three hundred years hence is nearly 
 the same in the United States as in the United Kingdom, the land 
 of the former will then be worth at least twenty times as much as that 
 of the latter. 
 
 In the early middle ages the whole value of the land of England 
 was much less than that of the few large-boned but small-sized animals 
 that starved through the winter on it : now, though much of the best 
 land is entered under the heads of houses, railways, &c. ; though the 
 live stock is now probably more than ten times as heavy in aggregate 
 weight, and of better quality ; and though there is now abundant 
 farming capital of kinds which were then unknown ; yet agricultural 
 land is now worth more than three times as much as the farm stock. 
 The few years of the pressure of the great French war nearly doubled 
 the nominal value of the land of England, and the free trade which 
 has enriched the people has checked the rise in the value of that part 
 of the land which is devoted to agriculture. Thus various causes, of 
 which her free trade policy is the chief, have made the general purchasing 
 power of money rise in England relatively to the continent. Early in 
 this century 25 fr. would buy more, and especially more of the things 
 needed by the working* classes, in France than 1 would in England. 
 But now the advantage is the other way : and even if it were true (as 
 Mr Harris argues by methods otherwise open to criticism in the Statistical 
 Journal, Vol. 57) that the money wealth of France is rising faster than 
 that of England, it might yet be true that the real wealth of England 
 is rising faster than that of France. 
 
 When account is taken of facts of this class, and also of the fact 
 that a fall in the rate of interest increases the number of years' purchase 
 at which any income has to be capitalized, and therefore increases the 
 value of a property which yields a given income ; we see that the 
 estimates of national wealth would be very misleading, even if the 
 
320 
 
 STATISTICAL NOTE ON THE GROWTH OF WEALTH. 
 
 BOOK IV. 
 CH. VII. 
 
 statistics of income on which they were based were accurate. But still 
 such estimates are not wholly without value. 
 
 Mr Giffen's Growth of Capital contains suggestive discussions on 
 many of the figures in the following table. 
 
 Country and 
 Author of 
 Estimate. 
 
 Land. 
 million. 
 
 Houses, 
 &c. 
 million. 
 
 Farm- 
 capital. 
 million. 
 
 Other 
 wealth. 
 & million. 
 
 Total 
 wealth. 
 million. 
 
 Wealth 
 perjap. 
 
 ENGLAND. 
 
 
 
 
 
 
 
 1679 (Petty) . . . 
 
 144 
 
 30 
 
 36 
 
 40 
 
 250 
 
 42 
 
 1690 (Gregory King) 
 
 180 
 
 45 
 
 25 
 
 70 
 
 320 
 
 58 
 
 1812 (Colquhoun) . 
 
 750 
 
 300 
 
 143 
 
 653 
 
 1,846 
 
 180 
 
 1885 (Giffen) . . . 
 
 1,333 
 
 1,700 
 
 382 
 
 3,012 
 
 6,427 
 
 315 
 
 UNITED KINGDOM. 
 
 
 
 
 
 
 
 1812 (Colquhoun) . 
 
 1,200 
 
 400 
 
 228 
 
 908 
 
 2,736 
 
 160 
 
 1855 (Edleston) . . 
 
 1,700 
 
 550 
 
 472 
 
 1,048 
 
 3,760 
 
 130 
 
 1865 (Giffen) . . . 
 
 1,864 
 
 1,031 
 
 620 
 
 2,598 
 
 6,113 
 
 200 
 
 1875 ... 
 
 2,007 
 
 1,420 
 
 668 
 
 4,453 
 
 8,548 
 
 260 
 
 1885 ... 
 
 1,691 
 
 1,927 
 
 522 
 
 5,897 
 
 10,037 
 
 270 
 
 UNITED STATES. 
 
 
 
 
 
 
 
 1880 (Census) . . . 
 
 2,040 
 
 2,000 
 
 480 
 
 4,208 
 
 8,728 
 
 175 
 
 1890 ... 
 
 
 
 
 
 13,200 
 
 200 
 
 FRANCE. 
 
 
 
 
 
 
 
 1892 (de Foville) . . 
 
 3,000 
 
 2,000 
 
 400 
 
 4,000 
 
 9,400 
 
 247 
 
 ITALY. 
 
 
 
 
 
 
 
 1884 (Pantaleoni) . 
 
 1,160 
 
 360 
 
 
 
 1,920 
 
 65 
 
 An instructive history of changes in the relative wealth of different 
 parts of England has been deduced by Rogers from the assessment of 
 the several counties for the purpose of taxation. Le Vicomte d'Avenel's 
 great work L'ffistoire Economique de la Propriete&c. 1200 1800 contains 
 a rich store of materials as to France ; and excellent comparative 
 studies of the growth of wealth in France and other nations have been 
 made by MM. Levasseur, Leroy Beaulieu, Neymarck and de Foville ; 
 see especially a paper by the last, translated in the Statistical Journal, 
 Vol. 56. 
 
CHAPTER VIII. 
 
 INDUSTRIAL ORGANIZATION. 
 
 1. WRITERS on social science from the time of Plato BOOK iv. 
 downwards have delighted to dwell on the increased efficiency CH< vm ' 
 which labour derives from organization. But in this, as in J h( ; . 
 
 . doctrine 
 
 other cases, Adam Smith gave a new and larger significance that or- 
 to an old doctrine by the philosophic thoroughness with 
 which he explained it, and the practical knowledge with 
 which he illustrated it. After insisting on the advantages of 
 the division of labour, and pointing out how they render it 
 possible for increased numbers to live in comfort on a limited 
 territory, he argued that the pressure of population on the 
 means of subsistence tends to weed out those races who 
 through want of organization or for any other cause are 
 unable to turn to the best account the advantages of the 
 place in which they live. 
 
 Before Adam Smith's book had yet found many readers, Biologists 
 biologists were already beginning to make great advances 
 towards understanding the real nature of the differences 
 
 in organization which separate the higher from the lower ^e which 
 animals ; and before two more generations had elapsed, gle for 
 Malthus' historical account of man's struggle for existence exerts 
 started Darwin on that inquiry as to the effects of the 
 struggle for existence in the animal and vegetable world, 
 which issued in his discovery of the selective influence 
 constantly played by it. Since that time biology has more 
 than repaid her debt ; and economists have in their turn 
 owed much to the many profound analogies which have been 
 discovered between social and especially industrial organiza- 
 M. 21 
 
322 INDUSTRIAL ORGANIZATION. 
 
 BOOK iv. tion on the one side and the physical organization of the 
 CH " vm ' higher animals on the other. In a few cases indeed the 
 apparent analogies disappeared on closer inquiry : but many 
 of those which seemed at first sight most fanciful, have 
 gradually been supplemented by others, and have at last 
 established their claim to illustrate a fundamental unity of 
 action between the laws of nature in the physical and in the 
 moral world. This central unity is set forth in the general 
 rule, to which there are not very many exceptions, that the 
 development of the organism, whether social or physical, 
 involves an increasing subdivision of functions between its 
 separate parts on the one hand, and on the other a more 
 intimate connection between them 1 . Each part gets to be 
 less and less self-sufficient, to depend for its well-being more 
 and more on other parts, so that any disorder in any part of 
 a highly-developed organism will affect other parts also. 
 Different!- This increased subdivision of functions, or " differentia- 
 integra! tion " as it is called, manifests itself with regard to industry 
 in such forms as the division of labour, and the develop- 
 ment of specialized skill, knowledge and machinery: while 
 "integration," that is, a growing intimacy and firmness of 
 the connections between the separate parts of the industrial 
 organism, shows itself in such forms as the increase of 
 security of commercial credit, and of the means and habits 
 of communication by sea and road, by railway and telegraph, 
 by post and printing-press. 
 
 The doctrine that those organisms which are the most 
 highly developed, in the sense in which we have just used 
 the phrase, are those which are most likely to survive in 
 the struggle for existence, is itself in process of develop- 
 ment. It is not yet completely thought out either in its 
 biological or its economic relations. But we may pass to 
 consider the main bearings in economics of the law that the 
 struggle for existence causes those organisms to multiply 
 which are best fitted to derive benefit from their environment. 
 
 1 Besides the writings of Herbert Spencer on this subject, and Bagehot's 
 Physics and Politics, see a brilliant paper by Hackel on Arbeitstheilung in 
 Menschen- und Thierleben. Reference may also be made to Schaffle's Ban und 
 Leben des socialen Korpers, and to Hearn's Plutology. 
 
STRUGGLE FOR SURVIVAL. 323 
 
 The law requires to be interpreted carefully : for the BOOK iv. 
 
 fact that a thing is beneficial to its environment will not - . ' 
 
 by itself secure its survival either in the physical or in the 25^^ of 
 moral world. The law of " survival of the fittest " states for survival 
 that those organisms tend to survive which are best fitted to be care- 
 to utilize the environment for their own purposes. Now preted? ei 
 those that utilize the environment most, may turn out to be 
 those that benefit those around them most. But it must not 
 be assumed in any particular case that they are thus bene- 
 ficial, without special study of the case. 
 
 In order therefore that the demand for any industrial 
 arrangement may be certain to call forth a supply, it must be 
 something more than a mere desire for the arrangement, or,, a 
 need for it, such as a desire on the part of employe's for a 
 share in the management and the profits of the factory in 
 which they work, or the need on the part of clever youths for 
 a good technical education. It must be an efficient demand ; 
 that is, it must take effect by offering payment or some other 
 benefit to those who supply it 1 ; otherwise it is not a demand 
 in the sense in which the ter,m is used when it is said that 
 supply naturally and surely follows demand. This seems a its harsh- 
 hard truth : but some of its harshest features are softened softened 1 ^ 
 down by the fact that those races, of which the members p^?, le of 
 render unrequited services to other members, are not only heredity, 
 the most likely to flourish for the time, but most likely to 
 rear a large number of descendants who inherit their bene- 
 ficial habits. 
 
 2. Even in the vegetable world a species of plants, influence 
 however vigorous in its growth, which should be neglectful care on 
 of the interests of its seeds, would soon perish from the earth, 
 The standard of family and race duty is often high in the 
 animal kingdom ; and even those predatory animals which 
 we are accustomed to regard as the types of cruelty, which 
 fiercely utilize the environment and do nothing for it in 
 return, must yet be willing as individuals to exert themselves 
 
 i Like all other doctrines of the same class, this requires to be interpreted in 
 the light of the fact that the effective demand of a purchaser depends on his 
 means, as well as on his wants : a small want on the part of a rich man often has 
 more effective force in controlling the business arrangements of the world than a 
 great want on the part of a poor man. 
 
 212 
 
324 INDUSTRIAL ORGANIZATION. 
 
 BOOK iv. for the benefit of their offspring. And going beyond the 
 
 J ' narrower interests of the family to those of the race, we find 
 
 that among so-called social animals, such as bees and ants, 
 those races survive in which the individual is most energetic 
 in performing varied services for the society without the 
 prompting of direct gain to himself, 
 in man But when we come to human beings, endowed with 
 
 cplf . 
 
 sacrifice reason and speech, the influence of a tribal sense of duty in 
 deliberate strengthening the tribe takes a more varied form. It is true 
 basisonhe * na * * n t^e ru( ^ er stages of human life many of the services 
 strength of rendered by the individual to others are nearly as much due 
 
 tllG T3.C6 
 
 to hereditary habit and unreasoning impulse, as are those of 
 the bees and ants. But deliberate, and therefore moral, self- 
 sacrifice soon makes its appearance; it is fostered by the 
 far-seeing guidance of prophets and priests and legislators, 
 and is inculcated by parable and legend. Gradually the un- 
 reasoning sympathy, of which there are germs in the lower 
 animals, extends its area and gets to be deliberately adopted 
 as a basis of action : tribal affection, starting from a level 
 hardly higher than that which prevails in a pack of wolves or 
 a horde of banditti, gradually grows into a noble patriotism ; 
 and religious ideals are raised and purified. The races in 
 which these qualities are the most highly developed are sure, 
 other things being equal, to be stronger than others in 
 war and in contests with famine and disease ; and to prevail 
 in the long run. Thus the struggle for existence causes in 
 the long run those races of men to survive in which the 
 individual is most willing to sacrifice himself for the 
 benefit of those around him ; and which are consequently 
 the best adapted collectively to make use of their en- 
 vironment. 
 
 But evil Unfortunately however not all the qualities which enable 
 
 with the one race ^0 prevail over another benefit mankind as a 
 good, whole. It would no doubt be wrong to lay very much stress 
 on the fact that warlike habits have often enabled half- 
 savage races to reduce to submission others who were their 
 superiors in every peaceful virtue ; for such conquests have 
 in the long run increased the physical vigour of the world, and 
 its capacity for great things, and ultimately perhaps have 
 
PRINCIPLE OF HEREDITY. 325 
 
 done more good than harm. But there is no such qualifica- BOOK iv. 
 tion to the statement that a race does not establish its claim CH ^*' 
 to deserve well of the world by the mere fact that it flourishes 
 in the midst or on the surface of another race. For, though 
 biology and social science alike show that parasites sometimes 
 benefit in unexpected ways the race on which they thrive ; 
 yet in many cases they turn the peculiarities of that race to 
 good account for their own purposes without giving any good 
 return. The fact that there is an economic demand for the especially 
 
 . .in the case 
 
 services or Jewish and Armenian money-dealers in Eastern of a para- 
 Europe and Asia, or for Chinese labour in California, is not S1 
 by itself a proof, nor even a very strong ground for believing, 
 that such arrangements tend to raise the quality of human 
 life as a whole. For, though a race entirely dependent on its 
 own resources can scarcely prosper unless it is fairly endowed 
 with the most important social virtues ; yet a race, which has 
 not these virtues and which is not capable of independent 
 greatness, may be able to thrive on its relations with another 
 race. But on the whole, and subject to grave exceptions, 
 those races survive and predominate in which the best 
 qualities are most strongly developed. 
 
 3. This influence of heredity shows itself nowhere more The 
 markedly than in social organization. For that must neces- 
 sarily be a slow growth, the product of many generations : it 
 
 must be based on those customs and aptitudes of the great earl J times 
 mass of the people which are incapable of quick change, it was 
 In early times when religious, ceremonial, political, military but not 
 
 and industrial organization were intimately connected, and 
 
 were indeed but different sides of the same thing, nearly drawbacks 
 
 PV6I1 tllGIl 
 
 all those nations which were leading the van of the world's 
 progress were found to agree in having adopted a more or 
 less strict system of caste : and this fact by itself proved 
 that the distinction of castes was well suited to its environ- 
 ment, and that on the whole it strengthened the races 
 or nations which adopted it. For since it was a controlling 
 factor of life, the nations which adopted it could not have 
 generally prevailed over others, if the influence exerted by it 
 had not been in the main beneficial. Their pre-eminence 
 proved not that it was free from defects, but that its ex- 
 
326 
 
 INDUSTRIAL ORGANIZATION. 
 
 BOOK IV. 
 CH. VIII. 
 
 The same 
 
 is true 
 
 of the 
 
 relations 
 
 between 
 
 different 
 
 industrial 
 
 classes in 
 
 the modern 
 
 Western 
 
 world. 
 
 cellencies, relatively to that particular stage of progress, 
 outweighed its defects. 
 
 We know that in the animal or vegetable kingdom a 
 species may differ from its competitors by having two 
 qualities, one of which is of great advantage to it, while the 
 other is unimportant, perhaps even slightly injurious, and 
 that the former of these qualities will make the species 
 succeed in spite of its having the latter : the survival of which 
 will then be no proof that it is beneficial. Thus the struggle 
 for existence has kept alive .many qualities and habits in the 
 human race which were in themselves of no advantage, but 
 which are associated by a more or less permanent bond with 
 others that are great sources of strength. Such instances 
 are found in the tendency to an overbearing demeanour 
 and a scorn for patient industry among nations that owe 
 their advance chiefly to military victories ; and again in the 
 tendency among commercial nations to think too much of 
 wealth and to use it for the purposes of display. But the 
 most striking instances are found in matters of organization ; 
 the excellent adaptation of the system of caste for the special 
 work which it had to do, enabled it to flourish in spite of its 
 great faults, the chief of which were its rigidity, and its 
 sacrifice of the individual to the interests of society, or rather 
 to certain special exigencies of society. 
 
 Passing over intermediate stages and coming at once to 
 the modern organization of the Western world, we find it 
 offering a striking contrast, and a no less striking resemblance, 
 to the system of caste. On the one hand, rigidity has been 
 succeeded by plasticity : the methods of industry which were 
 then stereotyped, now change with bewildering quickness; 
 the social relations of classes, and the position of the indi- 
 vidual in his class, which were then definitely fixed by 
 traditional rules, are now perfectly variable and change their 
 forms with the changing circumstances of the day. But on 
 the other hand, the sacrifice of the individual to the exigencies 
 of society as regards the production of material wealth seems 
 in some respects to be a case of atavism, a reversion to condi- 
 tions which prevailed in the far-away times of the rule of 
 caste. For the division of labour between the different ranks 
 
THE INDIVIDUAL IN RELATION TO SOCIETY. 327 
 
 of industry and between different individuals in the same BOOKIV. 
 rank is so thorough and uncompromising, that the real j_^_ XI - 
 interests of the producer are sometimes in .danger of being 
 sacrificed for the sake of increasing the addition which his 
 work makes to the aggregate production of material wealth. 
 
 4. Adam Smith while insisting on the general ad van- Adam 
 tages of that minute division of labour and of that subtle cautiou 
 industrial organization which were being developed with gj^ect ; 
 unexampled rapidity in his time, was yet careful to indicate 
 many points in which the system failed, and many incidental 
 evils which it involved 1 . But many of his followers with 
 less philosophic insight, and in some cases with less real 
 knowledge of the world, argued boldly that whatever is, is 
 right. They were not contented with insisting that the new 
 industrial organization was spreading rapidly and obtaining 
 victories over its rivals in every direction, and that this very 
 fact proved that it met a want of the times, and had a good 
 balance of advantages over disadvantages. But they went 
 further and applied the same argument to alt its details; 
 they did not see that the Very strength of the system as a 
 whole enabled it to carry along with it many incidents which 
 were in themselves evil. For a while they fascinated the 
 world by their romantic accounts of the flawless proportions the extra- 
 of that "natural" organization of industry which had grown 
 from the rudimentary germ of self-interest ; each man 
 selecting his daily work with the sole view of getting for it 
 the best pay he could, but with the inevitable result of 
 choosing that in which he could be of most service to others. 
 They argued for instance that, if a man had a talent for 
 managing business, he would be surely led to use that talent 
 for the benefit of mankind : that meanwhile a like pursuit of 
 their own interests would lead others to provide for his use 
 such capital as he could turn to best account ; and that his 
 own interest would lead him so to arrange those in his 
 employment that everyone should do the highest work of 
 which he was capable, and no other ; and that it would lead 
 him to purchase and use all machinery and other aids to 
 
 1 Reference has already been made (Bk. i. Ch. iv. 3) to the inaccurate use of 
 the term Smithianismus in Germany. 
 
328 INDUSTRIAL ORGANIZATION. 
 
 BOOK iv. production, which could in his hands contribute more than 
 CH ' vm ' the equivalent of their own cost towards supplying the wants 
 of the world. 
 
 They were right in contending that these were important 
 problems which could not be properly understood without a 
 much more careful study than was given to them by those 
 ready writers who, then as now, attained an easy popularity 
 by indiscriminate attacks on the existing state of society. 
 But their own defence of it, though more intelligent, was 
 almost equally open to the charge of partisan bias. The 
 romantic subtilty of this " natural organization of industry " 
 had a fascination for earnest and thoughtful minds ; it pre- 
 vented them from seeing and removing the evil that was 
 intertwined with the good in the changes that were going on 
 around them ; and it hindered them from inquiring whether 
 many even of the broader features of modern industry may 
 not be transitional, having indeed good work to do in their 
 time, as the caste system had in its time : but like it chiefly 
 serviceable in leading the way towards better arrangements 
 for a happier age. 
 
 They took 5. Moreover the doctrine took no account of the man- 
 ner m which organs are strengthened by being used. Mr 
 Herbert Spencer has done more than anyone else to establish 
 
 of faculties the truth and the significance of the law that if any physical 
 or mental exercise gives pleasure, and is therefore frequent, 
 those physical or mental organs which are used in it are 
 likely to grow rapidly. Among the lower animals indeed 
 the action of this law is so intimately interwoven with that 
 of the survival of the fittest, that the distinction between the 
 two need not often be emphasized. For as it may have been 
 guessed a priori, and as seems to be well proved by observa- 
 tion, the struggle for survival tends to prevent animals from 
 taking much pleasure in the exercise of functions which do 
 not contribute to their well-being. 
 
 But man, with his strong individuality, has greater free- 
 dom. He delights in the use of his faculties for their 
 own sake ; sometimes using them nobly, whether with the 
 abandon of the great Greek burst of life, or under the control 
 of a deliberate and steadfast striving towards important 
 
THE DEVELOPMENT OF FACULTIES BY USE. 329 
 
 ends; sometimes ignobly, as in the case of a morbid deve- BOOKIV. 
 lopment of the taste for drink. The physical superiority of ' v ' 
 the English race over all others that have lived a town life, 
 as largely as we are doing, is due to a great extent to the 
 games in which our youth exercises its physical faculties for 
 the sake of exercising them : the religious, the moral, the 
 intellectual and the artistic faculties on which the progress 
 of industry depends, are not acquired solely for the sake of 
 the things that may be got by them ; but are developed by 
 exercise for the sake of the pleasure and the happiness which 
 they themselves bring : and, in the same way, that great 
 factor of economic prosperity, the organization of a well- 
 ordered state, is the product of an infinite variety of motives ; 
 many of which have no direct connection with the pursuit of 
 national wealth 1 . 
 
 No doubt it is true that physical peculiarities acquired 
 by the parents during their life time are seldom if ever 
 transmitted to their offspring. But there seems no good 
 reason for doubting that the children of those who have led 
 healthy lives, physically and morally, will be born with a 
 firmer fibre than they would have been had the same parents 
 grown up under unwholesome influences which had en- 
 feebled the fibre of their bodies and their minds. And it is 
 certain that in the former case the children are likely after 
 birth to be better nourished, and better trained ; to acquire 
 more wholesome instincts ; and to have more of that regard 
 for others and that self-respect, which are the mainsprings of 
 human progress, than in the former case 2 . 
 
 It is needful then diligently to inquire whether the Con- 
 
 . . . elusion. 
 
 present industrial organization might not with advantage be 
 so modified as to increase the opportunities which the lower 
 grades of industry have for using their mental faculties, for 
 deriving pleasure from their use, and for strengthening them 
 
 1 Man with his many motives, as he may set himself deliberately to encourage 
 the growth of one peculiarity, may equally set himself to check the growth of 
 another: the slowness of progress during the Middle Ages was partly due to a 
 deliberate detestation of learning. 
 
 2 On these grounds we may admit the embryological doctrines on which 
 Mr Kidd bases so large a part of his doctrine of social evolution, and yet decline 
 to accept his conclusions. 
 
330 INDUSTRIAL ORGANIZATION. 
 
 BOOK iv. by use ; since the argument that if such a change had been 
 
 J ' beneficial, it would have been already brought about by the 
 
 struggle for survival, must be rejected as invalid. No doubt 
 development would of itself tend in that direction, but its 
 action would be slow; and it is the prerogative of man to 
 hasten the progress of development by forecasting and 
 preparing the way for its next step. 
 
 We may then proceed to study provisionally the present 
 forms of the organization of industry, and the part which 
 they play in governing the supply of material wealth ; 
 remembering always that changes, which add but little to 
 the immediate efficiency of production, may be worth having 
 if they make mankind ready and fit for a higher organization, 
 which will be more effective in the production of wealth and 
 more equal in its distribution ; and that every system which 
 allows the higher faculties of the lower grades of industry 
 to go to waste, is open to grave suspicion. But a final 
 judgment as to the good and evil effects of any system must 
 be deferred until we are able to take a broader survey. 
 
CHAPTER IX. 
 
 INDUSTRIAL ORGANIZATION, CONTINUED. DIVISION OF LABOUR. 
 THE INFLUENCE OF MACHINERY. 
 
 1. THE first condition of an efficient organization of BOOKIV. 
 industry is that it should keep everyone employed at such CH ' IX ' 
 work as his abilities and training fit him to do well, and J f h ^ c ]* r rse 
 should equip him with the best machinery and other appli- in this and 
 ances for his work. We shall leave on one side for the present following 
 the distribution of functions between those who carry out chap ei 
 the details of production on the one hand, and those who 
 manage its general arrangement and undertake its risk on 
 the other; and confine ourselves to the division of labour 
 between different classes of operatives, with special reference 
 to the influence of machinery. In the following chapter 
 we shall consider the reciprocal effects of division of labour 
 and localization of industry; in a third chapter we shall 
 inquire how far the advantages of division of labour depend 
 upon the aggregation of large capitals into the hands of 
 single individuals or firms, or, as is commonly said, on pro- 
 duction on a large scale ; and lastly, we shall examine the 
 growing specialization of the work of business management. 
 
 Everyone is familiar with the fact that " practice makes Practice 
 perfect," that it enables an operation, which at first seemed 
 difficult, to be done after a time with comparatively little 
 exertion, and yet much better than before; and physiology 
 in some measure explains this fact. For it gives reasons for Physio- 
 believing that the change is due to the gradual growth of 
 new habits of more or less "reflex" or automatic action. 
 Perfectly reflex actions, such as that of breathing during 
 sleep, are performed by the responsibility of the local nerve 
 
332 DIVISION OF LABOUR. 
 
 BOOK iv. centres without any reference to the supreme central autho- 
 
 _J ' rity of the thinking power, which is supposed to reside in 
 
 the cerebrum. But all deliberate movements require the 
 attention of the chief central authority : it receives infor- 
 mation from the nerve centres or local authorities and perhaps 
 in some cases direct from the sentient nerves, and sends back 
 detailed and complex instructions to the local authorities, or 
 in some cases direct to the muscular nerves, and so co- 
 ordinates their action as to bring about the required results 1 . 
 Knowledge The physiological basis of purely mental work is not yet 
 lectuai well understood ; but what little we do know of the growth 
 ability. o k ra j n structure seems to indicate that practice in any kind 
 of thinking develops new connections between different parts 
 of the brain. Anyhow we know for a fact that practice will 
 
 1 For instance, the first time a man attempts to skate he must give his whole 
 attention to keeping his balance, his cerebrum has to exercise a direct control over 
 every movement, and he has not much mental energy left for other things. But 
 after a good deal of practice the action becomes semi-automatic, the local nerve 
 centres undertake nearly aU the work of regulating the muscles, the cerebrum is 
 set free, and the man can carry on an independent train of thought ; he can even 
 alter his course to avoid an obstacle in his path, or recover his balance, after it has 
 been disturbed by a slight unevenness, without in any way interrupting the course 
 of his thoughts. It seems that the exercise of nerve force under the immediate 
 direction of the thinking power residing in the cerebrum has gradually built up a 
 set of connections, involving probably distinct physical change, between the nerves 
 and nerve centres concerned ; and these new connections may be regarded as a 
 sort of capital of nerve force. There is probably something like an organized 
 bureaucracy of the local nerve centres: the medulla, the spinal axis, and the 
 larger ganglia generally acting the part of provincial authorities, and being able 
 after a time to regulate the district and village authorities without troubling the 
 supreme government. Very likely they send up messages as to what is going on : 
 but if nothing much out of the way has happened, these are very little attended to. 
 When however a new feat has to be accomplished, as for instance learning to 
 skate backwards, the whole thinking force will be called into requisition for the 
 time ; and will now be able by aid of the special skating-organization of the nerves 
 and nerve centres to do what would have been altogether impossible without such 
 aid. 
 
 To take a higher instance : when an artist is painting at his best, his cerebrum 
 is fully occupied with his work : his whole mental force is thrown into it, and the 
 strain is too great to be kept up for a long time together. In a few hours of happy 
 inspiration he may give utterance to thoughts that exert a perceptible influence on 
 the character of coming generations ; but his power of expression had been earned 
 by numberless hours of plodding work in which he had gradually built up an 
 intimate connection between eye and hand, sufficient to enable him to make good 
 rough sketches of things with which he is tolerably familiar, even while he is 
 engaged in an engrossing conversation and is scarcely conscious that he has a 
 pencil in his hand. 
 
SPECIALIZATION IN MENTAL WORK. 
 
 enable a person to solve quickly, and without any considera- BOOK iv. 
 able exertion, questions which he could have dealt with but CH ' IX ' 
 very imperfectly a little while before, even by the greatest 
 effort. The mind of the merchant, the lawyer, the physician, 
 and the man of science, becomes gradually equipped with 
 a store of knowledge and a faculty of intuition, which can 
 be obtained in no other way than by the continual applica- 
 tion of the best efforts of a powerful thinker for many years 
 together to one more or less narrow class of questions. Of 
 course the mind cannot work hard for many hours a day in 
 one direction : and a hard-worked man will sometimes find 
 recreation in work that does not belong to his business, but 
 would be fatiguing enough to a person who had to do it all 
 day long. 
 
 Some social reformers have indeed maintained that those Change of 
 who do the most important brain work might do a fair often 1 a 7 
 share of manual work also, without diminishing their power 
 of acquiring knowledge or thinking out hard questions. But 
 experience seems to show that the best relief from overstrain 
 is in occupations taken up to suit the mood of the moment 
 and stopped when the mood is passed, that is, in what popular 
 instinct classes as " relaxation." Any occupation which is so 
 far business-like that a person must sometimes force himself 
 by an effort of the will to go on with it, draws on his nervous 
 force and is not perfect relaxation : and therefore it is not 
 economical from the point of view of the community unless 
 its value is sufficient to outweigh a considerable injury to his 
 main work 1 . 
 
 2. It is a difficult and unsettled question how far in the 
 specialization should be carried in the highest branches of grades of 
 
 1 J. S. Mill went so far as to maintain that his occupations at the India 
 Office did not interfere with his pursuit of philosophical inquiries. But it seems 
 probable that this diversion of his freshest powers lowered the quality of his best 
 thought more than he was aware ; and though it may have diminished but little 
 his remarkable usefulness in his own generation, it probably affected very much 
 his power of doing that kind of work which influences the course of thought in 
 future generations. It was by husbanding every atom of his small physical 
 strength that Darwin was enabled to do so much work of just that kind: and a 
 social reformer who had succeeded in exploiting Darwin's leisure hoars in useful 
 work on behalf of the community, would have done a very bad piece of business 
 for it. 
 
334 
 
 DIVISION OF LABOUR. 
 
 BOOK IV. 
 CH. IX. 
 
 work 
 extreme 
 specializa- 
 tion does 
 not always 
 increase 
 efficiency. 
 
 But it is 
 easy to 
 acquire a 
 high 
 manual 
 skill in a 
 narrow 
 range of 
 work. 
 
 work. In science it seems to be a sound rule that the 
 area of study should be broad during youth, and should 
 gradually be narrowed as years go on. A medical man 
 who has always given his attention exclusively to one class 
 of diseases, may perhaps give less wise advice even in his 
 special subject than another who, having learnt by wider 
 experience to think of those diseases in relation to general 
 health, gradually concentrates his study more and more on 
 them, and accumulates a vast store of special experiences 
 and subtle instincts. But there is no doubt that greatly 
 increased efficiency can be attained through division of 
 labour in those occupations in which there is much demand 
 for mere manual skill. 
 
 Adam Smith pointed out that a lad who had made nothing 
 but nails all his life could make them twice as quickly as 
 a first-rate smith who only took to nail-making occasionally. 
 Anyone who has to perform exactly the same set of opera- 
 tions day after day on things of exactly the same shape, 
 gradually learns to move his fingers exactly as they are 
 wanted, by almost automatic action and with greater rapidity 
 than would be possible if every movement had to wait for 
 a deliberate instruction of the will. One familiar instance 
 is seen in the tying of threads by children in a cotton mill. 
 Again, in a clothing or a boot factory, a person who sews, 
 whether by hand or machinery, just the same seam on a 
 piece of leather or cloth of just the same size, hour after 
 hour, day after day, is able to do it with far less effort and 
 far more quickly than a worker with much greater quickness 
 of eye and hand, and of a much higher order of general 
 skill, who was accustomed to make the whole of a coat or 
 the whole of a boot 1 . 
 
 1 The best and most expensive clothes are made by highly skilled and highly 
 paid tailors, each of whom works right through first one garment and then 
 another : while the cheapest and worst clothes are made for starvation wages by 
 unskilled women who take the cloth to their own homes and do every part of the 
 sewing themselves. But clothes of intermediate qualities are made in workshops 
 or factories, in which the division and subdivision of labour are carried as far as 
 the size of the staff will permit ; and this method is rapidly gaining ground at both 
 ends at the expense of the rival method. Lord Lauderdale, (Inquiry, p. 282,) quotes 
 Xenophon's argument that the best work is done when each confines himself to 
 one simple department, as when one man makes shoes for men, and another for 
 
SPECIALIZATION IN MANUAL WORK. 335 
 
 Again, in the wood and the metal industries, if a man BOOK iv. 
 has to perform exactly the same operations over and over ' IX ' 
 again on the same piece of material, he gets into the habit ^Lit^of 
 of holding it exactly in the way in which it is wanted, and man y F- 
 
 J cesses in 
 
 of arranging the tools and other things which he has to the wood 
 handle in such positions that he is able to bring them to traded a 
 work on one another with the least possible loss of time and 
 of force in the movements of his own body. Accustomed to 
 find them always in the same position and to take them in 
 the same order, his hands work in harmony with one another 
 almost automatically: and with increased practice his ex- 
 penditure of nervous force diminishes even more rapidly than 
 his expenditure of muscular force. 
 
 But when the action has thus been reduced to routine it The 
 has nearly arrived at the stage at which it can be taken over 
 by machinery. The chief difficulty to be overcome is that of 
 getting the machinery to hold the material firmly in exactly 
 the position in which the machine tool can be brought to 
 bear on it in the right way, and without wasting too much 
 time in taking grip of it. But this can generally be con- 
 trived when it is worth while to spend some labour and 
 expense on it; and then the whole operation can often be 
 controlled by a worker who, sitting before a machine, takes 
 with the left hand a piece of wood or metal from a heap and 
 puts it in a socket, while with the right he draws down 
 a lever, or in some other way sets the machine tool at work, 
 and finally with his left hand throws on to another heap the 
 material which has been cut or punched or drilled or planed 
 exactly after a given pattern. It is in these industries 
 especially that we find the reports of modern trades unions 
 to be full of complaints that unskilled labourers, and even 
 their wives and children, are put to do work which used to 
 require the skill and judgment of a trained mechanic, but 
 which has been reduced to mere routine by the improvement 
 
 women ; or better when one man only sews shoes or garments, another cuts them 
 out : the king's cooking is much better than anybody else's, because he has one 
 cook who only boils, another who only roasts meat; one who only boils fish, 
 another who only fries it : there is not one man to make all sorts of bread but 
 a special man for special qualities. 
 
336 DIVISION OF LABOUR. 
 
 BOOK iv. of machinery and the ever-increasing minuteness of the sub- 
 en. IX. , . /, i T 
 
 division of labour. 
 The divi- K 3. We are thus led to a general rule, the action of 
 
 sion of 
 
 labour in which is more prominent in some branches of manufacture 
 
 the* growth than others, but which applies to all. It is, that any manu- 
 
 of machm- f ac t urm g operation that can be reduced to uniformity, so 
 
 that exactly the same thing has to be done over and over 
 
 again in the same way, is sure to be taken over sooner or 
 
 later by machinery. There may be delays and difficulties; 
 
 but if the work to be done by it is on a sufficient scale, 
 
 money and inventive power will be spent without stint on 
 
 the task till it is achieved 1 . 
 
 Thus the two movements of the improvement of ma- 
 chinery and the growing subdivision of labour have gone 
 together and are in some measure connected. But the 
 connection is not so close as is generally supposed. It is 
 the largeness of markets, the increased demand for great 
 numbers of things of the same kind, and in some cases of 
 things made with great accuracy, that leads to subdivision 
 of labour ; the chief effect of the improvement of machinery 
 is to cheapen and make more accurate the work which would 
 Machinery anyhow have been subdivided. For instance, " in organizing 
 purely 068 the works at Soho, Boulton and Watt found it necessary to 
 carry division of labour to the furthest practicable point. 
 
 1 One great inventor is rumoured to have spent 300,000 on experiments relating 
 to textile machinery ; and his outlay is said to have been abundantly returned to 
 him : some of his inventions were of such a kind as can be made only by a man 
 of genius; and however great the need, they must have waited till the right 
 man was found for them. He charged not unreasonably 1000 as royalty for each 
 of his combing machines ; and a worsted manufacturer, being full of work, found 
 it worth his while to buy an additional machine, and pay this extra charge for it, 
 only six months before the expiry of the patent. But such cases are exceptional ; 
 as a rule patented machines are not very dear. In some cases the economy of having 
 them all produced at one place by special machinery has been so great that the 
 patentee has found it to his advantage to sell them at a price lower than the 
 old price of the inferior machines which they displaced : for that old price gave 
 him so high a profit, that it was worth his while to lower the price still further 
 in order to induce the use of the machines for new purposes and in new markets. 
 In almost every trade many things are done by hand, though it is well known that 
 they could easily be done by some adaptations of machines that are already in use 
 in that or some other trade, and which are not made only because there would 
 not as yet be enough employment for them to remunerate the trouble and expense 
 of making them. 
 
IN MODERN MANUFACTURE. 337 
 
 There were no slide-lathes, planing machines or boring tools, BOOK iv. 
 such as now render mechanical accuracy of construction CH ' IX ' 
 almost a matter of certainty. Everything depended on the 
 individual mechanic's accuracy of hand and eye; yet me- 
 chanics generally were much less skilled then than they 
 are now. The way in which Boulton and Watt contrived 
 partially to get over the difficulty was to confine their 
 workmen to special classes of work, and make them as 
 expert in them as possible. By continued practice in 
 handling the same tools and fabricating the same articles, 
 they thus acquired great individual proficiency 1 ." Thus and thus 
 machinery constantly supplants and renders unnecessary some o S f 
 
 that purely manual skill, the attainment of which was, even 
 
 up to Adam Smith's time, the chief advantage of division j{Jkour" 
 
 of labour. But this influence is more than countervailed increases 
 
 by its tendency to increase the scale of manufactures and for it C P 
 
 to make them more complex; and therefore to increase 
 
 the opportunities for division of labour of all kinds, and 
 
 especially in the matter of business management. 
 
 4. The powers of machinery to do work that requires Machine- 
 too much accuracy to be done by hand are perhaps best machinery 
 seen in some branches of the metal industries in which the 
 system of Interchangeable Parts is being rapidly developed. 
 
 It is only after long training and with much care and labour changeable 
 that the hand can make one piece of metal accurately to 
 resemble or to fit into another : and after all the accuracy is 
 not perfect. But this is just the work which a well made 
 machine can do most easily and most perfectly. For instance, 
 if sowing and reaping machines had to be made by hand, 
 their first cost would be very high ; and when any part of 
 them was broken, it could be replaced only at great cost 
 by sending the machine back to the manufacturer or by 
 bringing a highly skilled mechanic to the machine. But 
 as it is, the manufacturer keeps in store many facsimiles 
 of the broken part, which were made by the same machinery, 
 and are therefore interchangeable with it. A farmer in the 
 North- West of America, perhaps a hundred miles away from 
 any good mechanic's shop, can yet use complicated ma- 
 
 1 Smiles' Boulton and Watt, pp. 170 1. 
 
 M. 22 
 
338 DIVISION OF LABOUR. 
 
 BOOK iv. chinery with confidence ; since he knows that by telegraphing 
 
 _J ' the number of the machine and the number of any part of 
 
 it which he has broken, he will get by the next train a new 
 piece which he can himself fit into its place. The import- 
 ance of this principle of interchangeable parts has been 
 but recently grasped ; there are however many signs that 
 it will do more than any other to extend the use of machine- 
 made machinery to every branch of production, including 
 even domestic and agricultural work 1 . 
 
 iilustra- The influences which machinery exerts over the character 
 
 tSThistoiy of modern industry are well illustrated in the manufacture 
 watch- f wa tches. A few years ago the chief seat of this business 
 making was i n French Switzerland ; where the subdivision of labour 
 
 trade. 
 
 was carried far, though a great part of the work was done 
 
 by a more or less scattered population. There were about 
 
 fifty distinct branches of trade each of which did one small 
 
 part of the work. In almost all of them a highly specialized 
 
 manual skill was required, but very little judgment ; the 
 
 earnings were generally low, because the trade had been 
 
 established too long for those in it to have anything like a 
 
 monopoly, and there was no difficulty in bringing up to 
 
 it any child with ordinary intelligence. But this industry 
 
 is now yielding ground to the American system of making 
 
 watches by machinery, which requires very little specialized 
 
 manual skill. In fact the machinery is becoming every 
 
 year more and more automatic, and is getting to require 
 
 Complex less and less assistance from the human hand. But the 
 
 increases 7 m re delicate the machine's power, the greater is the 
 
 m^n^f judgment and carefulness which is called for from those 
 
 judgment who see after it. Take for instance a beautiful machine 
 
 general which feeds itself with steelwire at one end, and delivers 
 
 gence"; at the other tiny screws of exquisite form ; it displaces a 
 
 great many operatives who had indeed acquired a very high 
 
 and specialized manual skill, but who lived sedentary lives, 
 
 straining their eyesight through microscopes, and finding in 
 
 1 The system owes its origin in great measure to Sir Joseph Whit worth's 
 standard gauges ; but it has been worked out with most enterprise and thorough- 
 ness in America. There is a good account of it by Mr Trowbridge in Vol. n. of 
 the Report of the tenth census for the United States. 
 
ILLUSTRATION FROM THE WATCH-MAKING TRADE. 339 
 
 their work very little scope for any faculty except a mere BOOKIV. 
 command over the use of their fingers. But the machine is 
 intricate and costly, and the person who minds it must have 
 an intelligence, and an energetic sense of responsibility, which 
 go a long way towards making a fine character ; and which, 
 though more common than they were, are yet sufficiently 
 rare to be able to earn a very high rate of pay. No doubt 
 this is an extreme case ; and the greater part of the work 
 done in a watch factory is much simpler. But much of it 
 requires higher faculties than the old system did, and 
 those engaged in it earn on the average higher wages; at 
 the same time that it has already brought the price of a 
 trustworthy watch within the range of the poorest classes 
 of the community, and it is showing signs of being able soon 
 to accomplish the very highest class of work 1 . 
 
 Those who finish and put together the different parts and in 
 of a watch must always have highly specialized skill : but weakens 
 most of the machines which are in use in a watch factory, Carriers 
 are not different in general character from those which are tj?* 4 divide 
 
 different 
 
 used in any other of the lighter metal trades : in fact many trades, 
 of them are mere modifications of the turning lathes and of 
 the slotting, punching, drilling, planing, shaping, milling 
 machines and a few others, which are familiar to all engineer- 
 ing trades. This is a good illustration of the fact that while 
 there is a constantly increasing subdivision of labour, many 
 of the lines of division between trades which are nominally 
 distinct are becoming narrower and less difficult to be 
 passed. In old times it would have been very small comfort 
 to watch-makers, who happened to be suffering from a 
 diminished demand for their wares, to be told that the 
 gun-making trade was in want of extra hands ; but most 
 of the operatives in a watch factory would find machines 
 very similar to those with which they were familiar, if they 
 
 1 The perfection which the machinery has already attained is shown by the 
 fact that at the Inventions Exhibition recently held in London, the representative 
 of an American watch factory took to pieces fifty watches before some English 
 representatives of the older system of manufacture, and after throwing the dif- 
 ferent parts into different heaps, asked them to select for him one piece from each 
 heap in succession; he then set these pieces up in one of the watch-cases and 
 handed them back a watch in perfect order. 
 
 222 
 
340 
 
 DIVISION OF LABOUR. 
 
 iiiustra- 
 
 ing trade. 
 
 BOOK iv. strayed into a gun-making factory or sewing-machine factory, 
 CH " IX ' or a factory for making textile machinery. A watch factory 
 with those who worked in it could be converted without any 
 overwhelming loss into a sewing-machine factory : almost 
 the only condition would be that in the new factory no one 
 should be put to work which required a higher order of 
 general intelligence, than that to which he was already 
 accustomed. 
 
 5. The printing trade affords another instance of the 
 way in which an improvement of machinery and an increase 
 j n ^ Q volume of production causes an elaborate subdivision 
 of labour. Everyone is familiar with the pioneer newspaper 
 editor of newly settled districts of America, who sets up 
 the type of his articles as he composes them ; and with the 
 aid of a boy prints off his sheets and distributes them to his 
 scattered neighbours. When however the mystery of print- 
 ing was new, the printer had to do all this for himself, and 
 in addition to make all his own appliances 1 . These are 
 now provided for him by separate " subsidiary" trades, from 
 whom even the printer in the backwoods can obtain every- 
 thing that he wants to use. But in spite of the assistance 
 which it thus gets from outside, a large printing establish- 
 ment has to find room for many different classes of workers 
 within its walls. To say nothing of those who organize and 
 superintend the business, of those who do its office work and 
 keep its stores, of the skilled "readers" who correct any 
 errors that may have crept into the "proofs," of its engineers 
 and repairers of machinery, of those who cast, and who correct 
 and prepare its stereotype plates ; of the warehousemen and 
 the boys and girls who assist them, and several other minor 
 classes; there are the two great groups of the compositors 
 who set up the type, and the machinists and pressmen who 
 
 instance of print impressions from them. Each of these two groups is 
 divided into many smaller groups, especially in the large 
 
 1 "The type-founder was probably the first to secede from the concern ; then 
 printers delegated to others the making of presses; afterwards the ink arid the 
 rollers found separate and distinct manufacturers ; and there arose a class of 
 persons who, though belonging to other trades, made printing appliances a 
 specialty, such as printers' smiths, printers' joiners and printers' engineers " (Mr 
 Southward in the Article on Typography in the Encyclopedia Britannica). 
 
ILLUSTRATION FROM THE PRINTING TRADE. 341 
 
 centres of the printing trade. In London, for instance, a BOOKIV. 
 
 minder who was accustomed to one class of machine, or a " 
 
 compositor who was accustomed to one class of work, if ^ ern f n " 
 thrown out of employment would not willingly abandon the thin lines 
 advantage of his specialized skill, and falling back on his 
 general knowledge of the trade seek work at another kind of 
 machine or in another class of work 1 . These barriers be- 
 tween minute subdivisions of a trade count for a great deal 
 in many descriptions of the modern tendency towards 
 specialization of industry; and to some extent rightly, 
 because though many of them are so slight that a man which can 
 thrown out of work in one subdivision could pass into one of without 
 its neighbours without any great loss of efficiency, yet he does 
 not do so until he has tried for a while to get employment in 
 his old lines ; and therefore the barriers are as effective as 
 stronger ones would be so far as the minor fluctuations of 
 trade from week to week are concerned. But they are of an 
 altogether different kind from the deep and broad partitions 
 which divided one group of mediaeval handicraftsmen from 
 another, and which caused the lifelong suffering of the 
 handloorn-weavers when their trade had left them 2 . 
 
 1 For instance, Mr Southward tells us "a minder may understand only 
 book machines or only news machines ; he may know all about " machines that 
 print from flat surfaces or those that print from cylinders ; "or of cylinders he 
 may know only one kind. Entirely novel machines create a new class of artisans. 
 There are men perfectly competent to manage a Walter press who are ignorant 
 how to work two-colour or fine book-work machines. In the compositor's depart- 
 ment division of labour is carried out to a still minuter degree. An old-fashioned 
 printer would set up indifferently a placard, a title-page, or a book. At the 
 present day we have jobbing hands, book hands and news hands, the word 
 'hand' suggesting the factory-like nature of the business. There are jobbing 
 hands who confine themselves to posters. Book hands comprise those who set up 
 the titles and those who set up the body of the work. Of these latter again, 
 while one man composes, another, the 'maker-up,' arranges the pages." 
 
 2 Let us follow still further the progress of machinery in supplanting manual 
 labour in some directions and opening out new fields for its employment in others. 
 Let us watch the process by which large editions of a great newspaper are set up 
 and printed off in a few hours. To begin with, a good part of the type-setting is 
 itself often done by a machine ; but in any case the types are in the first instance 
 on a plane surface, from which it is impossible to print very rapidly. The next 
 step therefore is to make a papier-machd cast of them, which is bent on to a 
 cylinder, and is then used as the mould from which a new metal plate is cast that 
 fits the cylinders of the printing machine. Fixed on these it rotates alternately 
 against the inking cylinders and the paper. The paper is arranged in a huge roll 
 
342 DIVISION OF LABOUR. 
 
 BOOK iv. In the printing trades, as in the watch trade, we see 
 c ^l^' mechanical and scientific appliances attaining results that 
 
 theincreas f wou ^ ^ e impossible without them ; at the same time that 
 ed demand they persistently take over work that used to require manual 
 
 for facul- f . 
 
 ties of a skill and dexterity, but not much judgment; while they leave 
 
 for man's hand all those parts which do require the use of 
 machinery. j u jg men t j and open up all sorts of new occupations in which 
 there is a great demand for it. Every improvement and 
 cheapening of the printer's appliances increases the demand 
 for the judgment and discretion and literary knowledge of 
 the reader, for the skill and taste of those who know how to 
 set up a good title-page, or how to make ready a sheet on 
 which an engraving is to be printed, so that light and shade 
 will be distributed properly. It increases the demand for 
 the gifted and highly-trained artists who draw or engrave on 
 wood and stone and metal, and for those who know how to 
 give an accurate report in ten lines of the substance of a speech 
 that occupied ten minutes an intellectual feat the difficulty 
 of which we underrate, because it is so frequently performed. 
 And again, it tends to increase the work of photographers 
 and electrotypers, and stereotypers, of the makers of printer's 
 machinery, and many others who get a higher training and 
 a higher income from their work than did those layers on 
 and takers off, and those folders of newspapers who have 
 found their work taken over by iron fingers and iron arms. 
 Machinery 6. We may now pass to consider the effects which 
 6 machinery has in relieving that excessive muscular strain 
 
 a few generations ago was the common lot of more 
 than half the working men even in such a country as England. 
 The most marvellous instances of the power of machinery are 
 seen in large iron-works, and especially in those for making 
 armour plates, where the force to be exerted is so great that 
 man's muscles count for nothing, and where every move- 
 ment, whether horizontal or vertical, has to be effected by 
 
 at the bottom of the machine and unrolls itself automatically, first against the 
 damping cylinders and then against the printing cylinders, the first of which 
 prints it on one side, and the second on the other : thence to the cutting cylinders, 
 which cut it into equal lengths, and thence to the folding apparatus, which folds it 
 ready for sale. When the machinery has been got ready, one man can manage it 
 entirely and it will print off 12,000 copies in an hour. 
 
THE AID OF MACHINERY DIMINISHES FATIGUE. 343 
 
 hydraulic or steam force, and man stands by ready to govern BOOK iv. 
 the machinery and clear away ashes or perform some such 
 secondary task. 
 
 Machinery of this class has increased our command over 
 nature, but it has not directly altered the character of man's 
 work very much ; for that which it does he could not have 
 done without it. But in other trades machinery has 
 lightened man's labours. The house carpenters, for instance, 
 make things of the same kind as those used by our fore- 
 fathers, with much less toil for themselves. They now give 
 themselves chiefly to those parts of the task which are 
 most pleasant and most interesting ; while in every country 
 town and almost every village there are found steam mills 
 for sawing, planing and moulding, which relieve them of 
 that grievous fatigue which not very long ago used to make 
 them prematurely old 1 . 
 
 New machinery, when just invented, generally requires Machinery 
 a great deal of care and attention. But the work of its 
 attendant is always being sifted ; that which is uniform and 
 monotonous is gradually taken over by the machine, which nous work 
 
 in manu- 
 
 thus becomes steadily more and more automatic and self- facture. 
 acting ; till at last there is nothing for the hand to do, but 
 to supply the material at certain intervals and to take away 
 the work when finished. There still remains the responsi- 
 bility for seeing that the machinery is in good order and 
 working smoothly ; but even this task is often made light 
 by the introduction of an automatic movement, which brings 
 the machine to a stop the instant anything goes wrong. 
 
 1 The jack-plane, used for making smooth large boards for floors and other 
 purposes, was the worst enemy of the carpenter. All hut specially skilled men 
 were compelled to spend a great part of their time with the jack-plane, and this 
 brought on heart disease, making them as a rule old men by the time they were 
 forty. But now those who become prematurely old through overwork are to be 
 found almost exclusively among the professional classes, among those engaged in 
 the more anxious kinds of business, and in some agricultural districts in which the 
 rate of wages is still very low and the people are habitually underfed. Adam 
 Smith tells us that " workmen, when they are liberally paid, are very apt to over- 
 work themselves and to ruin their health and constitution in a few years. A car- 
 penter in London, and in some other places, is not supposed to last in his utmost 
 vigour above eight years.... Almost every class of artificers is subject to some 
 particular infirmity occasioned by excessive application to their peculiar species of 
 work." Wealth of Nations, Book i. Chapter vn. 
 
344 
 
 DIVISION OF LABOUR. 
 
 BOOK IV. 
 CH. IX. 
 
 Illustra- 
 tion from 
 the textile 
 industries. 
 
 It thus 
 prevents 
 monotony 
 of work 
 from in- 
 volving 
 monotony 
 of life. 
 
 Nothing could be more narrow or monotonous than the 
 occupation of a weaver of plain stuffs in the old time. But 
 now one woman will manage four or more looms, each of 
 which does many times as much work in the course of the 
 day as the old hand-loom did ; and her work is much less 
 monotonous and calls for much more judgment than his did. 
 So that for every hundred yards of cloth that are woven, the 
 purely monotonous work done by human beings is probably 
 not a twentieth part of what it was \ 
 
 Facts of this kind are to be found in the recent history 
 of many trades : and they are of great importance when we 
 are considering the way in which the modern organization of 
 industry is tending to narrow the scope of each person's 
 work, and thereby to render it monotonous. For those trades 
 in which the work is most subdivided are those in which the 
 chief muscular strain is most certain to be taken off by 
 machinery ; and thus the chief evil of monotonous work is 
 much diminished. As Roscher says, it is monotony of life 
 much more than monotony of work that is to be dreaded : 
 monotony of work is an evil of the first order only when it 
 involves monotony of life. Now when a person's employ- 
 ment requires much physical exertion, he is fit for nothing 
 after his work ; and unless his mental faculties are called 
 forth in his work, they have little chance of being developed 
 at all. But the nervous force is not very much exhausted in 
 the ordinary work of a factory, at all events where there is 
 not excessive noise, and where the hours of labour are not 
 too long. The social surroundings of factory life stimulate 
 mental activity in and out of working hours ; and even those 
 factory workers whose occupations are seemingly the most 
 monotonous have more intelligence and mental resource than 
 has been shown by the English agricultural labourer whose 
 employment has more variety 2 . 
 
 1 The efficiency of labour in weaving has been increased twelve-fold and that 
 in spinning six-fold during the last seventy years. In the preceding seventy 
 years the improvements in spinning had already increased the efficiency of labour 
 two-hundred-fold (see Ellison's Cotton Trade of Great Britain, ch. iv. and v.). 
 
 2 Perhaps the textile industries afford the best instance of work that used to be 
 done by hand and is now done by machinery. They are especially prominent in 
 England, where they give employment to nearly half a million males and more 
 
MONOTONY OF WORK AND MONOTONY OF LIFE. 345 
 
 It is true that the American agriculturist is an able man, BOOK iv. 
 and that his children rise rapidly in the world. But partly J ' 
 because land is plentiful, and he generally owns the farm that 
 he cultivates, he has better social conditions than the 
 English; he has always had to think for himself, and has 
 long had to use and to repair complex machines. The 
 English agricultural labourer has many great disadvantages 
 to contend with ; but he is steadily improving his position. 
 
 7. We must now proceed to consider what are the The 
 
 *;.. 1.1,1 ' I.L- econo 
 
 conditions under which the economies in production arising use O f 
 from division of labour can best be secured. It is obvious 
 that the efficiency of specialized machinery or specialized 
 skill is but one condition of its economic use ; the other that they 
 is that sufficient work should be found to keep it well fully 
 employed. As Babbage pointed out, in a large factory occu i >ietL 
 "the master manufacturer by dividing the work to be 
 executed into different processes, each requiring different 
 degrees of skill or force, can purchase exactly that precise 
 quantity of both which is necessary for each process ; whereas 
 if the whole work were executed by one workman that person 
 must possess sufficient skill to perform the most difficult and 
 
 than half a million females, or more than one in ten of those persons who are 
 earning independent incomes. The strain that is taken off 4 human muscles in 
 dealing even with those soft materials is shown by the fact that for every one of 
 these million operatives there is used ahout one horse-power of steam, that is, 
 about ten times as much as they would themselves exert if they were all strong 
 men; and the history of these industries will serve to remind us that many of 
 those who perform the more monotonous parts of manufacturing work are as 
 a rule not skilled workers who have come down to it from a higher class of work, 
 but unskilled workers who have risen to it. A great number of those who work in 
 the Lancashire cotton mills have come there from poverty-stricken districts of 
 Ireland, while others are the descendants of paupers and people of weak physique, 
 who were sent there hi large numbers early in the century from the most miser- 
 able conditions of life in the poorest agricultural districts, where the labourers 
 were fed and housed almost worse than the animals whom they tended. Again, 
 when regret is expressed that the cotton factory hands of New England have not 
 the high standard of culture which prevailed among them a century ago, we must 
 remember that the descendants of those factory workers have moved up to higher 
 and more responsible posts, and include many of the ablest and wealthiest of the 
 citizens of America. Those who have taken their places are in the process of being 
 raised ; they are chiefly French Canadians and Irish, who though they may learn 
 in their new homes some of the vices of civilization, are yet much better off and 
 have on the whole better opportunities of developing the higher faculties of them- 
 selves and their children than they had in their old homes. 
 
346 DIVISION OF LABOUR. 
 
 BOOK iv. sufficient strength to execute the most laborious of the 
 
 _J _ ' operations into which the work is divided." The economy 
 
 of production requires not only that each person should be 
 
 employed constantly in a narrow range of work, but also that, 
 
 when it is necessary for him to undertake different tasks, 
 
 each of these tasks should be such as to call forth as much as 
 
 possible of his skill and ability. Just in the same way the 
 
 economy of machinery requires that a powerful turning- 
 
 lathe when specially arranged for one class of work should be 
 
 kept employed as long as possible on that work ; and if after 
 
 all it is necessary to employ it on other work, that should be 
 
 such as to be worthy of the lathe, and not such as could have 
 
 been done equally well by a much smaller machine. 
 
 But Here then, so far as the economy of production goes, men 
 
 economic and machines stand on much the same footing : but while 
 
 machinery is a mere implement of production, man's welfare is 
 ag6 d t t' a ^ so ^ s ultimate aml - We have already been occupied with 
 is wasteful the question whether the human race as a whole gains by 
 himself carrying to an extreme that specialization of function which 
 causes all the most difficult work to be done by a few people : 
 but we have now to consider it more nearly with special 
 reference to the work of business management. The main 
 drift of the next three chapters is to inquire what are the 
 causes which make different forms of business management 
 the fittest to profit by their environment, and the most likely 
 to prevail over others; but it is well that meanwhile we 
 should have in our minds the question, how far they are 
 severally fitted to benefit their environment. 
 
 Many of those economies in the use of specialized skill 
 and machinery which are commonly regarded as within the 
 reach of very large establishments, do not depend on the size 
 of individual factories. Some depend on the aggregate 
 volume of production of the kind in the neighbourhood; 
 while others again, especially those connected with the 
 growth of knowledge and the progress of the arts, depend 
 chiefly on the aggregate volume of production in the whole 
 civilized world. And here we may introduce two technical 
 terms. 
 
 We may divide the economies arising from an increase in 
 
EXTERNAL AND INTERNAL ECONOMIES. 347 
 
 the scale of production of any kind of goods, into two classes BOOK iv. 
 those dependent on the general development of the c f^' 
 industry and those dependent on the resources of the in- ^ ernal 
 dividual houses of business engaged in the efficiency of their internal 
 
 n n Economies. 
 
 management. And we may call the former External 
 Economies, and the latter Internal Economies. In the 
 present chapter we have been chiefly discussing Internal 
 economies; but we now proceed to examine those very 
 important External economies which can often be secured by 
 the concentration of many small businesses of a similar 
 character in particular localities : or, as is commonly said, by 
 the localization of industry. 
 
CHAPTER X. 
 
 INDUSTRIAL ORGANIZATION CONTINUED. THE CONCENTRA- 
 TION OF SPECIALIZED INDUSTRIES IN PARTICULAR 
 LOCALITIES. 
 
 v. 1. IN an early stage of civilization every place had to 
 . Depend on j^g own resources for most of the heavy wares 
 wn ih it consumed; unless indeed it happened to have special 
 stages of facilities for water carriage. But the slowness with which 
 
 civiliza- . 
 
 tionthe customs changed, made it easy for producers to meet the 
 ofsome 10n wants even of consumers with whom they had little com- 
 vahmbie 1 munication ; and it enabled comparatively poor people to 
 wares b u v a few expensive goods from a distance, in the security 
 localized, that they would add to the pleasure of festivals and holidays 
 during a life-time, or perhaps even during two or three life- 
 times. Consequently the lighter and more expensive articles 
 of dress and personal adornment, together with spices and 
 some kinds of metal implements used by all classes, and many 
 other things for the special use of the rich, often came from 
 astonishing distances. Some of these were produced only in 
 a few places, or even only in one place ; and they were 
 diffused all over Europe partly by the agency of fairs x and 
 professional pedlers, and partly by the producers themselves, 
 who would vary their work by travelling on foot for many 
 thousand miles to sell their goods and see the world. These 
 sturdy travellers took on themselves the risks of their little 
 businesses ; they enabled the production of certain classes of 
 
 1 Thus in the records of the Stourbridge Fair held near Cambridge we find an 
 endless variety of light and precious goods from the older seats of civilization in 
 the East and on the Mediterranean ; some having been brought in Italian ships, 
 and others having travelled by land as far as the shores of the North Sea. 
 
PRIMITIVE FORMS OF LOCALIZED INDUSTRIES. 349 
 
 goods to be kept on the right track for satisfying the needs BOOK iv. 
 of purchasers far away ; and they created new wants among ' 
 consumers, by showing them at fairs or at their own houses 
 new goods from a distant land. An industry concentrated 
 in certain localities is commonly, though perhaps not quite 
 accurately, described as a Localized Industry \ 
 
 This elementary localization of industry gradually pre- 
 pared the way for many of the modern developments of 
 division of labour in the mechanical arts and in the task of 
 business management. Even now we find industries of a 
 primitive fashion localized in retired villages of central 
 Europe, and sending their simple wares even to the busiest 
 haunts of modern industry. In Russia the expansion of a 
 family group into a village has often been the cause of a 
 localized industry; and there are an immense number of 
 villages each of which carries on only one branch of produc- 
 tion, or even only a part of one 2 . 
 
 2. Many various causes have led to the localization of The 
 industries ; but the chief causes have been physical condi- origins of 
 tions ; such as the character of the climate and the soil, the industries ; 
 existence of mines and quarries in the neighbourhood, or conditions 
 within easy access by land or water. Thus metallic indus- 
 tries have generally been either near mines or in places 
 where fuel was cheap. The iron industries in England first 
 sought those districts in which charcoal was plentiful, and 
 
 1 Not very long ago travellers in Western Tyrol could find a strange and 
 characteristic relic of this habit in a village called Imst. The villagers had 
 somehow acquired a special art in breeding canaries: and their young men 
 started for a tour to distant parts of Europe each with about fifty small cages 
 hung from a pole over his shoulder, and walked on till they had sold all. 
 
 a There are for instance over 500 villages devoted to various branches of 
 woodwork ; one village makes nothing but spokes for the wheels of vehicles, 
 another nothing but the bodies and so on ; and indications of a like state of things 
 are found in the histories of oriental civilizations and in the chronicles of mediaeval 
 Europe. Thus for instance we read (Rogers' Six Centuries of Work and Wages, 
 Ch. TV.) of a lawyer's handy book written about 1250, which makes note of scarlet 
 at Lincoln ; blanket at Bligh ; burnet at Beverley ; russet at Colchester ; linen 
 fabrics at Shaftesbury, Lewes, and Aylsham; cord at Warwick and Bridport; 
 knives at Marstead; needles at Wilton; razors at Leicester; soap at Coventry; 
 horse girths at Doncaster ; skins and furs at Chester and Shrewsbury and so on. 
 
 The localization of trades in England at the beginning of the eighteenth 
 century is well described by Defoe, Place of English Commerce, 85 7 ; English 
 Tradesman, n. 2823. 
 
350 LOCALIZED INDUSTRIES. 
 
 BOOK iv. afterwards they went to the neighbourhood of collieries 1 . 
 CH ' X ' Staffordshire makes many kinds of pottery, all the materials 
 of which are imported from a long distance; but she has 
 cheap coal and excellent clay for making the heavy "seggars" 
 or boxes in which the pottery is placed while being fired. 
 Straw plaiting has its chief home in Bedfordshire, where 
 straw has just the right proportion of silex to give strength 
 without brittleness ; and Buckinghamshire beeches have 
 afforded the material for the Wycombe chairmaking. The 
 Sheffield cutlery trade is due chiefly to the excellent grit of 
 which its grindstones are made. 
 
 the patron- Another chief cause has been the patronage of a court. 
 
 courts; The rich folk there assembled make a demand for goods of 
 specially high quality, and this attracts skilled workmen 
 from a distance, and educates those on the spot. When an 
 Eastern potentate changed his residence and, partly for 
 sanitary reasons, this was constantly done the deserted 
 town was apt to take refuge in the development of a 
 specialized industry, which had owed its origin to the 
 
 the presence of the court. But very often the rulers deliberately 
 
 deliberate J J J 
 
 invitation invited artisans from a distance and settled them in a group 
 together. Thus the mechanical faculty of Lancashire is said 
 to be due to the influence of Norman smiths who were 
 settled at Warrington by Hugo de Lupus in William the 
 Conqueror's time. And the greater part of England's manu- 
 facturing industry before the era of cotton and steam had 
 its course directed by settlements of Flemish and Huguenot 
 artisans; many of which were made under the immediate 
 direction of Plantagenet and Tudor kings. These immigrants 
 taught us how to weave woollen and worsted stuffs, though 
 for a long time we sent our cloths to the Netherlands to be 
 fulled and dyed. They taught us how to cure herrings, how 
 to manufacture silk, how to make lace, glass, and paper, and 
 to provide for many other of our wants 2 . 
 
 1 The later wanderings of the iron industry from Wales, Staffordshire and 
 Shropshire to Scotland and the North of England are well shown in the tables 
 submitted by Sir Lowthian Bell to the recent Commission on the Depression of 
 Trade and Industry. See their Second Report, Part I. p. 320. 
 
 2 Fuller says that Flemings started manufactures of cloths and fustians in 
 Norwich, of baizes in Sudbury, of serges in Colchester and Taunton, of cloths in 
 
THEIR VARIOUS ORIGINS. 351 
 
 But how did these immigrants learn their skill ? Their BOOK iv. 
 ancestors had no doubt profited by the traditional arts of ' 
 
 earlier civilizations on the shores of the Mediterranean and 
 
 in the far East : for nearly all important knowledge has long 1 deveiop- 
 
 J 6 ment of 
 
 deep roots stretching downwards to distant times ; and so nations 
 widely spread have been these roots, so ready to send up opportuni- 
 shoots of vigorous life, that there is perhaps no part of the old U po n and 
 world in which there might not long ago have flourished many character. 
 beautiful and highly skilled industries, if their growth had 
 been favoured by the character of the people, and by their 
 social and political institutions. This accident or that may 
 have determined whether a particular industry flourished in 
 any one town; the industrial character of a whole country 
 even may have been largely influenced by the richness of 
 her soil and her mines, and her facilities for commerce. Such 
 natural advantages may themselves have stimulated free in- 
 dustry and enterprise : but it is the existence of these last, 
 by whatever means they may have been promoted, which 
 has been the supreme condition for the growth of noble 
 forms of the arts of life. In sketching the history of free 
 industry and enterprise we have already incidentally traced 
 the outlines of the causes which have localized the industrial 
 leadership of the world now in this country and now in that. 
 We have seen how physical nature acts on man's energies, 
 how he is stimulated by an invigorating climate, and how 
 he is encouraged to bold ventures by the opening out of 
 rich fields for his work : but we have also seen how the use 
 he makes of these advantages depends on his ideals of life, 
 and how inextricably therefore the religious, political and 
 economic threads of the world's history are interwoven ; while 
 together they have been bent this way or that by great 
 political events and the influence of the strong personalities 
 of individuals. 
 
 The causes which determine the economic progress of 
 nations will require further study when we come to discuss 
 
 Kent, Gloucestershire, Worcestershire, Westmoreland, Yorkshire, Hants, Berks 
 and Sussex, of kerseys in Devonshire and of Levant cottons in Lancashire. 
 Smiles' Huguenots in England and Ireland, p. 109. See also Lecky's History 
 of England in the eighteenth century, Ch. n. 
 
352 LOCALIZED INDUSTRIES. 
 
 BOOK iv. the problems of international trade 1 . But for the present we 
 CH ' X ' must turn aside from these broader movements of the locali- 
 zation of industry ; and follow the fortunes of groups of skilled 
 workers who are gathered within the narrow boundaries oi 
 a manufacturing town or a thickly peopled industrial district, 
 The ad- 3. When an industry has thus chosen a locality for 
 
 oHoSed itself, it is likely to stay there long : so great are the ad- 
 h n ered1tary ; vantages which people following the same skilled trade get 
 skill; f rom near neighbourhood to one another. The mysteries oi 
 the trade become no mysteries; but are as it were in the 
 air, and children learn many of them unconsciously. Good 
 work is rightly appreciated, inventions and improvements in 
 machinery, in processes and the general organization of the 
 business have their merits promptly discussed: if one mac 
 starts a new idea, it is taken up by others and combined 
 with suggestions of their own ; and thus it becomes the 
 the growth source of further new ideas. And presently subsidiary trades 
 sfdiary grow up in the neighbourhood, supplying it with implements 
 trades; an( j materials, organizing its traffic, and in many ways 
 
 conducing to the economy of its material. 
 
 the use of Again, the economic use of expensive machinery car 
 specialized sometimes be attained in a very high degree in a district ir 
 machinery; W j 1 ^ c j 1 there is a large aggregate production of the same 
 kind, even though no individual capital employed in the 
 trade be very large. For subsidiary industries devoting them- 
 selves each to one small branch of the process of production 
 and working it for a great many of their neighbours, are 
 able to keep in constant use machinery of the most highl} 
 specialized character ; and to make it pay its expenses, though 
 its original cost may have been high, and its rate of depre- 
 ciation very rapid. 
 
 a local Again, in all but the earliest stages of economic develop- 
 
 spetiai f r ment a localized industry gains a great advantage from th( 
 
 fact that it offers a constant market for skill. Employers 
 
 are apt to resort to any place where they are likely to find 
 
 a good choice of workers with the special skill which the} 
 
 1 Meanwhile attention may be called to an article on The Migrations oj 
 Centres of Indwtrial Energy by Mr Courtney in the Fortnightly Review foi 
 December 1878. 
 
. THEIR ADVANTAGES. 353 
 
 require ; while men seeking employment naturally go to BOOK iv. 
 places where there are many employers who need such skill CH ' x ' 
 as theirs and where therefore it is likely to find a good 
 market. The owner of an isolated factory is often put to 
 great shifts for want of some special skilled labour which has 
 suddenly run short; and a skilled workman, when thrown 
 out of employment in it, has no easy refuge. Social forces 
 here co-operate with economic : there are often strong friend- 
 ships between employers and employed ; but neither side 
 likes to feel that in case of any disagreeable incident 
 happening between them, they must go on rubbing against 
 one another : both sides like to be able easily to break off old 
 associations should they become irksome. These difficulties 
 are still a great obstacle to the success of any business in 
 which special skill is needed, but which is not in the 
 neighbourhood of others like it : they are however being 
 diminished by the railway, the printing-press and the tele- 
 graph. 
 
 On the other hand a localized industry has some disad- Sometimes 
 vantages as a market for labour if the work done in it is a localized 
 chiefly of one kind, such for instance as can be done only by JJJakesYoo 
 strong men. In those iron districts in which there are no extensive 
 
 demands 
 
 textile or other factories to give employment to women and for one 
 children, wages are high and the cost of labour dear to the 
 employer, while the average money earnings of each family 
 are low. But the remedy for this evil is obvious, and is 
 found in the growth in the same neighbourhood of industries 
 of a supplementary character. Thus textile industries are 
 constantly found congregated in the neighbourhood of mining 
 and engineering industries, in some cases having been attract- 
 ed by almost imperceptible steps ; in others, as for instance 
 at Barrow, having been started deliberately on a large scale 
 in order to give variety of employment in a place where pre- 
 viously there had been but little demand for the work of 
 women and children. 
 
 The advantages of variety, of employment are combined 
 
 with those of localized industries in some of our manufacturing 
 
 towns, and this is a chief cause of their continued growth. 
 
 But on the other hand the value which the central sites of a 
 
 M. 23 
 
354 
 
 LOCALIZED INDUSTRIES. 
 
 BOOK IV. 
 CH. X. 
 
 Different 
 industries 
 in the same 
 neighbour- 
 hood miti- 
 gate each 
 other's de- 
 pressions. 
 
 The in- 
 fluence of 
 improved 
 means of 
 communi- 
 cation on 
 the geo- 
 graphical 
 distribu- 
 tion of 
 industries. 
 
 Illustration 
 from the 
 recent 
 
 large town have for trading purposes, enables them to com- 
 mand much higher ground-rents than the situations are worth 
 for factories, even when account is taken of this combination 
 of advantages : and there is a similar competition for dwelling 
 space between the employe's of the trading houses and the 
 factory workers. The result is that factories now congregate 
 in the outskirts of large towns and in manufacturing districts 
 in their neighbourhood rather than in the towns themselves 1 . 
 
 A district which is dependent chiefly on one industry is 
 liable to extreme depression, in case of a falling-off in the 
 demand for its produce, or of a failure in the supply of the 
 raw material which it uses. This evil again is in a great 
 measure avoided by those large towns, or large industrial 
 districts in which several distinct industries are strongly 
 developed. If one of them fails for a time, the others are 
 likely to support it indirectly; and they enable local shop- 
 keepers to continue their assistance to workpeople in it. 
 
 4. Every cheapening of the means of communication, 
 every new facility for the free interchange of ideas between 
 distant places alters the action of the forces which tend to 
 localize industries. Speaking generally we may say that a 
 lowering of tariffs, or of freights for the transport of goods, 
 tends to make each locality buy more largely from a dis- 
 tance what it requires ; and thus tends to concentrate parti- 
 cular industries in special localities : but on the other hand 
 everything that increases people's readiness to migrate from 
 one place to another, tends to bring skilled artisans to ply 
 their crafts near to the consumers who will purchase their 
 wares. These two opposing tendencies are well illustrated 
 by the recent history of the English people. 
 
 On the one hand the steady cheapening of freights, the 
 opening of railways from the agricultural districts of America 
 
 1 The movement has been specially conspicuous in the case of the textile 
 manufactures. Manchester, Leeds and Lyons are still chief centres of the trade 
 in cotton, woollen and silk stuffs, but they do not now themselves produce any 
 great part of the goods to which they owe their chief fame. On the other hand 
 London and Paris retain their positions as the two largest manufacturing towns of 
 the world, Philadelphia coming third. The mutual influences of the localization 
 of industry, the growth of towns and habits of town life, and the development of 
 machinery are well discussed in Hobson's Evolution of Capitalism. 
 
MOVEMENTS OF ENGLISH INDUSTRIES. 355 
 
 and India to the sea-board, and the adoption by England of BOOK iv. 
 a free- trade policy, have led to a great increase in her impor- 
 tation of raw produce. But on the other hand the growing 
 cheapness, rapidity and comfort of foreign travel, are inducing 
 her trained business men and her skilled artisans to pioneer 
 the way for new industries in other lands, and to help them 
 to manufacture for themselves goods which they have been 
 wont to buy from England. English mechanics have taught 
 people in almost every part of the world how to use English 
 machinery, and even how to make the machinery like it ; and 
 English miners have opened out mines of ore which have 
 diminished the foreign demand for many of England's pro- 
 ducts 1 . 
 
 One of the most striking movements towards the speciali- 
 zation of a country's industries, which history records, is the 
 rapid increase of the non-agricultural population of England 
 in recent times. The exact nature of this change is however 
 liable to be misunderstood ; and its interest is so great, both 
 for its own sake, and on account of the illustrations it affords 
 of the general principles which we have been discussing in 
 the preceding chapter and in this, that we may with advan- 
 tage pause here to consider it a little. 
 
 In the first place, the real diminution of England's agri- The 
 cultural industries is not so great as at first sight appears. 
 It is true that in the Middle Ages three-fourths of the people 
 
 were reckoned as agriculturists ; that only one in nine was is tess 
 
 . . . than at 
 
 returned to the last census as engaged in agriculture, and first sight 
 that perhaps not more than one in twelve will be so returned ai 
 at the next census. But it must be remembered that the 
 so-called agricultural population of the Middle Ages were not 
 exclusively occupied with agriculture ; they did for them- 
 selves a great part of the work that is now done by brewers 
 and bakers, by spinners and weavers, by bricklayers and car- 
 penters, by dressmakers and tailors and by many other trades. 
 
 1 The high intelligence of the Cornish men has combined with the comparative 
 poverty of their own mines to make them take the lead in this movement : and 
 they even send to England from distant continents part of the tin and copper 
 which enter into many of her most valuable exports; and thus in some ways 
 increase the specialization of her industries. 
 
 232 
 
356 LOCALIZED INDUSTRIES. 
 
 BOOK iv. These self-sufficing habits died slowly ; but most of them had 
 CH - X - nearly disappeared by the beginning of this century ; and it 
 is probable that the labour spent on the land at this time 
 was not a much less part of the whole industry of the country 
 than in the Middle Ages : for, in spite of her ceasing to export 
 wool and wheat, there was so great an increase in the produce 
 forced from her soil, that the rapid improvement in the arts 
 of her agriculturists scarcely availed to hold in check this 
 action of the law of diminishing return. But gradually a 
 great deal of labour has been diverted from the fields to 
 making expensive machinery for agricultural purposes. This 
 change did not exert its full influence upon the numbers of 
 those who were reckoned as agriculturists so long as the 
 machinery was drawn by horses: for the work of tending 
 them and supplying them with food was regarded as agri- 
 cultural. But in recent years a rapid growth of the use of 
 steam power in the fields has coincided with the increased 
 importation of farm produce. The coal-miners who supply 
 these steam-engines with fuel, and the mechanics who make 
 them and manage them in the fields are not reckoned as 
 occupied on the land, though the ultimate aim of their labour 
 is to promote its cultivation. The real diminution then of 
 England's agriculture is not so great as at first sight appears ; 
 but there has been a change in its distribution 1 . 
 Changes in Attention has already been called to the influence which 
 tribution the importation of agricultural produce exerts in altering the 
 cultural" re ^ at ^ ve values of different soils : those falling most in value 
 with^the wn * c ^ depended chiefly on their wheat crops, and which were 
 country, not naturally fertile, though they were capable of being made 
 to yield fairly good crops by expensive methods of cultivation. 
 
 1 Dr Ogle has recently shown (Statistical Journal, June, 1889) that the aggre- 
 gate rural population of England i.e. that living in the open country or in 
 villages with less than 5000 inhabitants has decreased only by 2 per cent, between 
 1851 and 1881: but of course the decrease has been greater in certain counties. 
 " The decline was brought about by the migration of young people, mainly under 
 twenty-five years of age, from the rural to manufacturing districts, and of young 
 men in greater proportion than women.... The main decrease was among those 
 engaged in agriculture. But a very considerable share of it was borne by the 
 rural handicraftsmen There was a considerable increase among those engaged in 
 the transport of goods, among shopkeepers, among domestic and other servants* 
 and also, in the professional class, among those engaged in teaching." 
 
MOVEMENTS OF ENGLISH INDUSTRIES. 357 
 
 Districts, in which such soils predominate, have contributed BOOKIV. 
 more than their share to the crowds of agricultural labourers ' 
 who have migrated to the large towns; and thus the 
 geographical distribution of industries within the country has 
 been still further altered. A striking instance of the in- 
 fluence of the new means of transport is seen in those 
 pastoral districts in the remoter parts of the United King- 
 dom, which send dairy products by special express trains to 
 London and other large towns, meanwhile drawing their own 
 supplies of wheat from the further shores of the Atlantic or 
 even the Pacific Ocean. 
 
 But next, the changes of recent years have not, as would Those set 
 at first sight appear probable, increased the proportion of the agriculture 
 English people who are occupied in manufactures. The out- not to 
 put of England's manufactures is certainly several times as foctures 
 great now as it was at the middle of the century ; but those 
 occupied in manufacture of every kind were not a larger 
 percentage of the population in 1881 than in 185 1 1 . This 
 result is the more strange when we recollect that among the 
 manufacturers are reckoned those who make the machinery 
 and implements which do so great a part of the work of 
 English agriculture. 
 
 The chief explanation of this result lies in the wonderful but chiefly 
 increase in recent years of the power of machinery. This tries in 8 
 has enabled us to produce ever increasing supplies of manu- ^re has 
 factures of almost every kind both for our own use and for been no 
 exportation without requiring any considerable increase in increase 
 the number of people who tend the machines. And there- efficiency 
 fore we have been able to devote the labour set free from of labour - 
 agriculture chiefly to supplying those wants in regard to 
 which the improvements of machinery help us but little : the 
 efficiency of machinery has prevented the industries localized 
 in England from becoming as exclusively mechanical as they 
 otherwise would. Prominent among the occupations which 
 have increased since 1851 in England at the expense of 
 
 1 Mr Booth in his admirable paper On Occupations in the United Kingdom 
 18411881, published in the Statistical Journal for 1886, separates as well as he 
 can the dealers from the manufacturers ; and finds that those engaged in manu- 
 facture were 32'7 per cent, of those earning independent incomes hi 1851 and only 
 30-7 per cent, in 1881. 
 
358 LOCALIZED INDUSTRIES. 
 
 BOOK iv. agriculture are education, domestic service, building, dealing 
 CH>X - and transport by road 1 . In none of these is very much direct 
 help got from new inventions : man's labour is not much more 
 efficient in them now than it was a century ago : and there- 
 fore if the wants for which they make provision increase in 
 proportion to our general wealth, it is only to be expected 
 that they should absorb a constantly growing proportion of 
 our industry. 
 
 Transition Passing away from this illustration of the action of modern 
 subject of forces on the geographical distribution of industries, we will 
 chapter* resume our inquiry as to how far the full economies of divi- 
 sion of labour can be obtained by the concentration of large 
 numbers of small businesses of a similar kind in the same 
 locality ; and how far they are attainable only by the aggre- 
 gation of a large part of the business of the country into the 
 hands of a comparatively small number of rich and powerful 
 firms, or, as is commonly said, by production on a large scale ; 
 or, in other words, how far the economies of production on a 
 large scale must needs be Internal, and how far they can be 
 External. 
 
 1 Of course transport by railway, which is a mechanical industry, occupies 
 more people than it did ; for it is only of recent origin. But the shipping industry 
 is of old date ; and there we find that recent mechanical improvements have 
 enabled a traffic increased fourfold to be carried without any increase in the 
 number of those who work it. Except in the matter of tramways there has 
 been no considerable improvement in the vehicles used on the roads, and a com- 
 paratively slight increase in traffic by road has caused those who work it to 
 increase in numbers faster than those engaged in almost any other manual occu- 
 pation. 
 
CHAPTER XI. 
 
 INDUSTKIAL ORGANIZATION, CONTINUED. PRODUCTION 
 ON A LARGE SCALE. 
 
 1. THE advantages of production on a large scale are BOOKIV. 
 best shown in manufacture ; under which head we may _ _ ' 
 
 include all businesses engaged in working up material into 
 forms in which it will be adapted for sale in distant markets, for our 
 The characteristic of manufacturing industries which makes purpose are 
 them offer generally the best illustrations of the advantages engaged in 
 of production on a large scale, is their power of choosing 
 freely the locality in which they will do their work. They 
 are thus contrasted on the one hand with agriculture and 
 other extractive industries (mining, quarrying, fishing etc.), 
 the geographical distribution of which is determined by 
 nature ; and on the other hand with industries that make or 
 repair things to suit the special needs of individual con- 
 sumers, from whom they cannot be far removed, at all events 
 without great loss 1 . 
 
 The chief advantages of production on a large scale are The 
 economy of skill, economy of machinery and economy of 
 materials : but the last of these is rapidly losing importance 
 relatively to the other two. It is true that an isolated work- 
 man often throws away a number of small things which would 
 have been collected and turned to good account in a factory 2 ; 
 
 " Manufacture " is a term which has long lost any connection with its 
 original use : and is now applied to those branches of production where machine 
 and not hand work is most prominent. Roscher made the attempt to bring it 
 back nearer to its old use by applying it to domestic as opposed to factory 
 industries: but it is too late to do this now. 
 
 2 See Babbage's instance of the manufacture of horn. Economy of Manu- 
 factures, ch. xxn. 
 
360 PRODUCTION ON A LARGE SCALE. 
 
 BOOK IV 
 CH 
 
 but waste of this kind can scarcely occur in a localized manu- 
 :H - " facture even if it is in the hands of small men ; and there is not 
 very much of it in any branch of industry in modern England, 
 except agriculture and domestic cooking. No doubt many 
 of the most important advances of recent years have been 
 due to the utilizing of what had been a waste product ; but 
 this has been generally due to a distinct invention, either 
 chemical or mechanical, the use of which has been indeed 
 promoted by minute subdivision of labour, but has not been 
 directly dependent on it 1 . 
 
 Again, it is true that when a hundred sets of furniture, 
 or of clothing, have to be cut out on exactly the same 
 pattern, it is worth while to spend great care on so planning 
 the cutting out of the boards or the cloth, that only a few 
 small pieces are wasted. But this is properly an economy of 
 skill; one planning is made to suffice for many tasks, and 
 therefore can be done well and carefully. We may pass then 
 to the economy of machinery. 
 
 Theadvan- 2. In spite of the aid which subsidiary industries can 
 large give to small manufactures, where many in the same branch 
 regards the * trade are collected in one neighbourhood ", they are still 
 socialized P^ ace( ^ under a great disadvantage by the growing variety 
 machinery, and expensiveness of machinery. For in a large establish- 
 ment there are often many expensive machines each made 
 specially for one small use. Each of them requires space 
 in a good light, and thus stands for something considerable 
 in the rent and general expenses of the factory ; and inde- 
 pendently of interest and the expense of keeping it in repair, 
 a heavy allowance must be made for depreciation in conse- 
 quence of its being probably improved upon before long 3 . 
 
 1 Instances are the utilization of the waste from cotton, wool, silk and other 
 textile materials ; and of the bye products in the metallurgical industries and in 
 the manufacture of soda and gas. 
 
 2 See the preceding chapter, 3. 
 
 8 The average time which a machine will last before being superseded is in 
 many trades not more than fifteen years, while in some it is ten years or even 
 less. There is often a loss on the use of a machine unless it earns every year 
 twenty per cent, on its cost ; and when the operation performed by such a machine 
 costing 500 adds only a hundredth part to the value of the material that passes 
 through it and this is not an extreme case there will be a loss on its use unless 
 it can be applied in producing at least 10,000 worth of goods annually. 
 
ADVANTAGES IN THE USE OF MACHINERY. 361 
 
 A small manufacturer must therefore have many things done BOOK iv. 
 by hand or by imperfect machinery, though he knows how to _J _ ' 
 have them done better and cheaper by special machinery, if 
 only he could find constant employment for it. 
 
 But next, a small manufacturer may not always be Advan- 
 acquainted with the best machinery for his purpose. It is 
 true that if the industry in which he is engaged has been 
 long established on a large scale, his machinery will be well 
 up to the mark, provided he can afford to buy the best 
 in the market. In agriculture and the cotton industries for 
 instance, improvements in machinery are devised almost 
 exclusively by machine makers; and they are accessible to 
 all, at any rate on the payment of a royalty for patent right. 
 But this is not the case in industries that are as yet in an 
 early stage of development or are rapidly changing their 
 form ; such as the chemical industries, the watchmaking 
 industry and some branches of the jute and silk manufac- 
 tures ; and in a host of trades that are constantly springing 
 up to supply some new want or to work up some new 
 material 
 
 In all such trades new machinery and new processes are The small 
 for the greater part devised by manufacturers for their own turer 
 
 use. Each new departure is an experiment which may fail ; 
 those which succeed must pay for themselves and for the afford . to 
 failure of others ; and though a small manufacturer may think ment. 
 he sees his way to an improvement, he must reckon on having 
 to work it out tentatively, at considerable risk and expense 
 and with much interruption to his other work : and even if he 
 should be able to perfect it, he is not likely to be able to make 
 the most of it. For instance, he may have devised a new 
 speciality, which would get a large sale if it could be brought 
 under general notice : but to do this would perhaps cost 
 many thousand pounds ; and, if so, he will probably have to 
 turn his back on it. For it is almost impossible for him to 
 discharge, what Roscher calls a characteristic task of the 
 modern manufacturer, that of creating new wants by showing 
 people something which they had never thought of having 
 before ; but which they want to have as soon as the notion 
 is suggested to them : in the pottery trade for example the 
 
362 
 
 PRODUCTION ON A LARGE SCALE. 
 
 BOOK IV. 
 CH. XI. 
 
 But in 
 some 
 trades a 
 factory of 
 moderate 
 size can 
 have the 
 best 
 machinery 
 
 small manufacturer cannot afford even to make experiments 
 with new patterns and designs except in a very tentative 
 way. His chance is better with regard to an improvement 
 in making things for which there is already a good market. 
 But even here he cannot get the full benefit of his invention 
 unless he patents it ; and sells the right to use it ; or borrows 
 some capital and extends his business ; or lastly changes the 
 character of his business and devotes his capital to that 
 particular stage of the manufacture to which his improve- 
 ment applies/ But after all such cases are exceptional: 
 the growth of machinery in variety and expensiveness presses 
 hard on the small manufacturer everywhere. It has already 
 driven him completely out of some trades and is fast driving 
 him out of others 1 . 
 
 There are however some trades in which the advantages 
 which a large factory derives from the economy of machinery 
 almost vanish as soon as a moderate size has been reached. 
 For instance in cotton spinning, and calico weaving, a com- 
 paratively small factory will hold its own and give constant 
 employment to the best known machines for every process : 
 so that a large factory is only several parallel smaller factories 
 under one roof; and indeed some cotton-spinners, when en- 
 larging their works, think it best to add a weaving depart- 
 ment. In such cases the large business gains little or no 
 economy in machinery; but even then it generally saves 
 
 1 In many businesses only a small percentage of improvements are patented. 
 They consist of many small steps, which it would not be worth while to patent 
 one at a time. Or their chief point lies in noticing that a certain thing ought to 
 be done ; and to patent one way of doing it, is only to set other people to work to 
 find out other ways of doing it against which the patent cannot guard. If one 
 patent is taken out, it is often necessary to " block " it, by patenting other methods 
 of arriving at the same result ; the patentee does not expect to use them himself, 
 but he wants to prevent others from using them. All this involves worry and 
 loss of time and money : and the large manufacturer prefers to keep his improve- 
 ment to himself and get what benefit he can by using it. While if the small 
 manufacturer takes out a patent, he is likely to be harassed by infringements: 
 and even though he may win "with costs" the actions in which he tries to defend 
 himself, he is sure to be ruined by them if they are numerous. It is generally in 
 the public interest that an improvement should be published, even though it is at 
 the same time patented. But if it is patented in England and not in other 
 countries, as is often the case, English manufacturers may not use it, even though 
 they were just on the point of finding it out for themselves before it was patented; 
 while foreign manufacturers learn all about it and can use it freely. 
 
ADVANTAGES IN BUYING AND SELLING. 363 
 
 something in building, particularly as regards chimneys, and BOOK iv. 
 
 in the economy of steam power, and in the management and _J ' 
 
 repairs of engines and machinery. This last point is of 
 rather more importance than appears at first sight ; and large 
 works even though they produce nothing but soft goods, have 
 generally well-organized carpenters' and mechanics' shops, 
 which not only diminish the cost of repairs, but have the 
 important advantage of preventing delays from accidents 
 to the plant 1 . 
 
 Akin to these last, there are a great many advantages Advan- 
 which a large factory, or indeed a large business of almost O f g a large 
 any kind, nearly always has over a small one. A large bJ 
 business buys in great quantities and therefore cheaply ; selling 
 it pays low freights and saves on carriage in many ways, 
 particularly if it has a railway siding. It often sells in large 
 quantities, and thus saves itself trouble ; and yet at the same 
 time it gets a good price, because it offers conveniences to 
 the customer by having a large stock from which he can 
 select and at once fill up a varied order ; while its reputation 
 gives him confidence. It can spend large sums on advertis- 
 ing by commercial travellers and in other ways ; its agents 
 give it trustworthy information on trade and personal 
 matters in distant places, and its own goods advertise one 
 another. 
 
 Many of these economies in the matter of buying and Alliance 
 selling can be secured by a large trading house, which puts large 
 out its work to be done by small manufacturers or by g^aiT 8 &n 
 workpeople at their own homes. So far therefore they do P roducers - 
 not tell in the direction of destroying small manufacturers, 
 but rather of limiting the character of the work of business 
 
 1 It is a remarkable fact that cotton and some other textile factories form 
 an exception to the general rule that the capital required per head of the workers 
 is generally greater in a large factory than in a small one. The reason is 
 that in most other businesses the large factory has many things done by 
 expensive machines which are done by hand in a small factory; so that while 
 the wages bill is less in proportion to the output in a large factory than in a 
 small one, the value of the machinery and the factory space occupied by the 
 machinery is much greater. But in the simpler branches of the textile trades, 
 small works have the same machinery as large works have ; and since small 
 steam-engines, &c. are proportionately more expensive than large ones, they re- 
 quire a greater fixed capital in proportion to their output than larger factories do ; 
 and they are likely to require a floating capital also rather greater in proportion. 
 
364 . PRODUCTION ON A LARGE SCALE. 
 
 BOOK iv. management done by them; as we shall see more fully in 
 
 r<TT "VT 
 
 Advan- g 3 Next, with regard to the economy of skill. Every- 
 
 aTarge thing that has been said with regard to the advantages 
 
 aTieglrds which a large establishment has in being able to afford 
 
 specialized hi g n i v specialized machinery applies equally with regard to 
 
 highly specialized skill. It can contrive to keep each of 
 
 its employe's constantly engaged in the most difficult work 
 
 of which he is capable, and yet so to narrow the range of his 
 
 work that he can attain that facility and excellence which 
 
 come from long-continued practice. But enough has already 
 
 been said on the advantage of division of labour : and we 
 
 may pass to an important though indirect advantage which 
 
 a manufacturer derives from having a great many men in 
 
 his employment. 
 
 the selec- The large manufacturer has a much better chance than a 
 leading small one has, of getting hold of men with exceptional 
 men, etc. natura i abilities, to do the most difficult part of his work- 
 that on which the reputation of his establishment chiefly 
 depends. This is occasionally important as regards mere 
 handiwork in trades which require much taste and originality, 
 as for instance that of a house decorator, and in those which 
 require exceptionally fine workmanship, as for instance that 
 of a manufacturer of delicate mechanism 1 . But in most 
 businesses its chief importance lies in the facilities which 
 it gives to the employer for the selection of able and tried 
 men, men whom he trusts and who trust him, to be his 
 foremen and heads of departments. We are thus brought 
 to the central problem of the modern organization of in- 
 dustry, viz. that which relates to the advantages and 
 
 1 Thus Boulton writing in 1770 when he had 700 or 800 persons employed as 
 metallic artists and workers in tortoiseshell, stones, glass, and enamel, says: 
 " I have trained up many, and am training up more, plain country lads into good 
 workmen ; and wherever I find indications of skill and ability I encourage them. 
 I have likewise established correspondence with almost every mercantile town in 
 Europe, and am thus regularly supplied with orders for the grosser articles in 
 common demand, by which I am enabled to employ such a number of hands as to 
 provide me with an ample choice of artists for the finer branches of work : and I 
 am thus encouraged to erect and employ a more extensive apparatus than it would 
 be prudent to employ for the production of the finer articles only." Smiles' Life 
 of Boiilton, p. 128. 
 
ADVANTAGES AND DISADVANTAGES OF A LARGE FIRM. 365 
 
 disadvantages of the subdivision of the work of business BOOKIV. 
 
 CH. XI. 
 
 management. _ 
 
 4. The head of a large business can reserve all his The sub- 
 strength for the broadest and most fundamental problems of of the 
 his trade : he must indeed assure himself that his managers, business 
 clerks and foremen are the right men for their work, and are JUJJJ^a 
 doing their work well ; but beyond this he need not trouble vantages 
 himself much about details. He can keep his mind fresh large 
 
 and clear for thinking out the most difficult and vital pro- 
 blems of his business ; for studying the broader movements 
 of the markets, the yet undeveloped results of current events 
 at home and abroad ; and for contriving how to improve the 
 organization of the internal and external relations of his 
 business. 
 
 For much of this work the small employer has not the 
 time if he has the ability ; he cannot take so broad a survey 
 of his trade, or look so far ahead ; he must often be content 
 to follow the lead of others. And he must spend much of 
 his time on work that is below him ; for if he is to succeed 
 at all, his mind must be in some respects of a high quality, 
 and must have a good deal of originating and organizing 
 force ; and yet he must do much routine work. 
 
 On the other hand the small employer has advantages those of . 
 
 ~ , . ml , , the small 
 
 oi his own. 1 he master s eye is everywhere ; there is no manu- 
 shirking by his foremen or workmen, no divided responsibility, facturer - 
 no sending half-understood messages backwards and forwards 
 from one department to another. He saves much of the 
 book-keeping, and nearly all of the cumbrous system of 
 checks that are necessary in the business of a large firm ; 
 and the gain from this source is of very great importance 
 in trades which use the more valuable metals and other 
 expensive materials. 
 
 And though he must always remain at a great disadvant- 
 age in getting information and in making experiments, yet 
 in this matter the general course of progress is on his side. 
 For External economies are constantly growing in importance 
 relatively to Internal in all matters of Trade-knowledge : 
 newspapers, and trade and technical publications of all kinds 
 are perpetually scouting for him and bringing him much 
 
PRODUCTION ON A LARGE SCALE. 
 
 BOOK iv. of the knowledge he wants knowledge which a little while 
 cHja. ^ wou i ( j h ave been beyond the reach of anyone who 
 could not afford to have well-paid agents in many distant 
 places. Again, it is to his interest also that the secrecy of 
 business is on the whole diminishing, and that the most 
 important improvements in method seldom remain secret for 
 long after they have passed from the experimental stage. It 
 is to his advantage that changes in manufacture depend less 
 on mere rules of thumb and more on broad developments of 
 scientific principle; and that many of these are made by 
 students in the pursuit of knowledge for its own sake, and 
 are promptly published in the general interest. Although 
 therefore the small manufacturer can seldom be in the front 
 of the race of progress, he need not be far from it, if he has 
 the time and the ability for availing himself of the modern 
 facilities for obtaining knowledge. But it is true that he 
 must be exceptionally strong if he can do this without neg- 
 lecting the minor but necessary details of the business. 
 Advan- 8 5. The advantages which a large business has over a 
 
 tagesof * . & o 
 
 large small one are conspicuous in manufacture, because, as we 
 
 of other nave noticed, it has special facilities for concentrating a great 
 deal of work in a small area. But there is a strong tendency 
 for large establishments to drive out small ones in many 
 other industries. In particular the retail trade is being 
 transformed, the small shopkeeper is losing ground daily, 
 in retail Let us look at the advantages which a large retail shop 
 
 they are or store has in competing with its smaller neighbours. To 
 increase begin with, it can obviously buy on better terms, it can get 
 its goods carried more cheaply, and can offer a larger variety 
 to meet the taste of customers. Next, it has a great economy 
 of skill : the small shopkeeper, like the small manufacturer, 
 must spend much of his time in routine work that requires 
 no judgment : whereas the head of a large establishment, 
 and even in some cases his chief assistants, spend their whole 
 time in using their judgment. Until lately these advantages 
 have been generally outweighed by the greater facilities 
 which the small shopkeeper has for bringing his goods to 
 the door of his customers ; for humouring their several 
 tastes ; and for knowing enough of them individually to be 
 

 LARGE AND SMALL TRADING ESTABLISHMENTS. 367 
 
 able safely to lend them capital, in the form of selling them BOOK iv. 
 goods on credit. CH^XI. 
 
 But within recent years there have been many changes 5^ i 
 all telling on the side of large establishments. The habit of of cash 
 buying on credit is passing away ; and the personal relations P * 
 between shopkeeper and customer are becoming more distant. 
 The first change is a great step forwards : the second is on 
 some accounts to be regretted, but not on all ; for it is partly 
 due to the fact that the increase of true self-respect among 
 the wealthier classes is making them no longer care for the 
 subservient personal attentions they used to require. Again, 
 the growing value of time makes people less willing than 
 they were to spend several hours in shopping ; they now 
 often prefer to spend a few minutes in writing out a long 
 list of orders from a varied and detailed price-list ; and this 
 they are enabled to do easily by the growing facilities for 
 ordering and receiving parcels by post and in other ways. 
 And when they do go shopping, trarncars and local trains are 
 often at hand to take them easily and cheaply to the large 
 central shops of a neighbouring town. All these changes 
 render it more difficult than it was for the small shopkeeper 
 to hold his own even in the provision trade, and others in 
 which no great variety of stock is required. 
 
 But in many trades the ever-growing variety of commo- and the 
 dities, and those rapid changes of fashion which now extend 
 their baneful influence through almost every rank of society, { 
 weight the balance even more heavily against the small demand 
 dealer, for he cannot keep a sufficient stock to offer much 
 variety of choice, and if he tries to follow any movement of 
 fashion closely, a larger proportion of his stock will be left 
 stranded by the receding tide than in the case of a large 
 shopkeeper. Again, in some branches of the clothing and 
 furniture and other trades the increasing cheapness of ma- 
 chine-made goods is leading people to buy ready-made 
 things from a large store instead of having them made to 
 order by some small maker and dealer in their neighbour- 
 hood. Again, the large shopkeeper, not content with re- 
 ceiving travellers from the manufacturers, makes tours either 
 himself or by his agent in the most important manufacturing 
 
368 . PRODUCTION ON A LARGE SCALE. 
 
 BOOK iv. districts at home and abroad ; and he thus dispenses almost 
 CH ' "' entirely with middlemen between him and the manufacturer. 
 On the other hand, in some branches of the textile trades, the 
 ease with which large packets of patterns are distributed by 
 manufacturers and warehousemen, is telling perceptibly on 
 the side of the small shopkeeper 1 . 
 
 Small shopkeepers seem likely always to retain some hold 
 of the repairing trades : and they keep their own fairly well 
 in the sale of perishable food, especially to the working 
 classes, partly in consequence of their being able to sell goods 
 on credit and to collect small debts. But on the whole they 
 are losing ground. It is not certain that they are positively 
 decreasing in number ; but they certainly do not get their 
 share of the rapidly increasing retail business of the coun- 
 try 2 . 
 
 The social The decay of small manufacturers appeared to the econ- 
 o?this anBe omists in the first half of the century as one of the chief 
 question. causes that were changing the character of England's indus- 
 trial and social life : the relative decline of small shopkeepers 
 seems to be at least as potent an influence just at the present 
 time. And it is noteworthy that those small shopkeepers 
 who are holding their own best, are also as a rule producers 
 on a small scale, and vice versa. 
 
 6. We may next consider those industries whose geo- 
 graphical position is determined by the nature of their work. 
 The carry- Country carriers and a few cabmen are almost the only 
 8 ' survivals of small industry in the carrying trade : and Ameri- 
 can experience causes some doubt as to how long cabs will 
 remain in general use. Railways and tramways are con- 
 
 1 A tailor with moderate capital shows his customers specimens of many 
 hundreds of the newest cloths, and perhaps orders by telegraph the selected cloth 
 to be sent by parcels' post. Again, ladies often buy their materials direct from 
 the manufacturer, and get them made up by dressmakers who have scarcely any 
 capital. 
 
 2 In many trades a firm with a large capital prefers having many small shops 
 to one large one. The buying, and what production is desirable, is concentrated 
 under a central management ; and exceptional demands can be met from a central 
 reserve, so that each branch has large resources, without the expense of keeping a 
 large stock. The branch manager has nothing to divert his attention from his 
 customers ; and if an active man, with direct interest in the success of his branch, 
 may prove himself a formidable rival to the small shopkeeper ; as has been shown 
 in many trades connected with clothing and food. 
 
THE CARRYING TRADES. MINES. 369 
 
 stantly increasing in size, and the capital required to work BOOK iv. 
 
 FTM " CH. XI. 
 
 them is increasing at an even greater rate. Ihe growing 
 
 intricacy and variety of commerce is adding to the advan- 
 tages which a large fleet of ships under one management 
 derives from its power of delivering goods promptly, and 
 without breach of responsibility, in many different ports ; 
 and as regards the vessels themselves time is on the side of 
 large ships, especially in the passenger trade 1 . As a conse- 
 quence the arguments in favour of the State's undertaking 
 business are stronger in some branches of the carrying trade 
 than in any other, except the allied undertakings of carrying 
 away refuse, and bringing in water, gas, &c. 2 
 
 The contest between large and small mines and quarries Mines and 
 has not so clearly marked a tendency. The history of the qi 
 State management of mines is full of very dark shadows ; 
 for the business of mining depends too much on the probity 
 of its managers and their energy and judgment in matters of 
 detail as well as of general principle, to be well managed by 
 State officials : and for the same reason the small mine or 
 quarry may fairly be expected, other things being equal, to 
 hold its own against the large one. But in some cases the 
 cost of deep shafts, of machinery and of establishing means 
 of communication, are too great to be borne by any but a 
 very large business 3 . 
 
 1 A ship's carrying power varies as the cube of her dimensions, while the 
 resistance offered by the water increases only a little faster than the square 
 of her dimensions ; so that a large ship requires less coal in proportion to its 
 tonnage than a small one. It also requires less labour, especially that of navi- 
 gation : while to passengers it offers greater safety and comfort, more choice 
 of company and better professional attendance. In short, the small ship has no 
 chance of competing with the large ship between ports, which large ships can 
 easily enter, and between which the traffic is sufficient to enable them to fill 
 up quickly. 
 
 2 It is characteristic of the great economic change of the last half century that 
 when the first railway bills were passed, provision was made for allowing private 
 individuals to run their own conveyances on them, just as they do on a highway 
 or a canal ; and now we find it difficult to imagine how people could have expected, 
 as they certainly did, that this plan would prove a practicable one. 
 
 3 While the output of coal in this country is increasing, the number of mines 
 is diminishing : but this is partly due to the closing of many of the new mines 
 which were hastily opened some years ago when the price of coal was very high. 
 The contests between the large and small methods of production has led to 
 interesting episodes in the African diamond mines and the American oil regions. 
 The Sutro tunnel and the American oil ducts are good instances of the way 
 
 M. 24 
 
370 PRODUCTION ON A LARGE SCALE. 
 
 BOOK iv. In agriculture there is not much division of labour, and 
 CH^XI. t kere is no production on a very large scale ; for a so-called 
 The case large farm" does not employ a tenth part of the labour 
 ture is which is collected in a factory of moderate dimensions. This 
 is partly due to natural causes, to the changes of the seasons 
 and to the difficulty of concentrating a great deal of labour in 
 any one place ; but it is partly also due to causes connected 
 with varieties of land tenure. And it will be best to post- 
 pone discussion of all of them till we come to study Demand 
 and Supply in relation to Land in the sixth Book 1 . 
 
 in which a provision may be made for the joint use of a number of mines, which 
 no one of them could afford separately ; but they also show how this course gives 
 openings for the formation of powerful monopolies. 
 
 1 There is much of general interest bearing on the subjects of this and the 
 neighbouring chapters in general economic histories, such as those of Ashley and 
 Cunningham ; and in Cooke Taylor's Factory System, Jevons' Coal Question and 
 Hobson's Evolution of Modern Capitalism. A further discussion of the causes 
 which prevent a single large firm from so availing itself of the economies of 
 production on a large scale as to drive out all its rivals, will be found below, 
 Book v. Ch. xi. 2. 
 
CHAPTER XII. 
 
 INDUSTRIAL ORGANIZATION, CONTINUED. BUSINESS 
 MANAGEMENT. 
 
 5 1. WE have next to study the conditions of Business BOOK iv. 
 
 TIT * 1 ' 1 , 1 
 
 Management; and in so doing we must have in view a 
 problem that will occupy our attention as we go on. It 
 arises from the fact that, though in manufacturing at least solved. 
 nearly every individual business, so long as it is well 
 managed, tends to become stronger the larger it has grown ; 
 and though primd facie we might therefore expect to see 
 large firms driving their smaller rivals completely out of 
 many branches of industry, yet they do not in fact do so. 
 
 Business may be taken to include all provision for the Business 
 wants of others which is made in the expectation of payment me nt has 
 direct or indirect from those who are to be benefitted. It is ms. 
 thus contrasted with the provision for our own wants which 
 each of us makes for himself, and with those kindly services 
 which are prompted by family affection and the desire to 
 promote the well-being of others. Business management or 
 undertaking has always had many different forms, and their 
 number and variety was never so great as in England now. 
 Relics remain of almost every form that has ever been in use ; 
 while new forms are constantly being developed. 
 
 The primitive handicraftsman managed his whole business The pri- 
 for himself; but since his customers were with few exceptions handi- 
 
 his immediate neighbours, since he required very little capital, 
 since the plan of production was arranged for him by custom, 
 and since he had no labour to superintend outside of his own consumer; 
 household, these tasks did not involve any very great mental 
 strain. He was far from enjoying unbroken prosperity ; war 
 
 242 
 
372 BUSINESS MANAGEMENT. 
 
 BOOK iv. and scarcity were constantly pressing on him and his neigh- 
 CHJUI. kours, hindering his work and stopping their demand for his 
 wares. But he was inclined to take good and evil fortune, 
 like sunshine and rain, as things beyond his control: his 
 fingers worked on, but his brain was seldom weary, 
 and so do Even in modern England we find now and then a village 
 ^learned artisan who adheres to primitive methods, and makes things 
 professions Qn j^ own accoun t for sale to his neighbours ; managing his 
 own business and undertaking all its risks. But such cases 
 are rare : the most striking instances of an adherence to old- 
 fashioned methods of business are supplied by the learned 
 professions ; for a physician or a solicitor manages as a rule 
 his own business and does all its work. This plan is not 
 without its disadvantages : much valuable activity is wasted 
 or turned to but slight account by some professional men of 
 first-rate ability, who have not the special aptitude required 
 for obtaining a business connection; they would be better 
 paid, would lead happier lives, and would do more good ser- 
 vice for the world if their work could be arranged for them 
 by some sort of a middleman. But yet on the whole things 
 are probably best as they are : there are sound reasons behind 
 the popular instinct which distrusts the intrusion of the mid- 
 dleman in the supply of those services which require the 
 highest and most delicate mental qualities, and which can 
 have their full value only where there is complete personal 
 confidence. 
 
 But there English solicitors however act, if not as employers or 
 Sms'even undertakers, yet as agents for hiring that branch of the legal 
 profession which ranks highest, and whose work involves the 
 hardest mental strain. Again, many of the best instructors 
 of youths sell their services, not directly to the consumer, 
 but to the governing body of a college or school, or to a head 
 master, who arranges for their purchase : the employer sup- 
 plies to the teacher a market for his labour ; and is supposed 
 to give to the purchaser, who may not be a good judge him- 
 self, some sort of guarantee as to the quality of the teaching 
 supplied. 
 
 Again, artists of every kind, however eminent, often find 
 it to their advantage to employ someone else to arrange for 
 
THE BUSINESS UNDERTAKER OR ADVENTURER. 373 
 
 them with customers ; while those of less established repute BOOK iv. 
 are sometimes dependent for their living on capitalist traders, c ^_^' 
 who are not themselves artists, but who understand how to 
 sell artistic work to the best advantage. 
 
 2. But in the greater part of the business of the modern in most 
 world the task of so directing production that a given effort theservices 
 
 may be most effective in supplying human wants has to be ci 
 broken up and given into the hands of a specialized body of em- 
 ployers, or to use a more general term, of business men. They tervene. 
 <: ad venture" or "undertake" its risks; they bring together the 
 capital and the labour required for the work ; they arrange 
 or " engineer " its general plan, and superintend its minor 
 details. Looking at business men from one point of view we 
 may regard them as a highly skilled industrial grade, from 
 another as middlemen intervening between the manual 
 worker and the consumer. 
 
 There are some kinds of business men who undertake 
 great risks, and exercise a large influence over the welfare 
 both of the producers and of the consumers of the wares in 
 which they deal, but who are not to any considerable extent 
 direct employers of labour. The extreme type of these is 
 the dealer on the stock exchange or the produce markets, 
 whose daily purchases and sales are of vast dimensions, and 
 who yet has neither factory nor warehouse, but at most an 
 office with a few clerks in it. The good and the evil effects 
 of the action of speculators such as these are however very 
 complex ; and we may give our attention at present to those 
 forms of business in which administration counts for most 
 and the subtler forms of speculation for least. Let us then 
 take some illustrations of the more common types of business, 
 and watch the relations in which the undertaking of risks 
 stands to the rest of the work of the business man. 
 
 5 3. The building trade will serve our purpose well, niustra- 
 
 , . . . 'tionfrom 
 
 partly because it adheres in some respects to primitive house- 
 methods of business. Late in the Middle Ages it was quite x 
 common for a private person to build a house for himself 
 without the aid of a master builder; and the habit is not 
 even now altogether extinct. A person who undertakes his 
 own building must hire separately all his workmen, he must 
 
374 BUSINESS MANAGEMENT. 
 
 BOOK iv. watch them and check their demands for payment ; he must 
 CH^XII. k uv hi s materials from many quarters, and he must hire, or 
 dispense with the use of expensive machinery. He probably 
 pays more than the current wages ; but here others gain what 
 he loses. There is however great waste in the time he spends 
 in bargaining with the men and testing and directing their 
 work by his imperfect knowledge; and again in the time that 
 he spends in finding out what kinds and quantities he wants 
 of different materials, and where to get them best, and so on. 
 This waste is avoided by that division of labour which assigns 
 to the professional builder the task of superintending details, 
 and to the professional architect the task of drawing plans. 
 The chief The division of labour is often carried still further when 
 under- houses are built not at the expense of those who are to live 
 sometimes them, but as a building speculation. When this is done 
 separated on a } ar g e scale, as for instance in opening out a new suburb, 
 detailed the stakes at issue are so large as to offer an attractive field 
 ment ge to powerful capitalists with a very high order of general 
 building business ability, but perhaps with not much technical know- 
 trades ; ledge of the building trade. They rely on their own judgment 
 for the decision as to what are likely to be the coming rela- 
 tions of demand and supply for different kinds of houses ; but 
 they intrust to others the management of details. They 
 employ architects and surveyors to make plans in accordance 
 with their general directions ; and then enter into contracts 
 with professional builders for carrying them out. But they 
 themselves undertake the chief risks of the business, and 
 control its general direction. 
 
 inthe 4. We have already seen 1 how this division of respon- 
 
 trades- sibility prevailed in the woollen trade just before the begin- 
 ning of the era of large factories : the more speculative work 
 and the broader risks of buying and selling being taken over 
 by the undertakers, who were not themselves employers of 
 labour ; while the detailed work of superintendence and the 
 narrower risks of carrying out definite contracts were handed 
 over to small masters. This plan is still extensively followed 
 in some branches of the textile trades, especially those in 
 which the difficulty of forecasting the future is very great. 
 
 1 Book i. Ch. in. 8 4. 
 
THE UNDERTAKER WHO IS NOT AN EMPLOYER. 375 
 
 Manchester warehousemen give themselves to studying the BOOKIV. 
 movements of fashion, the markets for raw materials, the ' x "' 
 general state of trade, of the money market and of politics, 
 and all other causes that are likely to influence the prices of 
 different kinds of goods during the coming season ; and after 
 employing, if necessary, skilled designers to carry out their 
 ideas (just as the building speculator in the previous case 
 employed architects), they give out to manufacturers in dif- 
 ferent parts of the world contracts for making the goods on 
 which they have determined to risk their capital. 
 
 In the clothing trades especially we see a revival of what in house 
 has been called the "house industry," which prevailed long 
 ago in the textile industries ; that is, the system in which 
 large undertakers give out work to be done in cottages and 
 very small workshops to persons who work alone or with the 
 aid of some members of their family, or who perhaps employ 
 two or three hired assistants 1 . In remote villages in almost 
 every county of England agents of large undertakers come 
 round to give out to the cottagers partially prepared mate- 
 rials for goods of all sorts, but especially clothes such as 
 shirts and collars and gloves ; and take back with them the 
 finished goods. It is however in the great capital cities of 
 the world, and in other large towns, especially old towns, 
 where there is a great deal of unskilled and unorganized 
 labour, with a somewhat low physique and morale, that 
 the system is most fully developed, especially in the cloth- 
 ing trades, which employ two hundred thousand people in 
 London alone, and in the cheap furniture trades. There is 
 a continual contest between the factory and the domestic 
 
 1 The German economists call this "factory like" (fabrikmassig) house in- 
 dustry, as distinguished from the "National" house industry, which uses the 
 intervals of other work (especially the winter interruptions of agriculture) for 
 subsidiary work in making textile and other goods. (See Schbnberg on Getoerbe 
 in his Handbuch.) Domestic workers of this last class were common all over 
 Europe in the Middle Ages but are now becoming rare except in the mountains 
 and in Eastern Europe. They are not always well advised in their choice of 
 work ; and much of what they make could be made better with far less labour hi 
 factories, so that it cannot be sold profitably in the open market : but for the most 
 part they make for their own or their neighbours' use, and thus save the profits 
 of a series of middlemen. Compare Survival of domestic industries by Gonner in 
 the Economic Journal, Vol. n. 
 
376 BUSINESS MANAGEMENT. 
 
 BOOK iv. system, now one gaining ground and now the other: for 
 CH ' *"' instance just at present the growing use of sewing machines 
 worked by steam power is strengthening the position of the 
 factories in the boot trade; while factories and workshops 
 are getting an increased hold of the tailoring trade. On the 
 other hand the hosiery trade is being tempted back to the 
 dwelling-house by recent improvements in hand knitting 
 machines; and it is possible that new methods of distri- 
 buting power by gas and petroleum and electric engines 
 may exercise a like influence on many other industries, 
 in Sheffield Or there may be a movement towards intermediate plans, 
 trades; s i m il ar to those which are largely followed in the Sheffield 
 trades. Many cutlery firms for instance put out grinding 
 and other parts of their work, at piece-work prices, to 
 working men who rent the steam power which they require, 
 either from the firm from whom they take their contract 
 or from someone else : these workmen sometimes employing 
 others to help them, sometimes working alone. 
 
 in the Again, the foreign merchant very often has no ships of his 
 
 trade; own, but gives his mind to studying the course of trade, and 
 
 undertakes himself its chief risks ; while he gets his carrying 
 
 done for him by men who require more administrative ability, 
 
 but need not have the same power of forecasting the subtler 
 
 movements of trade ; though it is true that as purchasers of 
 
 ships they have great and difficult trade risks of their own. 
 
 and in the Again, the broader risks of publishing a book are borne by 
 
 production _ & ./ 
 
 of books the publisher, perhaps in company with the author; while 
 the printer is the employer of labour and supplies the ex- 
 pensive types and machinery required for the business. And 
 a somewhat similar plan is adopted in many branches of the 
 metal trades, and of those which supply furniture, clothing, &c. 
 
 This plan Thus there are many ways in which those who undertake 
 
 tages; the chief risks of buying and selling may avoid the trouble 
 of housing and superintending those who work for them. 
 They all have their advantages; and when the workers are 
 men of strong character, as at Sheffield, the results are on 
 
 toah Hable t ^ le w ^^ e not unsatisfactory. But unfortunately it is often 
 the weakest class of workers, those with the least resource 
 and the least self-control who drift into work of this kind. 
 
in~ 
 
 THE UNDERTAKER WHO IS AN EMPLOYER. 377 
 
 The elasticity of the system which recommends it to the BOOK iv. 
 
 CH XII 
 
 undertaker, is really the means of enabling him to exercise, J _ ' 
 if he chooses, an undesirable pressure on those who do his 
 work. 
 
 For while the success of a factory depends in a great 
 measure on its having a set of operatives who adhere steadily 
 to it, the capitalist who gives out work to be done at home 
 has an interest in retaining a great many persons on his 
 books ; he is tempted to give each of them a little employ- 
 ment occasionally and play them off one against another; 
 and this he can easily do because they do not know one 
 another, and cannot arrange concerted action. 
 
 5. When the profits of business are under discussion Several 
 
 distinct 
 
 they are generally connected in people s minds with the functions 
 employer of labour : " the employer " is often taken as a bined 
 term practically coextensive with the receiver of business 
 
 profits. But the instances which we have just considered manu- 
 
 facturer : 
 are sufficient to illustrate the truth that the superintendence 
 
 of labour is but one side, and often not the most important 
 side of business work ; and that the employer who undertakes 
 the whole risks of his business really performs two entirely 
 distinct services on behalf of the community, and requires 
 a twofold ability. 
 
 The ideal manufacturer, for instance, if he makes goods the facul- 
 
 tlGS F6- 
 
 not to meet special orders but for the general market, must, quired in 
 in his first role as merchant and organizer of production, have im ' 
 a thorough knowledge of things in his own trade. He must 
 have the power of forecasting the broad movements of pro- 
 duction and consumption, of seeing where there is an oppor- 
 tunity for supplying a new commodity that will meet a real 
 want or improving the plan of producing an old commodity. 
 He must be able to judge cautiously and undertake risks 
 boldly ; and he must of course understand the materials and 
 machinery used in his trade. 
 
 But secondly in this role of employer he must be a natural 
 leader of men. He must have a power of first choosing his 
 assistants rightly and then trusting them fully ; of interesting 
 them in the business and of getting them to trust him, so as 
 to bring out whatever enterprise and power of origination 
 
378 BUSINESS MANAGEMENT. 
 
 BOOK iv. there is in them ; while he himself exercises a general control 
 CH - I1 ' over everything, and preserves order and unity in the main 
 plan of the business. 
 
 The abilities required to make an ideal employer are 
 so great and so numerous that very few persons can exhibit 
 them all in a very high degree. Their relative importance 
 however varies with the nature of the industry and the size 
 of the business ; and while one employer excels in one set of 
 qualities, another excels in another; scarcely any two owe 
 their success to exactly the same combination of advantages. 
 Some men make their way by the use of none but noble 
 qualities, while others owe their prosperity to qualities in 
 which there is very little that is really admirable except 
 sagacity and strength of purpose. 
 
 The supply Such then being the general nature of the work of 
 abffitymay business management, we have next to inquire what op- 
 P or tunities different classes of people have of developing 
 
 connection business ability ; and, when they have obtained that, what 
 forms of opportunities they have of getting command over the capital 
 manage* required to give it scope. We may thus come a little closer 
 ment - to the problem stated at the beginning of the chapter, and 
 examine the course of development of a business firm during 
 several consecutive generations. And this inquiry may con- 
 veniently be combined with some examination of the different 
 forms of business management. Hitherto we have considered 
 almost exclusively that form in which the whole responsi- 
 bility and control rests in the hands of a single individual 
 But this form is yielding ground to others in which the 
 supreme authority is distributed among several partners 
 or even a great number of shareholders. Private firms and 
 joint-stock companies, co-operative societies and public cor- 
 porations are taking a constantly increasing share in the 
 management of business ; and one chief reason of this is 
 that they offer an attractive field to people who have good 
 business abilities, but have not inherited any great business 
 opportunities. 
 
 a business 1 ' ^ * s ^ v i us that the sou f a man already esta- 
 
 man has a blished in business starts with very great advantages over 
 
 ' others. He has from his youth up special facilities for ob- 
 
HEREDITARY BUSINESSES. 379 
 
 taining the knowledge and developing the faculties that are BOOK iv. 
 required in the management of his father's business : he learns __ _ ' 
 quietly and almost unconsciously about men and manners in 
 his father's trade and in those from which that trade buys 
 and to which it sells ; he gets to know the relative import- 
 ance and the real significance of the various problems and 
 anxieties which occupy his father's mind : and he acquires a 
 technical knowledge of the processes and the machinery of 
 the trade 1 . Some of what he learns will be applicable only 
 to his father's trade ; but the greater part will be serviceable 
 in any trade that is in any way allied with that ; - while 
 those general faculties of judgment and resource, of enter- 
 prise and caution, of firmness and courtesy, which are trained 
 by association with those who control the larger issues of 
 any one trade, will go a long way towards fitting him for 
 managing almost any other trade. Further, the sons of 
 successful business men start with more material capital 
 than almost anyone else except those who by nurture and 
 education are likely to be disinclined for business and un- 
 fitted for it : and if they continue their fathers' work, they 
 have also the vantage ground of established trade connections. 
 
 It would therefore at first sight seem likely that business Butbusi- 
 
 . . , , . v i nfi ss 
 
 men should constitute a sort of caste ; dividing out among do not 
 their sons the chief posts of command, and founding 
 hereditary dynasties, which should rule certain branches of 
 
 trade for many generations together. But the actual state and tastes 
 of things is very different. For when a man has got together always 
 a great business, his descendants often fail, in spite of their m 
 great advantages, to develop the high abilities and the 
 special turn of mind and temperament required for carrying 
 it on with equal success. He himself was probably brought 
 up by parents of strong earnest character ; and was educated 
 by their personal influence and by struggle with difficulties 
 in early life. But his children, at all events if they were 
 bom after he became rich, and in any case his grandchildren, 
 
 1 We have already noticed how almost the only perfect apprenticeships of 
 modern times are those of the sons of manufacturers, who practise almost every 
 important operation that is carried on in the works sufficiently to he ahle in after 
 years to enter into the difficulties of all their employ es and form a fair judgment 
 on their work. 
 
380 BUSINESS MANAGEMENT. 
 
 BOOK iv. are perhaps left a good deal to the care of domestic servants 
 
 CH ' XI1 ' who are not of the same strong fibre as the parents by whose 
 
 influence he was educated. And while his highest ambition 
 
 was probably success in business, they are likely to be at 
 
 least equally anxious for social or academic distinction 1 . 
 
 For a time indeed all may go well. His sons find a 
 firmly established trade connection, and what is perhaps 
 even more important, a well-chosen staff of subordinates 
 with a generous interest in the business. By mere assiduity 
 and caution, availing themselves of the traditions of the firm, 
 they may hold together for a long time. But when a full 
 generation has passed, when the old traditions are no longer 
 a safe guide, and when the bonds that held together the 
 old staff have been dissolved, then the business almost 
 invariably falls to pieces unless it is practically handed over 
 to the management of new men who have meanwhile risen 
 to partnership in the firm. 
 
 and after a But in most cases his descendants arrive at this result by 
 
 bi^o^must a shorter route. They prefer an abundant income coming to 
 
 in b r some tnem without effort on their part, to one which though twice 
 
 method. a s large could be earned only by incessant toil and anxiety ; 
 
 and they sell the business to private persons or a joint-stock 
 
 company; or they become sleeping partners in it; that is 
 
 sharing in its risks and in its profits, but not taking part in 
 
 its management : in either case the active control over their 
 
 capital falls chiefly into the hands of new men. 
 
 The 7. The oldest and simplest plan for renovating the 
 
 private f en ergies of a business is that of taking into partnership some 
 
 partner- o f fts ablest employes. The autocratic owner arid manager 
 
 of a large manufacturing or trading concern finds that, as 
 
 years go on, he has to delegate more and more responsibility 
 
 to his chief subordinates; partly because the work to be 
 
 1 Until lately there has ever been in England a kind of antagonism between 
 academic studies and business. This is now being diminished by the broadening 
 of the spirit of our great Universities, and by the growth of Colleges in our chief 
 business centres. The sons of business men when sent to the Universities do 
 not learn to despise their fathers' trades as often as they used to do even a 
 generation ago. Many of them indeed are drawn away from business by the 
 desire to extend the boundaries of knowledge. But the higher forms of mental 
 activity, those which are constructive and not merely critical, tend to promote a 
 just appreciation of the nobility of business work rightly done. 
 
PRIVATE PARTNERSHIPS. 381 
 
 done is growing heavier, and partly because his own strength BOOK iv. 
 
 is becoming less than it was. He still exercises a supreme _! ' 
 
 control, but much must depend on their energy and probity : 
 so, if his sons are not old enough, or for any other reason are 
 not ready to take part of the burden off his shoulders, he 
 decides to take one of his trusted assistants into partnership : 
 he thus lightens his own labours, at the same time that he 
 secures that the task of his life will be carried on by those 
 whose habits he has moulded, and for whom he has perhaps 
 acquired something like a fatherly affection 1 . 
 
 But there are now, and there always have been, private 
 partnerships on more equal terms, two or more people of 
 about equal wealth and ability combining their resources 
 for a large and difficult undertaking. In such cases there is 
 often a distinct partition of the work of management: in 
 manufactures for instance one partner will sometimes give 
 himself almost exclusively to the work of buying raw material 
 and selling the finished product, while the other is respon- 
 sible for the management of the factory: and in a trading 
 establishment one partner will control the wholesale and the 
 other the retail department. In these and other ways private 
 partnership is capable of adapting itself to a great variety of 
 problems : it is very strong and very elastic ; it has played a 
 great part in the past, and it is full of vitality now. 
 
 8. But from the end of the Middle Ages to the present The 
 
 .. .1 . - . ^ method of 
 
 time there has been in some classes or trades a movement public 
 towards the substitution of public joint-stock companies, companies, 
 the shares of which can be sold to anybody in the open 
 market, for private companies, the shares in which are not 
 transferable without the leave of all concerned. The effect 
 of this change has been to induce people, many of whom 
 have no special knowledge of trade, to give their capital into 
 the hands of others employed by them : and there has thus 
 
 1 Much of the happiest romance of life, much that is most pleasant to dwell 
 upon in the social history of England from the Middle Ages up to our own day is 
 connected with the story of private partnerships of this class. Many a youth has 
 been stimulated to a brave career by the influence of ballads and tales which nar- 
 rate the difficulties and the ultimate triumph of the faithful apprentice, who has at 
 length married his employer's daughter and been taken into partnership by him. 
 There are no influences on national character more far-reaching than those which 
 thus give shape to the aims of aspiring youth. 
 
382 BUSINESS MANAGEMENT. 
 
 BOOK iv. arisen a new distribution of the various parts of the work of 
 CBLXII. k us i ness management. 
 
 The share- The ultimate undertakers of the risks incurred by a joint- 
 undlrtake stock company are the shareholders ; but as a rule they do 
 the risks; ^ take muc ] 1 ac tive part in engineering the business and 
 controlling its general policy; and they take no part in 
 the superintending its details. After the business has once got 
 
 contro? rs out of the hands of its original promoters, the control of it is 
 the Mana- } e ft chiefly in the hands of Directors ; who, if the company is 
 a very large one, probably own but a very small proportion of 
 its shares, while the greater part of them have not much 
 technical knowledge of the work to be done. They are not 
 generally expected to give their whole time to it ; but they 
 are supposed to bring wide general knowledge and sound 
 judgment to bear on the broader problems of its policy; and 
 at the same time to make sure that the " Managers " of the 
 who super- company are doing their work thoroughly 1 . To the Managers 
 details. 6 an( ^ their assistants is left a great part of the work of engi- 
 neering the business, and the whole of the work of superin- 
 tending it : but they are not required to bring any capital 
 into it ; and they are supposed to be promoted from the lower 
 ranks to the higher according to their zeal and ability. Since 
 the joint-stock companies in the United Kingdom have 
 an aggregate income of 100,000,000, and do a tenth of the 
 business of all kinds that is done in the country, they offer 
 very large opportunities to men with natural talents for 
 business management, who have not inherited any material 
 capital, or any business connection. 
 
 Those who 9. Joint- stock companies have great elasticity and can 
 the risks expand themselves without limit when the work to which 
 always they have set themselves offers a wide scope ; and they are 
 
 1 Bagehot delighted to argue (see for instance English Constitution, Ch. vn.) 
 that a Cabinet Minister often derives some advantage from his want of technical 
 knowledge of the business of his Department. For he can get information on 
 matters of detail from the Permanent Secretary and other officials who are under 
 his authority ; and, while he is not likely to set his judgment against theirs on 
 matters where their knowledge gives them the advantage, his unprejudiced 
 common sense may well overrule the traditions of officialism in broad questions 
 of public policy: and in like manner the interests of a Company may possibly 
 sometimes be most advanced by those Directors who have the least technical 
 knowledge of the details of its business. 
 
JOINT-STOCK COMPANIES. 383 
 
 gaining ground in nearly all directions. But they have one BOOK iv. 
 great source of weakness in the absence of any adequate 
 knowledge of the business on the part of the shareholders 
 
 who undertake its chief risks. It is true that the head of a the b . usi - 
 
 ness is 
 
 large private firm undertakes the chief risks of the business, well 
 while he intrusts many of its details to others ; but his posi- m 
 tion is secured by his power of forming a direct judgment as 
 to whether his subordinates serve his interests faithfully and 
 discreetly. If those to whom he has intrusted the buying or 
 selling of goods for him take commissions from those with 
 whom they deal, he is in a position to discover and punish 
 the fraud. If they show favouritism and promote incompe- 
 tent relations or friends of their own, or if they themselves 
 become idle and shirk their work, or even if they do not 
 fulfil the promise of exceptional ability which induced him 
 to give them their first lift, he can discover what is going 
 wrong and set it right. 
 
 But in all these matters the great body of the share- The system 
 
 _ . . , , . is rendered 
 
 holders ot a joint-stock company are, save in a tew excep- workable 
 tional instances, almost powerless; though a few of the larger Modern th 
 shareholders often exert themselves to find out what is going {jJ^J^g * 
 on ; and are thus able to exercise an effective and wise con- morality. 
 trol over the general management of the business. It is a 
 strong proof of the marvellous growth in recent times of a 
 spirit of honesty and uprightness in commercial matters, that 
 the leading officers of great public companies yield as little as 
 they do to the vast temptations to fraud which lie in their 
 way. If they showed an eagerness to avail themselves of 
 opportunities for wrong doing at all approaching that of 
 which we read in the commercial history of earlier civili- 
 zation, their wrong uses of the trusts imposed in them would 
 have been on so great a scale as to prevent the development 
 of this democratic form of business. There is every reason 
 to hope that the progress of trade morality will continue, 
 aided in the future as it has been in the past, by a diminu- 
 tion of trade secrecy and by increased publicity in every 
 form ; and thus collective and democratic forms of business 
 management may be able to extend themselves safely in 
 many directions in which they have hitherto failed, and may 
 
384 BUSINESS MANAGEMENT. 
 
 BOOK iv. far exceed the great services they already render in opening 
 CHJKII. ^ } ar g e career to those who have no advantages of birth. 
 Govern- The same may be said of the undertakings of Govern- 
 
 Sakings. ments imperial and local : they also may have a great future 
 before them, but up to the present time the tax -payer who 
 undertakes the ultimate risks has not generally succeeded in 
 exercising an efficient control over the businesses, and in 
 securing officers who will do their work with as much energy 
 and enterprise as is shown in private establishments. The 
 problem of Government undertakings involves however many 
 complex issues, into which we cannot inquire here. 
 Co-opera- 10. The system of Co-operation aims at avoiding the 
 association evils of these two methods of business management. In 
 m^rts ideal t k at i^eal f orm o f Co-operative Society, for which many still 
 fondly hope, but which as yet has been scantily realized in 
 practice, a part or the whole of those shareholders who under- 
 take the risks of the business are themselves employed by it. 
 The employes, whether they contribute towards the material 
 capital of the business or not, have a share in its profits, and 
 some power of voting at the general meetings at which the 
 broad lines of its policy are laid down, and the officers 
 might appointed who are to carry that policy into effect. They 
 the chief are thus the employers and masters of their own managers 
 of -Joint 8 - an d foremen ; they have fairly good means of judging whether 
 stock com- ^ ne higher work of engineering the business is conducted 
 honestly and efficiently, and they have the best possible 
 opportunities for detecting any laxity or incompetence in its 
 detailed administration. And lastly they render unnecessary 
 some of the minor work of superintendence that is required 
 in other establishments ; for their own pecuniary interests and 
 the pride they take in the success of their own business 
 make each of them averse to any shirking of work either by 
 himself or by his fellow workmen. 
 
 it has But unfortunately the system has very great difficulties 
 
 in the^task f ^ ts own - For human nature being what it is, the employes 
 of business themselves are not always the best possible masters of their 
 
 manage- A 
 
 ment, own foremen and managers; jealousies and frettings at 
 reproof are apt to act like sand, that has got mixed with the 
 oil in the bearings of a great and complex machinery. The 
 
CO-OPERATIVE SOCIETIES. 385 
 
 hardest work of business management is generally that which BOOK iv. 
 
 makes the least outward show, those who work with their J ' 
 
 hands are apt to underrate the intensity of the strain 
 involved in the highest work of engineering the business, and 
 to grudge its being paid for at anything like as high a rate 
 as it could earn elsewhere. And in fact the managers of a 
 Co-operative Society seldom have the alertness, the inventive- 
 ness and the ready versatility of the ablest of those men who 
 have been selected by the struggle for survival, and have 
 been trained by the perfectly free and unfettered responsibi- 
 lity of private business. Partly for these reasons the Co- 
 operative system has seldom been carried out in its entirety ; 
 and its partial application has not yet attained a conspicuous 
 success except in retailing commodities consumed by working 
 men. But within the last few years more hopeful signs have 
 appeared of the success of bond fide productive associations, 
 or " co-partnerships." 
 
 Those working-men indeed whose tempers are strongly but it may 
 individualistic, and whose minds are concentrated almost some oT 
 wholly on their own affairs, will perhaps always find their tliese - 
 quickest and most congenial path to material success by 
 commencing business as small independent " undertakers," or 
 by working their way upwards in a private firm or a public 
 company. But co-operation has a special charm for those in 
 whose tempers the social element is stronger, and who desire 
 not to separate themselves from their old comrades, but to 
 work among them as their leaders. Its aspirations may in 
 some respects be higher than its practice ; but it undoubtedly 
 does rest in a great measure on ethical motives. The true 
 co-operator combines a keen business intellect with a spirit 
 full of an earnest Faith ; and some co-operative societies have 
 been served excellently by men of great genius both mentally 
 and morally men who for the sake of the Co-operative Faith 
 that is in them, have worked with great ability and energy, 
 and with perfect uprightness, being all the time content with 
 lower pay than they could have got as business managers on 
 their own account or for a private firm. Men of this stamp 
 are more common among the officers of co-operative societies 
 than in other occupations; and though they are not very 
 M. 25 
 
386 BUSINESS MANAGEMENT. 
 
 CH. XII. 
 
 BOOK iv. common even there, yet it may be hoped that the diffusion 
 of a better knowledge of the true principles of co-operation, 
 and the increase of general education, are every day fitting a 
 larger number of co-operators for the complex problems of 
 business management. 
 
 Profit- Meanwhile many partial applications of the co-operative 
 
 principle are being tried under various conditions, each of 
 which presents some new aspect of business management. 
 Thus under the scheme of Profit- Sharing, a private firm while 
 retaining the unfettered management of its business, pays 
 its employes the full market rate of wages, whether by Time 
 or Piece-work, and agrees in addition to divide among them 
 a certain share of any profits that may be made above a 
 certain fixed minimum ; it being hoped that the firm will find 
 a material as well as a moral reward in the diminution of 
 friction, in the increased willingness of their employes to go 
 out of their way to do little things that may be of great 
 benefit comparatively to the firm, and lastly in attracting to 
 themselves workers of more than average ability and industry. 
 
 Profit-and- Under the scheme of Profit-and-Loss-Sharing, a small part of 
 
 Sharing. ^ ne market wages of the employes is held back as a contribu- 
 tion towards any loss that may be shown on the year's work- 
 ing ; while they receive a more than proportionate share of the 
 
 Partial Co- profits in a bad year. Another partially co-operative scheme 
 is that of some Oldham Cotton-mills : they are really joint- 
 stock companies; but among their shareholders are many 
 working men who have a special knowledge of the trade, 
 though they often prefer not to be employed in the mills of 
 which they are part owners. And another is that of the 
 Productive establishments, owned by the main body of 
 Co-operative Stores, through their agents, the Co-operative 
 Wholesale Society; but in which, partly on account of 
 technical difficulties, the workers as such have as yet no 
 share either in the management or in the profits of the 
 works. 
 
 At a later stage we shall have to study all those various 
 co-operative and semi- co-operative forms of business more in 
 detail, and to inquire into the causes of their success or 
 failure in different classes of business, wholesale and retail, 
 
THE WORKING-MAN'S OPPORTUNITIES OF RISING. 387 
 
 agricultural, manufacturing and trading. But we must not BOOK iv. 
 pursue this inquiry further now. Enough has been said to C ^_^ I> 
 show that the world is only just beginning to be ready for the 
 higher work of the co-operative movement ; and that its 
 many different forms may therefore be reasonably expected 
 to attain a larger success in the future than in the 
 past ; and to offer excellent opportunities for working-men to 
 practise themselves in the work of business management, to 
 grow into the trust and confidence of others, and gradually 
 rise to posts in which their business abilities will find scope. 
 
 11. In speaking of the difficulty that a working-man The rise 
 has in rising to a post in which he can turn his business working- 
 ability to full account, the chief stress is commonly laid upon ?| 
 
 his want of capital: but this is not always his chief difficulty. as much 
 
 _, . J as at first 
 
 Jt" or instance the co-operative distributive societies have ac- sight 
 
 cumulated a vast capital, on which they find it difficult to 
 get a good rate of interest; arid which they would be rejoiced 
 to lend to any set of working-men who could show that they 
 had the capacity for dealing with difficult business problems. 
 Co-operators who have firstly a high order of business ability 
 and probity, and secondly the " personal capital " of a great 
 reputation among their fellows for these qualities, will have 
 no difficulty in getting command of enough material capital 
 for a considerable undertaking : the real difficulty is to con- 
 vince a sufficient number of those around them that they 
 have these rare qualities. And the case is not very different 
 when an individual endeavours to obtain from the ordinary 
 sources the loan of the capital required to start him in 
 business. 
 
 It is true that in almost every business there is a constant for the 
 increase in the amount of capital required to make a fair 
 start ; but there is a much more rapid increase in the amount 
 of capital which is owned by people who do not want to use and in 
 it themselves, and are so eager to lend it out that they will for employ- 
 accept a constantly lower and lower rate of interest for it. m 
 Much of this capital passes into the hands of bankers and 
 others, people of keen intellect and restless energy ; people 
 who have no class prejudices and care nothing for social dis- 
 tinctions; and who would promptly lend it to anyone of 
 
 252 
 
388 
 
 BUSINESS MANAGEMENT. 
 
 BOOK IV. 
 CH. XII. 
 
 He is 
 hindered 
 much by 
 the grow- 
 ing com- 
 plexity of 
 business ; 
 
 but he may 
 overcome 
 
 difficulties. 
 
 whose business ability and honesty they were convinced. To 
 say nothing of the credit that can be got in many businesses 
 from those who supply the requisite raw material or stock in 
 trade, the opportunities for direct borrowing are now so great 
 that an increase in the amount of capital required for a start 
 in business is no very serious obstacle in the way of a person 
 who has once got over the initial difficulty of earning a repu- 
 tation for being likely to use it well. 
 
 But perhaps a greater though less conspicuous hindrance 
 to the rise of the working man is the growing complexity 
 of business. The head of a business has now to think of 
 many things about which he never used to trouble himself 
 in earlier days ; and these are just the kind of difficulties for 
 which the training of the workshop affords the least prepa- 
 ration. Against this must be set the rapid improvement of 
 the education of the working man not only at school, but 
 what is more important, in after life by newspapers, and from 
 the work of co-operative societies and trades unions, and in 
 other ways. 
 
 'About three-fourths of the whole population of England 
 belong to the wage-earning classes ; and at all events when 
 they are well fed, properly housed and educated, they have their 
 fair share of that nervous strength which is the raw material 
 of business ability. Without going out of their way they are 
 all consciously or unconsciously competitors for posts of busi- 
 ness command. The ordinary workman if he shows ability 
 generally becomes a foreman, from that he may rise to be a 
 manager, and to be taken into partnership with his emplcyer. 
 Or having saved a little of his own he may start one of those 
 small shops which still can hold their own in a working man's 
 quarter, stock it chiefly on credit, and let his wife attend to 
 it by day, while he gives his evenings to it. In these or in 
 other ways he may increase his capital till he can start a 
 small workshop, or factory. Once having made a good begin- 
 ning he will find the banks eager to give him generous credit. 
 He must have time ; and since he is not likely to start in 
 business till after middle age he must have a long as well as 
 a strong life; but if he has this and has also "patience, 
 genius and good fortune " he is pretty sure to command a 
 
A RAPID RISE NOT ALWAYS AN UNMIXED BENEFIT. 389 
 
 large capital before he dies 1 . In a factory those who work BOOKIV. 
 with their hands have better opportunities of rising to posts ^J^ 1 - 
 of command than the book-keepers and many others to whom 
 social tradition has assigned a higher place. But in trading 
 concerns it is otherwise ; what manual work is done in them 
 has as a rule no educating character, while the experience of 
 the office is better adapted for preparing a man to manage a 
 commercial than a manufacturing business. 
 
 There is then on the whole a broad movement from below The rise 
 upwards. Perhaps not so many as formerly rise at once 
 from the position of working-men to that of employers : but F 
 there are more who get on sufficiently far to give their sons a one ; 
 good chance of attaining to the highest posts. The complete 
 rise is not so very often accomplished in one generation ; it 
 is more often spread over two; but the total volume of the 
 movement upwards is probably greater than it has ever been, but that 
 And it may be remarked in passing that it is better for society " u 
 as a whole that the rise should be distributed over two gene- evil - 
 rations. The workmen who at the beginning of this century 
 rose in such large numbers to become employers were seldom 
 fit for posts of command : they were too often harsh and 
 tyrannical ; they lost their self-control, and were neither 
 truly noble nor truly happy ; while their children were often 
 haughty, extravagant, and self-indulgent, squandering their 
 wealth on low and vulgar amusements, having the worst 
 faults of the older aristocracy without their virtues. The 
 foreman or superintendent who has still to obey as well as to 
 
 1 The Germans say that success in business requires "Geld, Geduld, Genie 
 und Gliick." The chances that a working-man has of rising vary somewhat with 
 the nature of the work, being greatest in those trades in which a careful attention 
 to details counts for most, and a wide knowledge, whether of science or of the 
 world movements of speculation, counts for least. Thus for instance " thrift and 
 the knowledge of practical details " are the most important elements of success in 
 the ordinary work of the pottery trade ; and in consequence most of those who 
 have done well in it "have risen from the bench like Josiah Wedgwood" (see 
 Mr G. Wedgwood's evidence before the Commission on Technical Education); 
 and a similar statement might be made about many of the Sheffield trades. But 
 some of the working classes develop a great faculty for taking speculative risks ; 
 and if the knowledge of facts by which successful speculation must be guided, 
 comes within then- reach, they will often push their way through competitors who 
 have started above them. Some of the most successful wholesale dealers in 
 perishable commodities such as fish and fruit have begun life as market porters. 
 
390 BUSINESS MANAGEMENT. 
 
 BOOK iv. command, but who is rising and sees his children likely to 
 CH ; XI1 ' rise further, is in some ways more to be envied than the 
 small master. His success is less conspicuous, but his work 
 is often higher and more important for the world, while his 
 character is more gentle and refined and not less strong. 
 His children are well-trained ; and if they get wealth, they 
 are likely to make a fairly good use of it. 
 
 An able 12. When a man of great ability is once at the head of 
 
 man* 58 * an independent business, whatever be the route by which he 
 increases ^ as ot tnere > ne w ^ w ^ moderate good fortune, soon be 
 the capital ofo\Q to show such evidence of his power of turning capital to 
 command, good account as to enable him to borrow in one way or another 
 almost any amount that he may need. Making good profits 
 he adds to his own capital, and this extra capital of his own 
 is a material security for further borrowings ; while the fact 
 that he has made it himself tends to make lenders less careful 
 to insist on a full security for their loans. Of course fortune 
 tells for much in business : a very able man may find things 
 going against him ; the fact that he is losing money may 
 diminish his power of borrowing. If he is working partly on 
 borrowed capital, it may even make those who have lent it 
 refuse to renew their loans, and may thus cause him to suc- 
 cumb to what would have been but a passing misfortune, if 
 he had been using no capital but his own 1 : and in fighting 
 his way upwards he may have a chequered life full of great 
 anxieties, and even misfortunes. But he can show his ability 
 in misfortune as well as in success: human nature is sanguine ; 
 and it is notorious that men are abundantly willing to lend to 
 those who have passed through commercial disaster without 
 loss to their business reputation. Thus, in spite of vicissi- 
 tudes, the able business man generally finds that in the long 
 run the capital at his command grows in proportion to his 
 ability. 
 
 1 The danger of not being able to renew his borrowings just at the time when 
 he wants them most, puts him at a disadvantage relatively to those who use only 
 their own capital, much greater than is represented by the mere interest on his 
 borrowings : and, when we come to that part of the doctrine of Distribution which 
 deals with Earnings of Management, we shall find that, for this among other 
 reasons, profits are something more than interest in addition to Net Earnings of 
 Management, i.e. those earnings which are properly to be ascribed to the abilities 
 of business men. 
 
ADJUSTMENT OF CAPITAL TO BUSINESS ABILITY. 391 
 
 
 Meanwhile, as we have seen, he, who with small ability is BOOK iv. 
 in command of a large. capital, speedily loses it : he may per- 
 haps be one who could and would have managed a small 
 
 business with credit, and left it stronger than he had found s reat J>??i- 
 
 . ness ability 
 
 it : but if he has not the genius for dealing with great pro- loses his 
 blems, the larger it is the more speedily will he break it up. 
 For as a rule a large business can be kept going only by 
 transactions which, after allowing for ordinary risks, leave but Business j s> 
 a very small percentage of gain. A small profit on a large 
 turn-over quickly made, will yield a rich income to able men : 
 and in those businesses which are of such a nature as to give 
 scope to very large capitals, competition generally cuts the 
 rate of profits on the turn-over very fine. A village trader 
 may make five per cent, less profits on his turn-over than his 
 abler rival, and yet be able to hold his head above water. 
 But in those large manufacturing and trading businesses in 
 which there is a quick return and a straightforward routine. 
 the whole profits on the turn-over are often so very small that 
 a person who falls behind his rivals by even a small percent- 
 age loses a large sum at every turn-over ; while in those large 
 businesses which are difficult and do not rely on routine, and 
 which afford high profits on the turn-over to really able 
 management, there are no profits at all to be got by anyone 
 who attempts the task with only ordinary ability. 
 
 These two sets of forces, the one increasing the capital These two 
 at the command of able men, and the other destroying the to adjust 
 
 capital that is in the hands of weaker men, bring about the 
 
 result that there is a far more close correspondence between 
 
 the ability of business men and the size of the businesses use it well. 
 
 which they own than at first sight would appear probable. 
 
 And when to this fact we add all the many routes, which we 
 
 have already discussed, by which a man of great natural 
 
 business ability can work his way up high in some private 
 
 firm or public company, we may conclude that wherever there 
 
 is work on a large scale to be done in such a country as 
 
 England, the ability and the capital required for it are pretty 
 
 sure to be speedily forthcoming. 
 
 Further, just as industrial skill and ability are getting 
 every day to depend more and more on the broad faculties 
 
392 BUSINESS MANAGEMENT. 
 
 BOOK iv. of judgment, promptness, resource, carefulness and steadfast- 
 CH-JUI. ^ egs ^ p ur p 0ge f acu lties which are not specialized to any 
 one trade, but which are more or less useful in all so it is 
 with regard to business ability. In fact business ability con- 
 sists more of these general and non-specialized faculties than 
 do industrial skill and ability in the lower grades : and the 
 higher the grade of business ability the more various are its 
 applications. 
 
 Business Since then business ability in command of capital moves 
 
 command w ith great ease horizontally from a trade which is over- 
 
 has a P fairi crow( ^ e( i * one which offers good openings for it : and since 
 defined it moves with great ease vertically, the abler men rising to 
 price in the higher posts in their own trade, we see, even at this 
 country as early stage of our inquiry, some good reasons for believing 
 England, that in modern England the supply of business ability in 
 command of capital accommodates itself, as a general rule, to 
 the demand for it ; and thus has a fairly denned supply price. 
 Finally, we may regard this supply price of business 
 ability in command of capital as composed of three elements. 
 The first is the supply price of capital; the second is the 
 supply price of business ability and energy ; and the third 
 is the supply price of that organization by which the 
 appropriate business ability and the requisite capital are 
 Net&nd brought together. We have called the price of the first 
 Earnings of these three elements " Interest ; " we may call the price of 
 the second taken by itself "Net Earnings of Management," 
 and that of the second and third, taken together, " Gross 
 Earnings of Management." 
 
CHAPTER XIII. 
 
 CONCLUSION. THE LAW OF INCREASING IN RELATION TO 
 THAT OF DIMINISHING RETURN. 
 
 1. AT the beginning of this Book we saw how the BOOK rv. 
 
 extra Return of raw produce which Nature affords to an J ' 
 
 increased application of capital and labour, other things being 
 
 equal, tends in the long run to diminish. In the remainder in winch 
 of the Book and especially in the last four chapters we have chapters of 
 looked at the other side of the shield, and seen how man's sta na to 
 power of productive work increases with the volume of the the earlier - 
 work that he does. Considering first the causes that deter- 
 mine the Supply of Labour, we saw how every increase in 
 the physical, mental and moral vigour of a people makes them 
 more likely, other things being equal, to rear to adult age a 
 large number of vigorous children. Turning next to the 
 Growth of Wealth, we observed how every increase of wealth 
 tends in many ways to make a greater increase more easy 
 than before. And lastly we saw how every increase of wealth 
 and every increase in the numbers and intelligence of the 
 people increased the facilities for a highly developed Indus- 
 trial Organization, which in its turn adds much to the collec- 
 tive efficiency of capital and labour. 
 
 Looking more closely at the economies arising from an A summary 
 increase in the scale of production of any kind of goods, we chapters 
 found that they fell into two classes those dependent on the 
 general development of the industry, and those dependent on 
 the resources of the individual houses of business engaged in 
 it and the efficiency of their management; that is, into 
 external and internal economies. 
 
 We saw how these latter economies are liable to constant 
 fluctuations so far as any particular house is concerned. An 
 able man, assisted perhaps by some strokes of good fortune, 
 
394 INCREASING AND DIMINISHING RETURNS. 
 
 BOOK iv. gets a firm footing in the trade, he works hard and lives 
 CH^XIII. S p are i v> n i s own ca pital grows fast, and the credit that 
 Summary. ena bles him to borrow more capital grows still faster; he 
 collects around him subordinates of more than ordinary zeal 
 and ability; as his business increases they rise with him, 
 they trust him and he trusts them, each of them devotes 
 himself with energy to just that work for which he is specially 
 fitted, so that no high ability is wasted on easy work, and no 
 difficult work is entrusted to unskilful hands. Corresponding 
 to this steadily increasing economy of skill, the growth of his 
 business brings with it similar economies of specialized ma- 
 chines and plant of all kinds ; every improved process is 
 quickly adopted and made the basis of further improvements ; 
 success brings credit and credit brings success; credit and 
 success help to retain old customers and to bring new ones ; 
 the increase of his trade gives him great advantages in buy- 
 ing ; his goods advertise one another, and thus diminish his 
 difficulty in finding a vent for them. The increase in the 
 scale of his business increases rapidly the advantages which 
 he has over his competitors, and lowers the price at which he 
 can afford to sell. This process may go on as long as his 
 energy and enterprise, his inventive and organizing power 
 retain their full strength and freshness, and so long as the 
 risks which are inseparable from business do not cause him 
 exceptional losses ; and if it could endure for a hundred years, 
 he and one or two others like him would divide between them 
 the whole of that branch of industry in which he is engaged. 
 The large scale of their production would put great economies 
 within their reach ; and provided they competed to their 
 utmost with one another, the public would derive the chief 
 benefit of these economies, and the price of the commodity 
 would fall very low. 
 
 But here we may read a lesson from the young trees of 
 the forest as they struggle upwards through the benumbing 
 shade of their older rivals. Many succumb on the way, and a 
 few only survive ; those few become stronger with every year, 
 they get a larger share of light and air with every increase of 
 their height, and at last in their turn they tower above their 
 neighbours, and seem as though they would grow on for ever, 
 
SUMMARY. 395 
 
 and for ever become stronger as they grow. But they do not. BOOK iv. 
 One tree will last longer in full vigour and attain a greater CH ^ U - 
 size than another ; but sooner or later age tells on them all. Summai T- 
 Though the taller ones have a better access to light and air 
 than their rivals, they gradually lose vitality ; and one after 
 another they give place to others, which, though of less 
 material strength, have on their side the vigour of youth. 
 
 And as with the growth of trees, so is it with the growth 
 of businesses. As each kind of tree has its normal life in 
 which it attains its normal height, so the length of life during 
 which a business of any kind is likely to retain full vigour is 
 limited by the laws of nature combined with the circum- 
 stances of place and time, and the character and stage of 
 development of the particular trade in which it lies. 
 
 The laws of nature press upon it by limiting the length 
 of the life of its original founders, and by limiting even more 
 narrowly that part of their lives, in which their faculties 
 retain full vigour. And so after a while the guidance of the 
 business falls into the hands of people with less energy and 
 less creative genius, if not with less active interest in its 
 prosperity. Perhaps it decays altogether; or it may be 
 carried on with more or less wisdom and ability by a public 
 company. In that case, it may retain the advantages of 
 division of labour, of specialized skill and machinery; it 
 may even increase them by a further increase of its capital ; 
 and under favourable conditions it may secure a permanent 
 and prominent place in the work of production. But it is 
 almost sure to have lost much of its elasticity and of its pro- 
 gressive force; the advantages are no longer exclusively on 
 its side in its competition with younger and smaller rivals : 
 and, unless it be in banking, or transport or some other of 
 those exceptional trades, which will require a separate dis- 
 cussion, it can no longer obtain from every increase in its 
 scale of production the means of reducing considerably the 
 price at which it sells its goods or its services. 
 
 The growth and the decay of the energies of a great 
 business establishment seldom follow twice on exactly the 
 same lines even in the same trade : they vary with the 
 varying incidents of the life and fortune, of the personal 
 
396 INCREASING AND DIMINISHING RETURNS. 
 
 BOOKIV. friendships and the business and family connections of the 
 ____ individuals concerned; but they also vary much from one 
 Summary. trac j e ^ Q ano t ne r. Thus for instance no single very large 
 business has appeared in agriculture, while in banking and 
 insurance, in the supply of news, and in transport by land 
 and sea, such small businesses as still remain find a constantly 
 increasing difficulty in holding their own. There is no rule 
 of universal application ; but the struggle between the solid 
 strength of steady -going firms with large, capitals on the one 
 hand, and the quick inventiveness and energy, the suppleness 
 and power of variation of their smaller rivals on the other, 
 seems inclined to issue in the large majority of cases in the 
 victory of the former. We may conclude that as a general 
 rule, subject to important exceptions, an increase in the total 
 volume of any branch of production tends to increase the 
 average size of the businesses engaged in it. 
 
 When therefore we are considering the broad results 
 which the growth of wealth and population exert on the 
 economies of production, the general character of our con- 
 clusions is not very much affected by the facts that many 
 of these economies depend directly on the size of the indi- 
 vidual establishments engaged in the production, and that 
 in almost every trade there is a constant rise and fall of large 
 businesses, at any one moment some firms being in the 
 ascending phase and others in the descending. For in times 
 of average prosperity decay in one direction is sure to be 
 xj more than balanced by growth in another. 
 
 Meanwhile an increase in the aggregate scale of produc- 
 tion of course increases those economies, which do not directly 
 depend on the size of individual houses of business. The 
 most important of these result from the growth of correlated 
 branches of industry which mutually assist one another, 
 perhaps being concentrated in the same localities, but any- 
 how availing themselves of the modern facilities for com- 
 munication offered by steam transport, by the telegraph and 
 by the printing-press. The economies arising from such 
 sources as this, which are accessible to any branch of pro- 
 duction, do not depend exclusively upon its own growth : but 
 yet they are sure to grow rapidly and steadily with that 
 
REPRESENTATIVE FIRM. 397 
 
 growth ; and they are sure to dwindle in some, though not BOOK iv. 
 in all respects, if it decays. CH ' xm ' 
 
 2. These results will be of great importance when we Forecast 
 come to discuss the causes which govern the supply price of 
 
 a commodity. We shall have to analyse carefully the normal the cost of 
 
 cost of producing a commodity, relatively to a given agere- inaJfe/M-e- 
 
 , ,{>>, , ,, tentative 
 
 gate volume of production ; and for this purpose we shall fi 
 
 rm. 
 
 have to study the expenses of a Representative producer for 
 that aggregate volume. On the one hand we shall not want 
 to select some new producer just struggling into business, 
 who works under many disadvantages, and has to be content 
 for a time with little or no profits, but who is satisfied with 
 the fact that he is establishing a connection and taking the 
 first steps towards building up a successful business ; nor on 
 the other hand shall we want to take a firm which by ex- 
 ceptionally long-sustained ability and good fortune has got 
 together a vast business, and huge well-ordered workshops 
 that give it a superiority over almost all its rivals. But our 
 representative firm must be one which has had a fairly long 
 life, and fair success, which is managed with normal ability, 
 and which has normal access to the economies, external and 
 internal, which belong to that aggregate volume of pro- 
 duction ; account being taken of the class of goods produced, 
 the conditions of marketing them and the economic environ- 
 ment generally. 
 
 The general argument of the present Book shows that an 
 increase in the aggregate volume of production of anything 
 will generally increase the size, and therefore the internal 
 economies possessed by this representative firm ; that it will 
 always increase the external economies to which such a firm 
 has access ; and thus will enable it to manufacture at a less 
 proportionate cost of labour and sacrifice than before. 
 
 In other words, we say broadly that while the part which The Laws 
 Nature plays in production conforms to the law of diminish- 
 ing return, the part which man plays conforms to the Law 
 of Increasing Return, which may be stated thus : An in- 
 crease of capital and labour leads generally to an improved 
 organization ; and therefore in those industries which are not 
 engaged in raising raw produce it generally gives a return 
 increased more than in proportion ; and further this improved 
 
398 INCREASING AND DIMINISHING RETURNS. 
 
 BOOK iv. organization tends to diminish or even override any increased 
 
 cH^xni. res i stance w hi c h Nature may offer to raising increased 
 
 and of amounts of raw produce. If the actions of the laws of in- 
 
 Constant creas i n g and diminishing return are balanced we have the 
 
 Law of Constant Return, and an increased produce is obtained 
 
 by labour and sacrifice increased just in proportion. 
 
 The For the two tendencies towards increasing and diminish- 
 
 of r Se mg i n g re turn press constantly against one another. In the 
 
 tendencies production of wheat and wool, for instance, the latter ten- 
 
 towards 
 
 increasing dency has almost exclusive 'sway in an old country, which 
 diminish- cannot import freely 1 . In turning the wheat into flour, or the 
 again^fone w l m t blankets, an increase in the aggregate volume of 
 another, production brings some new economies, but not many ; for 
 the trades of grinding wheat and making blankets are already 
 on so great a scale that any new economies that they may 
 attain are more likely to be the result of new inventions than 
 of improved organization. In a country however in which 
 the blanket trade is but slightly developed, these latter may 
 be important ; and then it may happen that an increase in 
 the aggregate production of blankets diminishes the propor- 
 tionate difficulty of manufacturing by just as much as it 
 increases that of raising the raw material. In that case the 
 actions of the laws of diminishing and of increasing return 
 would just neutralize one another; and blankets would con- 
 form to the law of constant return. But in most of the 
 more delicate branches of manufacturing, where the cost of 
 raw material counts for little, and in most of the modern 
 transport industries the law of increasing return acts 
 almost unopposed. 
 
 We shall long be occupied with the details and the limi- 
 tations of the broad truths which have just been sketched 
 out : but before closing the present Book we may stay a little 
 to consider their bearing on the problem of the pressure of 
 population on the means of subsistence. We are not yet in 
 a position to deal with it thoroughly, but there is some 
 advantage in taking a rapid survey of it at this early stage. 
 
 3. Our discussion of the character and organization of 
 industry taken as a whole tends to show that an increase in 
 
 1 As regards the struggle of the two tendencies in agriculture, compare Book 
 rv. Ch. in. 6. 
 
PRESSURE OF POPULATION ON MEANS OF SUBSISTENCE. 399 
 
 the volume of labour causes in general, other things being BOOKIV. 
 
 p-rr XII 
 
 equal, a more than proportionate increase in the total effi- _! 
 
 ciency of labour. But we must not forget that other things 
 may not be equal. The increase of numbers may be accom- 
 panied by more or less general adoption of unhealthy and under some 
 enervating habits' of life in overcrowded towns. Or it may 
 have started badly, outrunning the material resources of the 
 people, causing them with imperfect appliances to make ex- 
 cessive demands on the soil ; and so to call forth the stern 
 action of the law of diminishing return as regards raw 
 produce, without having the power of minimizing its effects : 
 having thus begun with poverty, an increase in numbers 
 may go on to its too frequent consequences in that weakness 
 of character which unfits a people for developing a highly 
 organized industry. 
 
 All this and more may be granted, and yet it remains but not 
 true that the collective efficiency of a people with a given others. 
 average of individual strength and energy may increase more 
 than in proportion to their numbers. If they can for a time 
 escape from the pressure of the law of diminishing return 
 by importing food and other raw produce on easy terms ; if 
 their wealth is not consumed in great wars, and increases at 
 least as fast as their numbers ; and if they avoid habits of life 
 that would enfeeble them; then every increase in their 
 numbers is likely for the time to be accompanied by a more 
 than proportionate increase in their power of obtaining 
 material goods. 
 
 For it enables them to secure the many various economies 
 of specialized skill and specialized machinery, of localized 
 industries and production on a large scale : it enables them 
 to have increased facilities of communication of all kinds ; 
 while the very closeness of their neighbourhood diminishes 
 the expense of time and effort involved in every sort of traffic 
 between them, and gives them new opportunities of getting 
 social enjoyments and the comforts and luxuries of culture in 
 every form. It is true that against this must be set the 
 growing difficulty of finding solitude and quiet and even 
 fresh air. This deduction is a weighty one ; but there may 
 still remain a balance of good 1 . 
 
 1 The Englishman Mill bursts into unwonted enthusiasm when speaking 
 
400 INCREASING AND DIMINISHING RETURNS. 
 
 BOOK iv. Taking account of the fact that an increasing density of 
 CH.JUII. p p u ] at i on generally brings with it access to new social 
 enjoyments we may give a rather broader scope to this 
 statement and say : An increase of population accompanied 
 by an equal increase in the material sources of enjoyment 
 and aids to production is likely to lead to a more than pro- 
 portionate increase in the aggregate income of enjoyment of 
 all kinds ; provided firstly, an adequate supply of raw produce 
 can be obtained without great difficulty, and secondly there 
 is no such overcrowding as causes physical and moral vigour 
 to be impaired by the want of fresh air and light and of 
 healthy and joyous recreation for the young. 
 
 The effects The accumulated wealth of civilized countries is at present 
 
 of numbers growing faster than the population : and though it may be 
 
 careful? true *kat ^ ne wealth per head would increase somewhat faster 
 
 distin- if the population did not increase quite so fast; yet as a 
 
 from those matter of fact an increase of population is likely to continue 
 
 growth of to be accompanied by a more than proportionate increase of 
 
 wScMt is ^ ne material aids to production : and in England at the 
 
 accom lly P resen t time, with easy access to abundant foreign supplies 
 
 panied. o f raw material, an increase of population is accompanied by 
 
 a more than proportionate increase of the means of satisfying 
 
 human wants other than the need for light, fresh air, &c. 
 
 Much of this increase is however attributable not to the 
 
 increase of industrial efficiency but to the increase of wealth 
 
 by which it is accompanied : and therefore it does not neces- 
 
 ' sarily benefit those who have no share in that wealth. And 
 
 further, England's foreign supplies of raw produce may at 
 
 any time be checked by changes in the trade regulations of 
 
 other countries, and may be almost cut off by a great war, 
 
 while the naval and military expenditure which would be 
 
 necessary to make the country fairly secure against this last 
 
 risk, would appreciably diminish the benefits that she derives 
 
 from the action of the law of increasing return. 
 
 (Political Economy, Book iv. Ch. vi. 2) of the pleasures of wandering alone in 
 beautiful scenery : and many American writers give fervid descriptions of the 
 growing richness of human life as the backwoodsman finds neighbours settling 
 around him, as the backwoods settlement developes into a village, the village into 
 a town, and the town into a vast city. (See for instance Carey's Principles of 
 Social Science and Mr Henry George's Progress and Poverty.) 
 
BOOK V. 
 
 THE EQUILIBRIUM OF DEMAND AND SUPPLY. 
 CHAPTER I. 
 
 ON MARKETS. 
 
 1. IN spite of a great variety in detail nearly all the BOOK v. 
 chief problems of economics agree in this that they have a CH ' T ' 
 kernel of the same kind. This kernel is an inquiry as to the JJjJnomic 
 balancing of two opposed classes of motives, the one consist- problems 
 
 4 . . . . I13.V6 Bi 
 
 ing of desires to acquire certain new goods, and thus satisfy common 
 wants ; while the other consists of desires to avoid certain relating to 
 
 efforts or retain certain immediate enjoyments or other 
 goods, the command over which has already been acquired ; 
 in other words it is an inquiry into the balancing of the 
 forces of demand and supply, these terms being used in their 
 broadest sense. The purpose of the ..present book is to 
 examine the general conditions of the equilibrium of demand 
 and supply : illustrations will be taken now from one class of 
 economic problems and now from another, but the main 
 course of the reasoning will be kept free from assumptions 
 which specially belong to any particular class. 
 
 2. When demand and supply are spoken of in relation Definition 
 to one another, it is of course necessary that the markets to 
 which they refer should be the same. As Cournot says, 
 "__Economists_underj3tand by the term Market, not any par- 
 ticular market place in which things are bought and sold, 
 but the whole of any region in which buyers and sellers are 
 M. 26 
 
402 ON MARKETS. 
 
 BOOK v. in such free intercourse with one another that the prices of 
 CH - Ij the same goods tend to equality easily and quickly 1 ." Or 
 again as Jevons says : " Originally a market was a public 
 place in a town where provisions and other objects were 
 exposed for sale; but the word has been generalized, so as to 
 mean any body of persons who are in intimate business 
 relations and carry on extensive transactions in any com- 
 modity. A great city may contain as many markets as there 
 are important branches of trade, and these markets may or may 
 not be localized. The central point of a market is the public 
 exchange, mart or auction rooms, where the traders agree to 
 meet and transact business. In London the Stock Market, 
 the Corn Market, the Coal Market, the Sugar Market, and 
 many others are distinctly localized ; in Manchester the 
 Cotton Market, the Cotton Waste Market, and others. But 
 this distinction of locality is not necessary. The traders 
 may be spread over a whole town, or region of country, and 
 yet make a market, if they are, by means of fairs, meetings, 
 published price lists, the post-office or otherwise, in close 
 communication with each other 2 ." 
 
 Thus the more nearly perfect a market is, the stronger 
 is the tendency for the same price to be paid for the same 
 thing at the same time in all parts of the market : but of 
 course if the market is large, allowance must be made for 
 the expense of delivering the goods to different purchasers ; 
 each of whom must be supposed to pay in addition to the 
 market price a special charge on account of delivery 3 . 
 Boundaries | 3. In applying economic reasonings in practice it is 
 market. often difficult to ascertain how far the movements of supply 
 and demand in any one place are influenced by those in 
 another. It is clear that the general tendency of the 
 telegraph, the printing-press and steam traffic is to extend 
 the area over which such influences act and to increase their 
 force. The whole Western World may, in a sense, be re- 
 
 1 Recherches sur les Principes Matkematiques de la Theorie des Richesses, 
 Ch. iv. See also above Book in. Ch. iv. 7. 
 
 2 Theory of Political Economy, Ch. rv. 
 
 8 Thus it is common to see the prices of bulky goods quoted as delivered " free 
 on board " (f . o. b.) any vessel in a certain port, each purchaser having to make 
 his own reckoning for bringing the goods home. 
 
THE SCOPE OF A MARKET. 403 
 
 garded as one market for many kinds of stock exchange BOOKV. 
 securities, for the more valuable metals, and to a less extent ' 
 for wool and cotton and even wheat ; proper allowance being 
 made for expenses of transport, in which may be included taxes 
 levied by any customs houses through which the goods have 
 to pass. For in all these cases the expenses of transport, 
 including customs duties, are not sufficient to prevent buyers 
 from all parts of the Western World from competing with 
 one another for the same supplies. 
 
 There are many special causes which may widen or General 
 narrow the market of any particular commodity : but nearly 
 all those things for which there is a very wide market are in 
 universal demand, and capable of being easily and exactly of tlie 
 described. Thus for instance cotton, wheat, and iron satisfy for a thing, 
 wants that are urgent and nearly universal. They can fa? grading 
 be easily described, so that they can be bought and sold 
 by persons at a distance from one another and at a distance 
 also from the commodities. If necessary, samples can be 
 taken of them which are truly representative : and they can 
 even be "graded," as is the actual practice with regard to 
 grain in America, by an independent authority; so that 
 the purchaser may be secure that what he buys will come 
 up to a given standard, though he has never seen a sample 
 of the goods which he is buying and perhaps would not 
 be able himself to form an opinion on it if he did 1 . 
 
 Commodities for which there is a very wide market must Porta- 
 also be such as will bear a long carriage: they must be some- l lty ' 
 what durable, and their value must be considerable in pro- 
 portion to their bulk. A thing which is so bulky that its 
 price is necessarily raised very much when it is sold far away 
 from the place in which it is produced, must as a rule have a 
 narrow market. The market for common bricks for instance 
 is practically confined to the near neighbourhood of the 
 
 1 Thus the managers of a public or private "elevator," receive grain from 
 a farmer, divide it into different grades, and return to him certificates for as 
 many bushels of each grade as he has delivered. His grain is then mixed with 
 those of other farmers ; his certificates are likely to change hands several times 
 before they reach a purchaser who demands that the grain shall be actually 
 delivered to him ; and little or none of what that purchaser receives may have 
 come from the farm of the original recipient of the certificate. 
 
 262 
 
404 ON MARKETS. 
 
 BOOK v. kilns in which they are made : they can scarcely ever bear 
 CH ' Ij a long carriage by land to a district which has any kilns of 
 its own. But bricks of certain exceptional kinds have a 
 market extending over a great part of England. 
 The con- g 4 L e t us then consider more closely the markets for 
 
 highly things which satisfy in an exceptional way these conditions 
 mfrkets d of being in general demand, cognizable and portable. They 
 are, as we have said, stock exchange securities and the more 
 valuable metals. 
 
 illustrated Any one share or bond of a public company, or any bond 
 euc^to of a government is of exactly the same value as any other 
 exchanges, of the same issue: it can make no difference to any purchaser 
 which of the two he buys. Some securities, principally those 
 of comparatively small mining, shipping, and other companies, 
 require local knowledge, and are not very easily dealt in 
 except on the stock exchanges of provincial towng in their 
 immediate neighbourhood. But the whole of England is one 
 market for the shares and bonds of a large English railway. 
 In ordinary times a dealer will sell, say, Midland Railway 
 shares, even if he has not them himself; because he knows 
 they are always coming into the market, and he is sure to be 
 able to buy them. 
 
 But the strongest case of all is that of securities which 
 are called "international," because they are in request in 
 every part of the globe. They are the bonds of the chief 
 governments, and of very large public companies such as 
 those of the Suez Canal and the New York Central Railway. 
 For bonds of this class the telegraph keeps prices at almost 
 exactly the same level in all the stock exchanges of the 
 world. If the price of one of them rises in New York or 
 in Paris, in London or in Berlin, the mere news of the 
 rise tends to cause a rise in other markets ; and if for any 
 reason the rise is delayed, that particular class of bonds 
 is likely soon to be offered for sale in the high priced market 
 under telegraphic orders from the other markets, while dealers 
 in the first market will be making telegraphic purchases in 
 other markets. These sales on the one hand, and purchases 
 on the other, strengthen the tendency which the price has to 
 seek the same level everywhere ; and unless some of the 
 
HIGHLY ORGANIZED MARKETS. 405 
 
 markets are in an abnormal condition, the tendency soon BOOKV. 
 becomes irresistible. 
 
 On the stock exchange also a dealer can generally make 
 sure of selling at nearly the same price as that at which he 
 buys ; and he is often willing to buy first class stocks at a 
 half, or a quarter, or an eighth, or in some cases even a six- 
 teenth per cent, less than he offers in the same breath to sell 
 them at. If there are two securities equally good, but one 
 of them belongs to a large issue of bonds, and the other to a 
 small issue by the same government, so that the first is con- 
 stantly coming on the market, and the latter but seldom, 
 then the dealers will on this account alone require a larger 
 margin between their selling price and their buying price in 
 the latter case than in the former 1 . This illustrates well 
 the great law, of which we shall have much to say when 
 we come to consider the influence of foreign trade on eco- */ 
 nomic progress, that the larger the market for a commodity ^ 
 the smaller generally are the fluctuations in its price, and 
 the lower is the percentage on the turnover which dealers 
 cjiarge for doing business in it. 
 
 Stock exchanges then are the pattern on which markets The world 
 have been, and are being formed for dealing in many kinds 
 of produce which can be easily and exactly described, are 
 portable and in general demand. The material commodities 
 however which possess these qualities in the highest degree 
 are gold and silver. For that very reason they have been 
 chosen by common consent for use as money, to represent the 
 value of other things: the world market for them is most 
 highly organized, and will be found to offer many subtle 
 illustrations of the actions of the laws which we are now 
 discussing. 
 
 5. At the opposite extremity to international stock 
 exchange securities and the more valuable metals are, firstly, 
 
 1 In the case of shares of very small and little known companies, the difference 
 between the price at which a dealer is willing to buy and that at which he will sell 
 amounts to from five to twenty per cent, of the selling value. If he buys, he may 
 have to carry this security a long time before he meets with any one who comes to 
 take it from him, and meanwhile it may fall in value : while if he undertakes to 
 deliver a security which he has not himself got and which does not come on the 
 market every day, he may be unable to complete his contract without much 
 trouble and expense. 
 
406 ON MARKETS. 
 
 BOOKV. things which must be made to order to suit particular 
 rc- 1 - individuals, such as well-fitting clothes ; and, secondly, perish- 
 Putting able and bulky goods, such as fresh vegetables, which can 
 cases of seldom be profitably carried long distances. The first can 
 dealing, scarcely be said to have a wholesale market at all ; the con- 
 ditions by which their price is determined are those of retail 
 buying and selling, and the study of them may be postponed 1 , 
 we pass to There are indeed wholesale markets for the second class, 
 wch kej but they are confined within narrow boundaries ; we may find 
 narrowiy be our typical instance in the sale of the commoner kinds of 
 confined, vegetables in a country town. The market-gardeners in the 
 neighbourhood have probably to arrange for the sale of their 
 vegetables to the townspeople with but little external inter- 
 ference on either side. There may be some check to extreme 
 prices by the power on the one side of selling, and on the 
 other of buying elsewhere ; but under ordinary circumstances 
 the check is inoperative, and it may happen that the dealers 
 in such a case are able to combine, and thus fix an artificial 
 monopoly price ; that is, a price determined with little direct 
 reference to cost of production, but chiefly by a consideration 
 of what the market will bear. 
 
 though On the other hand, it may happen that some of the 
 
 S^subjeS market-gardeners are almost equally near a second country 
 influences* t wn > an d send their vegetables now to one and now to the 
 other; and some people who occasionally buy in the first 
 town may have equally good access to the second. The least 
 variation in price will lead them to prefer the better market ; 
 and thus make the bargainings in the two towns to some 
 extent mutually dependent. It may happen that this second 
 town is in close communication with London or some other 
 central market, so that its prices are controlled by the prices 
 in the central market; and in that case prices in our first 
 town also must move to a considerable extent in harmony 
 
 1 A man may not trouble himself much about small retail purchases: he 
 may give half-a-crown for a packet of paper in one shop which he could have got 
 for two shillings in another. But it is otherwise with wholesale prices. A 
 manufacturer cannot sell a ream of paper for six shillings while his neighbour is 
 selling it at five. For those whose business it is to deal in paper know almost 
 exactly the lowest price at which it can be bought, and will not pay more than 
 this. The manufacturer has to sell at about the market price, that is at about the 
 price at which other manufacturers are selling at the same time. 
 
LOCAL MARKETS. 407 
 
 with them. As news passes from mouth to mouth till a BOOKV. 
 rumour spreads far away from its forgotten source, so even H ' *' 
 the most secluded market is liable to be influenced by changes 
 of which those in the market have no direct cognizance, 
 changes that have had their origin far away and have spread 
 gradually from market to market. 
 
 Thus at the one extreme are world markets in which com- 
 petition acts directly from all parts of the globe ; and at the 
 other those secluded markets in which all direct competition 
 from afar is^shut out, though indirect and transmitted com- 
 petition may make itself felt even in these ; and about midway 
 between, these extremes lie the great majority of the markets 
 which the_economist and the business man have to study. 
 
 6. Again, markets vary with regard to the period of Lhnita- 
 time which is allowed to the forces of demand and supply to 
 bring themselves into equilibrium with one another, as well as 
 
 with regard to the area over which they extend. And this to tim e 
 element of Time requires more careful attention just now nature of 
 than does that of Space. For the nature of the equilibrium of 'which 68 
 
 itself, and that of the causes by which it is determined, 
 depend on the length of the period over which the market is account. 
 taken to extend. We shall find that if the period is short, 
 the supply is limited to the stores which happen to be at 
 hand : if the period is longer, the supply will be influenced 
 by the cost of producing the commodity in question ; and if 
 the period is very long, this cost will be influenced by the 
 cost of producing the labour and the material things required 
 for producing the commodity. This latter distinction will be 
 seen to be one of degree only, and to be not clearly and 
 firmly drawn : and even the former is not perfectly definite, 
 but yet it is definite enough to merit a separate discussion. 
 Accordingly we shall consider in the next chapter those 
 temporary equilibria of demand and supply, in which the 
 cost of producing the commodity exerts either no influence 
 or merely an indirect influence. 
 
 At a later stage we shall have to combine the difficulties 
 with regard to time on the side of supply with those on the 
 side of demand, of which something has already been said 1 . 
 
 1 Book in. Ch. iv. 5, 6. 
 
CHAPTER II. 
 
 TEMPORARY EQUILIBRIUM OF DEMAND AND SUPPLY. 
 
 BOOK v. 1. THE simplest case of balance or equilibrium between 
 
 CH ' n " desire and effort is found when a person satisfies one of his 
 
 A simple wan t s by his own direct action, as for instance when he picks 
 
 instance of J A 
 
 equilibrium blackberries. At first the pleasure of eating is much more 
 
 desire and than enough to repay the trouble of picking ; in fact the 
 action of picking may itself be pleasurable for a time. But 
 after he has eaten a good deal, the desire for more diminishes ; 
 while the task of picking begins to cause weariness. This 
 weariness may be caused more by monotony than by fatigue. 
 And when at last his eagerness to play and his disinclination 
 for the work of picking counterbalance the desire for eating, 
 equilibrium is attained. The satisfaction which he can get 
 from picking fruit has arrived at its maximum : for up to 
 that time every fresh picking has added more to his pleasure 
 than it has taken away ; and after that time any further 
 picking would take away from his pleasure more than it 
 would add 1 . 
 
 In a casual In a casual bargain that one person makes with another, 
 as f r instance when two backwoodsmen barter a rifle for a 
 canoe there is seldom anything that can properly be called 
 
 equili- an equilibrium of supply and demand : there is probably a 
 margin of satisfaction on either side ; for probably the one 
 would be willing to give something besides the rifle for the 
 canoe, if he could not get the canoe otherwise; while the 
 other would in case of necessity give something besides the 
 canoe for the rifle. 
 
 1 See Book iv. Ch. i. 2, and Mathematical Note xn. 
 
MARKET DAY IN A LOCAL CORN-EXCHANGE. 409 
 
 It is indeed possible that a true equilibrium may be BOOKV. 
 
 arrived at under a system of barter ; but barter, though earlier ' 
 
 in history than buying and selling, is in some ways more ^tem^tic 
 intricate ; and the simplest cases of a true equilibrium value {^ r ^ r may 
 are found in the markets of a more advanced state of civiliza- ferred. 
 tion 1 . 
 
 2. Let us take an illustration from a corn-market in a illustra- 
 country town. The amount which each farmer or other local corn- 
 seller offers for sale at any price is governed by his own need ^Wcta, 111 
 for money in hand, and by his calculation of the present and * h 
 future conditions of the market with which he is connected, temporary 
 There are some prices which no seller would accept, somebriumis 
 which no one would refuse. There are other intermediate attame 
 prices which would be accepted for larger or smaller amounts 
 by many or all of the sellers. Let us assume for the sake of 
 simplicity that all the corn in the market is of the same 
 quality. An acute dealer having corn for sale may perhaps, 
 after looking around him, come to the conclusion that if 37s. 
 could be got throughout the day, the farmers between them 
 would be willing to sell to the extent of about 1,000 quarters ; 
 and that if no more than 36s. could be got r several would 
 refuse to sell, or would sell only small quantities, so that only 
 700 quarters would be brought forward for sale ; and that a 
 price of 35s. would only induce some 500 quarters to be 
 brought forward. Suppose him further to calculate that 
 
 1 We may put aside also as of very little practical importance, a class of 
 dealings which have occupied a good deal of space in economic literature. They 
 relate to such things as pictures by the old masters, rare corns and other things, 
 which cannot be "graded" at all; for each of them is unique, and has no direct 
 equivalent or competitor. Anyone who offers to buy such a thing, without any 
 thought of selling it again, has to assure himself only that the pleasure he will de- 
 rive from its possession is as great as that which he could get by spending its 
 price in any other way ; the highest price to which he will go is governed by the 
 utility or pleasure giving power to him of money on the one hand and the object 
 of worth on the other. And therefore the price at which such a thing is sold will 
 depend very much on whether any rich persons with a fancy for that particular 
 thing happen to be present at its sale. If not, it will probably be bought by 
 dealers who reckon on being able to sell it at a profit ; and the variations in the 
 price for which the same picture sells at successive auctions, great as they are, 
 would be much greater still if it were not for the steadying influence of profes- 
 sional and semi-professional purchasers. The "equilibrium price" for such sales 
 is very much a matter of accident ; but the curious might reap some reward from 
 a minute study of it. 
 
410 TEMPORARY EQUILIBRIUM OF DEMAND AND SUPPLY. 
 
 CH. II. 
 
 BOOKV. millers and others would be willing to buy 900 quarters if 
 they could be got at 35s. each, but only 700 if they could not 
 be got for less than 865., and only 600 if they could not be 
 got for less than 37s. 1 He will conclude that a price of 36s., 
 if established at once, would equate supply and demand, 
 because the amount offered for sale at that price would equal 
 the amount which could just find purchasers at that price. 
 He will therefore take at once any offer considerably over 
 36s. ; and other sellers will do the same. 
 
 Buyers on their part will make similar calculations ; and 
 if at any time the price should rise considerably above 36s. 
 they will argue that the supply will be much greater than 
 the demand at that price ; therefore even those of them who 
 would rather pay that price than go unserved, wait, and by 
 waiting they help to bring the price down. On the other 
 hand, when the price is much below 36s. even those sellers 
 who would rather take the price than leave the market with 
 their corn unsold, may argue that at that price the demand 
 will be in excess of the supply : so they wait, and by waiting 
 help to bring the price up. 
 
 The price of 36s. has thus a claim to be called the true 
 equilibrium price : because if it were fixed on at the begin- 
 ning, and adhered to throughout, it would exactly equate 
 demand and supply; and because every dealer who has a 
 perfect knowledge of the circumstances of the market 
 expects that price to be established. If he sees the price 
 I differing much from 36s. he expects that a change will 
 \ come before long, and by anticipating it he helps it to 
 4 come quickly. 
 
 It is not indeed necessary for our argument that any 
 dealers should have a thorough knowledge of the circum- 
 stances of the market. Many of the buyers may perhaps 
 underrate the willingness of the sellers to sell, with the effect 
 that for some time the price rules at the highest level at 
 
 1 This result of his study of the market may be put in a tabular form thus : 
 
 Sellers will be Buyers will be 
 
 At the price willing to sell willing to buy 
 
 37s. 1000 quarters, 600 quarters, 
 
 36s. 700 700 
 
 35s. 500 900 
 
CHANGES IN THE MARGINAL UTILITY OF MONEY. 411 
 
 which any buyers can be found ; and thus 500 quarters may BOOK v. 
 be sold before the price sinks below 37s. But afterwards the c ^!' 
 price must begin to fall and the result will still probably be 
 that 200 more quarters will be sold, and the market will close 
 on a price of about 36s. For when 700 bushels have been 
 sold, no seller will be anxious to dispose of any more except 
 at a higher price than 36s., and no buyer will be anxious to 
 purchase any more except at a lower price than 36s. In the 
 same way if the sellers had underrated the willingness of the 
 buyers to pay a high price, some of them might begin to sell 
 at the lowest price they would take, rather than have their 
 corn left on their hands, and in this case much corn might be 
 sold at a price of 35s. ; but the market would probably close 
 on a price of 36s. and a total sale of 700 quarters 1 . 
 
 3. In this illustration there is a latent assumption The latent 
 which is in accordance with the actual conditions of most tion, 
 markets ; but which ought to be distinctly recognized in order marginal 
 to prevent its creeping into those cases in which it is not 
 
 justifiable. We tacitly assumed that the sum which pur- nearly 
 chasers were willing to pay, and which sellers were willing to to each 
 
 take, for the seven hundredth bushel would not be affected a^ng the 
 by the question whether the earlier bargains had been made dealm g> 
 at a high or a low rate. We allowed for the diminution in 
 the marginal utility of corn to the buyers as the amount 
 bought increased. But we did not allow for any appreciable 
 change in the marginal utility of money ; we assumed that it 
 would be practically the same whether the early payments 
 had been at a high or a low rate. 
 
 This assumption is justifiable with regard to most of the is gene- 
 
 , ,. ' .,, , . , .. , rally valid 
 
 market dealings with which we are practically concerned, as to a 
 When a person buys anything for his own consumption, he 
 generally spends on it a small part of his total resources; 
 while when he buys it for the purposes of trade, he looks to 
 re-selling it, and therefore his potential resources are not 
 diminished. In either case the marginal utility of money to 
 him is not appreciably changed 2 . 
 
 1 A simple form of the influence which opinion exerts on the action of dealers, 
 and therefore on market price, is indicated in this illustration : we shall be much 
 occupied with more complex developments of it later on. 
 
 2 But though this is the case as a rule, there are exceptions to the rule. A 
 
412 TEMPOKARY EQUILIBRIUM OF DEMAND AND SUPPLY. 
 
 BOOK v. The exceptions are rare and unimportant in markets for 
 
 ' commodities ; but in markets for labour they are frequent and 
 labour a important. When a workman is in fear of hunger, the mar- 
 ^rket the gi na l utility of money to him is very high ; and if at starting- 
 are often he gets the worst of the bargaining, and is employed at low 
 
 important. , A . . f iv i i i_ 
 
 wages, it remains nigh, and he may go on selling his labour 
 at a low rate. That is all the more probable because, while 
 the advantage in bargaining is likely to be pretty well distri- 
 buted between the two sides of a market for commodities, it 
 is more often on the side of the buyers than on that of the 
 sellers in a market for labour. This is one among many 
 facts, in which we shall find, as we go on, the explanation 
 Thisdif- of much of that instinctive objection which the working 
 important 8 classes have felt to the habit of some economists, particularly 
 theory and * nose f tne employer class, of treating labour simply as a 
 in practice; commodity and regarding the labour market as like every 
 other market; whereas in fact the differences between the 
 two cases, though not fundamental from the point of view 
 of theory, are yet clearly marked, and in practice often very 
 important 1 . 
 
 The theory of buying and selling becomes therefore much 
 
 buyer is sometimes straitened for want of ready money, and has to let offers pass 
 by him in no way inferior to others which he has gladly accepted. His own funds 
 being exhausted, he could not perhaps borrow except on terms that would take 
 away all the profit that the bargains had at first sight offered. 
 
 Again, it is possible that several of those who had been counted as ready to sell 
 corn at a price of 36s. were willing to sell only because they were in urgent need 
 of a certain amount of ready money ; if they succeeded in selling some corn at a 
 high price, there might be a perceptible diminution in the marginal utility of ready 
 money to them ; and therefore they might refuse to sell for 36s. a quarter all the 
 corn which they would have sold if the price had been 36s. throughout. In this 
 case the sellers in consequence of getting an advantage in bargaining at the begin- 
 ning of the market might retain to the end a price higher than the equilibrium 
 price. The price at which the market closed would be an equilibrium price, but 
 not the equilibrium price. 
 
 Conversely, if the market had opened much to the disadvantage of the sellers 
 and they had sold some corn very cheap, so that they remained in great want of 
 ready money, the final utility of money to them might have remained so high that 
 they would have gone on selling considerably below 36,9. until the buyers had been 
 supplied with all that they cared to take. The market would then close without 
 the true equilibrium price having ever been reached. 
 
 1 The analogy, which we are now considering, between a labour market and a 
 market for commodities is weakened, as most others of this kind are, by the fact 
 that each seller of labour has only one unit of labour to dispose of. 
 
NOTE ON BARTER. 413 
 
 v. 
 
 CH. II. 
 
 more complex when we take account of the dependence of BOOK 
 marginal utility on amount in the case of money as Well as CH ' 11 
 of the commodity itself. When we do this we are really j^^y ^. 
 reverting to the problem of barter, in which the changes in is thrown 
 the marginal utilities of both commodities are of course study of 
 prominent. As we have remarked, barter, though earlier Sff^iioV- 
 historically than buying and selling, is really a more complex mg Note - 
 transaction : and the theory of it is curious rather than im- 
 portant. Some account of it is given in the following Note, 
 chiefly with a view of throwing additional light on the excep- 
 tional cases which we have just been considering. 
 
 NOTE ON BARTER. 
 
 Let us consider the case of two individuals engaged in barter. A The rate 
 has, say a basket of apples, B a basket of nuts ; A wants some nuts, B {^J^* 1 " 
 wants some apples. The satisfaction which B would get from one apple two indi- 
 would perhaps outweigh that which he would lose by parting with 12 viduals j, s 
 nuts ; while the satisfaction which A would get from perhaps three nuts by 
 would outweigh that which he would lose by parting with one apple, accident. 
 The exchange will be started somewhere between these two rates : but 
 if it goes on gradually, every apple that A loses will increase the 
 marginal utility of apples to him and make him more unwilling to part 
 with any more : while every additional nut that he gets will lower the 
 marginal utility of nuts to him and diminish his eagerness for more : 
 and vice versa with B. At last A's eagerness for nuts relatively to 
 apples will no longer exceed B's ; and exchange will cease because any 
 terms that the one is willing to propose would be disadvantageous to 
 the other. Up to this point exchange has increased the satisfaction on 
 both sides, but it can do so no further. Equilibrium has been attained ; 
 but really it is not the equilibrium, it is an accidental equilibrium. 
 
 There is, however, one equilibrium rate of exchange which has some There is a 
 sort of right to be called the true equilibrium rate, because if once hit ra * e ^ n * c h 
 upon it would be adhered to throughout. It is clear that if very many called the 
 nuts were to be given throughout for an apple, B would be willing to do true rate 5 
 but little business ; while if but very few were to be given, A would be 
 willing to do but little. There must be some intermediate rate at 
 which they would be willing to do business to the same extent. Suppose 
 that this rate is six nuts for an apple; and that A is willing to give 
 eight apples for 48 nuts, while B is willing to receive eight apples at 
 that rate; but that A would not be willing to give a ninth apple for 
 another six nuts while B would not be willing to give another six nuts 
 for a ninth apple. This is then the true position of equilibrium ; but 
 there is no reason to suppose that it will be reached in practice. 
 
414 
 
 TEMPORARY EQUILIBRIUM OF DEMAND AND SUPPLY. 
 
 BOOK V. 
 CH. II. 
 
 Suppose, for instance, that A's basket had originally 20 apples in it 
 and B's 100 nuts, and that A at starting induced B to believe that he 
 but it is does not care much to have any nuts ; and so manages to barter four 
 not likely apples for 40 nuts, and afterwards two more for 17 nuts, and afterwards 
 attained in one more for eight. Equilibrium may now have been reached, there 
 practice. ma y be no further exchange which is advantageous to both. A has 
 65 nuts and does not care to give another apple even for eight; 
 while B, having only 35 nuts, sets a high value on them, and will not 
 give as many as eight for another apple. 
 
 On the other hand, if B had been the more skilful in bargaining 
 he might have perhaps induced A to give six apples for 15 nuts,' and 
 then two more for seven. He has now given up eight apples and got 22 
 nuts : if the terms at starting had been six nuts for an apple and he 
 had got 48 nuts for his eight apples, he would not have given up 
 another apple for even seven nuts; but having so few nuts he is 
 anxious to get more and is willing to give two more apples in exchange 
 for eight nuts, and then two more for nine nuts, and then one more 
 for five; and then again equilibrium may be reached; for B, having 
 13 apples and 56 nuts, does not perhaps care to give more than five 
 nuts for an apple, and A may be unwilling to give up one of his few 
 remaining apples for less than six. 
 
 In both these cases the exchange would have increased the satis- 
 faction of both as far as it went; and when it ceased, no further 
 exchange would have been possible which would not have diminished the 
 satisfaction of at least one of them. In each case an equilibrium rate 
 would have been reached ; but it would be an arbitrary equilibrium. 
 
 Next suppose that there are a hundred people in a similar position 
 to that of A, each with about 20 apples, and the same desire for nuts as 
 A; and an equal number on the other side similarly situated to the 
 original B. Then the acutest bargainers in the market would probably 
 be some of them on A's side, some of them on B's ; and whether 
 there was free communication throughout the market or not, the 
 mean of the bargains would not be so likely to differ very widely 
 from the rate of six nuts for an apple as in the case of barter between 
 two people. But yet there would be no such strong probability of its 
 adhering very closely to that rate, as we saw was the case in the 
 corn-market. It would be quite possible for those on the A side 
 to get in varying degrees the better of those on the B side in bargain- 
 ing, so that after a time 6500 nuts might have been exchanged for 700 
 apples; and then those on the A side, having so many nuts, might 
 be unwilling to do any more trade except at the rate of at least eight 
 nuts for an apple, while those on the B side, having only 35 nuts apiece 
 left on the average, might probably refuse to part with any more at 
 that rate. On the other hand, the B's might have got in various 
 degrees the better of the A'a in bargaining, with the result that after a 
 time 1300 apples had been exchanged for only 4400 nuts: the B's 
 
 Nor is 
 the case 
 much 
 better in 
 barter 
 between 
 two 
 groups. 
 
NOTE ON BARTER. 415 
 
 having then 1300 apples and 5600 nuts, might be unwilling to offer BOOK v. 
 more than five nuts for an apple, while the J's, having only seven CH - n - 
 apples apiece left on the average, might decline that rate. In the one 
 case equilibrium would be found at a rate of eight nuts for an apple, 
 and in the other at the rate of five nuts. In each case an equilibrium 
 would be attained, but not the equilibrium. 
 
 This uncertainty of the rate at which equilibrium is reached does Much 
 not depend on the fact that one commodity is being bartered for another of tlie " n ' 
 instead of being sold for money. It results from our being obliged to removed 
 
 regard the marginal utilities of both commodities as varying. And . 
 indeed if we had supposed that it was a nut-growing district, and that utility of 
 all the traders on both sides had large stores of nuts, while only the A's one of the 
 had apples, then the exchange of a few handfuls of nuts would not mo dities 
 visibly affect their stores, or change appreciably the marginal utility of is nearly 
 nuts. In that case the bargaining would resemble in all fundamentals co 
 the buying and selling in an ordinary corn-market. The real dis- 
 tinction then between the theory of buying and selling and that of 
 barter is that in the former it generally is, and in the latter it generally 
 is not, right to assume that the marginal utility of one of the things 
 dealt with is practically constant. 
 
 Thus, for instance, let a single A with 20 apples, bargain with a 
 single B. Let A be willing to sell 5 apples for 15 nuts, a sixth for 
 4 nuts, a seventh for 5, an eighth for 6, a ninth for 7 and so on ; the 
 marginal utility of nuts being always constant to him, so that he is just 
 willing to sell the eighth for 6 and so on, whether in the earlier part of 
 the trade he has got the better of the bargaining with B or not. Mean- 
 while let B^ be willing to pay 50 nuts for the first 5 apples rather than 
 go without them, 9 for a sixth, 7 for a seventh, 6 for an eighth, and 
 only 5 for a ninth; the marginal utility of nuts being constant to him, 
 so that he will just give 6 nuts for the eighth apple whether he has 
 bought the earlier apples cheaply or not. Li jthis case the bargaining 
 must issue in the transfer of eight apples, the eighth apple being given 
 for six nuts. But of course if A had got the better of the bargaining 
 at first, he might have got 50 or 60 nuts for the first seven apples; 
 while if B had got the better of the bargaining at first, he might have 
 got the first seven apples for 30 or 40 nuts. This corresponds to the 
 fact that in the corn-market discussed in the text, about 700 quarters 
 would be sold with a final rate of 36s. ; but if the sellers had got the 
 best of the bargaining at first, the aggregate price paid might be a good 
 deal more than 700 times 36s. ; while if the buyers had got the better 
 of the bargaining at first, the aggregate price, would be a good deal less 
 than 700 times 36s. (See Mathematical Note xn.) 
 

 CHAPTER III. 
 
 EQUILIBRIUM OF NORMAL DEMAND AND SUPPLY. 
 
 BOOK v. 1. EVEN in the corn-exchange of a country town on a 
 market-day the equilibrium price is affected by calculations 
 of the future relations of production and consumption ; while 
 SeTthat?" * n ^ ne l ea di n g corn-markets of America and Europe dealings 
 are not for future delivery already predominate and are rapidly 
 perishable, weaving into one web all the leading threads of trade in 
 by^aicu- 6 corn throughout the whole world. Some of these dealings 
 tta future * n " futures " are but incidents in speculative manoeuvres ; 
 but in the main they are governed by calculations of the 
 world's consumption on the one hand, and of the existing 
 stocks and coming harvests in the Northern and Southern 
 hemispheres on the other : they take account of the areas 
 sown with each kind of grain, of the forwardness and weight 
 of the crops, and of the supply of things which can be used 
 as substitutes for corn, and of the things for which corn can 
 be used as a substitute. Thus, when buying or selling 
 barley, they would have to take account of the supplies of 
 ^uch things as sugar, which can be used as substitutes for it 
 ^ in brewing, and again of all the various feeding stuffs, a 
 scarcity of which might raise the value of barley for con- 
 sumption on the farm. If it is thought that the growers of 
 any kind of grain in any part of the world have been losing 
 money, and are likeTy u to sow a less area for a future harvest, 
 it is argued that prices are likely to rise as soon as that 
 harvest comes into sight; anticipations of that rise will 
 exercise an influence on present sales for future delivery, and 
 that in its turn influences cash prices ; so that these prices 
 
REAL AND MONEY COST OF PRODUCTION. 417 
 
 are indirectly affected by estimates of the expenses of pro- BOOK v. 
 ducing further supplies. J _ ' 
 
 But in this and the following chapters we are specially and we are 
 concerned with movements of price ranging over still longer consider 
 periods than those for which the most far-sighted dealers in g^JS* 
 futures generally make their reckoning : we have to consider adjust- 
 the volume of production adjusting itself to the conditions supply and 
 of the market, and the normal price being thus determined 
 at the position of stable equilibrium of normal demand and 
 normal supply. 
 
 In this discussion we shall have to make frequent use of 
 the terms " Cost " and " Expenses " of production ; and some 
 provisional account of them must be given before proceeding 
 further. 
 
 2. We may take up the discussion of the analogy The 
 between the supply price and the demand price of a com- supply 
 modity at the point at which we left it when, for the moment Juried a 
 assuming that the efficiency of production depended solely little 
 upon the exertions of the workers, we said " the price re- 
 quired to call forth the exertion necessary for producing 
 any given amount of a commodity may be called the 
 supply price for that amount 1 ." But now we have to take 
 account of the fact that the production of a commodity 
 generally requires many different kinds of labour and the 
 use of capital in many forms. The exertions of all the 
 different kinds of labour that are directly or indirectly 
 involved in making it ; together with the abstinences or 
 rather the waitings required for saving the capital used in 
 making it : all these efforts and sacrifices together will be 
 called the Real Cost of production of the commodity. The sums Real and 
 of money that have to be paid for these efforts and sacrifices Cost of 
 will be called either its Money Cost of production, or, for fcjjjf 1 *" 
 shortness, its Expenses of production ; they are the prices Expenses 
 
 u- i. i_ -j j 11 * ^ ofProd 
 
 which have to be paid in order to caii forth an adequate ti 
 supply of the efforts and waitings that are required for 
 making it ; or, in other words, they are its supply price 2 . 
 
 1 Book iv. Ch. i. 2. 
 
 2 Mill and some other economists have followed the practice of ordinary life in 
 using the term Cost of production in two senses, sometimes to signify the difficulty 
 of producing a thing, and sometimes to express the outlay of money that has to 
 
 M. 27 
 
 uc- 
 
418 EQUILIBRIUM OF NORMAL DEMAND AND SUPPLY. 
 
 CH. III. 
 
 BOOKV. The analysis of the Expenses of production of a com- 
 
 modity might be carried backward to any length ; but it is 
 seldom worth while to go back very far. It is for instance 
 often sufficient to take the supply prices of the different 
 kinds of raw material used in any manufacture as ultimate 
 facts, without analysing these supply prices into the several 
 elements of which they are composed ; otherwise indeed the 
 analysis would never end. We may then arrange the things 
 that are required for making a commodity into whatever 
 Factors of groups are convenient, and call them its Factors of production. 
 "' Its expenses of production when any given amount of it is 
 produced are thus the supply prices of the corresponding 
 quantities of its factors of production. And the sum of these 
 is the supply price of that amount of the commodity. 
 There is ^ 3. The typical modern market is often regarded as 
 varfety in that in which manufacturers sell goods to wholesale dealers 
 inf ortance at P r i ces m ^ which but few trading expenses enter. But 
 of different taking a broader view, we may consider t'hat the supply price 
 cost of pro- of a commodity is the price at which it will be delivered for 
 sale to that group of persons whose demand for it we are 
 considering ; or, in other words, in the market which we have 
 in view. On the character of that market will depend how 
 many trading expenses have to be reckoned to make up the 
 supply price 1 . For instance, the supply price of wood in the 
 
 be incurred in order to induce people to overcome this difficulty and produce 
 it. But by passing from one use of the term to the other without giving ex- 
 plicit warning, they have led to many misunderstandings and much barren contro- 
 versy. The attack on Mill's doctrine of Cost of Production in relation to Value, 
 which is made in Cairnes' Leading Principles, was published just after Mill's 
 death; and unfortunately his interpretation of Mill's words was generally ac- 
 cepted as authoritative, because he was regarded as a follower of Mill. But in 
 an article by the present writer on "Mill's Theory of Value" (Fortnightly Review, 
 April 1876) it is argued that Cairnes had mistaken Mill's meaning, and had really 
 seen not more but less of the truth than Mill had done. 
 
 The expenses of production of any amount of a raw commodity may best be 
 
 / estimated with reference to the "margin of production " at which no rent is paid. 
 
 But this method of speaking has great difficulties with regard to commodities that 
 
 obey the law of increasing return. It seemed best to note this point in passing : 
 
 it will be fully discussed later on, chiefly in Ch. xi. 
 
 1 We have already (Book n. Ch. in.) noticed that the economic use of the term 
 " production " includes the production of new utilities by moving a thing from a 
 place in which it is less wanted to a place in which it is more wanted, or by help- 
 ing consumers to satisfy their needs. 
 
THE LAW OF SUBSTITUTION. 419 
 
 neighbourhood of Canadian forests often consists almost BOOKV. 
 exclusively of the price of the labour of lumber men : but c ^_^- 
 the supply price of Canadian deal in the wholesale London 
 market consists in a large measure of freights; while the 
 supply price of the same wood to a small retail buyer in an 
 English country town is more than half made up of the 
 charges of the railways and middlemen who have brought 
 what he wants to his doors, and keep a stock of it ready for 
 him. Again, the supply price of a certain kind of labour 
 may for some purposes be analysed into the expenses of 
 rearing, of general education and of special trade education. 
 The possible combinations are numberless ; and though each 
 may have incidents of its own which will require separate 
 treatment in the complete solution of any problem connected 
 with it, yet at this stage of our inquiry all such incidents may 
 be ignored, so far as the reasonings of this Book are concerned. 
 
 In calculating the expenses of production of a commodity 
 we must take account of the fact that changes in the amounts 
 produced are likely, even when there is no new invention, to 
 be accompanied by changes in the relative quantities of its 
 several factors of production. For instance, when the scale 
 of production increases, horse or steam power is likely to be 
 substituted for manual labour; materials are likely to be 
 brought from a greater distance and in greater quantities, 
 thus increasing those expenses of production which corre- 
 spond to the work of carriers, middlemen and traders of all 
 kinds. 
 
 As far as the knowledge and business enterprise of the The Law 
 producers reach, they in each case choose those factors 
 production which are best for their purpose ; the sum of the 
 supply prices of those factors which are used is, as a rule, less 
 than the sum of the supply prices of any other set of factors 
 which could be substituted for them; and whenever it 
 appears to the producers that this is not the case, they will, 
 as a rule, set to work to substitute the less expensive method. 
 We may call this, for convenience of reference, The Law of 
 Substitution. 
 
 In the course of our future work we shall be constantly 
 referring to this Law: its applications extend over almost 
 
 272 
 
420 EQUILIBRIUM OF NORMAL DEMAND AND SUPPLY. 
 
 BOOK v. every field of economic inquiry, and indeed include a great 
 
 CH ' m * part of the results that are often referred to the action of 
 
 competition. From another point of view the law may be 
 
 regarded as closely akin to the law of the distribution of a 
 
 commodity between different uses 1 . 
 
 The posi- 4. The position then is this : we are investigating the 
 
 whteh'we equilibrium of normal demand and normal supply in their 
 
 most general form ; we are neglecting those features which 
 
 are special to particular parts of economic science, and are 
 
 confining our attention to those broad relations which are 
 
 We assume common to nearly the whole of it. Thus we assume that 
 
 free play 
 
 for demand the forces of demand and supply have free play; that there is 
 in the no combination among dealers on either side ; but each acts 
 market. Qr himself, and there is free competition ; that is, buyers 
 compete freely with buyers, and sellers compete freely with 
 sellers. But though everyone acts for himself, his knowledge 
 of what others are doing is supposed to be generally sufficient 
 to prevent him from taking a lower or paying a higher price 
 than ethers are doing. This is assumed provisionally to be 
 true both of finished goods and of their factors of production, 
 of the hire of labour and of the borrowing of capital. We 
 have already inquired to some extent, and we shall have to 
 inquire further, how far these assumptions are in accordance 
 with the actual facts of life. But meanwhile this is the sup- 
 position on which we proceed ; we assume that there is only 
 one price in the market at one and the same time ; it being 
 understood that separate allowance is made, when necessary, 
 for differences in the expense of delivering goods to dealers 
 in different parts of the market ; including, if it is a retail 
 market, allowance for the special expenses of retailing. 
 General In such a market there is a demand price for each amount 
 
 f tne commodity, that is, a price at which each particular 
 amount of the commodity can find purchasers in a unit of 
 time. The circumstances which govern this price for any 
 given amount of the commodity vary in character from one 
 problem to another ; but in every case the more of a thing is 
 
 1 See Book in. Ch. v. and Book iv. Ch. vn. 8. This general statement of 
 a broad principle is called a Law, not very appropriately, but for lack of a better 
 term. Its applications are numerous ; and many words would be wasted in bring- 
 ing it to bear, if it had not a special name. See Book i. Ch. vi. 6. 
 
BASIS OF THE GENERAL THEORY. 421 
 
 offered for sale in a market the lower is the price at which it BOOK v. 
 will find purchasers; or in other words, the demand price _ ' 
 for each unit diminishes with every increase in the amount 
 offered. 
 
 The unit of time may be chosen according to the cir- 
 cumstances of each particular problem : it may be a day, a 
 month, a year, or even a generation: but in every case it 
 must be short relatively to the whole period of the market 
 the equilibrium of which is being investigated. It is to be 
 assumed that the general circumstances of the market remain 
 unchanged throughout this period; that there is, for instance, 
 no change in fashion or taste, no new substitute which might 
 affect the demand, no new invention to disturb the supply. 
 
 The conditions of normal supply are less definite ; and a The condi- 
 full study of them must be reserved for later chapters. They supply will 
 
 will be found to vary in detail with the length of the period 
 
 of time to which the investigation refers; chiefly because fti me to 
 
 both the Material capital of machinery and other business reference 
 
 plant, and the Immaterial capital of business skill and ability 
 
 and organization, are of slow growth and slow decay. 
 
 Let us call to mind the Representative firm, whose But we 
 economies of production, internal and external, are dependent 
 on the aggregate volume of production of the commodity that 
 
 they make 1 ; and, postponing all further study of the nature supply 
 of this dependence, let us assume that the normal supply the ex- 
 price of any amount of that commodity may be taken to be production, 
 
 its normal_ejpnses of productioiT(mcluding gross earnings 
 
 of management 2 ) by that firm. That is, let us assume that 
 
 this is the price the expectation of which will just suffice to ment, of a 
 
 maintain the existing aggregate amount of production ; some tatwefirm. 
 
 firms meanwhile rising and increasing their output, and 
 
 others falling and diminishing theirs; but the aggregate pro- 
 
 duction remaining unchanged. A price higher than this 
 
 would increase the growth of the rising firms, and slacken, 
 
 though it might not arrest, the decay of the falling firms ; 
 
 with the net result of an increase in the aggregate produc- 
 
 tion. And on the other hand, a price lower than this would 
 
 1 See Book iv. Ch. xm. 2. 
 
 2 See last paragraph of Book iv. Ch. XH. 
 
422 
 
 EQUILIBRIUM OF NORMAL DEMAND AND SUPPLY. 
 
 BOOK V. 
 CH. III. 
 
 The con- 
 struction 
 of the list 
 of prices 
 at which a 
 thing can 
 be sup- 
 plied; or 
 its supply 
 schedule. 
 
 hasten the decay of the falling firms, and slacken the growth 
 of the rising firms ; and on the whole diminish production. 
 
 5. To give definiteness to the ideas let us suppose 
 that a person well acquainted with the woollen trade sets 
 himself to inquire what would be the normal supply price 
 of a certain number of millions of yards annually of a 
 particular kind of cloth. He would have to reckon (i) the 
 price of the wool, coal, and other materials which would be 
 used up in making it, (ii) wear and tear and depreciation of 
 the buildings, machinery and other fixed capital, (iii) interest 
 and insurance on all the capital, (iv) the wages of those who 
 work in the factories, and (v) the gross earnings of manage- 
 ment, (including insurance against loss) of those who under- 
 take the risks, who engineer and superintend the working. 
 He would of course estimate the supply prices of all these 
 different factors of production of the cloth with reference 
 to the amounts of each of them that would be wanted, and 
 on the supposition that the conditions of supply would be 
 normal. 
 
 Let us suppose a list of supply prices (or a supply 
 schedule) made' on a similar plan to that of our list of 
 demand prices (or demand schedule 1 ) : the supply price 
 of the production of each amount of the commodity in a 
 year, or any other unit of time, being written against that 
 amount 3 . As the (annual) amount produced increases, the 
 
 Fig. 18. 
 
 1 See Book m. Ch. in. 4. 
 
 2 Measuring, as in the case of the demand 
 curve, amounts of the commodity along Ox 
 and prices parallel to Oy, we get for each 
 point M along Ox a line HP drawn at right 
 angles to it measuring the supply price for 
 the amount OM, the extremity of which, P, 
 may be called a supply point ; this price MP 
 being made up of the supply prices of the 
 several factors of production for the amount 
 OM. The locus of P may be called the supply 
 curve. 
 
 Suppose, for instance, that we classify the 
 expenses of production of our representative 
 firm, when an amount OM of cloth is being 
 produced under the heads of (i) Mp { , the 
 supply price of the wool and other circulating capital which would be consumed 
 in making it, (ii) pip 3 the corresponding wear-and-tear and depreciation on build- 
 
THE LIST OF PRICES AT WHICH A THING WILL BE SUPPLIED. 423 
 
 supply price may either increase or diminish, or it may BOOKV. 
 even alternately increase and diminish 1 . For if nature is C ^J^' 
 offering a sturdy resistance to man's efforts to wring from 
 her a larger supply of raw material, while at that particular 
 stage there is no great room for introducing important 
 new economies into the manufacture, the supply price will 
 rise ; but if the volume of production were greater, it would 
 perhaps be profitable to substitute largely machine work for 
 hand work and steam power for muscular force ; and the 
 increase in the volume of production would have diminished 
 the expenses of production of the commodity of our Repre- 
 sentative firm. 
 
 But those cases in which the supply price falls as the We post- 
 amount increases involve special difficulties of their own. f^ 
 And, in order that we may get a clear view of the broad 
 relations between normal demand and supply, let us leave diminishes 
 
 rr J ' as the 
 
 them out of account, and confine our attention in the re- amount' 
 mainder of this chapter to cases in which the normal supply increases, 
 price either remains constant for different amounts or in- 
 creases as the amount produced increases. 
 
 6. When therefore the amount produced (in a unit of What is 
 time) is such that the demand price is greater than the equiii- 
 supply price, then sellers receive more than is sufficient to 
 make it worth their while to bring goods to market to that 
 
 ings, machinery and other fixed capital ; (iii) p 3 p 3 the interest and insurance on 
 all the capital, (iv) p$pi the wages of those who work in the factory, and (v) pP 
 the gross earnings of management, &c. of those who undertake the risks and direct 
 the work. Thus as M moves from towards the right p l , pz,ps,p4, will each 
 trace out a curve, and the ultimate supply curve traced out by P will be thus 
 shown as obtained by superimposing the supply curves for the several factors of 
 production of the cloth. 
 
 It must be remembered that these supply prices are the prices not of units of * 
 the several factors but of those amounts of the several factors which are required 
 for producing a yard of the cloth. Thus, for instance, p 3 p^ is the supply price not 
 of any fixed amount of labour but of that amount of labour which is employed in 
 making a yard where there is an aggregate production of OM yards. (See above, 
 3.) We need not trouble ourselves to consider just here whether the ground- 
 rent of the factory must be put into a class by itself : this belongs to a group of 
 questions which will be discussed later. We are taking no notice of rates and 
 taxes, for which he would of course have to make his account. 
 
 1 That is, a point moving along the supply curve towards the right may either 
 rise or fall, or even it may alternately rise and fall ; in other words, the supply 
 curve may be inclined positively or negatively, or even at some parts of its course 
 it may be inclined positively and at others negatively. (See foot-note on p. 175.) 
 
424 EQUILIBRIUM OF NORMAL DEMAND AND SUPPLY. 
 
 BOOKV. amount; and there is at work an active force tending to 
 cH^m. j ncrease h e amoun t brought forward for sale. On the other 
 hand, when the amount produced is such that the demand 
 price is less than the supply price, sellers receive less than is 
 sufficient to make it worth their while to bring goods to 
 market on that scale ; so that those who were just on the 
 margin of doubt as to whether to go on producing are decided 
 not to do so, and there is an active force at work tending to 
 \ diminish the amount brought forward for sale. When the 
 demand price is equal to the supply price, the amount 
 produced has no tendency either to be increased or to be 
 diminished ; it is in equilibrium. 
 
 When demand and supply are in equilibrium, the amount 
 f ^ ne commodity which is being produced in a unit of time 
 
 price' ma y ke ca ^ e d the Equilibrium-amount, and the price at 
 
 which it is being sold may be called the Equilibrium-price. 
 
 Stable Such an equilibrium is Stable ; that is, the price, if dis- 
 
 ' placed a little from it, will tend to return, as a pendulum 
 
 the con- oscillates about its lowest point ; and it will be found to be a 
 
 under 8 characteristic of stable equilibria that in them the demand 
 
 occur* the {/P r ^ ce i g greater than the supply price for amounts just less 
 
 than the equilibrium amount, and vice versa 1 . For when the 
 
 demand price is greater than the, supply price, the amount 
 
 produced tends to increase; and therefore, if the demand 
 
 price is greater than the supply price for amounts just less 
 
 than an equilibrium amount, then if the scale of production 
 
 / is temporarily diminished somewhat below that equilibrium 
 
 position, it will tend to return ; thus the equilibrium is stable 
 
 for displacements in that direction. If the demand price is 
 
 greater than the supply price for amounts just less than the 
 
 equilibrium amount, it is sure to be less than the supply 
 
 price for amounts just greater: and therefore, if the scale of 
 
 production is somewhat increased beyond the equilibrium 
 
 position, it will tend to return ; and the equilibrium will be 
 
 stable for displacements in that direction also. 
 
 1 When we come to discuss equilibria of demand and supply with reference to 
 things of which the supply price diminishes as the amount produced increases, 
 we shall find that some equilibria, which though not practically important are yet 
 theoretically possible, are unstable; and that they are distinguished from stable 
 equilibria by wanting this characteristic. 
 
STABLE EQUILIBRIUM. 425 
 
 V. 
 
 When demand and supply are in stable equilibrium 4 , if BOOK 
 any accident should move the scale of production from its 
 equilibrium position, there will be instantly brought into 
 
 play forces tending to bring it back to that position ; just as, a position 
 if a stone hanging by a string is displaced from its equilibrium equiii- 
 position, the force of gravity will at once tend to bring it back 
 to its equilibrium position. The movements of the scale of 
 production about its position of equilibrium will be of a 
 somewhat similar kind 1 . 
 
 But in real life such oscillations are seldom as rhythmi- are seldom 
 
 i . ' i rhythmi- 
 
 cal as those of a stone hanging freely from a string ; the cai. 
 comparison would be more exact if the string were supposed 
 to hang in the troubled waters of a mill-race, whose stream 
 was at one time allowed to flow freely, and at another parti- 
 ally cut off. The demand and supply schedules do not in 
 practice remain unchanged for a long time together, but 
 are constantly being changed ; and every change in them 
 alters the equilibrium amount and the equilibrium price, 
 and thus gives new positions to the centres about which 
 the amount and the price tend to oscillate. 
 
 These considerations point to the great importance of Looseness 
 the element of time in relation to demand and supply, to connection 
 the study of which we now proceed. We shall gradually 
 
 discover a great many different limitations of the doctrine P rice of a 
 
 commodity 
 
 1 To represent the equilibrium of demand and supply geometrically we may 
 draw the demand and supply curves together as in Fig. 19. If then OR repre- 
 sents the rate at which production is being actually carried on, and Rd the demand 
 price is greater than Rs the supply price, the production D 
 
 is exceptionally profitable, and will be increased. R, v \ 
 the amount-index, as we may call it, will move to the 
 right. On the other hand, if Rd is less than Rs, R will , 
 
 move to the left. If Rd is equal to Rs, that is, if R is 
 vertically under a point of intersection of the curves, ,T~~^*1 Hi' 
 
 demand and supply are in equilibrium. 
 
 This may be taken as the typical diagram for stable 
 equilibrium for a commodity that obeys the law of 
 diminishing return! 5ut it 1 we had made 88' a hori- 
 zontal straight line, we should have represented the case of "constant return," 
 in which the supply price is the same for all amounts of the commodity. And 
 if we had made SS' inclined negatively, but less steeply than DD' (the necessity for 
 this condition will appear more fully later on), we should have got a case of stable 
 equilibrium for a commodity which obeys the law of increasing return. In either 
 case the above reasoning remains unchanged without the alteration of a word or a 
 letter ; but the last case introduces difficulties which we have arranged to postpone. 
 
426 EQUILIBRIUM OF NORMAL DEMAND AND SUPPLY. 
 
 BOOK v. tha*t the price at which a thing can be produced represents 
 
 _J ' its real cost of production, that is, the efforts and sacrifices 
 
 real cost wn i cn nave been directly and indirectly devoted to its pro- 
 of pro- duction. That doctrine would indeed represent facts accu- 
 
 duction. . . . , . . . 
 
 rately enough in a stationary society, in which people s habits 
 of life, and the methods and volume of production remained 
 unchanged from one generation to another; provided that 
 people were tolerably free to choose those occupations for 
 their capital and labour which seemed most advantageous. . 
 The true But in an age of change such as this, the equilibrium of 
 
 cancfof a normal demand and supply does not thus correspond to any 
 norma? f distinct relation of a certain aggregate of pleasures got from 
 equili- the consumption of the commodity and an aggregate of efforts 
 and of the and sacrifices involved in producing them ; and it would not 
 do so even if normal earnings and interest were exact measures 
 of the efforts and sacrifices for which they are severally the 
 money payments. It represents only the equilibrium of the 
 forces working at the margins of demand and supply, tending 
 to increase the amount demanded on the one hand, or to 
 diminish the amount supplied at the equilibrium price. 
 
 This is the real drift of that much-quoted, and much- 
 misunderstood doctrine of Adam Smith and other economists 
 that the normal, or " natural," value of a commodity is that 
 which economic forces tend to bring about in the long run. 
 It is the average value which economic forces would bring 
 about if the general conditions of life were stationary for a 
 run of time long enough to enable them all to work out their 
 full effect. The fact that the general conditions of life are 
 not stationary is the source of many of the difficulties that 
 are met with in applying economic doctrines to practical 
 problems. And the remainder of the present volume will be 
 chiefly occupied with interpreting and limiting this doctrine 
 that the value of a thing tends in the long run to measure 
 its cost of production 1 . 
 
 1 It has been objected that since " the economic world is subject to continual 
 changes, and is becoming more complex,... the longer the run the more hopeless 
 the rectification ": so that to speak of that position which value tends to reach in 
 the long run is to treat "variables as constants." (Devas, Political Economy, 
 Book iv. Ch. v.) The charge is so far just, that we do treat variables provisionally 
 as constants. For indeed that is the only method by which science has ever made 
 
MEANING OF THE PHRASE "IN THE LONG RUN." 427 
 
 7. In the Note at the end of this Book some account BOOK v. 
 will be given of the controversy whether " Cost of production " 
 or " Utility " governs value. But it may be well to say here J 
 
 at once that we might as reasonably dispute whether it is and Cost of 
 
 ' . . production 
 
 the upper or the lower blade of a pair of scissors that cuts a on value. 
 piece of paper. It is true that when one blade is held still, 
 and the cutting is effected by moving the other, we may say 
 with careless brevity that the cutting is done by the second ; 
 but the statement is not strictly accurate, and is to be 
 excused only so long as it claims to be merely a popular and 
 not a strictly scientific account of what actually happens. 
 
 In the same way, when a thing alreafly r made has to be The former 
 sold, the prices which people will be willing to pay for it will S in** 61 
 be governed by their desire to have it, together with the ^JJ** 
 amount they can afford to spend on it. Their desire to have 
 it depends partly on the chance that, if they do not buy it, 
 they will be able to get another thing like it at as low a price : 
 this depends on the causes that govern the supply of it, and 
 this again upon cost of production. But it may so happen 
 that the stock to be sold is practically fixed. This for 
 instance is the case with a fish market, in which the value of 
 fish for the day is governed almost exclusively by the stock 
 on the slabs in relation to the demand. And if a person 
 chooses to take the stock for granted ; and say that the price 
 is governed by demand, his brevity may perhaps be excused 
 so long as he does not claim strict accuracy. So again it may 
 be pardonable, but it is not strictly accurate to say that the 
 varying prices which the same rare book fetches, when sold 
 and resold at Christie's auction room, are governed exclusively 
 by demand. 
 
 Taking a case at the opposite extreme, we find some the latter 
 commodities which conform pretty closely to the law of values. 
 constant return ; that is to say, their average cost of produc- 
 tion will be very nearly the same whether they are produced 
 in small quantities or in large. In such a case the normal 
 level about which the market price fluctuates will be this 
 definite and fixed (money) cost of production. If the demand 
 
 any great progress in dealing with complex and changeful matter, whether in 
 the physical or moral world. 
 
428 EQUILIBRIUM OF NORMAL DEMAND AND SUPPLY. 
 
 CH. III. 
 
 BOOKV. happens to be great, the market price will rise for a time 
 above the level ; but as a result production will increase and 
 the market price will fall : and conversely, if the demand falls 
 for a time below its ordinary level. 
 
 In such a case, if a person chooses to neglect market 
 fluctuations, and to take it for granted that there will any- 
 how be enough demand for the commodity to insure that 
 some of it, more or less, will find purchasers at a price equal 
 to this cost of production, then he may be excused for 
 ignoring the influence of demand, and speaking of (normal) 
 price as governed by cost of production provided only he 
 does not claim scientific accuracy for the wording of his 
 doctrine, and explains the influence of demand in its right 
 place. 
 
 Thus we may say that, as a general rule, the shorter the 
 period which we are considering the greater must be the 
 share of our attention which is given to the influence of 
 demand on value ; and the longer the period, the more 
 important will be the influence of cost of production on 
 value. 
 
CHAPTER IV. 
 
 INVESTMENT OF RESOURCES FOR A DISTANT RETURN. 
 PRIME COST AND TOTAL COST. 
 
 1. THE true nature of the investment of resources for BOOK v. 
 a distant return is disguised by the modern methods of doing CH ' Iv ' 
 business, in which the undertaker buys most of the labour The mo- 
 required for his work ; for he thinks chiefly of the expenses mining the 
 of production and seldom pays much attention to the efforts 
 
 and sacrifices to which those payments more or less closely 
 correspond, and which constitute the Real cost of production, complex. 
 It will be well therefore to begin by watching the action of 
 a person who neither buys what he wants nor sells what he 
 makes, but works on his own behalf; and who therefore 
 balances the efforts and sacrifices which he makes on the 
 one hand against the pleasures which he expects to derive 
 from their fruit on the other, without the intervention of any 
 money payments at all. 
 
 Let us then take the case of a man who builds a house They may 
 for himself on land, and of materials, which Nature supplies seentnthe 
 
 gratis ; and who makes his implements as he goes, the labour 
 of making them being counted as part of the labour of build- JJj es f J 
 ing the house. He would have to estimate the efforts re- his own 
 quired for building on any proposed plan; and to allow 
 almost instinctively an amount increasing in geometrical 
 proportion (a sort of compound interest) for the period that 
 would elapse between each effort and the time when the 
 house would be ready for his use. The utility of the house 
 to him when finished would have to compensate him not 
 only for the efforts, but for the waitings 1 . 
 
 1 For he might have applied these efforts, or efforts equivalent to them, to 
 producing immediate gratifications; and if he deliberately chose the deferred 
 
430 INVESTMENT OF CAPITAL. PRIME COST AND TOTAL COST. 
 
 BOOKV. If the two motives, one deterring, the other impelling, 
 CH ' IV ' seemed equally balanced, he would be on the margin of 
 doubt. . Probably the gain would be much stronger than the 
 " real " cost with regard to some part of the house ; (and from 
 this he would derive a Producer's Surplus or Rent) 1 . But as 
 he turned over more and more ambitious plans, there would 
 be a point at which the advantages of any further extension 
 would be balanced by the efforts and waitings required for 
 making it; and that part of the building would be on the 
 margin of profitableness of the investment of his capital 2 . 
 
 There would probably be several ways of building parts 
 of the house ; some parts for instance might almost equally 
 well be built of wood or of rough stones : the investment of 
 capital on each plan for each part of the accommodation 
 would be compared with the advantages offered thereby, and 
 each would be pushed forward till the margin of profitable- 
 ness had been reached. Thus there would be a great many 
 margins of profitableness : one corresponding to each kind 
 of plan on which each kind of accommodation might be 
 provided 3 . 
 
 Transition 2. This illustration may serve to keep before us the 
 vestment way in which the efforts and sacrifices which are the real 
 by C th P e ltal cost f production of a thing, underlie the expenses which are 
 
 gratifications, it would be because, even after allowing for the disadvantages of 
 waiting, he regarded them as outweighing the earlier gratifications which he could 
 have substituted for them. The motive force then tending to deter him from 
 building the house would be his estimate of the aggregate of these efforts, the evil 
 or discommodity of each being increased in geometrical proportion (a sort of 
 compound interest) according to the corresponding interval of waiting. The 
 motive on the other hand impelling him to build it, would be expectation of the 
 satisfaction which he would have from the house when completed ; and that again 
 might_be resolved into the aggregate of many pleasures more or less remote, and 
 more or less certain, which he expected to derive from its use. (See Book in. 
 Ch. v. 3, and Book iv. Ch. vn. 8.) 
 
 If he thought that this satisfaction which he would derive from the house 
 when finished, this aggregate of discounted values of satisfactions that it would 
 afford him, would be more than a recompense to him for all the efforts and 
 waitings which he had undergone, he would decide to build. 
 
 1 See above, pp. 314 and 217. 
 
 2 See Mathematical Note xin. 
 
 8 On such a supposition as that made in this Section, we may look upon capital 
 as stored-up effort, the amount of effort and the amount of sacrifice involved in 
 the waiting for the result being measured quantitatively. See Mathematical 
 Note xiv. 
 
BALANCING OF FUTURE BENEFITS AGAINST PRESENT. 431 
 
 its Money cost. But, as has just been remarked, the modern BOOK v. 
 business man commonly takes the payments which he has to c ^_^' 
 make, whether for wages or raw material, as he finds them ; jJJ^Sker 
 without staying to inquire how far they are an accurate of business 
 measure of the efforts and sacrifices to which they correspond, prises. 
 His expenditure is generally made piece-meal ; and the longer 
 he expects to wait for the fruit of any outlay, the richer must 
 that fruit be in order to compensate him. The anticipated 
 fruit may not be certain ; and in that case he will have to 
 allow for the risk of failure. After making that allowance, 
 the fruit of the outlay must be expected to exceed the outlay 
 itself by an amount which, independently of his own remu- 
 neration, increases at compound interest in proportion to the 
 time of waiting 1 . 
 
 For brevity we may speak of any element of outlay (allow- 
 ance being made for the remuneration of the undertaker 
 himself) when increased by compound interest in this way, 
 as Accumulated ; just as we used the term Discounted to Accumuia- 
 represent the present value of a distant pleasure. Each and dis- 
 element of outlay has then to be accumulated for the time ^^6^? 
 which will elapse between its being incurred and its bearing la y s . aild 
 fruit ; and the aggregate of these accumulated elements is 
 the total outlay involved in the enterprise. 
 
 If the enterprise were, say, to dig out a dock- basin on a Thebalanc- 
 contract, the payment for which would be made without fail agairfst'the 
 when the work was finished ; and if the plant used in the other- 
 work might be taken to be worn out in the process, and 
 valueless at the end of it; then the enterprise would be just 
 remunerative if this aggregate of outlays accumulated up to 
 the period of payment were just equal to that payment. 
 
 But in fact in nearly every business undertaking the 
 incomings are a constant process as well as the outgoings. 
 And to complete the case we must suppose a balance-sheet 
 struck, looking backwards and looking forwards. Looking 
 backwards we should add together the net outlays accumu- 
 
 1 We may, if we choose, regard the price of the business undertaker's own 
 work as part of the original outlay, and reckon compound interest on it together 
 with the rest. Or we might substitute for compound interest a sort of "compound 
 profit." The two courses are not strictly convertible: and at a later stage we 
 shall find that in certain cases the first is to be preferred, and in others the second. 
 
432 INVESTMENT OF RESOURCES FOR A DISTANT RETURN. 
 
 BOOK v. lated up to that time, deducting from each element of outlay 
 c fl!T any incomings that came in at the same time. Looking for- 
 wards we should deduct from each future incoming any out- 
 lay that would be made at the same time, together with 
 allowance for the undertaker's own remuneration ; and regard- 
 ing the result as the net incoming at that time, we should 
 discount it at compound interest for the period during which 
 it would be deferred. The aggregate of the net incomings so 
 discounted would be balanced against the aggregate of the 
 accumulated outlays : and if the two were just equal, the 
 business would be just remunerative 1 . 
 
 The Law of g 3. When at the beginning of a business an estimate is 
 tion. made of the profits likely to be earned in it, all the entries 
 
 for outgoings and incomings alike are prospective. And at 
 that and every successive stage the mind of the undertaker 
 is ceaselessly striving so to modify his arrangements as to 
 obtain greater results with a given expenditure or equal 
 results with a less expenditure. He is continually com- 
 paring the efficiency and the supply prices of different factors 
 of production which may be used in obtaining the same 
 result, so as to hit upon that combination which will give 
 
 1 Almost every trade has its own difficulties and its own customs connected 
 with the task of valuing the capital that has been invested in a business, and of 
 allowing for the depreciation which that capital has undergone from wear-and- 
 tear, from the influence of the elements, from new inventions, and from changes 
 in the course of trade. These two last causes may temporarily raise the value of 
 some kinds of fixed capital, at the same time that they are lowering that of others. 
 And people whose minds are cast in different moulds, or whose interests in the 
 matter point in different directions, will often differ widely on the question what 
 part of the expenditure required for adapting buildings and plant to changing 
 conditions of trade, may be regarded as an investment of new capital ; and what 
 ought to be set down as charges incurred to balance depreciation, and treated as 
 expenditure deducted from the current receipts, before determining the net profits 
 or true income earned by the business. These difficulties, and the consequent 
 differences of opinion, are greatest of all with regard to the investment of capital 
 in building up a business connection, and the proper method of appraising the 
 goodwill of a business, or its value "as a going concern." On the whole of this 
 subject see Matheson's Depreciation of Factories and their Valuation. 
 
 Another group of difficulties arises from changes in the general purchasing 
 power of money. If that has fallen, or, in other words, if there has been a rise of 
 general prices, the value of a factory may appear to have risen when it has really 
 remained stationary. Confusions arising from this source introduce greater errors 
 into estimates of the real profitableness of different classes of business than would 
 at first sight appear probable. But all questions of this kind must be deferred till 
 we have discussed the theory of money. 
 
BALANCING OF PECUNIARY OUTLAY AND RETURNS. 433 
 
 the largest incomings in proportion to any given outlay ; or, BOOK v. 
 in other words, he is ceaselessly occupied with the action of c ^^' 
 the law of substitution 1 . 
 
 Every locality has incidents of its own which affect in Different 
 various ways the methods of arrangement of every class of 
 business that is carried on in it. But even in the same place j 
 and the same trade no two persons pursuing the same aims end - 
 will adopt exactly the same routes. The tendency to varia- 
 tion is a chief cause of progress ; and the abler are the 
 undertakers in any trade the greater will this tendency be. 
 In some trades, as for instance cotton-spinning, the possible 
 variations are confined within narrow limits ; no one can hold 
 his own at all who does not use machinery, and very nearly 
 the latest machinery, for every part of the work. But in 
 others, as for instance in some branches of the wood and 
 metal trades, in farming, and in shopkeeping, there can be 
 great variations. For instance, of two manufacturers in the 
 same trade, one will perhaps have a larger wages bill and the 
 other heavier charges on account of machinery ; of two retail 
 dealers one will have a larger capital locked up in stock and 
 the other will spend more on advertisements and other means 
 of building up the immaterial capital of a profitable trade 
 connection. And in minor details the variations are number- 
 less. Each man's actions are influenced by his special 
 opportunities and resources, as well as by his temperament 
 and his associations. 
 
 But each man, taking account of his own means, will push The 
 the investment of capital in his business in each several profitable- 
 direction until what appears in his judgment to be the margin ^mere" 
 of profitableness is reached ; that is, until there seems to him P in * 
 no good reason for thinking: that the gains resulting from any route, but 
 
 J a line inter- 
 further investment in that particular direction would com- secting all 
 
 pensate him for his outlay. The margin of profitableness is ro 
 not to be regarded as a mere point on any one fixed line of 
 possible investment; but as a boundary line of irregular 
 shape cutting one after another every possible line of invest- 
 ment. 
 
 4. When investing his capital in providing the means 
 
 i Book v. Ch. in. 3. 
 
 M. 28 
 
434 
 
 BOOK V. 
 CH. IV. 
 
 Prime or 
 Special 
 cost. 
 
 Supplemen- 
 tary and 
 Total cost, 
 
 Prime cost 
 is taken to 
 include 
 only the 
 price of 
 raw mate- 
 rial and 
 ordinary 
 labour, 
 and extra 
 wear and 
 tear of 
 plant. 
 
 INVESTMENT OF RESOURCES FOR A DISTANT RETURN. 
 
 of carrying on a business, the undertaker looks to being 
 recouped by the price obtained for its various products ; and 
 he expects to be able under normal conditions to charge for 
 each of them a price that will not only cover its (Money) 
 Special, Direct, or Prime cost ; but also bear its proper share 
 of the general expenses of the business, which we may call 
 its Supplementary cost. These two elements together make 
 its (Money) Total cost. ^ (r^^Ju^^L ; t^-Le^ ca $~t* 
 
 There are great variations in the usage of the term 
 Prime cost in business life. But it is taken here in a narrow 
 sense, so as to include nothing but the (Money) cost of the 
 raw material used in making the commodity and the wages 
 of that part of the labour spent on it which is paid by the 
 day or the week and the extra wear and tear of plant : 
 the salaries of the upper employees are as a rule excluded, 
 because the charges to which the business is put on account 
 of their salaries cannot generally be adapted quickly to 
 changes in the amount of work there is for them to do. 
 Special costs are those incurred for a near return. Sup- 
 plementary costs are those incurred for a distant return 1 . 
 
 This is the special cost which a manufacturer has com- 
 monly in view when, trade being slack, he is calculating the 
 lowest price at which it will be worth his while to accept 
 an order, irrespectively of any effect that his action might 
 have in spoiling the market for future orders. And in 
 extreme cases he will even be willing to accept a lower price 
 than this. 'For when he has been for some time short of 
 work, and has already dismissed all save the best of his 
 employees, it would to say nothing of any less selfish motive 
 almost answer his purpose to pay the remainder full wages 
 to beat time, so to speak ; in order that he may have them 
 
 1 "There are many systems of Prime Cost in vogue.... we take Prime Cost to 
 mean, as in fact the words imply, only the original or direct cost of production ; 
 and while in some trades it may be a matter of convenience to include in the cost 
 of production a proportion of indirect expenses, and a charge for depreciation on 
 plant and buildings, in no case should it comprise interest on capital or profit." 
 (Garcke and Fells, Factory Accounts, Ch. i.) Elaborate statistics of thevarious 
 elements of cost of production in certain trades have been made by the Com- 
 missioner of Labour in the United States; and his Report for 1890 contains 
 many suggestive remarks on the subject of this chapter. See also the Report of 
 the Massachusetts Bureau of Labour for the same year. 
 
AN APPLICATION OF THE LAW OF SUBSTITUTION. 435 
 
 at hand when, trade revives and high profits are again to BOOKV. 
 be made. CH ' m 
 
 In trades which use very expensive plant, the supple- Where 
 mentary cost of goods is a large part of their total cost ; much fixed 
 and an order at much less than their normal price may 
 leave a large surplus above their direct and special or prime 
 cost. But if in their anxiety to prevent their plant from normal 
 being idle producers accept such orders, they glut the put reach- 
 
 market and tend to prevent prices from reviving. If they 
 pursue this policy constantly and without moderation, they cost - 
 may keep prices so low as to drive capital out of the trade, 
 ruining many of those employed in it, themselves perhaps 
 among the number. During all this time the income derived 
 from their plant and business organization will be very low ; 
 but after a while the demand for their goods will revive, 
 and the means for meeting it will be inadequate ; and the 
 prices of the goods will then rise high above their normal 
 level 1 . foAVed^ 
 
 5. That part of the receipts of a ^business which is The income 
 required to defray the supplementary cost of the things i on g ran 
 produced in it may in the long run be regarded as part of vie- 
 its normal profits, because the expectation of getting these mentary 
 
 Costs for a 
 
 gams in the long run was required to induce people to invest normally 
 their capital and energies in the trade. But on the other business, 
 hand, when once invested, the income which they yield to ^'JJ/run 
 their owner is governed by the selling price of the products b regard- 
 which they help to produce. We shall find reason for Quasi-rent. 
 describing the excess of this price over the prime cost or 
 immediate outlay required for the production as a Quasi- 
 rent, because we shall find that it has some analogy to that 
 
 1 Extreme variations of this kind are in the long run beneficial neither to 
 producers nor to consumers ; and general opinion is not altogether hostile to that 
 code of trade morality which condemns the action of anyone who "spoils the 
 market" by being too ready to accept a price that does little more than cover 
 the prime cost of his goods, and allows but little on account of his general 
 expenses. The public listen with some indulgence to those who argue that a 
 trade combination or a Trust is the only means available for securing a reasonable 
 steadiness of price. Questions of this kind are of great and growing importance, 
 and will occupy much of our attention later on when we come to consider the 
 causes of commercial fluctuations. 
 
 282 
 
436 
 
 INVESTMENT OF RESOURCES FOR A DISTANT RETURN. 
 
 BOOK V. 
 CH. IV. 
 
 Pro- 
 visional 
 forecast of 
 the long 
 study of 
 this prin- 
 ciple on 
 which we 
 are enter- 
 ing. 
 
 
 y 
 
 Producer's Surplus, accruing from the ownership of fertile 
 land, which is called Rent. 
 
 This brings us to the threshold of the main difficulty of 
 the problem of value ; and it will be well to pause a little to 
 look at it. What can be said now is not a solution of the 
 difficulty ; but a partial statement as to the general nature 
 of the solution which will ultimately be found for it. The 
 statement as it stands will perhaps not be completely in- 
 telligible: but it may help to prepare the way for future 
 explanations and to fit them into their place. 
 
 Appliances for production are of many different kinds: 
 they include land, factories, machines, business organizations 
 (including even such as a house-letting agency, with a good 
 connection but little or no material capital), business ability 
 and manual skill. The owner of any one of those will not 
 generally apply it to produce anything, unless he expects to 
 gain in return at least enough to compensate him for the 
 immediate and special trouble, sacrifice and outlay involved 
 in this particular operation, and which he could escape by 
 ^declining to undertake it. Any excess which he gets above 
 this prune cost has obviously some prima facie resemblance 
 to that excess value of the produce of land over the direct 
 cost of raising it which is the basis of rent as ordinarily 
 understood; and we are therefore justified in calling it a 
 Quasi-rent. 
 
 The question how close this resemblance is involves many 
 subtle considerations, some of which have but little interest 
 for the general reader, and the discussion of them is so 
 arranged that he can omit them. Much of it will turn on 
 the fact that while excess of the gross receipts which a 
 producer gets for any of his commodities over their prime 
 cost (that is, over that extra cost which he incurs in order to 
 produce those particular things, and which he could have 
 escaped if he had not produced them) is a temporary 
 surplus (or quasi-rent), yet that in the long run all these 
 temporary surpluses are needed to cover the supplementary 
 costs of the business. They_dcL-BoJb therefore, .iiLjJi 
 
 run, yield a true surplus, corresponding to the permanent 
 surplus which the possession of fertile land is commonly 
 
SUPPLEMENTARY COST AND QUASI-RENT. 437 
 
 supposed to yield, and in some cases does yield, to its BOOKV. 
 
 CH. IV. 
 
 owner. 
 
 The question how great a part of his expenses he must The 
 enter in these prime costs, and how much he must deduct 
 from his selling price before he calculates his surplus, depends 
 on how far he looks ahead ; or in other words, on whether cations 
 he is making his calculations for a long period or only for a principle, 
 short. 
 
 If he is looking only a little way ahead, and is not afraid 
 of spoiling his market ; if he has got all his apparatus ready 
 and standing idle; then a new order coining in will give him 
 a surplus over its direct cost to him, consisting of the whole 
 price which he receives after deducting the special outlay 
 for raw material, for extra wages, and for wear and tear of 
 plant involved in filling up the order. But suppose him to 
 be looking far ahead, and proposing to extend his factory so 
 as to do an increased business ; he does not then reckon any 
 price as affording him a real surplus, unless, after allowing 
 for all risks, it will yield him, in addition to prime costs, 
 sufficient to give normal profits on all his outlay for material, 
 plant, and for building up his business connection, together 
 with charges for depreciation through the lapse of time, and 
 for office and other general expenses which are not reckoned 
 in the prime, or special and direct, costs of filling up any 
 particular order. 
 
 The conditions which govern the amount of this surplus 
 and its relations to value depend not so much on the nature 
 of the industry as on the period of time for which the calcu- 
 lation is made. But a short period for one class of industry 
 may be a long one for another, just as the age of youth for 
 a dog is shorter than for an elephant 1 . 
 
 To put the same thing in another way, when we are taking 
 a broad view of normal value extending over a very long period 
 of time, when we are investigating the causes which determine 
 normal value "in the long run," when we are tracing the 
 " ultimate " effects of economic causes, then the income that 
 
 1 This and a few other passages are reproduced from an article On Rent in the 
 Economic Journal for March, 1893. See also the remarks on Continuity in the 
 Preface to the first edition of this volume. 
 
438 INVESTMENT OF RESOURCES FOR A DISTANT RETURN. 
 
 BOOK v. is derived from capital in these forms enters into the payments 
 c ^lH' by which the expenses of production of the commodity in 
 question have to be covered, and it directly controls the action 
 of the producers who are on the margin of doubt as to whether 
 to increase the means of production or not. But, on the 
 other hand, when we are considering the causes which deter- 
 mine normal prices for a period which is short relatively to 
 that required for largely increasing the supply of those 
 appliances for production, then their influence on value is 
 chiefly indirect and more or less similar to that exerted by 
 the free gifts of nature. The shorter the period which we 
 are considering, and the slower the process of production of 
 those appliances, the less part will variations in the income 
 derived from them play in checking or increasing the supply 
 of the commodity produced by them, and in raising or 
 lowering its supply price ; and the more nearly true will it 
 be that, for the period under discussion, the net income to 
 be derived from them is to be regarded as a producer's 
 surplus or quasi-rent. And thus in passing from the free 
 gifts of nature through the more permanent improvements 
 in the soil to less permanent improvements, to farm and 
 factory buildings, to steam-engines, &c., and finally to the 
 less durable and less slowly made implements, we find a 
 continuous series. 
 
 Caution From this provisional and incomplete statement it will be 
 
 confusion, obvious that this producer's surplus (or quasi-rent) is of a 
 different character from that which the worker or accumu- 
 lator of capital derives from the fact that much of his work 
 or waiting involves no sacrifice, while yet the whole of it 
 reaps a reward 1 . For the basis of these surpluses is a psycho- 
 logical peculiarity of the individual : while the quasi-rent of 
 an appliance for production is not generally any surplus at 
 all in the long run ; but under the influence of changing 
 circumstance, varying fashion, innovating invention, fluctuat- 
 ing credit, &c. sometimes rises above, and sometimes falls 
 below that level which was anticipated when the appliance 
 was brought into existence. Further light will be thrown on 
 this question later on in the present book and in the sixth book. 
 
 1 See pp. 21718 and 314. 
 
CHAPTER V. 
 
 EQUILIBRIUM OF NORMAL DEMAND AND SUPPLY, CONTINUED. 
 THE TERM NORMAL WITH REFERENCE TO LONG AND 
 SHORT PERIODS. 
 
 1. THE present chapter is chiefly occupied with differ- BOOK v - 
 ences of degree between different parts of the problem of value, ' 
 and especially normal value, resulting from differences in the Chapter 
 length of time to which the problem relates. In this case, d -^ us f es 
 
 ' difficulties 
 
 as in others, the economist merely brings to light difficulties relating 
 that are latent in the common discourse of life, so that by element 
 being frankly faced they may be thoroughly overcome. For 
 in ordinary life it is customary to use the word Normal in 
 different senses, with reference to different periods of time ; discourse. 
 and to leave the context to explain the transition from one 
 to another. The economist follows this practice of every-day 
 life: but, by taking pains to indicate the transition, he some- 
 times seems to have created a complexity which in fact he 
 has only revealed. 
 
 Thus, for instance, when it is said that the price of wool Our elastic 
 on a certain day was abnormally high though the average the term 
 
 price for the year was abnormally low, that the wages of coal- 
 miners were abnormally high in 1872 and abnormally low in *** 
 1879, that the (real) wages of labour were abnormally high practice. 
 at the end of the fourteenth century and abnormally low in 
 the middle of the sixteenth ; everyone understands that the 
 scope of the term normal is not the same in these various 
 cases. Everyone takes the context as indicating the special 
 use of the term in each several case; and a formal inter- 
 pretation clause is seldom necessary, because in ordinary 
 
440 EQUILIBRIUM OF NORMAL DEMAND AND SUPPLY, CONTINUED. 
 
 BOOK v. conversation misunderstandings can be nipped in the bud by 
 
 CH ' v ' question and answer. Thus the difficulty arising from the 
 
 elastic use of the term Normal need not be a serious one, if 
 
 it is fairly faced: while on the other hand much confusion 
 
 and fruitless controversy have arisen from ignoring it. 
 
 studies of 2. But though applications of the term Normal are 
 
 libriunTof thus elastic, and capable of being extended gradually from 
 
 demand verv snor t to very long periods; yet these periods may be 
 
 and supply divided roughly into two classes. In the first class there 
 
 divided is time for the supply of those things which are used in 
 
 dasselas producing the commodity (or in other words, its factors 
 
 to e which dS f production) to adapt itself to the demand ; in the second 
 
 they relate c j ass there is not. The relation which this first class of 
 
 are long or . 
 
 compara- normal equilibria bears to the second may be made clearer 
 short by observing that it is similar to the relation which this 
 second class bears to the temporary equilibria discussed 
 in Chapter II.; for there the period over which we were 
 studying the action of the forces of demand and supply was 
 so short that cost of production could not exercise any 
 direct influence over the supply price. 
 
 illustration For instance, on the day following a large catch of 
 markets 1 " niackerel the price in the market may settle down after 
 Temporary a little manceuvring to an equilibrium level at as many 
 librium. pence as it had been at shillings on the previous day ; and 
 tionsof this change will in no way depend on the normal cost of 
 price about ca *ching mackerel ; it will be governed by the volume of the 
 Sh riod P ast ca * cn > w ^^ P erna P s some slight reference to the chance 
 normal that a similar catch may be had on the morrow. If we sup- 
 price. 7 pose the boat owned by a capitalist undertaker who pays the 
 fisherman by the day, the net earnings of his boat for the 
 day will be the excess of the price he gets for his fish over 
 his outlay for wages and stores, together with allowance for 
 the injury done to the boat and net by the day's work. The 
 excess on this particular day may be either more or less than 
 the normal supply price required to make it worth his while 
 to provide the boat and its equipment and the business 
 organization needed for managing it and selling its catch. 
 But if, in the long run and on the average, the excess is 
 more than this normal supply price, capital will drift into 
 
LONG AND SHORT PERIODS. 441 
 
 the fishing trade ; if less, it will drift out ; that is to say, BOOK v. 
 old boats and nets, when worn out, will seldom be replaced. CH ' v ' 
 And therefore, if the general conditions of the fishing trade 
 are stationary, the earnings of the boat will oscillate about 
 this normal supply price as a position of stable equilibrium. 
 
 But next suppose there to be great increase in the Oscilla- 
 general demand for fish, such for instance as might arise short- 
 from the spreading of a disease through all kinds of farm normal 
 stock simultaneously, by which meat was made a dear and ^ppty 
 
 J ' J price about 
 
 dangerous food. The increased demand for fish could not its equi- 
 well be met without bringing into the fishing trade some position, 
 people from outside, who were not fitted by training to do 
 its work well, and to whom many of its ordinary incidents 
 would prove great hardships. Old and unsuitable boats 
 would be pressed into the service ; the better class of boats 
 might earn in a year enough to pay fifty per cent, or more on 
 their total cost ; and able fishermen, whether paid by shares 
 or by the day, might for a time get twice their ordinary 
 wages. 
 
 The (short-period) normal price of fish would be higher 
 than before ; variations in the catch of fish from day to day 
 might make the market price oscillate at least as violently as 
 before about this new normal level for an increased amount ; 
 but this new level would rise rapidly with every such increase 
 of demand. 
 
 Of course these high prices would tend to bring capital For short 
 and labour into the trade : but if it were expected that 
 the disease among live stock would not last very long, and 
 that therefore the unusual demand for fish would die away 
 in a few years, people would be cautious about investing raises 
 capital and skill in a trade that was in danger of being supply 
 glutted. And therefore, though when the demand slackened pnce * 
 off, the price would fall too, and probably below its old level ; 
 yet so long as the demand was fully maintained the price 
 would keep up. And here we see an illustration of the 
 almost universal law that an increase in the amount demanded 
 raises the short-period normal supply price. 
 
 3. But if we turn to consider the long-period normal Long- 
 supply price, we shall find that it is determined by a different normal 
 
442 EQUILIBRIUM OF NORMAL DEMAND AND SUPPLY, CONTINUED. 
 
 CH ' v ' 
 
 BOOK v. set of causes, and with different results. For suppose that 
 the disuse of meat causes a permanent distaste for it, and 
 an i norease d demand for fish continues long enough 
 
 to enable the forces by which its supply is governed to work 
 out their action fully. The source of supply in the sea 
 might perhaps show signs of exhaustion, and the fishermen 
 might have to resort to more distant coasts and to deeper 
 waters, Nature giving a diminishing return to the increased 
 application of capital and labour of a given order of efficiency. 
 On the other hand, those might turn out to be right who 
 think that man is responsible for but a very small part 
 of the destruction of fish that is constantly going on ; and in 
 that case a boat starting with equally good appliances and 
 an equally efficient crew would be likely to get nearly 
 as good a haul after the increase in the total volume of 
 the fishing trade as before. In any case the normal real 
 cost and therefore (the general purchasing power of money 
 being assumed stationary) the normal money cost of 
 equipping a good boat with an efficient crew would certainly 
 not be higher, and probably be a little lower, after the trade 
 had settled down to its now increased dimensions, than 
 before. For since fishermen require only trained aptitudes, 
 and not any exceptional natural qualities, their number 
 could be increased in less than a generation to almost any 
 extent that was necessary to meet the demand ; while the 
 industries connected with building boats, making nets, &c., 
 being now on a larger scale, would be organized more 
 thoroughly and economically. If therefore the waters of the 
 sea showed no signs of depletion of fish, an increased supply 
 could be produced at a lower price after a time sufficiently 
 long to enable the normal action of economic causes to work 
 itself out: and, the term Normal being taken to refer to 
 a long period of time, the normal price of fish would decrease 
 with an increase in the amount produced. 
 
 Diustra- To drive this fundamental distinction well home it may 
 
 thTcostof b e we H to ^ a ke an illustration from manufacture. We saw 1 
 
 of cloth"" 1 t ^ iat to es timate the price at which a certain quantity of 
 
 cloth could be produced, a person would first calculate the 
 
 1 Above, Ch. in. 5. 
 
LONG AND SHORT PERIODS. 443 
 
 expenses of producing of all the different things required BOOKV. 
 for the purpose with reference to the amounts of each of ' 
 them that would be wanted, and on the supposition in 
 the first instance that the conditions of supply would be 
 normal. But now we have to notice that he would give 
 to this term a wider or narrower range according as he was 
 looking more or less far ahead. 
 
 Thus in estimating the wages required to call forth an 
 adequate supply of labour to work a certain class of looms, 
 he might take the current wages of similar work in the 
 neighbourhood : or he might argue that there was a scarcity 
 of that particular class of labour in the neighbourhood, that 
 its current wages there were higher than in other parts of 
 England, and that looking forward over several years so as to 
 allow for immigration, he might take the normal rate of 
 wages at a rather lower rate than that prevailing there at 
 the time. Or lastly, he might think that the wages of 
 weavers all over the country were abnormally low relatively 
 to others of the same grade, in consequence of a too sanguine 
 view having been taken of the prospects of the trade half a 
 generation ago. He might argue that this branch of work 
 was overcrowded, that parents had already begun to choose 
 other trades for their children which offered greater net 
 advantages and yet were not more difficult ; that in con- 
 sequence a few years would see a falling-off in the supply 
 of labour suited for his purpose ; so that looking forward a 
 long time he must take normal wages at a rate rather higher 
 than the present average. (There are indeed not many use of 
 occasions on which the calculations of a business man for NormaHn 
 practical purposes need to look forward so far, and to extend ordinary 
 
 business, 
 
 the range of the term Normal over a whole generation : 
 but in the broader applications of economic science it is 
 sometimes necessary to extend the range even further, and to 
 take account of the slow changes that in the course of 
 centuries affect the supply price of the labour of each 
 industrial grade.) 
 
 Again, in estimating the normal supply price of wool, he 
 would probably take the average of past years, making an 
 allowance however for any probable change in the causes 
 
444 EQUILIBRIUM OF NORMAL DEMAND AND SUPPLY, CONTINUED. 
 
 BOOKV. likely to affect the supply in the immediate future. He 
 CH ' v " would probably reckon for the effect of such droughts as 
 from time to time occur in Australia and elsewhere; since 
 their occurrence is too common to be regarded as abnormal : 
 but he would probably not allow here for the chance of our 
 being involved in a great war, by which the Australian sup- 
 plies might be cut off; he would consider that any allowance 
 for this should come under the head of extraordinary trade 
 risks, and not enter into his estimate of the normal supply 
 price of wool. 
 
 He would deal in the same way with the risk of civil 
 tumult or any violent and long-continued disturbance of the 
 labour market of an unusual character ; but in his estimate 
 of the amount of work that could be got out of the machinery, 
 &c. under normal conditions, he would probably reckon for 
 minor interruptions from trade disputes such as are con- 
 tinually occurring, and are therefore to be regarded as 
 belonging to the regular course of events, that is as not 
 abnormal 1 . 
 
 it may In all these calculations he would not concern himself 
 
 specially to inquire how far mankind are under the exclusive 
 influence of selfish or self-regarding motives. He might be 
 
 regarding, aware that anger and vanity, jealousy and offended dignity are 
 still almost as common causes of strikes and lockouts, as the 
 desire for pecuniary gain : but that would not enter into his 
 calculations: all that he would want to know about them 
 would be whether they acted with sufficient regularity for 
 
 1 These conditions are described incidentally by Tooke (History of Prices, 
 Vol. i. p. 104) : " There are particular articles of which the demand for naval and 
 military purposes forms so large a proportion to the total supply, that no diminu- 
 tion of consumption by individuals can keep pace with the immediate increase of 
 demand by government; and consequently, the breaking out of a war tends to 
 raise the price of such articles to a great relative height. But even of such articles, 
 if the consumption were not on a progressive scale of increase so rapid that the 
 supply, with all the encouragement of a relatively high price, could not keep pace 
 with the demand, the tendency is (supposing no impediment, natural or artificial, 
 to production or importation) to occasion such an increase of quantity, as to 
 reduce the price to nearly the same level as that from which it had advanced. 
 And accordingly it will be observed, by reference to the table of prices, that salt- 
 petre, hemp, iron, etc., after advancing very considerably under the influence of a 
 greatly extended demand for military and naval purposes, tended downwards 
 again whenever that demand was not progressively and rapidly increasing." 
 
LONG AND SHORT PERIODS. 445 
 
 him to be able to make a reasonably good allowance for BOOKV. 
 their influence in causing interruptions of work and increasing ' 
 the normal supply price of the goods 1 . 
 
 4. To go over the ground again in another way. Market Restate- 
 values are governed by the relation of demand to stocks the main 
 actually in the market ; with more or less reference to result - 
 * future ' supplies, and not without some influence of trade 
 combinations 2 . But the current supply is in itself the result 
 of the action of producers in the past ; this action has been 
 mainly determined by their comparing the prices which they 
 expect to get for their goods with the expenses to which they 
 will be put in producing them. The range of expenses of 
 which they take account will depend on whether they are 
 merely considering the extra expenses of certain extra 
 production with their existing plant, or are considering 
 whether to lay down new plant for the purpose. But in any 
 case it will be the general rule that that portion of the 
 supply which can be most easily produced will be produced, 
 unless the price is expected to be very low. Every increase 
 in the price expected will, as a rule, induce some people who 
 would not otherwise have produced anything, to produce a 
 little ; while those who have produced something for the 
 lower price, will probably produce more for the higher price. 
 
 The producers who are in doubt whether to produce 
 anything at all may be said to lie altogether on the margin 
 of production (or, if they are agriculturists, on the margin of 
 cultivation). Their decision exerts some influence on supply 
 and therefore on price. But as a rule they are very few in 
 number; there may be none in this position; and anyhow 
 their action is far less important than that of the great body 
 
 1 See Book i. ch. v. 9. 
 
 2 Where there is a strong combination, tacit or overt, producers may some- 
 times regulate the price for a considerable time together with very little reference 
 to cost of production. And if the leaders in that combination were those who had 
 the best facilities for production, it might be said, in apparent though not in real 
 contradiction to liicardo's doctrines, that the price was governed by that part of 
 the supply which was most easily produced. But as a fact, those producers whose 
 finances are weakest, and who are bound to go on producing to escape failure, 
 often impose their policy on the rest of the combination. And it is a common 
 saying, both in America and England, that the weakest members of a combination 
 are frequently its rulers. 
 
446 EQUILIBRIUM OF NORMAL DEMAND AND SUPPLY, CONTINUED. 
 
 BOOK v. of producers who will produce something whatever be the price 
 _ !_* (within certain limits), but watch the price to see how far it 
 is worth their while to extend their production. That part 
 of their production with regard to which such persons are on 
 the margin of doubt as to whether it is worth while for them 
 to produce it at the price, is to be included together with 
 that of the persons who are in doubt whether to produce at 
 all ; the two together constitute the marginal production at 
 that price. 
 
 The ^hus then the general drift of the term Normal Supply 
 
 drift of the price is always the same whether the period to which it refers 
 Normal is short or long; but there are great differences in detail. 
 
 price is A " every case it has reference to a certain given rate of 
 for short a gg re g ate production, that is, to the production of a certain 
 and long aggregate amount daily or annually. In every case it means 
 the price the expectation of which is sufficient and only 
 just sufficient to make it worth while for people to produce 
 ftiat aggregate amount : in every case it is the marginal cost 
 of production ; that is, it is the cost of production of those 
 goods which are on the margin of not being produced at all, 
 and which would not be produced if the price to be got for 
 them were expected to be at all lower. But the causes 
 which determine this margin vary with the length of the 
 period under consideration. 
 
 But for The immediate effect of the expectation of a high price is 
 
 periods the to cause people to bring into active work all their appliances 
 *f produc 8 of production, and to work them full time and perhaps over- 
 marginal supply price is then the money cost of 
 
 for grant- production of that part of the produce which forces the 
 supply undertaker to hire such inefficient labour (perhaps tired by 
 thaTwhich working overtime) at so high a price, and to put himself and 
 needed to * ners to so mucn strain and inconvenience that he is on the 
 call forth margin of doubt whether it is worth his while to do it or not. 
 elements The immediate effect of the expectation of a low price is to 
 which^re throw many appliances for production out of work, and slacken 
 margin of ^ ne wor ^ f others. If the producers had no fear of spoiling 
 their mar kets, it would be worth their while to produce for a 
 
 with those time for any price that covered the prime costs of production 
 account eS ' and rewarded them for their own trouble. But, as it is, they 
 
LONG AND SHORT PERIODS. 447 
 
 generally hold out for a higher price ; each man fears to spoil BOOK v. 
 
 his chance of getting a better price later on from his own !_' 
 
 customers ; or, if he produces for a large and open market, he being taken 
 is more or less in fear of incurring the resentment of other of spoiling 
 producers, should he sell needlessly at a price that spoils the tuemarket * 
 common market for all. The marginal production in this 
 case is the production of those whom a little further fall of 
 price would cause, either from a regard to their own interest 
 or by formal or informal agreement with other producers, to 
 suspend production for fear of further spoiling the market. 
 This then is the interpretation of marginal supply price for 
 short periods : for which it rises with every increase in the 
 amount that has to be produced 1 . 
 
 Thus in short periods the supply of specialized skill and Meanwhile 
 ability, of suitable machinery and other material capital, and derived me 
 of the appropriate industrial organization has not time to be fro1 ?. those 
 fully adapted to demand ; but the producers have to adjust affords a 
 their supply to the demand as best they can with the over prime 
 appliances already at their disposal. On the one hand there costs> 
 is not time materially to increase those appliances if the 
 supply of them is deficient ; and on the other, if the supply 
 is excessive, some of them must remain imperfectly employed, 
 since there is not time for the supply to be much reduced by 
 gradual decay, and by conversion to other uses. The par- 
 ticular income derived from them during those times does 
 not for ike time affect perceptibly the supply nor therefore 
 the price of the commodities produced by them : it is a 
 surplus of total receipts over prime (money) cost, governed 
 by the more or less accidental relations of demand and 
 supply for that time (i.e. a Quasi-rent) ; but unless it is 
 sufficient to cover in the long run the supplementary costs of 
 the business, production will gradually fall off. In this way 
 a controlling influence over the relatively quick movements 
 
 1 We shall later study the mutual influences of fluctuations in the purchasing 
 power of money, in credit, and in the activity of producers ; and also the motives 
 and the methods of combinations among employers to restrict their output, and 
 of combinations among employes to restrict their work, with the double purpose 
 of extracting better terms for themselves from their employers and of putting 
 pressure on those of their employers who are inclined to sell nearly at prime cost 
 and spoil the common market. 
 
448 EQUILIBRIUM OF NORMAL DEMAND AND SUPPLY, CONTINUED. 
 
 BOOKV. of supply price during short periods is exercised by causes 
 CH ' V - in the background which range over a long period ; and the 
 fear of " spoiling the market " often makes those causes act 
 more promptly than they otherwise would. 
 
 But for 5. In long periods all investments of capital and effort 
 
 p^fods the in providing the material plant and the organization of a 
 supply business, and in acquiring trade knowledge and specialized 
 
 price is m i i 
 
 that which ability, have time to be adjusted to the incomes which are 
 needed expected to be earned by them : and the estimates of those 
 fortifthose incomes therefore directly govern supply and are the true 
 new t?of st " l n g-p er iod normal supply price of the commodities pro- 
 capital, duced. 
 
 A great part of the capital invested in a business is 
 generally spent on building up its internal organization and 
 required to fa ex t e rnal trade connections. If the business does not 
 
 make up a 
 
 certain prosper all this capital is lost, even though its material plant 
 volume of may realize a considerable part of its original cost. And any- 
 tion; UC one proposing to start a new business in any trade must 
 reckon for the chance of this loss. If himself a man of 
 normal capacity for that class of work, he may look forward 
 ere long to his business being a Representative one, in the 
 sense in which we have used this term, with its fair share of 
 those internal and external economies which the aggregate 
 scale of production in that trade will cause to accrue to such 
 a business. If the net receipts of such a representative 
 business, that is, the excess of its incomings over its outgoings, 
 seem likely to be greater than he could get by similar invest- 
 ments in other trades to which he has access, he will choose 
 this trade. Thus that marginal investment of capital in a 
 trade, on which the price of the commodity produced by it 
 depends in the long run, is governed by estimates on the one 
 hand of the outgoings required to build up and to work a 
 representative firm, and on the other of the incomings, spread 
 over a long period of time, to be got by such a price. 
 these For we must remember that, though at any particular 
 
 moment some businesses will be rising and others falling; 
 
 when 011 ' y et wnen we are ^king a broad view of the causes which 
 viewed govern normal supply price, we need not trouble ourselves 
 increase with these eddies on the surface of the great tide. Such 
 
LONG AND SHORT PERIODS. 449 
 
 eddies will always exist, and occasionally play an important BOOK v. 
 
 part in the history of a particular trade ; the recent histories _ !_' 
 of the manufactures of silk, of watches, and of agricultural 
 
 implements, arid again of the shipbuilding, the sugar refining aggregate 
 and the chemical industries afford examples of the way in increases. 
 which the energy or the incompetence of a few business men 
 may exert a powerful influence on the development of a great 
 trade in one place and its decadence in another. 
 
 Such facts are significant for some purposes, but they do 
 not concern us just now ; because looking, as we now are, at 
 broad results only, we have no reason to believe that the 
 eddy at any particular time will be moving in one direction 
 rather than another. Any particular increment of produc- 
 tion may be due to some new manufacturer who is struggling 
 against difficulties, working with insufficient capital, and en- 
 during great privations in the hope that he may gradually 
 build up a good business. Or it may be due to some wealthy 
 firm which by enlarging its premises is enabled to attain new 
 economies altogether out of proportion to the small fraction 
 that the extension of its particular business adds to the aggre- 
 gate volume of production in its trade, and reap great gains 
 from its successful adaptation to its surroundings or from the 
 favours of fortune. But these inequalities do not prevent 
 the steady tendency of the long-period normal supply price to 
 diminish in many branches of industry as a direct consequence 
 of an increase in their aggregate volumes of production. 
 
 Of course there is no hard and sharp line of division There is 
 between " long " and " short " periods. Nature has drawn no 
 such lines in the economic conditions of actual life ; and in 
 
 dealing with practical problems they are not wanted. Just short 
 as we contrast civilized with uncivilized races, and establish 
 many general propositions about either group, though no 
 hard and fast division can be drawn between the two ; so we 
 contrast long and short periods without attempting any rigid 
 demarcation between them. If it is necessary for the pur- 
 poses of any particular argument to divide one case sharply 
 from the other, it can be done by a special interpretation 
 clause : but the occasions on which this is^ necessary are 
 neither frequent nor important. In those broad inquiries 
 M. 29 
 
450 
 
 EQUILIBRIUM OF NORMAL DEMAND AND SUPPLY, CONTINUED. 
 
 BOOK V. 
 CH. V. 
 
 Anewterm. 
 subnormal. 
 
 Relation 
 of this 
 Book to 
 the next. 
 
 Scope of 
 remaining 
 chapters 
 of this 
 Book. 
 
 which will occupy the remainder of this Book, we shall be 
 concerned almost exclusively with the true normal equilibria : 
 but when at a later stage we come to consider the quickly 
 moving oscillations of trade and commerce, the short-period 
 normal, or as we may conveniently call them, the subnormal 
 equilibria will claim more of our attention 1 . 
 
 6. Such are the broad outlines of the general theory of 
 equilibrium of normal demand and supply ; but there remain 
 many important questions to be considered. Some of these 
 relate to the several peculiarities, and the mutual relations 
 of the agents of production, Labour, Capital, Organization, 
 and Land; and they will be postponed to the following Book. 
 But there are several others which are more general in 
 character and may be taken at once. 
 
 The first group is concerned with the relations between 
 the different factors that are required to co-operate for the 
 production of the same goods, and with those between the 
 
 1 Of course the periods required to adapt the several factors of production to 
 the demand may be very different ; the number of skilled compositors for instance, 
 cannot be increased nearly as fast as the supply of type and printing-presses. 
 And this cause alone would prevent any rigid division being made between long 
 and short periods. But in fact a theoretically perfect long period must give time 
 enough to enable not only the factors of production of the commodity to be 
 adjusted to the demand, but also the factors of production of those factors of 
 production to be adjusted and so on; and this, when carried to its logical 
 consequences, will be found to involve the supposition of a stationary state of 
 industry, in which the requirements of a future age can be anticipated an 
 indefinite time beforehand. Some such assumption is indeed unconsciously im- 
 plied in many popular renderings of Ricardo's theory of value, if not in his own 
 versions of it ; and it is to this cause more than any other that we must attribute 
 that simplicity and sharpness of outline, from which the economic doctrines in 
 fashion in the first half of this century derived some of their seductive charm as 
 well as most of whatever tendency they may have to lead to false practical con- 
 clusions. 
 
 The periods for which prices are reckoned may be divided into any number of 
 classes according to their length. But four classes stand out. In each, price is 
 governed by the relations between demand and supply. But as regards market 
 prices, " supply " is taken to mean the stock of the commodity in question which is 
 on hand, or at all events " in sight." As regards short-normal or sub-normal prices, 
 " supply " means broadly what can be produced for the price in question with the 
 existing stock of plant, personal and impersonal, in the given time. As regards 
 (full) normal prices, supply means what can be produced by plant, which itself can 
 be remuneratively produced and applied within the given time. While lastly there 
 are secular movements of normal price, caused by the gradual growth of knowledge, 
 of population and of capital, and the changing conditions of demand and supply 
 from one generation to another. 
 
A BRIEF FORECAST. 451 
 
 joint products of the same branch of production, &c. Some BOOK v. 
 interruption of the natural course of the argument is involved ' 
 by taking these next: but though they do not directly ^ I ha v p I t I ers 
 continue the train of thought pursued in this chapter, they Chapters 
 throw on it an important side-light of which it seemed best 
 to avail ourselves before proceeding further. 
 
 The argument of the present chapter, with regard to 
 the influence of time on value, is continued in the second 
 group, which deals with the various relations in which 
 the incomes derived from the free gifts of nature, and 
 possessions of all kinds, personal and impersonal, stand to 
 value. In this group several difficulties, that have been 
 slightly touched on as yet, will be examined at length, with 
 the purpose among others of bringing out the complete 
 continuity between the theory of the income derived from 
 land and from other things which are commonly said to be 
 made by man, but really are only turned to account by him ; 
 since man can create only utilities, whether he is working on 
 land or on a movable commodity. 
 
 This further study of these incomes from possessions (or chapter xi. 
 quasi-rents) will lead the way to a rather technical discussion 
 of the relations between marginal and average supply price 
 expenses of production ; and of problems in which two or 
 more positions of stable equilibrium between normal demand 
 and normal supply may, theoretically at least, be possible. 
 
 The last group relates to the bearings of the theories of Chapters 
 demand and supply, and of monopolies on the famous doctrine XII> XI 
 that free competition tends to make the aggregate satisfaction 
 a maximum. 
 
 All of these discussions are integral parts of a complete some of 
 understanding of the theory of value : but at all events the chapters 
 last two groups are not essential to the discussion of the ma y ^ e 
 
 passed 
 
 broad problem of Distribution and Exchange, which will over for 
 occupy our attention in the following Book. And the sum- present. 
 mary of their chief results given in the concluding chapters 
 of this Book may suffice for the present purpose of those 
 readers who desire to get as soon as possible to the applica- 
 tion of the theory of value to social questions. 
 
 292 
 
CHAPTER VI. 
 
 JOINT AND COMPOSITE DEMAND : JOINT AND COMPOSITE 
 
 SUPPLY. 
 
 BOOK v. 1. THE demand for the things used for making other 
 
 CH^NI. things, an( j their factors of production, is indirect ; it is 
 demand derived from the demand for the things towards the pro- 
 and joint duction of which they contribute ; or, in other words, the 
 demands for all the various factors of production of a finished 
 commodity are joined together in the joint demand for it 1 . 
 Thus the demand for beer is direct, and is a joint demand 
 for hops, malt, brewers' labour, and the other factors of pro- 
 duction of beer: and the demand for any one of them is 
 an indirect demand derived from that for beer. Again, there 
 ' is a direct demand for new houses ; and from this there arises 
 a joint demand for the labour of all the various building 
 trades, and for bricks, stone, wood, etc., which are factors of 
 production of building work of all kinds, or as we may say for 
 shortness, of new houses. But the demand for any one of 
 these, as for instance the labour of plasterers, is only an 
 indirect, or Derived, demand. 
 
 illustration Let us take an illustration from a class of events that are 
 a a iabour m f frequent occurrence in the labour market ; the period over 
 fheTuild- 1 wn i c ^ ^ ne disturbance extends being short, and the causes of 
 ing trade, which we have to take account as readjusting demand and 
 
 1 Compare Book in. Ch. HI. 6. It will be recollected that the things in a 
 form ready for immediate use have been called goods of the first Order, or Con- 
 sumers' goods ; and that things used as Factors of production of other goods have 
 been called Producers' goods, or goods of the second and higher Orders or Inter- 
 mediate goods: also that it is rather difficult to say when goods are really 
 finished; and that many things are commonly treated as finished Consumers' 
 goods before they are really ready for consumption, e.g. flour (Book 11. Ch. 
 in- 1). 
 
DERIVED DEMAND PRICE. 453 
 
 supply being only such as are able to operate within that BOOKV. 
 . ' CH. vi. 
 
 short period. 
 
 This case has important practical bearings, which give it 
 a special claim on our attention ; but we should notice that, 
 referring as it does to short periods, it is an exception to our 
 general rule of selecting illustrations in this and the neigh- 
 bouring chapters from cases in which there is time enough 
 for the full long-period action of the forces of supply to be 
 developed. 
 
 Let us then suppose that the supply and demand for 
 building being in equilibrium, there is a strike on the part 
 of one group of workers, say the plasterers, or that there is . 
 some other disturbance to the supply of plasterers' labour. 
 In order to isolate and make a separate study of the demand 
 for that factor, we suppose firstly that the general conditions 
 of the demand for new houses remain unchanged (that is, 
 that the demand schedule for new houses remains valid); 
 and secondly we assume that there is no change in the general 
 conditions of supply of the other factors, two of which are of 
 course the business faculties and the business organizations 
 of the master builders ; (that is, we assume that their lists of 
 supply prices also remain valid). Then a temporary check to 
 the supply of plasterers' labour will cause a proportionate 
 check to the amount of building : the demand price for the 
 diminished number of houses will be a little higher than 
 before ; and the supply prices for the other factors of pro- 
 duction will not be greater than before 1 . Thus new houses 
 can now be sold at prices which exceed by a good margin the 
 sum of the prices at which these other requisites for the 
 production of houses can be bought ; and that margin gives 
 the limit to the possible rise of the price that will be offered 
 for plasterers' labour, on the supposition that plasterers' 
 labour is indispensable. The different amounts of this margin, 
 corresponding to different checks to the supply of plasterers' 
 labour, are governed by the general rule that : 
 
 1 This is at any rate true under all ordinary conditions: there will be less 
 extra charges for overtime; and the price of the labour of carpenters, brick- 
 layers and others is likely rather to go down than to go up, and the same is true 
 of bricks and other building materials. 
 
454 
 
 JOINT AND COMPOSITE DEMAND AND SUPPLY. 
 
 Law of 
 Derived 
 Demand. 
 
 The price that will be offered for any thing used in pro- 
 ducing a commodity is, for each separate amount of the 
 commodity, limited by the excess of the price at which that 
 amount of the commodity can find purchasers, over the sum 
 of the prices at which the corresponding supplies of the other 
 things needed for making it will be forthcoming. Or, to use 
 technical terms, the demand schedule for any factor of pro- 
 duction of a commodity can be Derived from that for the 
 commodity by subtracting from the demand price of each 
 separate amount of the commodity the sum of the supply 
 prices for corresponding amounts of the other factors. 
 
 It must always be remembered that this Derived schedule 
 has no validity except on the supposition that we are isolating 
 this one factor for separate study ; that its own conditions 
 of supply are disturbed ; that there is at the time no in- 
 dependent disturbance affecting any other element in the 
 problem ; and that therefore in the case of each of the other 
 factors of production the selling price may be taken to coincide 
 always with the supply price 1 . 
 
 1 In illustrating this by a diagram it will be well, for the sake of shortness of 
 wording, to divide the expenses of production of a commodity into the supply 
 prices of two things of which it is made ; let us then regard the supply price of a 
 knife as the sum of the supply prices of its blade and handle, and neglect the ex- 
 pense of putting the two together. Let ss' be the supply curve for handles and 
 88' that for knives ; so that M being any point on Ox, and Mq Q being drawn ver- 
 tically to cut as' in q and SS' in Q, Mq is the supply price for OM handles, qQ is 
 the supply price for OM blades and MQ the supply price for OM knives. Let DD f 
 the demand curve for knives cut SS' in A, and AaB be drawn vertically as in the 
 figure. Then in equilibrium OB knives are sold 
 at a price BA of which Ba goes for the handle 
 and aA for the blade. 
 
 (In this illustration we may suppose that 
 sufficient time is allowed to enable the forces 
 which govern supply price to work themselves 
 out fully ; and we are at liberty therefore to make 
 our supply curves inclined negatively. This 
 change will not affect the argument ; but on the 
 whole it is best to take our typical instance with 
 the supply curve inclined positively.) 
 
 Now let us suppose that we want to isolate 
 
 for separate study the demand for knife handles. Accordingly we suppose that the 
 demand for knives and the supply of blades conform to the laws indicated by 
 their respective curves: also that the supply curve for handles still remains 
 in force and represents the circumstances of normal supply of handles, althotigh 
 the supply of handles is temporarily disturbed. Let MQ cut DD' in P, then 
 
DERIVED DEMAND PRICE. 455 
 
 2. When however we come to apply this theory to the BOOK v. 
 
 actual conditions of life, it will be important to remember _! ' 
 
 that if the supply of one factor is disturbed, the supply of ^t^the 
 others is likely to be disturbed also. In particular, when the practical 
 factor by which the supply is disturbed in one class of labour, tions of the 
 as that of the plasterers, the employers' earnings generally 
 act as a buffer. That is to say, the loss falls in the first 
 instance on them : but by discharging some of their work- 
 men and lowering the wages of others, they ultimately 
 distribute a great part of it among the other factors of pro- 
 duction. The details of the process by which this is effected 
 are various, and depend on the action of trade combinations, 
 on the higgling and bargaining of the market, and on other 
 causes with which we are not just at present concerned. 
 
 We may note the general conditions, under which a check Conditions 
 to the supply of a thing that is wanted not for direct use, "^k-h a 
 but as a factor of production, may cause a very great rise in chec ^ to ^ 
 its price. The first condition is that the factor itself should raise much 
 
 MP is the demand price for OM knives and Qq is the supply price for OM blades. 
 Take a point p in MP such that Pp is equal to Qq, and therefore Mp is the 
 excess of MP over Qq ; then Mp is the demand price for OM handles. Let dd' be 
 the locus of p obtained by giving M successive positions along Ox and finding the 
 corresponding positions of p; then dd' is the derived demand curve for handles. 
 Of course it passes through a. We may now neglect ah 1 the rest of the figure 
 except the curves dd', */; and regard them as representing the relations of 
 demand for and supply of handles, other things being equal, that is to say, 
 in the absence of any disturbing cause which affects the law of supply of blades 
 and the law of demand for knives. Ba is then the equilibrium price of handles, 
 about which the market price oscillates, in the manner investigated in the 
 preceding chapter, under the influence of demand and supply, of Avhich the 
 schedules are represented by dd' and ss'. It has already been remarked that 
 the ordinary demand and supply curves have no practical value except in the , 
 immediate neighbourhood of the point of equilibrium. And the same remark 
 applies with even greater force to the equation of derived demand. 
 
 Since Mp Mq = MP MQ ; therefore A being a point of stable equilibrium, 
 the equilibrium at a also is stable, whether the supply curves are positively or 
 negatively inclined. 
 
 In the illustration that has just been worked out the unit of each of the 
 factors remains unchanged whatever be the amount of the commodity produced ; 
 for one blade and one handle are always required for each knife; but when a 
 change in the amount of the commodity produced occasions a change in the 
 amount of each factor that is required for the production of a unit of the com- 
 modity, the demand and supply curves for the factor got by the above process are 
 not expressed in terms of fixed units of the factor. They must be translated back 
 into fixed units before they are available for general use. (See Mathematical Note 
 xiv bis.) 
 
456 JOINT AND COMPOSITE DEMAND AND SUPPLY. 
 
 BOOKV. be essential, or nearly essential to the production of the 
 CH ' VI ' commodity, no good substitute being available at a moderate 
 
 the price of 
 a requisite P ric e. 
 
 of produc- The second condition is that the commodity in the pro- 
 duction of which it is a necessary factor, should be one for 
 which the demand is stiff and inelastic ; so that a check to 
 its supply will cause consumers to offer a much increased 
 price for it rather than go without it; and this of course 
 includes the condition that no good substitutes for the com- 
 modity are available at a price but little higher than its 
 equilibrium price. If the check to house building raises the 
 price of houses very much, builders, anxious to secure the 
 exceptional profits, will bid against one another for such 
 plasterers' labour as there is in the market 1 . 
 
 The third condition is that only a small part of the 
 expenses of production of the commodity should consist of 
 the price of this factor. Since the plasterer's wages are but 
 a small part of the total expenses of building a house, a rise of 
 even 50 per cent, in them would add but a very small per- 
 centage to the expenses of production of a house and would 
 check demand but little 2 . 
 
 The fourth condition is that even a small check to the 
 amount demanded should cause a considerable fall in the 
 supply prices of other factors of production ; for that will in- 
 crease the margin available for paying a high price for this 
 one 3 . If, for instance, bricklayers and other classes of work- 
 men, or the employers themselves cannot easily find other 
 things to do, and cannot afford to remain idle, they may be 
 willing to work for much lower earnings than before, and this 
 will increase the margin available for paying higher wages to 
 
 1 We have to inquire under what conditions the ratio pM to aB will be the 
 greatest, pM being the demand price for the factor in question corresponding to 
 a supply reduced from OB to OM, that is reduced by the given amount BM. The 
 second condition is that PM should be large ; and since the elasticity of demand is 
 measured by the ratio which BM bears to the excess of PM" over AB, the greater 
 PM is, the smaller, other things being equal, is the elasticity of demand. 
 
 2 The third condition is that when PM exceeds A B in a given ratio, pM shall 
 be caused to exceed Ba in a large ratio : and other things being equal, that requires 
 Ba to be but a small part of BA. 
 
 3 That is, if Qq had been smaller than it is, Pp would have been smaller and 
 Mp would have been larger. See also Mathematical Note xv. 
 
DERIVED DEMAND PRICE. 457 
 
 plasterers. These four conditions are independent, and the BOOK v. 
 effects of the last three are cumulative. 
 
 The rise in plasterers' wages would be checked if it were The 
 possible either to avoid the use of plaster, or to get the work 
 done tolerably well and at a moderate price by people outside 
 the plasterers' trade. The law of substitution here as else- 
 where exercises a subduing influence on forces which might 
 otherwise lead to startling results. The tyranny which one 
 factor of production of a commodity might in some cases 
 exercise over the other factors through the law of derived 
 demand is tempered by the law of substitution 1 . 
 
 Again, an increased difficulty in obtaining one of the 
 factors of a finished commodity can often be met by modify- 
 ing the character of the finished product. Some plasterers' 
 labour may be indispensable ; but people are often in doubt 
 how much plaster work it is worth while to have in their 
 houses, and if there is a rise in its price they will have less 
 of it. The intensity of the satisfaction of which they would and of the 
 be deprived if they had a little less of it, is its marginal Modifying 
 utility; the price which they are just willing to pay in order [j^^iSi 
 to have it, is the true demand price for plasterers' work up the several 
 
 ,.,... r factors of 
 
 to the amount which is being used, DO again there is a joint production 
 demand for malt and hops in ale : but their proportions can modity m 
 be varied, the difference in the price which can be got for another. " 6 
 two kinds of ale similar in other respects, but of which one 
 has more hops than the other, is a representative of the 
 causes which govern the demand price for hops 2 . 
 
 The relations between plasterers, bricklayers, &c., are 
 representative of much that is both instructive and romantic 
 in the history of alliances and conflicts between trades unions 
 in allied trades. But the most numerous instances of Joint 
 demand are those of the demand for a raw material and the 
 
 1 Dr Bohm-Bawerk in his excellent G-rundziiye der Theorie des wirtschaftlichen 
 Giiterwerts (Jakrbuch fur Nationalokonomie und Statistik, vol. xin. p. 59) shows 
 that if all but one of the factors of production of a commodity have available sub- 
 stitutes in unlimited supply, by which their own price is rigidly fixed, the derived 
 demand price for the remaining factor will be the excess of the demand price for 
 the finished product over the sum of the supply prices thus fixed for the remaining 
 factors. This is an interesting special case of the law given in the text. 
 
 2 See Mathematical Note xvi. 
 
458 
 
 JOINT AND COMPOSITE DEMAND AND SUPPLY. 
 
 BOOK V. 
 CH. VI. 
 
 Composite 
 Demand. 
 
 operatives who work it up; as for instance cotton or jute or 
 iron or copper, and those who work up these several 
 materials. Again, the relative prices of different articles of 
 food vary a good deal with the supply of skilled cooks' labour : 
 thus for instance many kinds of meat and many parts of 
 vegetables which are almost valueless in America, where 
 skilled cooks are rare and expensive, have a good value in 
 France, where the art of cooking is widely diffused. 
 
 3. We have already 1 discussed the way in which the 
 demand for any commodity is, made up or compounded of the 
 demands of the different groups of people, who may need it. 
 But we now may extend this notion of Composite Demand to 
 requisites of production, which are needed by several groups 
 of producers. Nearly every raw material and nearly every 
 kind of labour is applied in many different branches of 
 industry, and contributes to the production of a great variety 
 of commodities. Each of these commodities has its own 
 direct demand from which the derived demand for any of the 
 factors made in using it can be found. The total demand 
 for the factor is the sum of the derived demands for it, in 
 each of its several uses ; and these may be added together, 
 in just the same way as the partial demands of several classes 
 of society for a finished commodity are added together, and 
 thus make up the total demand for it 2 . 
 
 Fig. 21. 
 
 1 See Book in. Ch. iv. 2. 
 
 2 Thus, let a factor of production have three uses. Let d^d^ be the demand 
 curve for it in its first use. From N any 
 
 point 011 Oy draw Np v horizontally to cut d^di 
 in p l ; then Np l is the amount that is de- 
 manded for the first use at price ON. Produce 
 Npi to p 2 , and further on to P making p l p z 
 and p 3 P of such lengths as to represent the 
 amounts of the factor demanded at price ON 
 for the second and third uses respectively. As 
 N moves along Oy let p% trace out the curve 
 d^ and let P trace out the curve DD'. Thus 
 dtflj would be the demand curve for the factor 
 if it had only its first and second uses. DD' 
 is its demand curve for all three uses. It is 
 immaterial in what order we take the several 
 
 uses. In the case represented, the demand for the second use begins at a lower 
 price and that for the third use begins at a higher price than does the demand for 
 the first use. (See Mathematical Note xvn.) 
 
DERIVED SUPPLY PRICE. 45 
 
 4. We may now pass to consider the case of things BOOK v. 
 which cannot be produced separately, and have therefore a 
 Joint Supply such as beef and hides, or wheat and straw. 
 It corresponds to that of things which have a joint demand, 
 and it may be discussed almost in the same words, by merely 
 substituting " demand " for " supply," and vice versa. When 
 two or more things are produced by one and the same process ; 
 so that the expenses of producing them all together are not 
 greater than the expenses of producing one of them alone 
 would be ; then these things are called Joint Products. 
 Thus wheat and straw are joint products ; beef and hides are 
 joint products 1 . 
 
 In manufacture and agriculture, in the carrying and 
 distributing trades, it is often a matter of the greatest 
 difficulty to decide what are the real expenses of any one of 
 the many operations that are being done at the same time. 
 The difficulty is greatest with regard to those fixed charges 
 which would run on if little or nothing were being done in 
 
 1 If it is desired to isolate the relations of demand and supply for a joint 
 product, the derived supply price is found in just the same way as the derived 
 demand price for a factor of production was found in the parallel case of demand. 
 Other things must be assumed to be equal (that is, the supply schedule for the 
 whole process of production must be assumed to remain in force and so must the 
 demand schedule for each of the joint products except that to be isolated). The 
 derived supply price is then found by the rule that it must equal the excess of the 
 supply price for the whole process of production over the sum of the demand 
 prices of all the other joint products; the prices being taken throughout with 
 reference to corresponding amounts. 
 
 We may again illustrate by a simple example. Let SS' be the supply curve 
 for bullocks ; dd' the demand curve for their carcases, 
 that is, for the meat derived from them. M being any 
 
 point on Ox draw Mjp vertically to cut dd' in p, and Fig. 22. 
 
 produce it to P so that pP represents the demand 
 price for OM hides. Then MP is the demand price for 
 OH bullocks, and DD' the locus of P is the demand 
 curve for bullocks : it may be called the total demand 
 curve. Let DD' cut SS' in A ; and draw AaB as in 
 the figure. Then in equilibrium OB bullocks are pro- 
 duced and sold at the price BA of which Ba goes for M B x 
 the carcase and aA for the hide. 
 
 Let MP cut SS' in Q. From QM cut off Qq equal to Pp ; then q is a point on 
 the derived supply curve for carcases. For if we assume that the selling price of 
 OM hides is always equal to the corresponding demand price Pp, it follows that 
 since it costs QM to produce each of OM bullocks there remains a price QM Pp, 
 that is qM, to be borne by each of the OM hides. Then ss' the locus of q, and dd' 
 are the supply and demand curves for hides. (See Mathematical Note xvm.) 
 
460 
 
 JOINT AND COMPOSITE DEMAND AND SUPPLY. 
 
 But, where 
 tiv e r pro- 
 
 of joint* 
 products 
 
 can be 
 
 modified, 
 
 the establishment ; and we shall be much occupied hereafter 
 with the troubles that arise from this source. 
 
 There are however very few cases of joint products the 
 c st of production of both of which together is exactly the 
 same as that of one of them alone. So long as any product 
 O f a business has a market value, it is almost sure to have 
 devoted to it some special care and expense, which would be 
 diminished, or dispensed with if the demand for that product 
 were to fall very much. Thus, for instance, if straw were 
 valueless, farmers would exert themselves more than they do 
 to make the ear bear as large a proportion as possible to the 
 stalk. Again, the importation of foreign wool has caused 
 English sheep to be selected almost exclusively for their 
 tendency to develop early heavy weights of good meat. It 
 is only when one of two things produced by the same process 
 is valueless, unsaleable, and yet does not involve any expense 
 for its removal, that there is no inducement to attempt to 
 modify their relative proportions. 
 
 And it is only in these exceptional cases that there is, as 
 a rule, any great difficulty in ascertaining the separate supply 
 price of each of the joint products. For when it is possible 
 ^ moc ^fy tne proportions of these products, it can always be 
 ascertained what part of the whole expense of the process of 
 production would be saved, by so modifying these proportions 
 as slightly to diminish the amount of one of the joint pro- 
 ducts, without affecting the amounts of the others. That 
 part of the expense is the expense of production of the mar- 
 ginal element of that product ; it is the supply price of which 
 we are in search 1 . 
 
 5. We may pass to the problem of Composite Supply 
 which is analogous to that of composite demand. It is closely 
 connected with the law of substitution which has been 
 noticed already. We may consider that two things are 
 Rivals or competing commodities 2 , when they are capable of 
 satisfying the same demand. If the causes which govern 
 
 1 See Mathematical Note xix. 
 
 2 This latter phrase is used by Prof. Fisher in his brilliant Mathematical 
 Investigations in the theory of value and prices, which throw much light on the 
 subjects discussed in the present chapter. 
 
DERIVED AND COMPOSITE SUPPLY PRICE. 461 
 
 their production are nearly the same, they may for many BOOKV. 
 purposes be treated as one commodity 1 . For instance, beef ' 
 and mutton may be treated as varieties of one commodity 
 for many purposes ; but they must be treated as separate for 
 others, as for instance for those in which the question of the 
 supply of wool enters. Rival things are however often not 
 finished commodities, but factors of production. For instance, 
 there are many rival fibres which are used in making 
 ordinary printing paper 2 . 
 
 Continued rivalry is as a rule possible only when none of cannot 
 the rivals has its supply governed by the law of increasing remain in 
 return. The equilibrium is stable only when none of them together, if 
 is able to drive the others out ; and this is the case when all ^ m of obe a 
 of them conform to the law of diminishing return ; because tne Law of 
 
 -< Increasing 
 
 then if one did obtain a temporary advantage and its use Return. 
 increased, its supply price would rise, and then the others 
 would begin to undersell it. But if one of them conformed 
 to the law of increasing return, the rivalry would soon 
 cease ; for whenever it happened to gain a temporary ad- 
 vantage over its rivals its increased use would lower its 
 supply price and therefore increase its sale its supply price 
 would then be further lowered, and so on : thus its advantage 
 over its rivals would be continually increased until it had 
 
 1 Comp. Jevons, I.e. pp. 145, 6. 
 
 a The want which all the rivals tend to satisfy is met by a composite supply, 
 the total supply at any price being the sum of the partial supplies at that price. 
 
 Thus, for instance, N being any point on Oy draw Nq^Q parallel to 
 Ox such that Nq l , q l q, 2 and q 2 Q are Pi g 2 3. 
 
 respectively the amounts of the 
 first, second and third of those rivals 
 which can be supplied at the price 
 ON. Then NQ is the total com- 
 posite supply at that price, and the 
 locus of Q is the total supply curve 
 of the means of satisfying the want 
 iii question. Of course the units of 
 the several things which are rivals 
 must be so taken that each of them 
 
 satisfies the same amount of the 
 
 want. In the case represented in 
 
 the figure small quantities of the first rival can be put on the market at a price 
 
 too low to call forth any supply of the other two, and small quantities of the 
 
 second at a price too low to call forth any ot the third. (See Mathematical 
 
 Note xx.) 
 
462 JOINT AND COMPOSITE DEMAND AND SUPPLY. 
 
 BOOKV. driven them out of the field. It is true that there are 
 CH ' VI ' apparent exceptions to this rule ; and things which conform 
 to the law of increasing return do sometimes seem to 
 remain for a long time in the field as rivals: such is the 
 case perhaps with different kinds of sewing machines and of 
 electric lights. But in these cases the things do not really 
 satisfy the same wants, they appeal to slightly different needs 
 or tastes ; there is still some difference of opinion as to their 
 relative merits ; or else perhaps some of them are patented 
 or in some other way have become the monopoly of particular 
 firms. In such cases custom and the force of advertising 
 may keep many rivals in the field for a long time ; particu- 
 larly if the producers of those things which are really the 
 best in proportion to their expenses of production are not 
 able effectively to advertise and push their wares by travellers 
 and other agencies. 
 
 The con- 6. All the four chief problems which have been dis- 
 
 between cussed in this chapter have some bearing on the causes that 
 ^ovenSiT* g overn th e value of almost every commodity : and many of 
 the values the most important cross connections between the values of 
 
 of different . 
 
 things are different commodities are not obvious at first sight. 
 
 cate ilius- Thus when charcoal was generally used in making iron, 
 
 trations. ^ Q price of leather depended in some measure on that of 
 
 iron ; and the tanners petitioned for the exclusion of foreign 
 
 iron in order that the demand on the part of English iron 
 
 smelters for oak charcoal might cause the production of 
 
 English oak to be kept up, and thus prevent oak bark from 
 
 becoming dear 1 . Again, the development of railways and 
 
 other means of communication for the benefit of one trade, 
 
 as for instance wheat growing in some parts of America and 
 
 1 Toynbee (Industrial Revolution, p. 80). This instance may serve to remind 
 us of the way in which an excessive demand for a thing may cause its sources of 
 supply to be destroyed, and thus render scarce any joint products that it may 
 have : for the demand for wood on the part of the ironmakers led to a relentless 
 destruction of many forests in England. Again, an excessive demand for lamb 
 was assigned as a cause of the prevailing scarcity of sheep a few years ago, while 
 some argued on the contrary that the better the price to be got for spring lamb 
 sold to the rich, the more profitable would be the production of sheep, and the 
 cheaper would mutton be for the people. The fact is that an increase of demand 
 may have opposite effects according as it does or does not act so suddenly as to 
 prevent producers from adapting their action to it. 
 
COMPLEX CASES. 463 
 
 silver mining in others, greatly lowers some of the chief BOOK v. 
 
 ,-, .. YJ 
 
 expenses of production of nearly every other product of _J ' 
 
 those districts. Again, the prices of soda, and bleaching 
 materials and other products of industries, the chief raw 
 material of which is salt, move up and down relatively to 
 one another with almost every improvement in the various 
 processes which are used in those industries; and every 
 change in those prices affects the prices of many other 
 goods ; for the various products of the salt industries are 
 more or less important factors in many branches of manu- 
 facture. 
 
 Again, cotton and cotton-seed oil are joint products, and 
 the recent fall in the price of cotton is largely due to the 
 improved manufacture and uses of cotton-seed oil. Now, as 
 the history of the cotton famine shows, the price of cotton 
 largely affects that of wool, linen and other things of its own 
 class ; while cotton-seed oil is ever opening up new rivalries 
 with things of its own class. Again, many new uses have 
 been found for straw in manufacture; and these inventions, 
 together with the growth of an urban population in the West, 
 are giving a high value to straw that used to be burnt, and 
 are therefore lowering the value of wheat 1 . 
 
 1 See Mathematical Note xxi. It may be observed that the Austrian doctrine of 
 Imputed value has something in common with that of Derived value given in this 
 chapter. Whichever phrase be used, it is important that we should recognize the 
 continuity between the old doctrine of value and the new; and that we should 
 treat Imputed or Derived values merely as elements which take their place with 
 many others in the broad problem of Distribution and Exchange. The new 
 phrases merely give the means of applying to the ordinary affairs of life, some of 
 that precision of expression which is the special property of mathematical 
 language. Producers have always to consider how the demand for any raw 
 material in which they are interested is dependent on the demand for the things 
 in making which it is used, and how it is influenced by every change that affects 
 them ; and this is really a special case of the problem of ascertaining the efficient 
 value of any one of the forces, which contribute to a common result. In mathe- 
 matical language this common result is called a function of the various forces : 
 and the (marginal) contribution, which any of them is making to it, is represented 
 by the (small) change in the result which would result from a (small) change in 
 that force; that is by the differential coefficient of the result with regard to that 
 force. In other words the Imputed value, or the Derived value of a factor of 
 production, if used for only one product, is the differential coefficient of that 
 product with regard to that factor; and so on in successive complications, as 
 indicated in the Mathematical Notes xiv xxi. (Some objections to parts of 
 Prof. Wieser's doctrine of Imputed values are well urged by Prof. Edge worth, 
 Economic Journal, Vol. v. pp. 279 85.) 
 
CHAPTER VII. 
 
 PRIME AND TOTAL COST IN RELATION TO JOINT PRODUCTS. 
 COST OF MARKETING. INSURANCE AGAINST RISK. COST 
 OF REPRODUCTION. 
 
 BOOK V. 
 CH. VII. 
 
 Supple- 
 mentary 
 costs of 
 Joint 
 products. 
 Difficulty 
 arising 
 when one 
 branch of 
 a business 
 supplies a 
 raw mate- 
 rial to 
 another. 
 
 Difficulties 
 as to the 
 joint pro- 
 ducts of 
 the same 
 business, 
 
 1. WE may now return to the consideration of Prime 
 and Supplementary costs, with special reference to the proper 
 distribution of the latter between the Joint products of a 
 business. 
 
 It often happens that a thing made in one branch of a 
 business is used as a raw material in another, and then the 
 question of the relative profitableness of the two branches 
 can be accurately ascertained only by an elaborate system of 
 book-keeping by double entry ; though in practice it is more 
 common to rely on rough estimates made by an almost 
 instinctive guess. Some of the best illustrations of this 
 difficulty are found in agriculture, especially when the same 
 farm combines permanent pasture and arable land worked on 
 long rotation \ 
 
 Another difficult case is that of the shipowner who has to 
 apportion the expenses of his ship between heavy goods and 
 goods that are bulky but not heavy. He tries, as far as may 
 be, to get a mixed cargo of both kinds ; and an important 
 element in the struggle for existence of rival ports is the 
 disadvantage under which those ports lie which are able to 
 offer a cargo only of bulky or only of heavy goods : while 
 a port whose chief exports are weighty but not bulky, 
 attracts to its neighbourhood industries which make for 
 
 1 There is scope for applications of mathematical or semi-mathematical 
 analyses such as are indicated in the last chapter, to some of the chief practical 
 difficulties of book-keeping by double entry in different trades. 
 
SUPPLEMENTARY COSTS OF JOINT PRODUCTS. 465 
 
 export goods that can be shipped from it at low freights. BOOKV. 
 
 The Staffordshire Potteries, for example, owe part of their ' 
 
 success to the low freights at which their goods are carried 
 by ships sailing from the Mersey with iron and other heavy 
 cargoes. 
 
 But there is free competition in the shipowning trade, are often 
 and it has great powers of variation as regards the size and through 
 shape of ships, the routes which they take, and the whole 
 method of trading ; and thus in many ways the general JJ 
 principle can be applied, that the relative proportions of the of produc- 
 joint products of a business should be so modified that the 
 marginal expenses of production of either product should be 
 equal to its marginal demand price 1 . Or, in other words, 
 the amount of carrying power for each kind of cargo has 
 a constant tendency to move towards equilibrium at a point 
 at which the demand price for that amount in a normal 
 state of trade is just sufficient to cover the expenses of pro- 
 viding it; these expenses being reckoned so as to include 
 not only its (money) prime cost, but also all those general 
 expenses of the business which are in the long run incurred 
 on its account, whether directly or indirectly 2 . 
 
 In some branches of manufacture it is customary to A first ap- 
 make a first approximation to the total cost of producing 
 any class of goods, by assuming that their share of the 
 general expenses of the business is proportionate either to 
 their prime cost, or to the special labour bill that is incurred mentary as 
 in making them. Corrections can then be made to meet tSS'to 
 such cases as those of goods which require either more or Pnme cost " 
 less than an average share of space or light, or of the use of 
 expensive machinery ; and so on. 
 
 All such questions are of considerable interest, but we 
 must not pursue them in detail. There are however two 
 
 1 Compare Ch. vi. 4. 
 
 2 Of course this does not apply to railway rates. For a railway company 
 having little elasticity as to its methods of working, and often not much competi- 
 tion from outside, has no inducement to endeavour to adjust the charges which 
 it makes for different kinds of traffic to their cost to itself. In fact though it 
 may ascertain the prime cost in each case easily enough, it cannot determine 
 accurately what are the relative total costs of fast and slow traffic, of short 
 and long distance traffic, of light and heavy traffic; nor again of extra traffic 
 when its lines and its trains are crowded and when they are nearly empty. 
 
 M. 30 
 
466 PRIME AND TOTAL COST IN RELATION TO JOINT PRODUCTS. 
 
 BOOK v. elements of the general expenses of a business, the sharing of 
 
 _J ' which between the different branches requires some special 
 
 attention. They are the expense of marketing and that of 
 insurance against risk. 
 
 The dim- 2. Some kinds of goods are easily marketed ; there is 
 
 assigning a steady demand for them, and it is always safe to make 
 branch of tnem f r stock. But for that very reason competition cuts 
 business their price "very fine," and does not allow a large margin 
 of the ex- above the direct cost of making them. Sometimes the tasks 
 marketing of making and selling them can be rendered almost automatic, 
 so as to require very little to be charged on their account 
 under the heads of the expenses of management and market- 
 ing. But in practice it is not uncommon to charge such 
 goods with even less than the small share that would properly 
 fall to them, and to use them as a means of obtaining and 
 maintaining a business connection, that will facilitate the 
 marketing of other classes of goods, the production of which 
 cannot so well be reduced to routine ; for as to these there is 
 not so close a competition. Manufacturers, especially in 
 trades connected with furniture and dress, and retailers in 
 almost all trades, frequently find it best to use certain of 
 their goods as a means of advertising others, and to charge 
 the first with less and the second with more than their 
 proportionate share of Supplementary expenses. In the 
 former class they put those goods which are so uniform in 
 character and so largely consumed that nearly all purchasers 
 know their value well, in the second those with regard to 
 which purchasers think more of consulting their fancy than 
 of buying at the lowest possible price. 
 
 becomes All difficulties of this kind are much increased by that 
 
 whence instability of supply price which results from the action of 
 
 increasing ^ ne ^ aw ^ increasing return, whenever that action is very 
 
 Return powerful. We have seen that in seeking the normal supply 
 
 strongly; price in such cases we must select as representative a 
 
 business which is managed with normal ability and so as 
 
 to get its fair share of the economies both Internal and 
 
 External resulting from industrial organization; and that 
 
 these economies, though they fluctuate with the fortunes 
 
 of particular businesses, yet increase generally when the 
 
COST OF MARKETING. 467 
 
 aggregate production increases. Now it is obvious that if a BOOK v. 
 manufacturer makes a commodity the increased production CH ' VI1 ' 
 of which would put largely increased Internal economies 
 within his reach, it is worth his while to sacrifice a great 
 deal in order to push its sales in a new market. If he has a 
 large capital, and the commodity is one in much demand, his 
 expenditure for this purpose may be very great, even exceed- 
 ing that which he devotes directly to the manufacture : and 
 if, as is likely, he is pushing at the same time several other 
 commodities, nothing more than a very rough guess can be 
 made as to what share of this expenditure should be charged 
 to the sales of each of them in the current year, and what 
 share should be charged to the connection which he is en- 
 deavouring to build up for them in the future. 
 
 In fact when the production of a commodity conforms to especially 
 
 ... . / . when the 
 
 the law ot increasing return in such a way as to give a very production 
 
 great advantage to large producers, it is apt to fall almost 
 entirely into the hands of a few large firms ; and then the 
 normal marginal supply price cannot be isolated on the 
 plan just referred to, because that plan assumes the existence 
 of a great many competitors with businesses of all sizes, some 
 of them being young and some old, some in the ascending 
 and some in the descending phase. The production of such 
 a commodity really partakes in a great measure of the nature 
 of a monopoly ; and its price is likely to be so much influenced 
 by the incidents of the campaign between rival producers, 
 each struggling for an extension of territory, that no free 
 play is allowed to the normal action of economic forces, and 
 it can scarcely be said to have a normal supply price. 
 
 Economic progress is constantly offering new facilities for Economies 
 marketing goods at a distance : it not only lowers cost of 
 carriage, but what is often more important, it enables pro- 
 ducers and consumers in distant places to get in touch with 
 one another. In spite of this, the advantages of the producer for market- 
 who lives on the spot are very great in many trades ; they 
 often enable him to hold his own against competitors at a 
 distance whose methods of production are more economical. 
 He can sell in his own neighbourhood as cheaply as they 
 can, because though the prime cost is greater for his goods 
 
 302 
 
468 PRIME AND TOTAL COST IN RELATION TO JOINT PRODUCTS. 
 
 BOOK v. than for theirs, he escapes much of the supplementary cost 
 
 _ which they incur for marketing. But time is on the side 
 
 of the more economic methods of production ; his distant 
 
 competitors will gradually get a stronger footing in the place, 
 
 unless he or some new man adopts their improved methods. 
 
 A great part of these expenses of marketing results from 
 the risk that a thing preparing for a certain market will not 
 find the expected sale there. But it still remains to make a 
 closer study of the relation in which insurance against the 
 risks of a business stands to the supply price of any par- 
 ticular commodity produced in it. 
 
 ^ in _ 3. The manufacturer and the trader commonly insure 
 
 surance against injury by fire and loss at sea ; and the premiums 
 effected at which they pay are among the general expenses, a share of 
 rates which has to be added to the prime cost in order to deter- 
 busine ss a mine the total cost of their goods. But no insurance can be 
 effected against the great majority of business risks. 
 
 Even as regards losses by fire and sea, insurance com- 
 panies have to allow for possible carelessness and fraud ; and 
 must therefore, independently of all allowances for their own 
 expenses and profits, charge premiums considerably higher 
 than the true equivalent of the risks run by the buildings or 
 the ships of those who manage their affairs well. The injury 
 done by fire or sea however is likely, if it occurs at all, to be 
 so very great that it is generally worth while to pay this 
 extra charge; partly for special trade reasons, but chiefly 
 because the total utility of wealth increases less than in 
 proportion to its amount. But the greater part of business 
 risks are so inseparably connected with the general manage- 
 ment of the business that an insurance company which 
 undertook them would really make itself responsible for the 
 . business: and in consequence every firm has to act as its 
 own insurance office with regard to them. The charges to 
 , which it is put under this head are part of its general 
 expenses, and a share of them has to be added to the prime 
 cost of each of its products. 
 
 Caution But here there are two difficulties. In some cases 
 
 overtook- insurance against risk is apt to be left out of account 
 ing certain altogether, in others it is apt to be counted twice over. 
 
INSUKANCE AGAINST RISK. 469 
 
 Thus a large shipowner sometimes declines to insure his BOOKV. 
 ships with the underwriters : and sets aside part at least of -_ 
 the premiums that he might have paid to them, to build up 
 an insurance fund of his own. But he must still, when 
 calculating the Total cost of working a ship, add to its prime 
 cost a charge on account of insurance. And he must do the 
 same thing, in some form or other, with regard to those risks 
 against which he could not buy an insurance policy on 
 reasonable terms even if he wanted to. At times, for in- 
 stance, some of his ships will be idle in port, or will earn 
 only nominal freights : and to make his business remuner- 
 ative in the long run he must, in some form or other, charge 
 his successful voyages with an insurance premium to make 
 up for his losses on those which are unsuccessful. 
 
 In general, however, he does this, not by making a formal and against 
 entry in his accounts under a separate head, but by the others 
 simple plan of taking the average of successful and unsuccess- twice over ' 
 ful voyages together; and when that has once been done, 
 insurance against these risks cannot be entered as a separate 
 item in cost of production, without counting the same thing 
 twice over. Having decided to run these risks himself, he is 
 likely to spend a little more than the average of his com- 
 petitors, in providing against their occurrence ; and this extra 
 expense enters in the ordinary way into his balance-sheet. 
 It is really an insurance premium in another form ; and 
 therefore he must not count insurance against this part of 
 the risk separately, for then he would be counting it twice 
 over 1 . 
 
 When a manufacturer has taken the average of his sales 
 of dress materials over a long time, and bases his future 
 action on the results of his past experience, he has already 
 allowed for the risks that the machinery will be depreciated 
 
 1 Again, certain insurance companies in America take risks against fire in 
 factories at veiy much less than the ordinary rates, on condition that some 
 prescribed precautions are taken, such as providing automatic sprinklers and 
 making the walls and floors solid. The expense incurred in these arrangements 
 is really an insurance premium ; and care must be taken not to count it twice 
 over. A factory which undertakes its own risks against fire will have to add to 
 the prime cost of its goods an allowance for insurance at a lower rate, if it is 
 arranged on this plan, than if built in the ordinary way. 
 
470 
 
 INSURANCE AGAINST RISK. 
 
 BOOK V. 
 CH. VII. 
 
 But un- 
 certainty 
 is an evil 
 in itself, 
 
 and an 
 average 
 gain 
 
 generally 
 counts for 
 less, the 
 more un- 
 certain the 
 elements of 
 which it is 
 made up. 
 
 by new inventions that will render it nearly obsolete and 
 that his goods will be depreciated by changes in fashion. If 
 he were to allow separately for insurance against these risks, 
 he would be counting the same thing twice over 1 . 
 
 | 4. But though when we have counted up the average 
 receipts of a risky trade, there is no separate allowance to be 
 made for insurance against risk ; there may be, and often is, 
 something to be allowed as a charge on account of un- 
 certainty. It is true that an adventurous occupation, such 
 as gold mining, has special attractions for some people : the 
 deterrent force of risks of loss in it is less than the attractive 
 force of chances of great gain, even when the value of the 
 latter estimated on the actuarial principle is much less than 
 that of the former; and as Adam Smith has pointed out 2 , 
 a risky trade, in which there is an element of romance, often 
 becomes so overcrowded that the average earnings in it are 
 lower than if there were no risks to be run. But in the large 
 majority of cases the influence of risk is in the opposite 
 direction ; a railway stock that is certain to pay four per cent, 
 will sell for a higher price than one which is equally likely to 
 pay one or seven per cent, or any intermediate amount. 
 
 Every trade then has its own peculiarities, but in most 
 cases the evils of uncertainty count for something, though not 
 very much : in some cases a slightly higher average price is 
 required to induce a given outlay, if that average is the 
 mean of widely divergent and uncertain results, than if the 
 adventurer may reckon confidently on a return that differs 
 but little from that average. To the average price therefore 
 we must add a recompense for uncertainty, if that is un- 
 usually great ; though if we added insurance against risk we 
 should be counting the greater part of that twice over 3 . 
 
 1 Again, when a farmer has calculated the expenses of raising any particular 
 crop with reference to an average year, he must not count in addition insurance 
 against the risk that the season may be bad, and the crop a failure : for in taking 
 an average year, he has already set off the chances of exceptionally good and bad 
 seasons against one another. When the earnings of a ferryman have been 
 calculated on the average of a year, allowance has already been made for the risk 
 that he may sometimes have to cross the stream with an empty boat. 
 
 2 Wealth of Nations, Book i. Ch. x. 
 
 3 The evils resulting from the uncertainty involved in great business risks are 
 well shown by Von Thiinen (Isolirter Stoat, II. i. p. 82). 
 
COST OF REPRODUCTION. 471 
 
 5. This discussion of the risks of trade has again BOOK v. 
 
 brought before us the fact that the value of a thing, though CH ' vn ' 
 it tends to equal its normal (money) cost of production, does 
 
 not coincide with it at any particular time, save by accident, reproduc- 
 Carey, observing this, suggested that we should speak of cost of pro- 
 value in relation to (money) cost of Reproduction instead of the theory 
 
 in relation to cost of production. of normal 
 
 values is 
 
 The suggestion has, however, no significance so far as to make 
 normal values are concerned. For normal cost of production change; 
 and normal cost of reproduction are convertible terms ; and 
 no real change is made by saying that the normal value 
 of a thing tends to equal its normal (money) cost of re- 
 production instead of its normal cost of production. The 
 former phrase is less simple than the latter, but means 
 the same thing. 
 
 And no valid argument for the change can be founded on and though 
 the fact, which may be readily admitted, that there are some laiu? Shf 
 few cases in which the market value of a thing is nearer its sometimes 
 cost of reproduction than the cost that was actually incurred 
 
 in producing that particular thing. The present price of an production 
 
 , . ,. . , , than cost of 
 
 iron ship for instance, made before the great recent improve- production, 
 ments in the manufacture of iron, might diverge less from governed 
 the cost of reproducing it, that is of producing another just 
 like it by modern methods, than from that which was actually tion 
 incurred in producing it. But the price would probably be 
 less than the cost of reproduction of the ship, because the art 
 of designing ships has improved as fast as that of manu- 
 facturing iron. It may still be urged that the price of the 
 ship is equal to that of producing a ship, which would be 
 equally serviceable, on a modern plan and by modern 
 methods; but even if that were true, it would not be the 
 same thing as saying that the value of the ship is equal 
 to its cost of reproduction ; and, as a matter of fact, when, 
 as often happens, an unexpected scarcity of ships causes 
 freights to increase very rapidly, those who are anxious to 
 reap the harvest of profitable trade, will pay for a ship in 
 sailing order a price much above that for which a shipbuild- 
 ing firm would contract to produce another equally good and 
 -deliver it some time hence. Cost of reproduction exerts little 
 
472 COST OF REPRODUCTION. 
 
 BOOK v. direct influence on value, save when purchasers can con- 
 CH^VII. ven j en ti v wa ^ f or the production of new supplies. 
 
 Again, there is no connection between cost of reproduction 
 and price in the cases of food in a beleaguered city, of quinine 
 the supply of which has run short in a fever-stricken island, 
 of a picture by Raphael, of a book that nobody cares to read, 
 of an armour-clad ship of obsolete pattern, of fish when the 
 market is glutted, of fish when the market is nearly empty, 
 of a cracked bell, of a dress material that has gone out of 
 fashion, or of a house in a deserted mining village. 
 
CHAPTER VIII. 
 
 ON THE VALUE OF AN APPLIANCE FOR PRODUCTION IN 
 RELATION TO THAT OF THE THINGS PRODUCED BY IT. 
 
 1. WE have now to return to the study of the influence BOOK v. 
 of the element of time on the causes which govern value, - ' 
 and mode of operation; taking up the study where it was 
 left in Chapters iv. and v., with special reference to the 
 (Derived) value of an appliance for production which we 
 partially considered in Chapter vi. 
 
 Nearly the whole of our inquiry will apply to markets for Our argu- 
 labour as well as to markets for commodities; to the supply applicable 
 of skill as well as to that of business organization ; to the 
 investment of capital in education and industrial training as 
 well as to its investment in the improvement of land or the 
 making of machinery ; to the income derived from that present in 
 genius which is, so far as we know, the free and almost general 
 arbitrary gift of nature, as well as to that derived from a fo 
 vineyard of unique natural fertility. But the human 
 elements of production have important incidents that are 
 peculiar to themselves; and to introduce them here would add 
 needless complexity to problems which are necessarily intri- 
 cate. It will be best therefore to keep our argument for the 
 present in its most general form ; and to defer to the next 
 Book our application of it to the price of human abilities ; 
 although a great part of its interest lies in this application. 
 
 We shall find that much that appears at first sight to be 
 true only of the rent of land is true of many other kinds of 
 income, subject to suitable modifications with regard to the 
 element of Time; and that on the other hand the Kent of 
 land in a newly settled country has at first strong points of 
 resemblance to the gains got by " making," that is adapting 
 
474 EARNINGS OF AN APPLIANCE FOR PRODUCTION. 
 
 BOOKV. to human use, other material things. It has indeed been 
 CH ' vm ' shown by a long series of writers, among whom Senior and 
 Mill, Hermann and Mangoldt are conspicuous, that much of 
 what is commonly called profits ought rather to be regarded 
 as belonging to a special class of income derived from "a 
 differential advantage in producing a commodity;" that is, 
 the possession by one or more persons of facilities for 
 production that are not accessible to all. Since the leading 
 and representative member of this class is the rent of land, 
 the name of Rent is sometimes applied to the whole class : 
 though this course is not without danger 1 . 
 
 The allied The principle which we have to study, is that speaking 
 that broadly, the price of anything and the amount of it that is 
 
 expenses of P r d uce d are together governed by the general relations of 
 demand an d supply: that the price just covers the expenses 
 
 value, and of production of that part of this amount which is raised at 
 
 does not the greatest disadvantage ; that every other part yields a 
 
 cost of ntl> surplus above its direct cost; and that this surplus is a result 
 
 production, an( j no ^ a cause o f the selling price. For the price is 
 
 governed by the relations of supply and demand ; and while, 
 
 of course, the surplus does not affect the demand, so 
 
 neither does it affect the supply, since it is yielded only 
 
 by a part of the produce which would be produced even at a 
 
 lower price. 
 
 In other words, there is a part of the produce which is on 
 
 1 Thus Mill says, Political Economy, Book in. Ch. v. 4, "Any difference in 
 favour of certain producers or in favour of production in certain circumstances is 
 the source of a gain, which though not called rent unless paid periodically by one 
 person to another is governed by laws entirely the same with it. The price paid 
 for a differential advantage in producing a commodity cannot enter into the cost 
 of production of the commodity." Again Senior pointing, though not very clearly, 
 towards the element of time as holding the key of the division between rent and 
 profits, says (Political Economy, p. 129), "for all useful purposes the distinction 
 of profits from rent ceases as soon as the capital from which a given revenue 
 arises has become, whether by gift or by inheritance, the property of a person 
 to whose abstinence and exertions it did not owe its creation." And within the 
 last few years this subject has been pursued with great zeal and ability by many 
 writers, especially in Austria and America. 
 
 It may be mentioned that rent is compared with profits rather than with 
 interest, because it commonly includes an element of earnings of management 
 and undertaking : but this is a question of degree ; and there are a few exceptional 
 cases in which a net rent emerges that may more fitly be compared with interest. 
 This point will require further discussion at a later stage. 
 
TRUE BUT MISLEADING DOCTRINES. 475 
 
 the margin of doubt as to whether it will be supplied or not, BOOK v. 
 
 and the expenses of production of this part of the produce J ' 
 
 are often said to determine the price of the whole. But, JJ^*^ 
 more strictly, we should say that they take direct part in rather 
 governing it : that is, that the price of the whole will, other sense, 
 things being equal, be raised or lowered, according as it is 
 decided to produce or not to produce these marginal ele- 
 ments. For those parts which do yield a surplus, will 
 generally be produced whatever the price is, provided 
 only it is not so low as wholly to destroy that surplus; 
 and that surplus is therefore governed by the price and 
 does not govern it : while there is no surplus yielded 
 by that part of the produce the expenses of production of 
 which do take direct part in governing the price. No 
 surplus therefore enters into that (money) cost of production 
 which gives the level at which the whole supply is held fixed. 
 This then is what we mean by the phrase " Producer's surplus / 
 does not enter into cost of production " ; or in Ricardo's y 
 words, "Rent does not enter into cost of production." It 
 is one of those short phrases which do not explain themselves, 
 and are easily misunderstood ; but it has an important mean- 
 ing, and it is applicable to many different kinds of income. 
 
 The point of the doctrine is to be sought in the fact that 
 the cost of production of the marginal produce can be 
 ascertained (theoretically at least) from the circumstances 
 of the margin, without reasoning in a circle, and that the 
 cost of production of other parts of the produce cannot. For 
 other parts yield a rent or a quasi-rent, or both; which 
 are governed not by the circumstances of production of the 
 parts in question, but by the price of the whole produce. 
 The costs of production of these parts cannot be reckoned up 
 without counting in the corresponding rents and quasi-rents ; * 
 and therefore the price of the commodity cannot be deduced 
 from them without reasoning in a circle. 
 
 Another aspect of the same truth is that the income 
 earned by machinery and other plant already in existence 
 is not any given percentage on their cost of production, but 
 is a quasi-rent determined by the value of what they produce. 
 If they are of obsolete fashion, this quasi-rent is small. But 
 
476 EARNINGS OF AN APPLIANCE FOR PRODUCTION. 
 
 BOOK v. whether it is large or small, this value is found by capitalising 
 
 CH-JOII. j.jjgjj. q uas j_ ren t ; and if we were to turn round, and say that 
 
 their quasi-rent would return a certain rate of interest on 
 
 their value, then we should be reasoning in a circle. 
 
 The This then is the principle which we have to study in 
 
 question is 
 
 of academic detail. So large a part of the economic controversy of this 
 
 rather than , / , i , j 
 
 general century, and even of this generation, appears to proceed 
 interest. rom ft m j sunc i ers tanding of its general bearings and in 
 particular of the place which the element of time holds in it, 
 that some fulness of illustration and some persistency of 
 repetition may be advisable ; in spite of the fact that it 
 is largely of an academic character, and that the general 
 reader has little interest in some of its intricacies. 
 
 2. We may take our first illustration from a class of 
 incomes which is not commonly classed as Rent, but to which 
 that term may be safely applied. For the eminent claim to 
 / be called a true producer's surplus or rent is not confined to 
 the income derived from land or other (Real) property, but 
 extends to that derived from all things the supply of which 
 cannot be increased. 
 
 Anillustra- For instance, suppose that a meteoric shower of a few 
 income The thousand stones as hard as diamonds, but very large, fell all 
 meteoric * n one P^ ace ' so *^ a ^ ^ey were all picked up at once, and no 
 stones may amount of search could find any more. These stones, able to 
 Rent, if cut the hardest material, would revolutionize many branches 
 number of industry ; and the owners of them would have a differential 
 hicreased- advantage in production that would afford a large Producer's 
 Surplus : this would be a true economic rent, whether they 
 used the stones themselves or loaned them out to manufac- 
 turers, though only in the latter case would it be called Rent. 
 Its amount would be governed by the value of services the 
 stones rendered in production ; and this would in the main 
 be governed by the cost of equivalent services of chilled 
 steel and other cutting tools, which are made by man and 
 have therefore a normal supply price. 
 
 Again, if the stones were of exceptional splendour, and 
 useful for ornament rather than for manufacturing purposes, 
 they might be worn by their owners, or let out to be worn 
 by others ; and the money value of the satisfactions they 
 
CASE OF A TRUE RENT FROM MOVE ABLE PROPERTY. 477 
 
 rendered would be a true rent, corresponding to the money BOOK v. 
 value of the satisfactions derived from a building site of CH ' YI "' 
 exceptional beauty, whether its owner lives on it or lets it 
 to others 1 . 
 
 The influence of taxes on value affords excellent illustration and a tax 
 of many of the subtlest points in the theory of value. Let on the & 
 us take advantage of this. A special tax on these stones owners - . 
 would fall entirely on their owners (a lessee being regarded 
 as a part-owner) ; for it would not diminish their supply and 
 therefore would not alter the gross value of the utilities and 
 gratifications which they can be made to afford 2 . 
 
 But next let us suppose that the stones were not all But if 
 found at once ; but were scattered over the surface of the can be Pply 
 earth on public ground, and that a long and laborious search S 
 
 might expect to be rewarded by finding one here and there. tb - e income 
 
 , , , , is for long 
 
 Then people would hunt for the stones only up to that point, periods, 
 
 or margin, at which the probable gain of so doing would in 
 the long run just reward the outlay of labour and capital periods a 
 required for finding them ; and the long-period normal value quasi-rent. 
 of the stones would be kept in equilibrium between demand 
 and supply, the number of the stones gathered annually being 
 in the long run just that for which the normal demand price 
 was equal to the normal supply price. A special tax on 
 these stones would ultimately fall upon the consumers of the 
 utilities produced by them. But, for some time, it would 
 fall chiefly on the owners; for it could not for some time 
 materially diminish the supply of the stones, nor therefore of 
 their services ; and accordingly it could not greatly raise the 
 value of their services. This shows that the income derived 
 
 1 Similar remarks apply to pictures by a deceased artist. If these are let out 
 for show, the gratifications which they produce are the source of a money income, 
 which, after deductions for the immediate outlays, is a net producer's surplus or 
 rent. If retained by the owners for their own pleasure, they yield equally a true 
 rent of real satisfaction; for it is always understood that the "rental value" of a 
 country includes rents which the owners of land who keep it in their own 
 occupation are supposed to pay to themselves. 
 
 2 It should perhaps be noticed in passing, though it is not relevant to the main 
 issue, that in so far as the pictures or the stones, retained for private use, were 
 valued not for their beauty but for the show of wealth which they made, a tax on 
 them would increase their value for display, and therefore would give more to the 
 State than it took from those who paid it. 
 
478 EARNINGS OF AN APPLIANCE FOR PRODUCTION. 
 
 BOOK v. from the stones may be regarded as a quasi-rent for short 
 
 CH. VIII. 
 
 - periods. 
 
 if it can be Next let us suppose that the stones were brittle, and 
 quicSytiie were soon broken and destroyed ; but that new supplies 
 is anordi- cou ^ be found quickly. In that case a tax on them would 
 D xce ffor* a ^ most at once diminish the supply and raise the price of the 
 very short services rendered by them ; and therefore would be trans- 
 
 ferred to the consumers. 
 
 The truths indicated by this illustration may be pre- 
 
 sented in a more general form thus: 
 
 General A tax on any set of things that are already produced, 
 
 Lk>the 10n falls exclusively on the owners of those things, if it is not 
 
 accompanied by a tax, or the expectation of a tax, on the 
 production, or bringing into use, of similar or rival things. If 
 rents and it falls also on all rival things, and the supply of them is not 
 absolutely fixed, its incidence will be gradually transferred 
 to the consumers. For any period, for which a tax would fall 
 mainly on the consumers, the income derived from the things 
 may be regarded as of the nature of profits entering directly 
 into supply price. For a shorter period, in which the tax 
 falls mainly on the owners (lessees being regarded as part- 
 owners), the income may be regarded as more or less of the 
 nature of rent. 
 
 Illustration 3. Our next illustration may be from the rent of land 
 
 ren?of e in an old country such as England. But, at starting, three 
 
 land - cautions may be entered. In the first place, Rent is here 
 
 taken as another name for the Surplus produce which is in 
 
 excess of what is required to remunerate the cultivator for 
 
 his capital and labour ; and if the cultivator owns the land 
 
 himself, he of course retains this surplus. 
 
 Next, the " Marginal " application of capital and labour 
 by the return to which we estimate the amount required to 
 remunerate the farmer, is not necessarily applied to land on 
 the margin of cultivation : it is on the margin of profitable 
 expenditure on land of any quality. 
 
 Lastly, the doctrine does not mean that a tenant farmer 
 need not take his rent into account when making up his 
 year's balance-sheet : when he is doing that, he must count 
 his rent just in the same way as he does any other expense. 
 
RENT OF LAND IN RELATION TO COST OF PRODUCTION. 47 & 
 
 What it does mean is that when the farmer is calculating BOOK v. 
 whether it is worth his while to apply more capital and CH '^ m ' 
 labour to the land, then he need not think of his rent ; for he 
 will have to pay this same rent whether he applies this extra 
 marginal capital and labour or not : and therefore if the 
 marginal produce due to this "dose" seems likely to give 
 him normal profits, he applies it ; and his rent does not then 
 enter into his calculations. 
 
 Thus the doctrine is, that the price of the produce, in so 
 far as it depends on supply, is governed by the action of the 
 farmers with regard to their marginal produce ; and that since 
 this action is not affected by the rent they have to pay, there- 
 fore rent does not enter into the price of the marginal produce, 
 and therefore does not enter into the price of any part 1 . 
 
 If, following Ricardo, we suppose that all kinds of agri- The 
 cultural produce can be regarded as converted into certain thaVrent 
 quantities of corn ; and then take it for granted that all the g^. 1 ]^ 
 land will be used for agricultural purposes of some kind or c st f 
 
 i_i /> -1 v production, 
 
 other, with the exception 01 building sites which are a small is not mis- 
 and nearly fixed part of the whole ; it is then true that the 
 price of agricultural produce taken as a whole cannot in the 
 long 1 run be greater, and cannot in the loner run be less, than tural 
 
 produce as. 
 
 its marginal expenses of production (or, to use the ordinary a whole, 
 metaphor, than the expenses on the margin of cultivation). 
 More simply, other things being equal, it is governed in the 
 long run by these expenses ; these expenses are -not in 
 any way affected, directly or indirectly, by the true rent 
 (exclusive of the quasi-rent of improvements) paid for 
 the land; and therefore this rent does not enter into 
 
 1 Adam Smith is attacked by Ricardo for putting rent on the same footing with 
 wages and profits as parts of (money) cost of production ; and no doubt he does this 
 sometimes. But yet he says elsewhere, " Rent it is to be observed enters into the 
 composition of the price of commodities in a different way from wages and profit. 
 High or low wages and profit are the causes of high or low price : high or low 
 rent is the effect of it. It is because high or low wages and profit must be paid 
 in order to bring a particular commodity to market that its price is high or low. 
 But it is because its price is high or low a great deal more, or very little more, 
 or no more than what is sufficient to pay those wages and profits, that it affords a 
 high rent, or a low rent, or no rent at all." (Wealth of Nations, Book i. Chapter 
 xi.) In this, as in many other instances, he anticipated in one part of his writings 
 truths which in other parts he has seemed to deny. We shall recur to his and 
 Ricardo's doctrines as to the rent of mines later on. 
 
480 EARNINGS OF AN APPLIANCE FOR PRODUCTION. 
 
 BOOK v. the expenses of production of agricultural produce taken as a 
 J whole. 
 
 But when 4. But when applied to the case of one kind of agri- 
 trine *is cultural produce considered separately, the doctrine is liable 
 anyone* ^ ^ e understood in a sense in which it is not true. For 
 kind of instance the production of those oats which only just pay 
 taken sepa- their way is often said to " determine " the price of all other 
 misleading, oats ', rent, it is argued, does not enter into their cost of pro- 
 duction, and therefore rent does not enter into the supply 
 price of oats. But this, though true in a sense, is misleading. 
 It is true that when we know what are the most un- 
 favourable conditions under which oats are grown, we can 
 calculate the supply price of oats by reckoning up their ex- 
 penses of production; just as we can discover the tempera- 
 ture by looking at the thermometer. But as it would be 
 misleading to say that the height of the thermometer deter- 
 mines the temperature; so a great deal of confusion has 
 arisen from saying simply that the normal value of oats is 
 determined by their production under the most unfavourable 
 circumstances under which they are grown. This statement 
 needs to be completed by adding that these circumstances 
 are, no less than the normal value itself, governed by the 
 general conditions of demand and supply ; and that one of 
 the chief of these conditions is the amount of land which is 
 capable of growing oats, but for which there is so great a 
 demand for other purposes that it affords a higher rent, when 
 used for them, than when used for growing oats. For the 
 expenses of production of those oats which only just pay their 
 way, are greater than they would be, were it not that much 
 of the land which would return the largest crops of oats to 
 the smallest outlay is diverted to growing other crops that 
 will enable it to pay a higher rent than oats would afford ; 
 and therefore the rent that land on which oats could be 
 grown, can be made to pay for other purposes, though it does 
 not " enter into " the expenses of production and the normal 
 value of oats, yet does indirectly affect them 1 . 
 
 1 As Mill points out when discussing " some peculiar cases of value," all ques- 
 tions relating to the competition of crops for the possession of particular soils are 
 complicated by the rotation of crops and similar causes (Principles, Book in. 
 
EXTENSIONS OF RICARDO'S DOCTRINE AS TO RENT AND COST. 481 
 
 We conclude then that the doctrine that rent does not BOOKV. 
 enter into money-cost of production applies to agriculture CH ' vm ' 
 only when carefully limited ; and if Ricardo had studied its 
 limitations more carefully he would probably have seen that 
 there remained no reason for confining its scope to agricul- 
 ture. It may be taken in a sense in which it is not true of 
 agricultural rent ; when properly interpreted, it is equally 
 true of all kinds of rent 1 . 
 
 Ch. xvi. 2). He does not however appear to have noticed the bearing of these 
 remarks on the general problem of " Rent in its relation to Value." 
 
 1 This method of treating the rent of land may be supplemented by another, 
 proceeding rather on Cournot's plan of starting with value as determined by a 
 monopoly, and then introducing the competition of many rivals so as to work 
 towards the circumstances of a free market. 
 
 We will take the case of perennial springs of natural mineral water. If there 
 were only one spring of the kind, its owner would have a pure Monopoly ; which 
 he may be supposed to let out on lease. The lessee would fix the price of the 
 water so that the aggregate (yearly) receipts from the sales would exceed the 
 aggregate (yearly) expenses of working the business by as large a sum as possible : 
 and this excess (his own Earnings of Management being included in the expenses 
 of working) would be the rent which the owner of the spring could compel him to 
 pay. (We shall soon discuss the question of Monopoly in some detail, and shall 
 observe more closely the fact that Monopoly rent is rent determined, other things 
 being equal, by the price of the water, and does not enter into that price. This 
 fact is in harmony with the doctrine we are discussing, but is not an illustration 
 of it.) 
 
 Next suppose that there are several such springs, owned by different persons, 
 not acting in combination ; and that the supply drawn from each of them can be 
 increased by expensive pumping appliances, which yield a constantly diminishing 
 return. The equilibrium price will be such as just to remunerate each producer 
 for his marginal production ; that is, for the last gallon of water which his ex- 
 penditure enables him to raise, when the amounts raised from the several springs 
 are such that they are together equal to the amount which purchasers are willing 
 to buy at that price. The rental value of each spring will be the excess which this 
 price affords over the expenses of working it. Thus the price will be determined 
 by the relations of demand and supply ; it will take part directly in determining 
 the rent and will not be determined by the rent: rent will not enter into its 
 expenses of production. 
 
 If however one of the smaller springs happened to be so situated that it could 
 not be worked without injury to a valuable site, it would probably not be worked 
 at all ; the fact that the site had a high rental value for other purposes would cut 
 off part of the supply of mineral water that otherwise would have been forth- 
 coming; and this would cause more water to be obtained from the other springs 
 at expenses increased more than in proportion. The expenses of production of that 
 part which is raised at the greatest disadvantage, would be greater than before ; 
 and producers would at once raise their prices : if the price did not rise enough 
 to cover these expenses, the supply would be curtailed, and the scarcity of supply 
 would compel the price to rise. The price therefore would be raised in con- 
 sequence of the high rent that could be got by using for other purposes one 
 of the sites on which machinery for pumping mineral water might have been 
 
 M. 31 
 
482 EARNINGS OF AN APPLIANCE FOR PRODUCTION. 
 
 BOOK v. 5. We have seen 1 that the law of diminishing return 
 
 CH ' vm ' applies to the use of land for the purposes of living and 
 
 Those Hmi- wor king on it in all trades. Of course in the trade of build- 
 
 tations and 
 
 conditions i n g } a s in agriculture, it is possible to apply capital too 
 necessary thinly. Just as a squatter may find that he can raise more 
 
 produce by cultivating only a half of the 160 acres allotted 
 cultural^ 1 to n * m t ^ iari kj spreading his labour over the whole, so even 
 rents are when ground has scarcely any value, a very low house may 
 to make it be dear in proportion to its accommodation. But, as in 
 
 agriculture, there is a certain application of capital and 
 labour to the acre which gives the highest return, and 
 further applications after this give a less return, so it is in 
 building. The amount of capital per acre which gives the 
 maximum return varies in agriculture with the nature of the 
 crops, with the state of the arts of production, and with the 
 character of the markets to be supplied; and similarly in 
 building, the capital per square foot which would give the 
 maximum return, if the site had no scarcity value, varies with 
 the purpose for which the building is wanted. But when 
 the site has a scarcity value, it is worth while to go on 
 applying capital beyond this maximum rather than pay the 
 extra ground-rent required for extending the site. In places 
 where ground-rent is high, each square foot is made to yield 
 perhaps twice the accommodation, at more than twice the 
 cost, that it would be made to give, if used for similar 
 The Mar- purposes where ground-rent is low. We may apply the 
 Building, phrase the Margin of Building to that accommodation which 
 it would not be worth while to obtain from a given site if its 
 ground-rent were a little lower ; and, to fix the ideas, we may 
 suppose this accommodation to be given by the top floor of 
 the building 2 . 
 
 erected. Thus again we see that the proposition that rent does not enter into 
 expenses of production, when rightly understood, is not inconsistent with the fact 
 that if some of the possible sources of supply of the commodity in question have 
 been diverted to purposes that will enable them to render a higher rent, this 
 diminution of supply will raise prices. 
 
 1 Book iv. Ch. in. 
 
 2 Houses built in flats are often provided with a lift which is run at the expense 
 of the owner* of the house, and in such cases, at all events in America, his top floor 
 sometimes lets for a higher rent than any other. If the site is very valuable and 
 the law does not limit the height of his house in the interest of his neighbours, he 
 
EXTENSIONS OF RICARDO'S DOCTRINE AS TO RENT AND COST. 483 
 
 By erecting this floor, instead of spreading the building BOOK v. 
 
 over more ground, a saving of ground-rent is effected, which - _ ' 
 just compensates for the extra expense and inconvenience of 
 
 the plan. The accommodation given by this floor, when tlie margin 
 allowance has been made for its incidental disadvantages, pay no 
 is only just enough to be worth what it costs without 
 allowing anything for ground-rent ; and the expenses of pro- 
 duction of the things raised on this floor, if it is part of a 
 factory, are just covered by their price ; there is no surplus 
 for ground-rent. The expenses of production of manufactures 
 may then be reckoned as those of the goods which are made 
 on the margin of building, so as to pay no ground-rent. On 
 the understanding that we do so reckon them, it is true that 
 ground-rent does not enter into the expenses of manufacture ; 
 and this understanding is exactly parallel to that which has 
 to be supplied in order to make Bicardo's doctrine true, 
 when applied to agriculture. For, the expenses of produc- 
 tion of oats are increased by the fact that land which could 
 yield good crops of oats is in great demand for growing other 
 crops, which enable it to yield a higher rent; while the 
 printing-presses which may be seen at work in London some 
 sixty feet above the ground could afford to do their work a 
 little cheaper if the ground were not so much in demand 
 for other- uses, and pressure of ground-rent did not push the 
 margin of building up so high 1 . 
 
 may build very high : but at last he will reach the margin of building. At last he 
 will find that the extra expenses for foundations and thick walls, and for his lift, 
 together with some resulting depreciation of the lower floors, makes him stand to 
 lose more than he gains by adding one more floor; the extra accommodation 
 which it only just answers his purpose to supply is then to be regarded as at the 
 margin of building, even though the gross rent be greater for the higher floors 
 than for the lower. 
 
 1 Jevons in the Preface to the Second Edition of his Theory of Political 
 Economy argues in the direction of treating agricultural rent on the same footing 
 as ground-rent. But he goes on : " If land which has been yielding 2 per acre 
 rent, as pasture, be ploughed up and used for raising wheat, must not the 2 per 
 acre be debited against the expenses of production of wheat?" It is true that 
 Mill was inconsistent in answering this question in the negative, while he main- 
 tained that when land capable of yielding rent in agriculture is applied to some 
 other purpose, the rent which it would have yielded is an element in the cost 
 of production of the commodity which it is employed to produce. But still the 
 proper answer to Jevons' question is in the negative. For there is no connection 
 between this particular sum of 2 and the expenses of production of that 
 
 312 
 
484 
 
 EARNINGS OF AN APPLIANCE FOR PRODUCTION. 
 
 BOOK V. 
 CH. VIII. 
 
 The indi- 
 rect effect 
 of rent on 
 Expenses 
 of produc- 
 tion must 
 not be 
 overlooked 
 either in 
 manufac- 
 ture or 
 in agri- 
 culture. 
 
 Reverting to a caution given at the beginning of this 
 chapter against misunderstanding the general bearing of 
 Ricardo's doctrine, we may notice that this argument does 
 not imply that a manufacturer when making up the profit 
 and loss account of his business would not count his rent 
 among his expenses. If the ground-rent in, say, Leeds rises, 
 a manufacturer finding his expenses of production increased 
 may move to another town or into the country ; and leave the 
 land on which he used to work to be built over with shops 
 and warehouses, for which a town situation is more valuable 
 than it is for factories 1 . For he may think that the saving 
 in ground-rent that he will make by moving into the country, 
 together with other advantages of the change, will more than 
 counterbalance its disadvantages. In a discussion as to 
 whether it was worth his while to do so, the ground-rent of 
 his factory would be reckoned among the expenses of pro- 
 duction of his cloth. 
 
 This is true. But it is no less true that in making up 
 the profit and loss account of the cultivation of land, the 
 farmer's rent must be reckoned among his expenses. A hop- 
 grower, for instance, may find that on account of the high 
 rent which he pays for his land, the price of his hops will not 
 cover their expenses of production where he is, and he may 
 abandon hop-growing, or seek other land for it ; while the 
 land that he leaves may perhaps be let to a market-gardener. 
 After a while the demand for land in the neighbourhood 
 may again become so great that the aggregate price which 
 
 wheat which only just pays its way. The amount of capital applied in culti- 
 vation is elastic, and is stretched until the return to it only just repays the 
 outlay: this limit is determined by the general circumstances of supply and 
 demand ; and is independent of the particular sum of 2 which the land will afford 
 as rent. Mill ought to have said, "When land capable of being used for pro- 
 ducing one commodity (whether agricultural produce or not) is used for producing 
 another, the price of the first is raised by the consequent limitation of its field of 
 production. The price of the second will be the expenses of production (wages 
 and profits) of that part of it which only just pays its way, that which is pro- 
 duced on the margin of cultivation or building. And if for the purposes of any 
 particular argument we take together the whole expenses of the production on 
 that site, and divide these among the whole of the commodity produced, then, the 
 rent which we ought to count in is not that which the site would pay if used for 
 producing the first commodity, but that which it does pay when used for pro- 
 ducing the second." 
 
 1 Compare the latter part of Book iv. Ch. in. 7. 
 
LIMITATIONS OF RICARDO'S DOCTRINE AS TO RENT AND COST. 485 
 
 the market-gardener obtains for his produce will not pay its BOOK v. 
 
 CM VTTT 
 
 expenses of production, including rent ; and so he in his turn _! _ ' 
 makes room for, say, a building company. 
 
 6. Mines, quarries, &c. form a class by themselves, Mining 
 as has already been indicated 1 . For, except when they are enter into 
 
 practically inexhaustible, the excess of their income over their 
 direct outgoings has to be regarded, in part at least, as the ti ? n of 
 price got by the sale of stored-up goods stored up by Nature 
 indeed, but now treated as private property ; and therefore 
 the marginal supply price of minerals includes a royalty in 
 addition to the marginal expenses of working the mine. This 
 royalty on a ton of coal, when accurately adjusted, represents 
 that diminution in the value of the mine, regarded as a 
 source of wealth in the future, which is caused by taking 
 the ton out of Nature's storehouse. Ricardo was technically 
 right when he said that rent does not enter into the marginal 
 expenses of production of mineral produce. But he ought to 
 have added that the incomes derived from mines, which are 
 not practically inexhaustible, are in fact partly rent and 
 partly royalty; and that though the rent does not, the 
 minimum royalty does enter directly into the expenses paid 
 for any part of the produce, whether it is marginal or not. 
 
 1 Book iv. Ch. in. 8 7. 
 
CHAPTER IX. 
 
 ON THE VALUE OF AN APPLIANCE FOR PRODUCTION IN 
 RELATION TO THAT OF THE THINGS PRODUCED BY IT, 
 CONTINUED. 
 
 BOOK v. 1 1. THE illustrations in the last chapter related gene- 
 J _ ' rally to fixed and stable conditions. Those in the present 
 onhe chapter will bear on the application to less permanent 
 Chapter, incomes of the rule that Rent does not enter into cost of pro- 
 duction. _^ We have to inquire what modifications are needed 
 to adapt it to incomes derived from factors of production, the 
 supply of which, though not permanently limited, cannot be 
 increased quickly enough to affect appreciably the production 
 of the commodity in question during the period which we 
 have in view when speaking of its normal supply price. In 
 order to emphasize this continuity the better we will study 
 the incomes derived from land in a newly settled country: 
 we shall find that for some purposes they are to be classed as 
 profits, or at most as quasi-rents, rather than rents. 
 When A settler who takes up land in a new country exercises 
 
 country is no exclusive privilege, for he only does what anyone else 
 i g a ^ liberty to do. He undergoes many hardships, if not 
 P ersona l dangers, and perhaps runs some risk that the land 
 
 profits may turn out badly, and that he may have to abandon his 
 rent. improvements. On the other hand, his venture may turn 
 
 out well ; the flow of population may trend his way, and the 
 value of his land may soon give as large a surplus over the 
 normal remuneration of his outlay on it as the fishermen's 
 haul does when they come home with their boat full. But 
 in this there is nothing which presents itself to him as rent. 
 He has engaged in a risky business which was open to all, 
 
LAND IN A NEW COUNTRY. 487 
 
 and his energy and good fortune have given him an excep- BOOK v. 
 tionally high reward: others might have taken the same ' 
 chance as he did ; and from a business point of view they 
 ought to have done so, if they thought that, after discounting 
 all the hardships and risks of the venture, it would yield a 
 surplus which could fairly be called the rent of a special 
 privilege or monopoly. 
 
 Thus the income which he expects the land to afford in 
 the future enters into the calculations of the settler, and adds 
 to the motives which determine his action when on the 
 margin of doubt as to how far to carry his enterprise. He 
 regards its "discounted value" 1 as profits on his capital, 
 and as earnings of his own labour, in so far as his improve- 
 ments are made with his own hands. 
 
 A settler often takes up land with the expectation that 
 the produce which it affords while in his possession will fall 
 short of an adequate reward for his hardships, his labour 
 and his expenditure. He looks for part of his reward to the 
 value of the land itself, which he proposes after a while to 
 sell to some new-comer who has no turn for the life of a 
 pioneer. Sometimes even, as the British farmer learns to 
 his cost, the new settler regards his wheat almost as a by- 
 product ; the main product for which he works is a farm, the 
 title-deeds to which he will earn by improving the land, and 
 the value of which will steadily rise 2 . 
 
 1 Compare Book in. Ch. v. 3. 
 
 2 It has even been maintained that any new country which should refuse to 
 settlers the power of acquiring an absolute right of property in the soil, and 
 should grant long leases only, would see the stream of immigrants into it speedily 
 run away. But there does not seem to be any strong reason for thinking that 
 this effect would be more than temporary: for the more far-seeing class of 
 immigrants might think that what was kept from them as " individual wealth " 
 was more than returned to them as shareholders in the "collective wealth." 
 And even if not, it may be doubtful whether the few people who first arrive on 
 a new shore are justified in assuming that they have the right to dispose of its 
 vast resources in perpetuity. Warned by the experiences of the past our own 
 generation might well pause before entering into new engagements that purport 
 to bind its successors for all time. The gain which the world as a whole can get 
 from turning the stream of migration in this direction rather than that, is not very 
 great : distant generations may think that the fee-simple of the soil was too high 
 a price to pay for such a purpose ; and that, since a hundred years, though nothing 
 in the life of the race, is long relatively to individual lives, a free lease for a hun- 
 dred years would have been a sufficient price to pay. But this takes us out beyond 
 
488 EARNINGS OF AN APPLIANCE FOR PRODUCTION. 
 
 BOOK v. 2. But when the land is all taken up, the desire to 
 
 _J ' obtain its title-deeds no longer acts as a motive to further 
 
 thenTare improvement and to further production. Henceforth that 
 
 no more ne t income which the land affords to its owner in excess of 
 
 title-deeds . 
 
 to be normal profits on his fresh application of capital is a pro- 
 equaiiy ducer's surplus standing outside of those gains which are 
 situations, required to cover the marginal expenses of production. As 
 rent population and wealth increase in the neighbourhood this 
 
 emerges, r r . 
 
 net income also will increase; but except in so far as the 
 
 improvement may be due to the direct action of individual 
 
 owners, the whole of it may be regarded as a rent coming 
 
 under the general argument of the preceding chapter. 
 
 shorter the "^ ts amoun ^ therefore will be governed, other things 
 
 period being equal, by the supply price of produce at the margin 
 
 sideration, of cultivation and it will play very little direct part in 
 
 are the 6r governing that price. For that price will be governed 
 
 im S rove f cn ^ e % ^J ^ ne results which landowners and farmers can get 
 
 ments, the from applying capital and labour in the further development 
 
 income of 
 
 which is of the resources of the soil, and in cultivating it by more 
 assent. intensive methods than those of the early settler. The 
 results of all kinds of improvements, both those which bear 
 fruit slowly and those which bear fruit quickly, will be 
 watched ; and their success or failure will influence those 
 who are thinking of investing more capital in the soil. 
 Local variations of land tenure and custom will affect the 
 issue ; but in every case it will be true that the marginal 
 supply price of produce in the near future will not be 
 affected by improvements that bear fruit slowly, in the 
 same way that it is by those which act quickly. 
 An iiius- Suppose, for instance, that a war, which was not expected 
 
 instance, to last long, were to cut off part of our food supplies. People 
 would set themselves to raise heavier crops by such extra 
 application of capital or labour as was likely to yield a 
 speedy return; they would consider the results of artificial 
 manures, of the use of clod-crushing machines, and so on ; 
 
 the range of our present inquiries : the point with which we are concerned just here 
 is that anything that affects the hopes of distant gain on the part of the settler 
 exerts a clearly marked, though perhaps slowly acting influence on the amount of 
 produce which will be forthcoming in the country at any given time. 
 
LAND IN AN OLD COUNTRY. 489 
 
 and the more favourable these results were, the lower would BOOK v. 
 be the price of produce in the coming year which they re- c ^_^- 
 garded as necessary to make it worth their while to incur 
 additional outlay in these directions. But the war would 
 have very little effect on their action as to improvements 
 that would not bear fruit till it was over. 
 
 In any inquiry then as to the causes that will determine 
 the prices of corn during a short period, that fertility which 
 the soil derives from slowly made improvements has to be 
 taken for granted as it then exists, almost in the same way 
 as if it had been made by Nature. But in the long run the 
 net returns to the investment of capital in the land, taking 
 successful and unsuccessful returns together, do not afford 
 more than an adequate motive to such investment. If poorer 
 returns had been expected than those on which people 
 actually based their calculations, fewer improvements would 
 have been made ; and in any case the improvements would 
 depend partly on the conditions of land tenure, and the 
 enterprise and ability and command over capital on the part 
 of landlords and tenants which existed at the time and place 
 in question. In this connection we shall find, when we come 
 to study land tenure, that there are large allowances to be 
 made for the special conditions of different places. 
 
 But meanwhile we may conclude that, when the enter- 
 prise of landowners is most active, the extra income derived 
 from improvements that have been made in the land by its 
 individual owner this income being so reckoned as not to 
 include any benefit which would have been conferred on the 
 land by the general progress of society independently of his 
 efforts and sacrifices does not as a rule give a surplus 
 beyond what is required to remunerate him for those efforts 
 and sacrifices. He may have under-estimated the gains 
 which will result from them ; but he is about equally likely 
 to have made an over-estimate. If he has estimated them 
 rightly, his interest would lead him to make the investment 
 as soon as it showed signs of being profitable : and in the 
 absence of any special reason to the contrary we may suppose 
 him to have done this. 
 
 On these suppositions then, when we are considering 
 
490 EARNINGS OF AN APPLIANCE FOR PRODUCTION. 
 
 BOOK v. periods which are long in comparison with the time required 
 
 CH.JX. ^ ma k e improvements of any kind, and bring them into 
 
 General u jj O p er ation, the net incomes derived from them are to be 
 
 results as 
 
 to agricul- regarded as the price required to be paid for the efforts and 
 long sacrifices of those who make them. The expenses of making 
 
 them thus directly enter into marginal expenses of production, 
 and for and directly govern long-period supply price. But in short 
 periods, that is, in periods short relatively to the time re- 
 quired to make and bring into full bearing improvements of 
 the class in question, the incomes derived from them exercise 
 no such direct influence on supply price ; and when we are 
 dealing with such periods these incomes may be regarded as 
 a quasi-rent which takes little direct part in determining, 
 but is rather dependent on the price of the produce. It may 
 be noted, however, that rent proper is estimated on the 
 understanding that the original properties of the soil are 
 unimpaired. And when the income derived from improve- 
 ments is regarded as a quasi-rent, it is to be understood 
 that they are kept up in full efficiency: if they are being 
 deteriorated, the equivalent of the injury done to them must 
 be deducted from the income they are made to yield before 
 we can arrive at that Net income which is to be regarded as 
 their quasi-rent. 
 
 are .3. These results do not depend upon the special quali- 
 
 fo aU Ca ties of land, or on the special conditions of agriculture ; they 
 
 industry 8 - 01 are g enera % applicable to all branches of industry. This is 
 
 perhaps already obvious enough : for the main substance of 
 
 the argument has already been given in Chapter v. But 
 
 the subject is one of so much difficulty that the space given 
 
 in this section to repeating, in another form, what has been 
 
 said there, may not be wasted. 
 
 as is Let us suppose then that an exceptional demand for a 
 
 shown'by certain kind of textile fabrics is caused by, say, a sudden 
 tration 8 " movement of the fashions. The special machinery required 
 relating to for making that fabric will yield for the time an income, 
 
 manu- 
 facture, which bears no direct relation to the expenses of making 
 
 the machinery ; but is rather a high quasi-rent governed by 
 the price that can be got for the produce and consisting of 
 the excess of the aggregate price of that produce, over the 
 
EARNINGS OF MACHINERY. 491 
 
 direct outlay (including wear-and-tear) incurred in its pro- BOOK v. 
 , . CH. ix. 
 
 auction. _ 
 
 Next, suppose that the tide has turned, and that the 
 demand for a certain class of goods is much less than had 
 been expected. The factories with the most imperfect ap- 
 pliances and the worst machinery in other factories will be 
 thrown out of work : those machines which it is just worth 
 while to keep in work will just pay the actual expenses of 
 working them, but will yield no surplus. Their produce will 
 be on the margin of production ; and the excess of the price 
 got for the goods made by the better appliances over wear- 
 and-tear, together with the actual expenses of working them, 
 will be the income which these appliances yield during the 
 short period of depression. In this case the income will be 
 not more but less than normal profits on the original invest- 
 ment. 
 
 The argument of the last section but one of the preceding Arguments 
 chapter applies, so far as short periods are concerned, to reifts^x- 
 quasi-rents very nearly in the same way as to true Rents, 
 
 When existing factories or machinery which could be ap- rents - 
 plied to producing one commodity are diverted to producing 
 another because the demand for that is such as to enable 
 them to earn a higher income by producing it, then for the 
 time the supply of the first will be less, and its price higher 
 than if the machinery had not been able to earn a higher 
 income by another use. But as in the case of rent, there will 
 be no direct or numerical relation between the increase in 
 the price of the first commodity and the income that the 
 machinery can earn by producing the second. 
 
 4. Similar illustrations might be taken from any other The 
 branch of business. Each branch has special features of its 
 own ; but with proper modifications in detail, the same 
 general principle applies to all. In every case the net income 
 derived from the investment of capital, when once that in- sh . rfc 
 vestment has been made, is a quasi-rent. That is to say, P * 
 when the causes which determine short-period fluctuations 
 of production are under discussion, this quasi-rent may be 
 classed with rent proper, on the ground that it stands outside 
 of the payments which influence producers to take such 
 
492 EARNINGS OF AN APPLIANCE FOR PRODUCTION. 
 
 BOOK v. action as would increase the available supply within a short 
 c fl^' period.^ But this resemblance to rent is only partial and in 
 
 a sense superficial, 
 and has no p or wnen land or other free gifts of nature have once 
 
 bearing on . 
 
 the broader become private property, their rent proper does not act as 
 
 problems of ,. . Al f r , ,. 
 
 economic a direct incentive to make and save the means of production : 
 
 3SS ' though of course a violent appropriation of it might destroy 
 
 that security on which all such motives depend. It is a true 
 
 surplus. But the quasi-rent of capital_is j _jpeaking gene- 
 
 rally^no true surplus" IT it had been expected to be less 
 
 than it actually is, the motives to work and to save the pro- 
 
 - duct of work would have been less. And if this quasi-rent 
 
 i were to be diminished now, in such a way as to diminish the 
 
 expectations of the future gain likely to result from the effort 
 and sacrifice involved in working and saving the product of 
 work, the growth of individual capital would at once be 
 checked. The existing plant might indeed be sufficient 
 to prevent the change from considerably affecting the supply 
 of finished commodities, for a few years : but the broad 
 course of economic development would be changed ; and, so 
 far as it depends on the supply of individual capital, it would 
 be arrested. 
 
 It is true that what was lost in this direction might be 
 counterbalanced by a corresponding growth of Collective 
 capital. Whether there would be any considerable chance 
 of this is a matter on which opinions differ. But when we 
 come to discuss the schemes of modern socialists it will be 
 important to remember that, though there is some real 
 analogy between the quasi-rent of capital and rent proper, 
 yet the analogy does not reach far. It has no validity at all 
 except when short periods only are under discussion: it has 
 no bearing on those broad and slow movements on which the 
 general progress and the ultimate well-being of mankind 
 depend. 
 
CHAPTER X. 
 
 ON THE VALUE OF AN APPLIANCE FOR PRODUCTION IN 
 RELATION TO THAT OF THE THINGS PRODUCED BY IT, 
 CONTINUED. SITUATION RENT. COMPOSITE RENT. 
 
 1. WE have now considered the relation in which cost BOOK v. 
 of production stands to the income derived from the owner- CH>Xt 
 ship of the " original powers " of land and other free gifts of Relation in 
 Nature, and also to that which is directly due to the invest- Chapter 
 
 ment of private capital. But there is a third class, holding 
 
 an intermediate position between these two, of which some- i )recedin g- 
 
 thing should be said here. It consists of those incomes, or 
 
 rather those parts of incomes which are the indirect result 
 
 of the general progress of society, rather than the direct 
 
 result of the investment of capital and labour by individuals 
 
 for the sake of securing certain gains to themselves. 
 
 We have already seen how Nature nearly always gives influence 
 a less than proportionate return, when measured by the onThT * 
 amount of the produce raised, to increasing applications of |.? e of 
 capital and labour in the cultivation of land ; but that, on cultural 
 the other hand, if the more intensive cultivation is the result 
 of the growth of a non-agricultural population in the neigh- 
 bourhood, this very concourse of people is likely to raise the 
 real price which the cultivator can get for every part of his 
 produce. We saw how this influence opposes, and usually 
 outweighs the action of the law of diminishing return when 
 the produce is measured according to its value and not <^- 
 according to its amount ; the cultivator gets good markets 
 in which to supply his wants, as well as good markets in 
 which to sell, he buys more cheaply while he sells more 
 
494 THE INDUSTRIAL ENVIRONMENT. 
 
 BOOKV. dearly, and the conveniences and enjoyments of social life 
 
 H ' X ' are ever being brought more within his reach 1 . 
 
 in all Again, we saw how the economies which result from a 
 
 access to high industrial organization 2 often depend only to a small 
 
 External extent on the resources of individual firms. Those internal 
 
 economies 
 
 depends economies which each establishment has to arrange for itself 
 Situation, are frequently very small as compared with those external 
 economies which result from the general progress of the in- 
 dustrial environment; the Situation of a business nearly 
 always plays a great part in determining the extent to which 
 it can avail itself of external economies. 
 
 It is true that situation often counts for little with 
 regard to those economies that result from the gradual 
 growth of knowledge, or from the gradual development of 
 world markets for commodities the value of which is great 
 in proportion to their bulk. Cost of carriage is not a very 
 large element in the budget of a watch-factory where- 
 ever it is placed : though near access to markets where 
 specialized skill can be easily got may be very important to 
 it. But in the great majority of industries the success of a 
 business depends chiefly upon the resources and the markets 
 of its own immediate neighbourhood; and the Situation 
 value which a site derives from the growth of a rich and 
 active population close to it, or from the opening up of rail- 
 ways and other good means of communication with existing 
 markets, is the most striking of all the influences which 
 changes in the industrial environment exert on cost of pro- 
 duction. 
 
 Situation 2. If in any industry, whether agricultural or not, 
 
 two producers have equal facilities in all respects, except 
 that one has a more convenient situation than the other, 
 and can buy or sell in the same markets with less cost of 
 carriage, the differential advantage which his situation gives 
 him is the aggregate of the excess charges for cost of carriage 
 to which his rival is put. And we may suppose that other 
 advantages of situation, such for instance as the near access 
 to a labour market specially adapted to his trade, can be 
 translated in like manner into money values. When this 
 
 i Book iv. Ch. m. 8 6. 2 21, Ch. x. xra. 
 
SITUATION RENT. 495 
 
 is done for, say, a year, and all are added together we have BOOK v. 
 the annual money value of the advantages of situation which ' 
 the first business has over the second ; and the corresponding 
 difference in the incomes derived from the two businesses is 
 commonly regarded as a difference of Situation Rent. If we 
 suppose the second of the two sites to have less advantages 
 of situation than any other, we may regard it as having no 
 special situation rent ; and then the income derived from 
 the differential advantage of the former site constitutes the 
 whole of its situation rent 1 . 
 
 3. There are however some exceptional cases in which Exception- 
 this income derived from an advantageous situation is not 
 properly to be regarded as rent but rather as profits. Some- 
 times, for instance, the settlement of a whole town, or even from ad - 
 
 . . . vantageous 
 
 district is planned on business principles, and carried out as situation is 
 an investment at the expense and risk of a single person or gaMedas 
 company. The movement may be partly due to philan- rather than 
 thropic or religious motives, but its financial basis will in any rent - 
 case be found in the fact that the concourse of numbers is 
 itself a cause of increased economic efficiency. Under ordi- 
 nary circumstances the chief gains arising from this efficiency 
 would accrue to those who are already in possession of the 
 place : but the chief hopes of commercial success, by those 
 who undertake to colonise a new district or build a new town, 
 are usually founded on securing these gains for themselves. 
 
 1 If we suppose that two farms, which sell in the same market, return severally 
 to equal applications of capital and labour amounts of produce, the first of which 
 exceeds the second by the extra cost of carrying its produce to market, then the 
 rent of the two farms will be the same. (The capital and labour applied to the 
 two farms are here supposed to be reduced to the same money measure, or which 
 comes to the same thing, the two farms are supposed to have equally good access 
 to markets in which to buy.) Again, if we suppose that two mineral springs A 
 and B supplying exactly the same water are capable of being worked each to 
 an unlimited extent at a constant money cost of production, this cost being, say 
 two pence a bottle at A whatever the amount produced by it, and two pence half- 
 penny at B ; then those places to which the cost of carriage per bottle from B is 
 a half -penny less than from A, will be the neutral zone for their competition. (If 
 the cost of carriage be proportional to the distance, this neutral zone is a hyper- 
 bola of which A and B are foci.) A can undersell B for all places on A's side 
 of it, and vice versa ; and each of them will be able to derive a Monopoly Bent 
 from the sale of its produce within its own area. This is a type of a great many 
 fanciful, but not uninstructive, problems which readily suggest themselves. Com- 
 pare Von Thlinen's brilliant researches in Der isolirte Staat. 
 
496 IMPROVEMENT OF THE ENVIRONMENT. 
 
 BOOK v. When, for instance, Mr Salt and Mr Pullman determined 
 
 CH ' X ' to take their factories into the country and to found Saltaire 
 
 tionffrom anc ^ P u ^ man ity> they foresaw that the land, which they 
 Saltaire could purchase at its value for agricultural purposes, would 
 
 and Pull- . i-i 
 
 man City, obtain the special situation value which town property 
 derives from the immediate neighbourhood of a dense popu- 
 lation. And similar considerations have influenced those, 
 who, having fixed upon a site adapted by nature to become 
 a favourite watering-place, have bought the land and spent 
 large sums in developing -its resources : they have been 
 willing to wait long for any net income from their invest- 
 ment in the hope that ultimately their land would derive a 
 high situation value from the concourse of people attracted 
 to it 1 . 
 
 In all such cases the yearly income derived from the land 
 (or at all events that part of it which is in excess of the 
 agricultural rent) is for many purposes to be regarded as 
 profits rather than rent. And this is equally true, whether 
 the land is that on which the factory itself at Saltaire or 
 Pullman city is built, or that which affords a high " ground- 
 rent" as the site of a shop or store, whose situation will 
 enable it to do a brisk trade with those who work in the 
 factory. For in such cases great risks have to be run ; and 
 in all undertakings in which there are risks of great losses, 
 there must also be hopes of great gains. The normal ex- 
 penses of production of a commodity must include payment 
 for the ventures required for producing it, sufficient to cause 
 those who are on the margin of doubt whether to venture or 
 not, to regard the probable net amount of their gains net, 
 that is, after deducting the probable amount of their losses 
 as compensating them for their trouble and their outlay. 
 And that the gains resulting from such ventures are not 
 much more than sufficient for this purpose is shown by the 
 fact that they are not as yet very common. They are how- 
 ever likely to be more frequent in those industries which are 
 in the hands of very powerful corporations. A large railway 
 company, for instance, can found a Crewe or a New Swindon 
 
 1 Cases of this kind are of course most frequent in new countries. But they 
 are not very rare in old countries: Saltburn is a conspicuous instance. 
 
SHARING THE BENEFITS OF A LOCAL IMPROVEMENT. 497 
 
 for manufacturing railway plant without running any great BOOK v. 
 
 . 1 i CH, X. 
 
 risk 1 . 
 
 Somewhat similar instances are those of a group of land- improve- 
 owners who combine to make a railway, the net traffic receipts Stated at 
 of which are not expected to pay any considerable interest on tne J oint . 
 the capital invested in making it; but which will greatly raise the land- 
 the value of their land. In such cases part of the increase concerned, 
 of their incomes as landowners ought to be regarded as 
 profits on capital which they have invested in the improve- 
 ment of their land : though the capital has gone towards 
 making a railway instead of being applied directly to their 
 own property. 
 
 Other cases of like nature are main drainage schemes, 
 and other plans for improving the general condition of agricul- 
 tural or town property, in so far as they are carried out by 
 the landowners at their own expense, whether by private 
 agreement or by the levying of special rates on themselves. 
 Similar cases again are found in the investment of capital 
 by a nation in building up its own social and political orga- 
 nization as well as in promoting the education of the people 
 and in developing its sources of material wealth. 
 
 Thus that improvement of the environment, which adds to 
 the value of land and of other free gifts of nature, is in a good 
 many cases partly due to the deliberate investment of capital 
 by the owners of the land for the purpose of raising its value ; 
 and therefore a portion of the consequent increase of income 
 may be regarded as profits when we are considering long 
 periods. But in many cases it is not so ; and any increase 
 
 1 Governments have great facilities for carrying out schemes of this kind, 
 especially in the matter of choosing new sites for garrison towns, arsenals, and 
 establishments for the manufacture of the materials of war. In comparisons of 
 the expenses of production by Government and by private firms, the sites of the 
 Government works are often reckoned only at their agricultural value. But such 
 a plan is misleading. A private firm has either to pay heavy annual charges on 
 account of its site, or to run very heavy risks if it tries to make a town for itself. 
 And therefore in order to prove that Government management is for general 
 purposes as efficient and economical as private management, a full charge ought 
 to be made in the balance-sheets of Government factories for the town- value of 
 their sites. In those exceptional branches of production for which a Government 
 can found a manufacturing town without incurring the risks that a private firm 
 would incur in a similar case, that point of advantage may fairly be reckoned as 
 an argument for Governments undertaking those particular businesses. 
 
 M. 32 
 
498 EARNINGS OF AN APPLIANCE FOR PRODUCTION. 
 
 BOOK v. i n the net income derived from the free gifts of nature which 
 was not brought about by, and did not supply the direct 
 motive to, any special outlay on the part of the landowners, 
 is to be regarded as rent for all purposes. 
 
 Composite 4. The so-called rent of a building is generally com- 
 posed of two elements, one the quasi-rent of the building 
 itself, and the other the rent often chiefly a situation 
 rent of the ground on which it is built. The task of dis- 
 tinguishing between these two elements may be taken here 
 as a special case of a more general problem of composite 
 rents. 
 
 its com- At starting there may appear to be some contradiction 
 
 elements in the statement that a thing is yielding at the same time 
 
 tSIgufshed two rents : for a rent is in some sense a residual income after 
 
 but no? in deducting tne expenses of working it : and it may seem that 
 
 all cases, there cannot be two residues. But really we often find a 
 
 true producer's surplus or rent, which itself includes two or 
 
 more minor rents. 
 
 For instance, the rent of a flour-mill worked by water 
 includes the rent of the site on which it is built, and the rent 
 of the water power which it uses. Suppose that it is con- 
 templated to build a mill in a place where there is a limited 
 water power which could be applied equally well on any one 
 of many sites ; then the rent of the water power together with 
 the site selected for it is the sum of two rents ; which are 
 respectively the equivalent of the differential advantages 
 which possession of the site gives for production of any kind, 
 and which the ownership of the water power gives for working 
 a mill on any of the sites. And these two rents, whether 
 they happen to be owned by the same person or not, can be 
 clearly distinguished and separately estimated both in theory 
 and in practice. 
 
 But this cannot be done if there are no other sites on 
 which a mill can be built : and in that case, should the water 
 power and the site belong to different persons, there is nothing 
 but "higgling and bargaining" to settle how much of the 
 excess of the value of the two together over that which the 
 site has for other purposes shall go to the owner of the latter. 
 And even if there were other sites at which the water power 
 
COMPOSITE RENT. 499 
 
 could be applied, but not with equal efficiency, there would BOOK v. 
 still be no means of deciding how the owners of the site __ 
 and the water power should share the excess of the producer's 
 surplus which they got by acting together, over the sum of 
 that which the site would yield for some other purpose, and 
 of that which the water power would yield if applied else- 
 where. The mill would probably not be put up till an agree- 
 ment had been made for the supply of water power for a term 
 of years : but at the end of that term similar difficulties would 
 arise as to the division of the aggregate producer's surplus 
 afforded by the water power and the site with the mill on it. 
 Difficulties of this kind are continually arising with re- 
 gard to attempts by partial monopolists, such as railway, gas, 
 water and electrical companies, to raise their charges on the 
 consumer who has adapted his business arrangements to make 
 use of their services, and perhaps laid down at his own expense 
 a costly plant for the purpose. For instance, at Pittsburgh 
 when manufacturers had just put up furnaces to be worked by 
 natural gas instead of coal, the price of the gas was suddenly 
 doubled. And the whole history of mines is full of difficulties 
 of this kind, with neighbouring landowners as to rights of 
 way, &c., and with the owners of neighbouring cottages, 
 railways and docks. 
 
 322 
 
CHAPTER XI. 
 
 THE EQUILIBRIUM OF NORMAL DEMAND AND SUPPLY CON- 
 CLUDED. MULTIPLE POSITIONS OF EQUILIBRIUM. 
 
 BOOK v. 1. IN the present chapter we have, firstly, to examine 
 
 ' the relation in which average expenses of production stand 
 
 oTthe ^ norma l sll Pply price ; secondly, to consider further the 
 chapter, conditions of production and marketing in industries which 
 obey the law of increasing return, to look again at the 
 causes which limit the production of individual firms in those 
 industries and hinder any one of them from driving its rivals 
 out of the field as soon as it has once got a start over them ; 
 thirdly, to take up that study of normal equilibrium with 
 regard to commodities obeying the law of increasing return 
 which we avoided in Chapter v. and postponed to this place ; 
 and lastly, to discuss some points of a rather technical 
 character relating to the interpretation of normal supply 
 price and the normal demand and supply schedules and 
 multiple positions of equilibrium. The second of these tasks 
 is of general interest; the rest are of rather an academic 
 character. 
 
 The terms Firstly, then, as to the relations between average ex- 
 ana penses of production and normal supply price. The last few 
 expemsesof chapters have thrown some light on the relations in which 
 have U <miy n ^ G normal supply price of a commodity stands to its so- 
 aconven- called "average" expenses of production at any time. In 
 meaning in this use the term is somewhat misleading. For in the world 
 ofrapid in which we live, most of the appliances of production, ma- 
 change, terial and personal, by which a commodity was made, came 
 into existence long before. Their values are therefore not 
 
NORMAL SUPPLY PRICE IN A STATIONARY STATE. 501 
 
 likely to be just what the producers expected them to be BOOKV. 
 
 originally; but some of their values will be greater, and " 
 
 others less. The present incomes earned by them will be 
 governed by the general relations between the demand for, 
 and the supply of their products; and their values will be 
 arrived at by capitalizing these incomes (which will be of the 
 nature of quasi-rents). 
 
 It is obvious therefore that when making out a list 
 of normal supply prices, which, in conjunction with the list 
 of normal demand prices, is to determine the equilibrium 
 position of normal value, we cannot take for granted the values 
 of these appliances for production without reasoning in a 
 circle. In a world of change, such as ours is, the terms 
 " aggregate " or " average " expenses of production have in 
 general no exact and definite meaning; though of course 
 they may be legitimately used, with an artificial interpre- 
 tation clause, for the special purposes of a particular 
 problem. 
 
 One such use is found when we suppose a world in which But let us 
 everything is, and has long been, in a stationary state ; in perfectly 
 which the same amounts of the same things have been pro- state/hi^ 
 duced in the same ways by the same classes of people for wbicl1 tne 
 many generations together ; and in which therefore this things are 
 
 f xi T f i_ i. j f 11 *.- done in the 
 
 supply of the appliances for production has had full time to same way 
 be adjusted to the steady demand. same * 
 
 Of course we might assume that in our stationary state extent for 
 
 J ^ many gene- 
 
 every business remained always of the same size, and with rations, 
 the same trade connection. But we need not go so far as 
 that ; it will suffice to suppose that firms rise and fall with 
 the same regular monotony as the trees of a forest ; and 
 that, though some firms may turn the economies of pro- 
 duction on a large scale to better account than others, yet 
 they will not obtain a preponderating influence in, and change 
 the character of, their own branch of industry. The " repre- 
 sentative " firm would therefore be of a constant size, as the 
 representative tree of a virgin forest is ; its internal economies 
 would be constant ; and its external also, because the aggre- 
 gate volume of production would be constant. The marginal 
 price, the expectation of which just induced persons to enter 
 
502 EQUILIBRIUM OF NORMAL DEMAND AND SUPPLY. 
 
 BOOKV. the trade, would be sufficient to cover in the long run the 
 _J _ ' cost of building up a trade connection which was afterwards 
 to decay ; these would be the normal expenses governing the 
 normal supply price for long periods. 
 
 And in such a state there would be no distinction be- 
 tween long-period and short-period normal value, or between 
 true normal price and sub-normal price, at all events if we 
 supposed that in that monotonous world the harvests them- 
 selves were uniform : for the representative firm being 
 always of the same size, and always doing the same class 
 of business to the same extent and in the same way with no 
 slack times, and no specially busy times, its normal expenses 
 by which the normal supply price is governed would be always 
 the same. The demand and the supply lists of prices would 
 always be the same, and normal price would never vary. 
 in such a ..\ There would be no such things as quasi-rents: for the 
 
 state there . , , ,. ' j . . . 
 
 would be income earned by every appliance of production being truly; 
 
 beforehand, would represent the normal measure 
 would. 6 "* 8 f *ke e ^ r ^ s an d appliances required to call it into existence. 
 remain. _ k But true rents would remain. For that which cannot be 
 increased by man's effort in time however long, would still 
 have no supply price ; and its value would still be found by 
 capitalizing the income derived from the differential advan- 
 ' tages which it offered for production ; and that income would 
 be determined by the expenses of production of that part 
 of the supply which had not the benefit of any permanent 
 differential advantages; i.e. by the marginal expenses of 
 production. 
 
 Aggregate The aggregate expenses of production might then be 
 of pro- 68 found either by multiplying these marginal expenses by the 
 wonUUhen num ^ er f units of the commodity ; or by adding together 
 be definite : all the actual expenses of production of its several parts, and 
 being adding in all the rents earned by differential advantages 
 average ' f r production. The aggregate expenses of production being 
 wouKUhen determined by either of these routes, the average expenses 
 
 be equal to could be deduced by dividing out by the amount of the 
 and to commodity ; and would be the normal supply price, whether 
 expenses. f r l n g periods or for short. 
 
 In this stationary state we have supposed every particular 
 
NORMAL SUPPLY PRICE IN A STATIONARY STATE. 
 
 503 
 
 thing to bear its proper share of supplementary costs ; and 
 have supposed that it would not ever be worth while for a 
 producer to accept a particular order at a price other than 
 the total cost, in which is to be reckoned a charge for the 
 task of building up the trade connection and external organi- 
 zation of a representative firm 1 . 
 
 1 This case may be illustrated by the adjoining diagram, in which SS' is not a 
 true supply curve, but has properties, which are often erroneously attributed to 
 the supply curve ; and some study of it may be useful, if for no other purpose, yet 
 as a means of guarding the true supply curve against misunderstandings. We 
 will call it the Particular Expenses Curve. As usual the amount of a commodity 
 is measured along Ox, and its price along Oy. OH is the amount of the commodity 
 produced annually, A H is the equilibrium price of a unit of it. The producer of 
 the OHtb unit is supposed to have no differential advantages ; but the producer 
 of the OMth unit has differential advantages which enable him to produce with an 
 outlay PM, a unit which it would have cost him an outlay AH to produce without 
 those advantages. The locus of P is our particular expenses curve ; and it is such 
 that any point P being taken on it, and PM being drawn perpendicular to Ox, PM 
 represents the particular expenses of production incurred for the production 
 of the OMih unit. The excess of ^tZTover PM = QP, and is a producer's surplus 
 or rent. For convenience the owners of differential advantages may be arranged 
 in descending order from left to right; and thus SS' becomes a curve sloping up- 
 wards to the right. 
 
 Proceeding as in the case of consumer's surplus or rent (Bk. in. Ch. vi. 1), 
 we may regard MQ as a thin parallelogram 
 or as a thick straight line. And as M takes 
 consecutive positions along OH, we get a 
 number of thick straight lines cut in two by 
 the curve SA, the lower part of each repre- 
 senting the expenses of production of a unit 
 of the commodity, and the upper the contri- 
 bution which that unit affords towards rent. 
 The lower set of thick lines taken together 
 fill up the whole space SOHA ; which there- 
 fore represents the aggregate of the expenses 
 of production of an amount OH. The upper 
 set of thick lines taken together fill up the 
 space FSA, which therefore represents pro- 
 ducer's surplus or rent in the ordinary sense 
 of the term. Subject to the corrections men- 
 tioned in Bk. in. Ch. vi. 2, DFA represents the surplus satisfaction which 
 consumers get from an amount OH over that, the value of which is represented 
 to them by a sum of money equal to OH x HA ; and the diagram shows how the 
 name " consumer's rent" was suggested for this surplus. 
 
 Now the difference between the particular expenses curve and a normal 
 supply curve lies in this, that in the former we do, and in the latter we do not, 
 take the general economies of production as fixed and uniform throughout. The 
 particular expenses curve is based throughout on the assumption that the aggre- 
 gate production is OH, and that all the producers have access to the internal and 
 external economies which belong to this scale of production ; and, these assump- 
 tions being carefully borne in mind, the curve may be used to represent a particu- 
 
 BOOK v. 
 
 CH. XI. 
 
 Fig. 24. 
 
 Con- 
 sumer's 
 Rent. 
 
 Producer' 
 
 Prodtuer's 
 xpent es. 
 
504 
 
 EQUILIBRIUM OF NORMAL DEMAND AND SUPPLY. 
 
 BOOK V. 
 CH. XI. 
 
 We now 
 pass from 
 this hypo- 
 thesis 
 
 2. The hypothesis of a stationary state is useful to 
 illustrate many points in economics ; but it is the nature of 
 such hypotheses to be treacherous guides if pursued far away 
 from their starting point : they soon lead us into a region of 
 unreal abstractions, and, in particular, this one is not suitable 
 
 lar phase of any industry, whether agricultural or manufacturing, but cannot be 
 taken to represent its general conditions of production. 
 
 That can be done only by the normal supply curve, in which PM represents 
 the normal expenses of production of the OMih unit on the supposition that OM 
 units (not any other amount, as OH) are being produced ; and that the available 
 economies of production external and. internal are those which belong to a repre- 
 sentative firm where the aggregate volume of production is OM. These economies 
 will generally be less than if the aggregate volume of production were the larger 
 quantity OH ; and therefore, M being to the left of H, the ordinate at M for the 
 supply curve will be greater than for a particular expenses curve drawn for an 
 aggregate production OH. 
 
 It follows that the area SAF which represents aggregate rent in our present 
 diagram would have represented something less than the aggregate rent, if SS' 
 had been a normal supply curve even for agricultural produce (DD' being the 
 normal demand curve). For even in agriculture the general economies of pro- 
 duction increase with an increase in the aggregate scale of production. 
 
 If however we choose to ignore this fact for the sake of any particular argu- 
 ment ; that is, if we choose to assume that MP being the expenses of production of 
 that part of the produce which was raised under the most difficult circumstances 
 (so as to pay no rent) when OM units were produced, it remains also the expenses 
 of production (other than rent) of the Mth unit even when OH is produced ; or in 
 other words, if we assume that the increase in production from the amount OM 
 to the amount OH did not alter the expenses of production of the OMth unit, 
 then we may regard SAF as representing the aggregate rent even when SS' is 
 the normal supply curve. It may be occasionally convenient to do this, attention 
 being of course called every time to the nature of the special assumption made. 
 
 But no assumption of the kind can be made with regard to the supply curve of 
 a commodity that obeys the laws of increasing return. To do so would be a con- 
 tradiction in terms. The fact that the production of the commodity obeys that 
 law, implies that the general economies available when the aggregate volume of 
 production is large, are so much greater than when it is small, as to override the 
 increasing resistance that Nature offers to an increased production of the raw 
 materials of which the industry makes use. In the case of a particular expenses 
 curve, MP will always be less than AH (M being to the left of H) whether the 
 commodity obeys the law of increasing or diminishing returns ; but on the other 
 hand in the case of a Supply curve, for a commodity that obeys the law of 
 increasing returns, MP would generally be greater than AH. 
 
 It remains to say that if we are dealing with a problem in which some even of 
 those appliances for production which were made by man, have to be taken as a 
 given quantity for the time, so that their earnings will be of the nature of a 
 quasi- rent ; we may then draw a particular expenses curve, in which MP stands 
 for the expenses of production in the narrower sense in which such quasi-rents 
 are excluded; and the area SAF would thus represent the aggregate of rents 
 proper and of -these quasi-rents. This method of treating short -period normal 
 value problems has attractions, and may perhaps ultimately be of service : but it 
 requires careful handling, for the assumptions on which it rests are very slippery. 
 
MODES OF ACTION OF THE LAW OF INCREASING RETURN. 505 
 
 for that part of the pure theory of equilibrium of normal BOOK v. 
 demand and supply which remains for us to discuss; and ' 
 which relates to industries that obey the law of increasing J 
 
 return, a law that belongs essentially to an age of change stud y fur - 
 
 ther the 
 
 and progress. causes that 
 
 It will be recollected that the general view of that theory, normal 
 given in Chapter ill. of this Book, left out of account all 
 cases in which the supply price falls as the amount produced 
 increases ; because they present special difficulties which the law of 
 would have obscured those main outlines of the theory 
 which we were then seeking to obtain a general view. These 
 difficulties arise chiefly from the facts, firstly, that the law 
 of increasing return seldom shows its true character in a 
 short period of time ; and, secondly, that in the long period 
 of time required for its full operation, the general conditions 
 of equilibrium are likely to be modified by .external changes 1 . 
 Let us begin with the first of these two difficulties, and 
 consider further the conditions of production and marketing 
 with regard to short periods in industries that obey the law 
 of increasing return, and inquire what are the reasons 
 which induce any particular producer of a commodity, 
 which obeys the law of increasing return, to produce as 
 much as he does and no more. The fact that the economies 
 of production on a large scale act differently in different 
 trades, makes it difficult to adapt a general theory of equi- 
 librium to the conditions of these industries ; and we are 
 compelled to go back a little, and work, partly over old 
 ground, from details to general results. 
 
 1 These difficulties lie rather below the surface and are often concealed in 
 popular discussions of the equilibrium conditions of trade ; but they have made 
 themselves felt with great force in the attempts made, from the time of Cournot 
 and von Thiinen downwards, to express those conditions by mathematical formulae. 
 Some, among whom Cournot himself is to be counted, have before them what is 
 in effect the supply schedule of an individual firm, representing that an increase 
 in its output gives it command over so great internal economies as much to 
 diminish its expenses of production; and they follow their mathematics boldly, 
 but apparently without noticing that it leads inevitably to the ultimate monopoly 
 of the whole business of its trade in its district by whatever firm first got a good 
 start. While others avoiding this horn of the dilemma, maintain that there is no 
 true equilibrium at all for commodities which obey the law of increasing return ; 
 and some would appear even to have called in question the validity of any supply 
 schedule which represents prices diminishing as the amount produced increases. 
 
506 EQUILIBRIUM OF NORMAL DEMAND AND SUPPLY. 
 
 BOOKV. The question is more difficult to answer with regard to 
 
 _J _ ' commodities that obey the law of increasing than those that 
 
 seenfthat k ev ^ e law of diminishing return. With regard to the 
 
 it is the latter, the producer whose normal marginal expenses of pro- 
 
 interest of r . 
 
 each pro- duction are just equal to the normal demand price in the 
 
 to limit? market, would generally have no inducement to raise ad- 
 crease its ditional produce, even though he could market it on the 
 production, same terms as the rest. But in the case of a commodity 
 that obeys the law of increasing return, the point at which 
 the producer should stop is not so clearly marked out. It 
 may seem at first sight that by doubling his production, he 
 will increase very much his internal economies, and, market- 
 ing his output on nearly the same terms as before, he will 
 more than double his profits. It may be argued that so 
 long as this course is open to him, his production can never 
 be in equilibrium. 
 
 it must be Now it must be admitted fully that in a trade in which 
 that there are large Internal economies of production still avail- 
 
 , an individual firm is seldom in a position of true equi- 
 ducts e obe likrium. -^ or a new man working his way with small capital 
 the law of and small trade connection, in a trade in which the econo- 
 
 increasing . 
 
 return are mies of production on a large scale tell powerfully on the side 
 state/ 11 a f large firms, would probably be able to continue for a time 
 brium; to i ncrease his normal output, to lower his normal expenses 
 per unit, and the price at which he is able to sell. If, as his 
 business increased, his faculties adapted themselves to his 
 larger sphere, as they had done to his smaller ; if he retained 
 his originality, and versatility and power of initiation, his 
 perseverance, his tact and his good luck for a hundred years 
 together; he might have absorbed into his own hands the 
 whole volume of production in his branch of trade for his 
 district : and if his goods were not very difficult of transport, 
 he might have extended this district very wide. During all 
 this time there would have been no equilibrium, but only 
 movement ; and at the end his price would not be a normal 
 expenses of production price, but that of a limited monopoly; 
 that is, of a monopoly limited by the consideration that a 
 very high price would bring rival producers into the field. 
 But all that this shows is, that we must be careful not to 
 
MODES OF ACTION OF THE LAW OF INCREASING RETURN. 507 
 
 regard the conditions of supply by an individual producer as BOOK v. 
 typical of those which govern the general supply in a market, 
 without taking account of the fact that very few firms have 
 
 a long-continued life of active progress ; and that while some tend to 
 
 L . compen- 
 
 are growing, others are sure to be decaying, like the older sate one 
 trees of the forest; so that their normal productive power 
 remains nearly constant, though the yield of each one of 
 them is generally either on the rise or on the decline. This 
 argument has been dwelt on so long in this and the preceding 
 Book, that we may take its broad outlines for granted, and 
 consider an objection to applying it to the particular question 
 before us. 
 
 The objection is that the decay of human energies is 
 after all a slow process, and that, if a large output would 
 cost much less in proportion than a small one, an able and 
 energetic man could often find the means of increasing his 
 output tenfold or more within a period very short in com- 
 parison with the length of his own life. This also must be 
 admitted. It is true that a man who is prospering can often 
 borrmv capital so fast and therefore can increase his material 
 appliances so fast, that the expansion of his business might 
 be very rapid, if he could both market his new output easily, 
 and at the same time obtain very important internal econo- 
 mies by every increase of his output. It must be admitted 
 further that there are a few industries, in which these two save in 
 conditions do coexist ; and that such industries are, for that exceptional 
 very reason, in so transitional a state that for the time there m 
 is nothing to be gained by trying to apply the statical theory 
 of equilibrium of normal demand and supply to them. They 
 must be thought of as in motion, rather than at rest. But, 
 on the other hand, these industries are very few in number. 
 For, though there are many industries in which an indi- 
 vidual producer could secure much increased Internal eco- 
 nomies by a great increase of his output ; and there are 
 many in which he could market that output easily; yet 
 there are few in which he could do both. And this is not 
 an accidental but almost a necessary result. 
 
 There are not very many industries obeying the law of For in 
 increasing return in which a producer has equally good 
 
508 EQUILIBRIUM OF NORMAL DEMAND AND SUPPLY. 
 
 BOOKV. access to the whole of a large market. No doubt he may 
 CH^XI. .^ ^ e cage ^ g OQC | s wn i cn can b e graded 1 , and which can be 
 
 market is s0 ^ * n a P u ^^ c market. But, most goods that can be graded 
 more or are raw produce ; and of the rest nearly all are simple corn- 
 limited, modities, such as steel rails or calico, the production of which 
 can be reduced to routine, for the same reasons that enable 
 them to be graded. In the industries which produce them 
 no firm can hold its own at all unless equipped with expen- 
 sive appliances of nearly the latest type ; and there remains 
 no very great difference between the economies available by 
 a large and by a very large firm 2 . In these industries, in 
 short, the tendency of large firms to drive out small ones 
 has already gone so far as to exhaust most of the strength of 
 those forces by which it was originally promoted. 
 
 And even in these industries, to produce for an open 
 market, means generally to produce for sale to middlemen 
 who will sell to others : those producers, who can miss out one 
 in the link of middlemen, will often gain by so doing a good 
 deal more than the additional economies to be got by in- 
 creasing an already large and well-found stock of machinery ; 
 and when this is so, a large part of the value of any business 
 will- consist of its particular trade connections and external 
 organization, in spite of the fact that the commodities which 
 it produces resemble those made by many other firms. 
 
 But the majority of commodities with regard to which 
 
 the law of increasing return acts strongly are, more or less, 
 
 An in- specialities : many of them aim at creating a new want, or at 
 
 producer meeting an old want in a new way. Many of them are 
 
 extendlS? a( ^ a P te( i * special tastes ; some can never have a very large 
 
 special market; and some have merits that are not easily tested, 
 
 quickly. and must win their way to general favour slowly. In all 
 
 such cases the sales of each business are limited, more or less 
 
 according to circumstances, to the particular market which 
 
 it has slowly acquired. There are firms whose business 
 
 connections have been built up by a gradual investment of 
 
 capital, and are worth nearly as much as, or possibly even more 
 
 than, the whole of their material capital. When a business 
 
 is thus confined more or less to its own particular market, a 
 
 1 See Book v. Chapter n. 2 See above, p. 362. 
 
MODES OF ACTION OF THE LAW OF INCREASING RETURN. 509 
 
 v. 
 
 CH. XI. 
 
 hasty increase in its production is likely to lower the demand BOOK 
 price in that market out of all proportion to the increased 
 Internal economies that it will gain, even though its produc- 
 tion is but small relatively to the broad market for which in 
 a more general sense it may be said to produce 1 . So gene- 
 rally is this recognized that, when trade is slack, a producer 
 will often try to sell his surplus goods outside of his own 
 particular market at prices that do little more than cover 
 their prime costs ; while within that market he still tries to 
 sell at prices that nearly cover supplementary costs, a great 
 part of which are the returns expected on capital invested 
 in building up the external organization of his business. 
 
 To conclude, then, the supplementary costs are generally, The 
 though not always, large relatively to prime costs for com- 
 modities that obey the law of increasing return; because 
 their production needs the investment of a large capital in periods are 
 
 similar for 
 
 material appliances and in building up trade connections, the laws of 
 Each firm has often to acquire a market of its own, partly and <5- * 
 because of the difficulties of grading ; and when this is the 
 case, it seldom sells much at short notice outside this market 
 except at less than total cost price. This does not alter the 
 character, but does increase the intensity of those fears of 
 spoiling his own peculiar market, or incurring odium from 
 other producers for spoiling the common market, which we 
 have already learnt to regard as controlling the short-period 
 supply price of goods when the appliances of production are 
 not fully employed 2 . 
 
 1 This may be expressed by saying that when we are considering an individual 
 producer, we must couple his supply curve not with the general demand curve 
 for his commodity in a wide market but with the particular demand curve of his 
 own special market. And this particular demand curve will generally be very 
 steep, steeper than his own supply curve is likely to be even when an increased 
 output will give him an important increase of Internal economies. The whole of 
 this argument lends itself easily to expression in mathematical language. 
 
 2 Of course this rule is not universal. It may be noted, for instance, that the 
 net loss of an omnibus, that is not full and loses a fourpenny fare, is nearer 
 fourpence than threepence, though the omnibus trade conforms perhaps to tbe 
 law of constant return ; and if it were not for the fear of spoiling his market, the 
 Regent Street shoemaker, whose goods are made by hand, but whose expenses of 
 marketing are very heavy, would be tempted to go further below his normal price 
 in order to avoid losing a special- order, than a shoe manufacturer who uses much 
 expensive machinery and avails himself generally of the economies of production 
 on a large scale. 
 
510 
 
 EQUILIBRIUM OF NORMAL DEMAND AND SUPPLY. 
 
 BOOK v. 
 
 But for 
 periods the 
 
 are wholly 
 different, 
 
 The long- 
 supply 
 
 reaii 'the 
 price of a 
 
 Aniiius- 
 
 factored 
 commo- 
 
 dities. 
 
 But when they are fully employed, a temporary increase 
 .^ ^gj-^nd j s iik e iy to raise the short-period supply price 
 quite as much for commodities that obey the law of in- 
 creasing return as for others. For the very fact that their 
 production generally requires much specialized skill and 
 specialized machinery will make a quick increase in the 
 output possible only by working much overtime under great 
 disadvantages ; and perhaps calling into use some imperfect 
 skill and some old-fashioned machinery. And therefore the 
 supply schedule for short . periods must generally show a 
 price increasing and not diminishing with an increase in the 
 amount produced. There are exceptions to this rule; but 
 their conditions are so peculiar, that each must be treated by 
 itself; there is nothing to be gained by forcibly moulding our 
 general supply schedules, so as to fit their special conditions. 
 
 3. It is then only as regards the long-period normal 
 supply price that the true nature of the law of increasing 
 re t urn is shown. If there is a prospect of a permanent 
 large demand for a thing, it will be worth while to invest 
 capital in building up the material appliances, and the 
 external and internal organization of large businesses, which 
 will be able to sell profitably at a low price. The long- 
 period supply price for large amounts will be low, because 
 ^ * s i n e ^ QC ^> ^ ne su pply P r i ce n t f particular things, but 
 o f the whole processes of production of those things. The 
 law of increasing return is in truth a law that the supply 
 price of the processes of production (and marketing) of large 
 quantities of certain goods falls, when the scale of those 
 processes increases. 
 
 It is true for instance that if a sudden fashion were to 
 se ^ in for wearing watch-shaped aneroid barometers, highly 
 P a ^ labour, that had no special training for the work, would 
 have to be drawn in from other trades, there would be a good 
 deal of wasted effort and for a time the real and the money 
 cost of production would be increased. But it is also true 
 that if the fashion lasted a considerable time, then indepen- 
 dently of any new invention in the cost of making aneroids 
 the process of production on a large scale would be economi- 
 cal. For specialized skill in abundance would shortly be 
 
STABLE AND UNSTABLE EQUILIBRIA. 511 
 
 forthcoming, and properly graduated to the various work to BOOK v. 
 
 be done : with a large use of the method of interchangeable J ' 
 
 parts, specialized machinery would do better and more cheaply 
 much of the work that is now done by hand ; and a steady 
 increase in the annual output of watch-shaped aneroids will 
 lower very much their long-period supply price, as a result of 
 that development of industrial organization which normally 
 belongs to a large scale of production. 
 
 Now their long-period supply price when it has been thus The 
 lowered, might be either greater or less than the normal position of 
 demand price for the corresponding scale of production, when 
 at last the force of fashion died away ; and the demand for 
 aneroids was again based solely on their real utility. In the regulates 
 former case capital and labour would avoid that trade. Of stability 
 the firms already started some might pursue their course adjustment 
 though with less net gains (lower quasi-rents) than they ^nd supply, 
 had hoped ; but others would try to edge their way into 
 some nearly related branch of production that was more 
 prosperous : and as old firms dwindled, there would be few 
 new ones to take their place. The scale of production would 
 dwindle again; and the old position of equilibrium would 
 have shown itself stable against assaults. 
 
 But now let us turn to the other case, in which the long- 
 period supply price for the increased output fell so far that the 
 demand price remained above it. In that case undertakers, 
 looking forward to the life of a firm started in that trade, 
 considering its chances of prosperity and decay, discounting 
 its future outlays and its future incomings, would conclude 
 that the latter showed a good balance over the former: 
 capital and labour would stream rapidly into the trade ; and 
 the production might perhaps be increased tenfold before the 
 fall in the demand price became as great as the fall in the 
 long-period supply price, and a position of stable equilibrium 
 had been found. 
 
 For indeed, though in that account of the oscillations of Two or 
 demand and supply about a position of stable equilibrium, positions 
 which was given at the end of the third Chapter, we tacitly q u1m>rium 
 implied, as is commonly done, that there could be only one JJj ^jj " 
 position of stable equilibrium in a market : yet in fact under result from 
 
512 
 
 EQUILIBRIUM OF NORMAL DEMAND AND SUPPLY. 
 
 BOOK V. 
 CH. XI. 
 
 the same 
 
 set of 
 
 conditions 
 
 and such 
 
 cases 
 
 sometimes, 
 
 though 
 
 rarely, 
 
 occur in 
 
 practice. 
 
 certain conceivable, though rare, conditions there can be two, 
 or more positions of real equilibrium of demand and supply, 
 any one of which is equally consistent with the general cir- 
 cumstances of the market, and any one of which if once 
 reached would be stable, until some great disturbance 
 occurred 1 . 
 
 1 Besides positions of stable equilibrium, there are theoretically at least posi- 
 tions of unstable equilibrium: they are the dividing boundaries between two 
 positions of stable equilibria, the watersheds, so to speak, dividing two river 
 basins, and the price tends to flow away from them in either direction. 
 
 When demand and supply are in unstable equilibrium, then, if the scale of 
 production be disturbed ever so little from its equilibrium position, it will move 
 rapidly away to one of its positions of stable equilibrium ; as an egg if balanced 
 on one of its ends would at the smallest shake fall down, and lie lengthways. 
 Just as it is theoretically possible, but practically impossible, that an egg should 
 stand balanced on its end, so it is theoretically possible, but practically impossible, 
 that the scale of production should stay balanced in unstable equilibrium. 
 
 Thus in Fig. 25, the curves intersect several times and the arrow-heads on Ox 
 show the directions in which, according to its situation, R tends to move along 
 Ox. This shows that if R is at H or at L and is 
 displaced slightly in either direction, it will, as soon 
 
 as the disturbing cause is over, return to the equi- \ A Pi^. 25. 
 
 librium position from which it was displaced: but 
 that if it is at K and is displaced towards the right, 
 it will continue even after the cessation of the dis- 
 turbing cause, to move to the right till it reaches 
 L, and if displaced towards the left it will con- 
 tinue to move to the left till it reaches H. That is 
 
 to say, H and L are points of stable equilibrium o'H "UK'VL ' x 
 and K is a point of unstable equilibrium. We are 
 thus brought to the result that: 
 
 The equilibrium of demand and supply corresponding to a point of intersection 
 of the demand and supply curves is stable or unstable according as the demand 
 curve lies above or below the supply curve just to the left of that point; or, 
 which is the same thing, according as it lies below or above the supply curve just 
 to the right of that point. (If the curves touch one another at any point, the 
 equilibrium corresponding to it will be stable for displacements in one direction, 
 and unstable for displacements in the other. No practical interest attaches to the 
 investigation of this barely possible case.) 
 
 We have seen that the demand curve is inclined throughotit negatively. From 
 this it follows that if just to the right of any point of intersection the supply curve 
 lies above the demand curve, then if we move along the supply curve to the right 
 we must necessarily keep above the demand curve till the next point of inter- 
 section is reached : that is to say, the point of equilibrium next on the right-hand 
 side of a point of stable equilibrium, must be a point of unstable equilibrium ; 
 and, it may be proved in like manner, that so must the adjacent point of intersec- 
 tion on the left-hand side. In other words, in cases in which the curves cut each 
 other more than once points of stable and unstable equilibrium alternate. 
 
 Also the last point of intersection reached as we move to the right must be a 
 point of stable equilibrium. For if the amount produced were increased in- 
 definitely the price at which it could be sold would necessarily fall almost to zero ; 
 
STABLE AND UNSTABLE EQUILIBRIA. 513 
 
 4. It must be admitted however that the theory of BOOK v. 
 stable equilibrium of normal demand and supply in its most CH ' XI ' 
 abstract form assumes a certain rigidity in the conditions of JP 16 pu F e 
 demand and supply, which does not really exist. It helps its earlier 
 indeed to give definiteness to our ideas ; and in its elemen- diverges 
 tary stages it does not diverge from the actual facts of life so 
 far as to prevent its giving a fairly trustworthy picture of the 
 
 chief methods of action of the strongest and most persistent far i1; ? 
 group of economic forces. But when pushed to its more value 
 remote and intricate logical consequences, especially those diminfshes. 
 connected with multiple positions of equilibrium, it slips 
 away from the conditions of real life, and soon ceases to be of 
 much service in dealing with practical problems. One cause 
 of this divergence is the fact that, if the normal production of 
 a commodity increases and afterwards again diminishes to its 
 old amount, the demand price and the supply price are not 
 likely to return, as the pure theory assumes that they will, to 
 their old positions for that amount. 
 
 We have already noticed 1 that the increase in consump- Theas- 
 tion arising from a fall in price is of gradual, and sometimes that P tbe n 
 even of slow growth : and now we have to lay stress on the 
 
 fact that habits which have once grown up around the use of P ei ? 
 a commodity while its price is low, are not quickly abandoned 1 
 when its price rises again. If therefore after the supply has 
 gradually increased, some of the sources from which it is 
 derived should be closed, or any other cause should occur to 
 make the commodity scarce, many consumers will be re- 
 'luctant to depart from their wonted ways. For instance, the 
 prices of cotton during the American war showed that the 
 
 but the price required to cover the expense of producing it would not so fall. 
 Therefore, if the supply curve be produced sufficiently far towards the right, it 
 must at last lie above the demand curve. 
 
 The first point of intersection arrived at as we proceed from left to right may 
 be a point either of stable or of unstable equilibrium. If it be a point of unstable 
 equilibrium, this fact will indicate that the production of the commodity in ques- 
 tion on a small scale will not remunerate the producers ; so that its production 
 cannot be commenced at all unless some passing accident has caused temporarily 
 an urgent demand for the commodity, or has temporarily lowered the expenses of 
 producing it ; or unless some enterprising firm is prepared to sink a large capital 
 in overcoming the initial difficulties of the production, and bringing out the com- 
 modity at a price which will ensure large sales. 
 
 1 Book in. Ch. iv. 6. 
 
 M. 33 
 
514 EQUILIBRIUM OF NORMAL DEMAND AND SUPPLY. 
 
 BOOK v. consumers were bidding for the reduced supply a price higher 
 _' than that for which an equal amount could have been sold, if 
 its previous low price had not brought it into common use to 
 meet a great variety of wants, many of which indeed it had 
 itself created. Thus then the list of demand prices which 
 holds for the forward movement of the production of a 
 commodity will seldom hold for the return movement, but 
 will in general require to be raised 1 . 
 
 The as- Again, the list of supply prices may have fairly represented 
 
 that the" the actual fall in the supply price of the thing which takes 
 
 supply place when the supply is being increased ; but if the demand 
 
 prices should fall off, or if for any other reason, the supply should 
 
 have to be diminished, the supply price would not move 
 
 back by the course by which it had come, but would take a 
 
 lower course. The list of supply prices which had held for 
 
 the forward movement would not hold for the backward 
 
 movement, but would have to be replaced by a lower schedule. 
 
 This is true whether the production of the commodity obeys 
 
 the law of diminishing or increasing return ; but it is of 
 
 special importance in the latter case, because the fact that 
 
 the production does obey this law, proves that its increase 
 
 leads to great improvements in organization. 
 
 For, when any casual disturbance has caused a great in- 
 crease in the production of any commodity, and thereby has 
 led to the introduction of extensive economies, these econo- 
 mies are not readily lost. Developments of mechanical ap- 
 pliances, of division of labour and of the means of transport, 
 and improved organization of all kinds, when they have been 
 once obtained are not readily abandoned. Capital and labour, 
 when they have once been devoted to any particular industry, 
 may indeed become depreciated in value, if there is a falling 
 off in the demand for the wares which they produce : but 
 they cannot quickly be converted to other occupations ; and 
 their competition will for a time prevent a diminished demand 
 from causing an increased price of the wares 2 . 
 
 1 That is, for any backward movement of the amount offered for sale, the 
 left end of the demand curve would probably need to be raised in order to make it 
 represent the new conditions of demand. 
 
 2 For instance, the shape of the supply-curve in Fig. 25, implies that if the 
 ware in question were produced on the scale V annually, the economies intro- 
 
INSUFFICIENCY OF THE STATICAL METHOD IN ECONOMICS. 515 
 
 Partly for this reason there are not very many cases in BOOK v. 
 which two positions of stable equilibrium would stand out as ' ' 
 
 possible alternatives at one and the same moment, even if all n 
 
 the facts of the market could be ascertained with perfect demand or 
 accuracy. But when the conditions of a branch of manufac- often 
 ture are such that the supply price would fall very rapidly, if much the 
 
 there should be any great increase in the scale of production, 
 then a passing disturbance by which the demand for the 
 commodity was increased might cause a very great fall in the 
 stable equilibrium price, a very much larger amount than 
 before being henceforward produced for sale at a very much 
 lower price. This is always possible when, if we could trace 
 the lists of demand and supply prices far ahead, we should 
 find them keeping close together 1 . For if the supply prices 
 for largely increased amounts are but very little above the 
 corresponding demand prices, a moderate increase in demand, 
 or a comparatively slight new invention or other cheapening 
 of production may bring supply and demand prices together 
 and make a new equilibrium. Such a change resembles in 
 some respects a movement from one alternative position of 
 stable equilibrium to another, but differs from the latter in 
 that it cannot occur except when there is some change in the 
 conditions of normal demand or normal supply. 
 
 5. The difficulties that have just been discussed have The imper- 
 very deep roots. They really arise from the fact that in a e staScai 
 
 economics, as in other sciences, we are unable to discuss at 
 once the effects of all the causes at work. We speak of the problems 
 prices at which certain amounts of a commodity will be 
 normally demanded or supplied, arid leave provisionally out 
 of calculation the facts that large changes in the amounts 
 produced or supplied can as a rule only be effected gradually, 
 and that during the time in which they are being effected 
 
 duced into its production would be so extensive as to enable it to be sold at a 
 price TV. If these economies were once effected the shape of the curve SS' 
 would probably cease to represent accurately the circumstances of supply. The 
 expenses of production, for instance, of an amount U would no longer be much 
 greater proportionately than those of an amount 0V. Thus in order that the 
 curve might again represent the circumstances of supply it would be necessary to 
 draw it lower down, as the dotted curve in the figure. 
 
 1 That is, when at a good distance to the right of the equilibrium point, the 
 supply curve is but little above the demand curve. 
 
 332 
 
516 EQUILIBRIUM OF NORMAL DEMAND AND SUPPLY. 
 
 BOOK v. many other changes are sure to take place, by which the 
 ' XI ' general social and economic conditions of the problem will be 
 
 altered. 
 
 are partly This brings us to the second of the difficulties of which 
 ' mention was made at the beginning of the second Section. 
 And indeed we find here a special application of the broad 
 truth that economic problems are imperfectly presented when 
 they are treated as problems of statical equilibrium, and not 
 of organic growth. For though the former treatment alone 
 can give us definiteness and precision of thought, and is there- 
 fore a necessary introduction to a more philosophic treatment 
 of society as an organism ; it is yet only an introduction 1 , 
 partly such But not all this imperfection lies in the nature of the 
 gres^of case > P arfc f ^ results from the imperfections of our analyti- 
 science ca j methods, and may conceivably be much diminished in a 
 
 may dimi- > * 
 
 nish. later age by the gradual improvement of our scientific 
 machinery. We should have made a great advance if we 
 could represent roughly, as a function of time itself, the chief 
 of the changes in those elements which we are not specially 
 considering ; that is, in the particular case of lists of demand 
 and supply prices, if we could represent the normal demand 
 price and supply price as functions both of the amount nor- 
 mally produced and of the time at which that amount became 
 normal 2 . 
 
 A plan for Meanwhile we have to make special provision for all 
 events external to the special changes which we are con- 
 sidering. So long as there is no substantive alteration in 
 
 the next the conditions of demand or supply ; so long as the only im- 
 portant changes in the price at which purchasers can be found 
 for the commodity, and the price at which producers can afford 
 
 1 See above, Book i. Ch. vi. 2. 
 
 2 That is to say, instead of normal demand and supply curves we should use 
 demand and supply surfaces, price being measured 'along the axis of z, time along 
 that of y, and amount along that of x. Even now there might be some interest in 
 working out, analytically or geometrically, the curves of intersection of such 
 surfaces drawn on various assumptions as to the influence of time. And though 
 for many years to come work of this kind must be rather a mathematical diversion, 
 than a solid contribution to economics, yet it may show the way towards such 
 methods of study of social and economic history and statistics, as may enable 
 future generations to impart to such demand and supply surfaces a reality that 
 is altogether beyond our present range. 
 
DEFICIENCIES OF THE STATICAL METHOD IN ECONOMICS. 517 
 
 to supply it, are those changes which are due to an increase BOOK v. 
 or diminution in the volume of the amount of the commodity ' 
 produced and sold; so long we may regard the demand 
 schedule and the supply schedule as representing the broad 
 outlines of normal demand and normal supply. But any 
 great and lasting change in fashion, any substantive new 
 invention, any diminution of population by war or pestilence, 
 or the development or dwindling away of a source of supply 
 of the commodity in question, or of a raw material used in 
 it, or of another commodity which is a rival and possible 
 substitute for it : any such change as these may cause the 
 prices set against any given annual (or daily) consumption 
 and production of the commodity to cease to be its normal 
 demand and supply prices for that volume of consumption 
 and production ; or, in other words, they may render it neces- 
 sary to make out a new demand schedule or a new supply 
 schedule, or both of them. We proceed to study the problems 
 thus suggested. 
 
CHAPTER XII. 
 
 THEORY OF CHANGES OF NORMAL DEMAND AND SUPPLY IN 
 RELATION TO THE DOCTRINE OF MAXIMUM SATISFACTION. 
 
 BOOK v. 1. WE have seen that an increase of normal demand 
 
 cH^xn. j nvo j ves generally an increase in the price at which each 
 
 meant" severa -l amount can find purchasers: or which is the same 
 
 an increase thing, at each several price a greater quantity than before 
 
 of normal L . n -, . . 
 
 demand, can find purchasers ; (and this we have called a rising of the 
 list of demand prices, or demand schedule). This increase of 
 normal demand may be caused by the commodity's coming 
 more into fashion, by the opening out of a new use for it or 
 of new markets for it, by the permanent falling off in the 
 supply of some commodity for which it can be used as a 
 substitute, by a permanent increase in the wealth and 
 general purchasing power of the community, and so on. 
 Changes in the opposite direction will cause a falling off in 
 demand and a sinking of the list of demand prices. 
 
 or of nor- An increase of normal supply means an increase of the 
 
 supp y. amoun t s that can be supplied at each several price, and a 
 
 diminution of the price at which each separate amount can 
 
 be supplied ; (thus an increase of normal supply involves a 
 
 lowering of the list of supply prices, or supply schedule) 1 . 
 
 1 A rise or fall of the demand or supply schedule involves of course & rise or 
 fall of the demand or supply curve. 
 
 [If the change is gradual, the supply curve will assume in succession a series 
 of positions, each of which is a little below the preceding one ; and in this way 
 we might have represented the effects of that gradual improvement of industrial 
 organization which arises from an increase in the scale of production, and which 
 we have represented by assigning to it an influence upon the supply price for 
 long-period curves. In an ingenious paper privately printed by Mr H. Cunyng- 
 hame, a suggestion is made, which seems to come in effect to proposing that 
 a long-period supply curve should be regarded as in some manner representing a 
 series of short-period curves ; each of these curves would assume throughout its 
 
INCREASE OF NORMAL DEMAND. 519 
 
 This change may be caused by the opening up of a new BOOKV. 
 source of supply, whether by improved means of transport or c f^ It 
 in any other way, by an advance in the arts of production, 
 such as the invention of a new process or of new machinery, or 
 again, by the granting of a bounty on production. Conversely, 
 a diminution of normal supply (or a raising of the supply 
 schedule) may be caused by the closing up of a new source 
 of supply or by the imposition of a tax 1 . 
 
 The typical case of rapid oscillation is that of the current 
 or market price about its normal (or rather its subnormal) 
 position of equilibrium. But, as has already been explained, 
 the subnormal (or 'short-period normal) level moves in a 
 similar manner, though more slowly and less conspicuously 
 about a long-period normal level. The longer the periods to 
 which our reasonings apply, and for which our normal lists 
 of demand and supply prices are taken, the fewer will be the 
 disturbing causes which are so great and lasting, as to 
 amount to a distinct change in the general conditions of 
 demand and supply, and to necessitate the making out of a 
 new list of demand prices, or of supply prices, or both. And 
 therefore in the great majority of cases to which the reasonings 
 of this chapter are applicable, the supply price will increase 
 with the amount produced. But the exceptions to this rule, 
 though not numerous, are. important. 
 
 2. We have, then, to regard tne effects of an increase Effects of 
 of normal demand from three points of view, according as ^normal* 6 
 the commodity in question obeys the law of constant or of deman 
 diminishing or of increasing return : that is, its supply 
 price is practically constant for all amounts, or increases or 
 diminishes with an increase in the amount produced. 
 
 whole length that development of industrial organization which properly belongs 
 to the scale of production represented by the distance from Oy of the point in 
 which that curve cuts the long-period supply curve (compare the end of the note 
 on p. 503) and similarly with regard to demand.] 
 
 1 The theory of the incidence of taxation has been generally treated as a branch 
 of the application of economic science to the practical Art of Government. But 
 really it is an integral part of the general theory of value ; and there is a gain of 
 scientific completeness in regarding in the first instance a tax on a thing simply 
 as one of many causes which may raise its normal supply price. It will be best 
 not to trace in detail the incidence of particular taxes until we come to discuss 
 taxation as a whole : but meanwhile a tax may be taken as a representative in- 
 stance of the changes which may affect supply price. 
 
520 
 
 CHANGES IN NO 
 
 BOOK V. 
 CH. XII. 
 
 DEMAND AND SUPPLY. 
 
 In the first case an increase of demand simply increases 
 the amount produced without altering its price ; for the 
 normal price of a commodity which obeys the law of constant 
 return is determined absolutely by its expenses of produc- 
 tion: demand has no influence in the matter beyond this, 
 that the thing will not be produced at all unless there is 
 some demand for it at this fixed price. 
 
 If the commodity obeys the law of diminishing return 
 an increase of demand for it raises its price and causes more 
 of it to be produced ; but not so much more as it would, if it 
 obeyed the law of constant return. 
 
 On the other hand, if the commodity obeys the law of 
 increasing return an increase of demand causes much more 
 of it to be produced, more than if the commodity obeyed 
 the law of constant return, and at the same time lowers 
 its price. If, for instance, a thousand things of a certain 
 kind have been produced and sold weekly at a price of 10s., 
 while the supply price for two thousand weekly would be 
 only 9., a very small increase in normal demand may cause 
 this to become the normal price, since we are considering 
 periods long enough for the full normal action of the causes 
 that determine supply to work itself out 1 . The converse 
 
 1 Diagrams are of especial aid in enabling us to comprehend clearly the pro- 
 blems of this chapter. 
 
 Fig. 26. 
 
 Fig. 28. 
 
 . 
 
 O HA 
 
 The three figures 26, 27, 28 represent the three cases of constant, diminishing 
 and increasing return respectively. The return in the last case is a diminishing 
 one in the earlier stages of the increase of production, but an increasing one in 
 those subsequent to the attainment of the original position of equilibrium, i.e. for 
 amounts of the commodity greater than OH. In each case SS' is the supply curve, 
 DLf the old position of the demand curve, and dd' its position after there has been 
 increase of normal demand. In each case A and a are the old and new positions 
 of equilibrium respectively, AH and ah are the old and new normal or equilibrium 
 prices, and OH and Oh the old and new equilibrium amounts. Oh is in every case 
 
INCREASE OF NORMAL SUPPLY. 521 
 
 holds in each case should normal demand fall off instead of BOOK v. 
 
 CH. XII. 
 
 increasing. 
 
 3. We have seen that an increase in normal demand, Effects of 
 while leading in every case to an increased production, will Semites of 
 in some cases raise and in others lower prices. But now we 
 are to see that increased facilities for supply (causing the 
 supply schedule to be lowered) will always lower the normal 
 price at the same time that it leads to an increase in the 
 amount produced. For so long as the normal demand 
 remains unchanged an increased supply can be sold only at 
 a diminished price; but the fall of price consequent on a 
 given cheapening of supply will be much greater in some 
 cases than in others. It will be small if the commodity 
 obeys the law of diminishing return ; because then the 
 difficulties attendant on an increased production will tend to 
 counteract the new facilities of supply. On the other hand, 
 if the commodity obeys the law of increasing return, the 
 
 greater than OH, but in fig. 27 it is only a little greater, while in fig. 28 it is 
 much greater. (This analysis may be carried further on the plan adopted later on 
 in discussing the similar but more important problem of the effects of changes in 
 the conditions of normal supply.) In fig. 26 ah is equal to AH, in fig. 27 it is 
 greater, in fig. 28 it is less. 
 
 The effect of a falling-off of normal demand can be traced with the same 
 diagrams, dd' being now regarded as the 
 old and DD' as the new position of this y 
 demand curve; ah being the old equili- o 
 
 Fig. 29. 
 
 brium price, and AH the new one. s 
 
 [It is interesting to trace the effect of 
 changes of this kind when the curves cut 
 one another several times, as in A, B and 
 C in fig. 29. Suppose the demand curve 
 to rise gradually, then the points of inter- 
 section corresponding to A and B will 
 approach one another, until they coalesce. 
 Thus whether price when in equilibrium 
 was actually at A or at C originally (it 
 could not have been at B, because the 
 
 equilibrium there is unstable) it will by a sufficient rise of demand move away 
 to c. 
 
 If the supply curve to the right of A had kept above the original demand 
 curve, but only a little above it, so as to have only one point of intersection with 
 it, its point of intersection with the new, and slightly raised demand curve might 
 have been a long way to the right of A ; thus representing a simpler instance of 
 the way in which a small increase in the normal demand for a commodity that 
 obeys the law of increasing return may cause a very great fall in its price and 
 a very great increase of its consumption.] 
 
522 
 
 CHANGES IN NORMAL DEMAND AND SUPPLY. 
 
 BOOK V. 
 CH. XII. 
 
 increased production will bring with it increased facilities, 
 which will co-operate with those arising from the change in 
 the general conditions of supply ; and the two together will 
 enable a great increase in production and consequent fall in 
 price to be attained before the fall of the supply price over- 
 takes the fall of the demand price. If it happens that the 
 demand is very elastic, then a small increase in the facilities 
 of normal supply, such as a new invention, a new application 
 of machinery, the opening up of new and cheaper sources of 
 supply, the taking off a tax or granting a bounty, may cause 
 an enormous increase of production and fall of price 1 . 
 
 1 All this can be most clearly seen by the aid of diagrams, and indeed there are 
 some parts of the problem which cannot be satisfactorily treated without their 
 aid. The three figures 30, 31, 32 represent the three cases of constant and 
 diminishing and increasing returns, respectively. In each case DD' is the demand 
 curve, SS' the old position, and ss' the new position of the supply curve. A is the 
 old, and a the new position of stable equilibrium. Oh is greater than OH, and ah 
 is less than AH in every case : but the changes are small in fig. 31 and great in 
 fig. 32. Of course the demand curve must he below the old supply curve to the 
 right of A, otherwise A would be a point not of stable, but of unstable equilibrium. 
 
 Pig. 31. 
 
 Fig. 32. 
 
 x o 
 
 But subject to this condition the more elastic the demand is, that is, the more 
 nearly horizontal the demand curve is at A the further off will a be from A, and 
 the greater therefore will be the increase of production and the fall of price. 
 
 The whole result is rather complex. But it may be stated thus. Firstly, given 
 the elasticity of demand at A, the increase in the quantity produced and the fall in 
 price will both be the greater, the greater be the return got from additional capital 
 and labour applied to the production. That is, they will be the greater, the more 
 nearly horizontal the supply curve is at A in fig. 31, and the more steeply 
 inclined it is in fig. 32 (subject to the condition mentioned above, that it does not 
 lie below the demand curve to the right of A, and thus turn A into a position of 
 unstable equilibrium). Secondly, given the position of the supply curve at A, the 
 greater the elasticity of demand the greater will be the increase of production 
 in every case; but the smaller will be the fall of price in fig. 31, and the greater 
 the fall of price in fig. 32. Fig. 30 may be regarded as a limiting case of either 
 fig. 31 or 32. 
 
 All this reasoning assumes that the commodity either obeys the law of 
 diminishing return or obeys the law of increasing return throughout. If it 
 
INCREASE OF NORMAL SUPPLY. 523 
 
 If we take account of the circumstances of composite and BOOK v. 
 joint supply and demand discussed in Chapter VI., we have "' 
 suggested to us an almost endless variety of problems which 
 can be worked out by the methods adopted in these two 
 chapters. 
 
 4. We may now consider the effects which a change Changes 
 in the conditions of supply may exert on consumers' surplus O r lower 6 
 
 or rent. For brevity of language a tax may be taken as 
 representative of those changes which may cause a general may be r , e " 
 
 * presented 
 
 increase, and a bounty as representative of those which may by a tax 
 cause a general diminution in the normal supply price for r 
 each several amount of the commodity. 
 
 Firstly, if the commodity is one, the production of which The case of 
 obeys the law of constant return, so that the supply price return. 
 is the same for all amounts of the commodity, consumers' 
 rent will be diminished by more than the increased pay- 
 ments to the producer; and therefore, in the special case 
 of a tax, by more than the gross receipts of the State. For 
 in so far as the consumption of the commodity is main- 
 tained, the consumer loses what the State receives : and on 
 that part of the consumption which is destroyed by the rise 
 in price, the consumers' rent is destroyed ; and of course 
 there is no payment for it to the producer or to the State 1 . 
 
 obeys first one, and then the other, so that the supply curve is at one part inclined 
 positively and at another negatively, no general rule can be laid down as to the 
 effect on price of increased facilities of supply, though in every case this must lead 
 to an increased volume of production. A great variety of curious results may be 
 got by giving the supply curve different shapes, and in particular such as cut the 
 demand curve more than once. 
 
 1 This is most clearly seen by aid of a diagram. 
 SS', the old constant return supply curve cuts Z)Z>' 
 the demand curve in A : DSA is the consumers' rent. |\ Fig. 33. 
 
 Afterwards a tax Ss being imposed the new equi- 
 librium is found at a, and consumers' rent is Dsa. 
 The gross tax is only the rectangle sSKa, that is, a 
 tax at the rate of Ss on an amount sa of the 
 commodity. And this falls short of the loss of 
 consumers' rent by the area aKA. The net loss ' 
 aKA is small or great, other things being equal, as 
 
 aA is or is not inclined steeply. Thus it is smallest _ _ _ _ 
 for those commodities the demand for which is most o A H 
 
 inelastic, that is, for necessaries. If therefore a given aggregate taxation has to 
 be levied ruthlessly from any class it will cause less loss of consumers' rent if 
 levied on necessaries than if levied on comforts. 
 
 & 
 
 s' 
 
524 
 
 CHANGES IN NORMAL DEMAND AND SUPPLY. 
 
 BOOK v. Conversely, the gain of consumers' rent caused by a bounty 
 on a commodity that obeys the law of constant return, is 
 less than the bounty itself. For on that part of the con- 
 sumption which existed before the bounty, consumers' rent 
 is increased by just the amount of the bounty ; while on the 
 new consumption that is caused by the bounty, the gain of 
 the consumers' rent is less than the bounty 1 . 
 
 diminSi f ^ however the commodity obey the law of diminishing 
 ing return, return, a tax by raising its price, and diminishing its con- 
 sumption, will lower its expenses of production other than 
 the tax : and the result will be to raise the supply price by 
 something less than the full amount of the tax. In this 
 case the gross receipts from the tax may be greater than the 
 resulting loss of consumers' rent, and they will be greater 
 if the law of diminishing return acts so sharply that a 
 small diminution of consumption causes a great falling-off in 
 the expenses of production other than the tax 2 . 
 
 On the other hand, a bounty on a commodity which 
 obeys the law of diminishing return will lead to in- 
 creased production, and will extend the margin of culti- 
 vation to places and conditions in which the expenses of 
 production, exclusive of the bounty, are greater than before. 
 Thus it will lower the price to the consumer and increase 
 
 1 If we now regard ss' as the old supply curve which is lowered to the position 
 88' by the granting of a bounty, we find the gain of consumers' rent to be sSAa. 
 But the bounty paid is Ss on an amount 8 A, which is represented by the 
 rectangle sSAL : and this exceeds the gain of consumers' rent by the area aLA. 
 
 2 Let the old supply curve be SS' fig. 34, and let the imposition of a tax 
 raise it to ss' ; let A and a be the old and new posi- 
 tions of equilibrium, and let straight lines be drawn # Fig. 34. 
 through them parallel to Ox and Oy, as in the figure. 
 
 Then the tax being levied, as shown by the figure, at 
 the rate of aE on each unit; and Oh, that is, C K 
 units, being produced in the new position of equili- 
 brium, the gross receipts of the tax will be cFEa, and 
 the loss of consumers' rent will be cCAa; that is, 
 the gross receipts from the tax will be greater or less 
 than the loss of consumers' rent as CFEK is greater 
 or less than aKA; and in the figure as it stands it 
 is much greater. If however we had drawn SS' to 
 indicate only very slight action of the law of diminish- 
 ing return, that is, if it had been nearly horizontal 
 in the neighbourhood of A, then EK would have been 
 very small; and CFEK would have become less than aKA. 
 
 /Ik 
 
 h H 
 
EFFECTS ON CONSUMERS' RENT. 
 
 525 
 
 consumers' rent less than if it were given for the production BOOK v. 
 of a commodity which obeyed the law of constant return. In c f^ n> 
 that case the increase of consumers' rent was seen to be less 
 than the direct cost of the bounty to the State ; and therefore 
 in this case it is much less 1 . 
 
 By similar reasoning it may be shown that a tax on a The case of 
 commodity which obeys the law of increasing return is more 
 injurious to the consumer than if levied on one which obeys 
 the law of constant return ; because it diminishes consumers' 
 rent by much more than the total payments which it brings 
 in 2 . On the other hand, a bounty on such a commodity 
 causes so great a fall in its price to the consumer, that the 
 consequent increase of consumers' rent may exceed the total 
 payments made by the State to the producers ; and certainly 
 will do so in case the law of increasing return acts at all 
 sharply 3 . 
 
 Fig. 35. 
 
 1 To illustrate this case we may take ss f in fig. 34 to be the position of the 
 supply curve before the granting of the bounty, and SS' to be its position 
 afterwards. Thus a was the old equilibrium point, and A is the point to which 
 the equilibrium moves when the bounty is awarded. The increase of consumers' 
 rent is only cCAa, while the payments made by the State under the bounty are, 
 as shown by the figure, at the rate of A T on each unit of the commodity ; and as 
 in the new position of equilibrium there are produced OH, that is, CA units, they 
 amount altogether to R CA T which includes and is necessarily greater than the 
 increase of consumers' rent. 
 
 2 Thus taking SS' in fig. 35 to be the old position 
 of the supply curve, and ss' its position after the tax, 
 A to be the old and a the new positions of equili- 
 brium, we have, as in the case of fig. 34, the total 
 tax represented by cFEa, and the loss of consumers' 
 rent by cCAa ; the former being always less than the 
 latter. 
 
 3 To illustrate this case we may take ss e in fig. 35 
 to be the position of the supply curve before the 
 granting of the bounty, and SS' to be its position 
 afterwards. Then, as in the case of fig. 34, the 
 increase of consumers' rent is represented by c CAa, 
 while the direct payments made by the State under 
 
 the bounty are represented by EC AT. As the figure is drawn, the former is 
 much larger than the latter. But it is true that if we had drawn ss' so as to 
 indicate a very slight action of the law of increasing return, that is, if it had been 
 very nearly horizontal in the neighbourhood of a, the bounty would have increased 
 relatively to the gain of consumers' rent ; and the case would have differed but 
 little from that of a bounty on a commodity which obeys the law of constant 
 return, represented in fig. 33. 
 
526 CHANGES IN NORMAL DEMAND AND SUPPLY. 
 
 BOOKV. These results are suggestive of some principles of tax- 
 _J_ ' ation which will require our careful study hereafter ; when we 
 results shall take account of the expenses of collecting a tax and of 
 throw light administering a bounty, and of the many indirect effects, 
 doctrine of some economic and some moral, which a tax or a bounty is 
 Satisfac- likely to produce. But the present form of these results 
 is well adapted for our immediate purpose of examining 
 a little more closely than we have done hitherto the general 
 doctrine that a position of (stable) equilibrium of demand 
 and supply is a position also of Maximum Satisfaction. That 
 is a doctrine which needs to be interpreted carefully. 
 There is a 5. There is indeed one interpretation of the doctrine 
 sense in according to which every position of equilibrium of demand 
 an( * supply may fairly be regarded as a position of maximum 
 satisfaction 1 . For it is true that so long as the demand price 
 is in excess of the supply price, exchanges can be effected at 
 prices which give a surplus of satisfaction to buyer or to 
 seller or to both. The marginal utility of what he receives 
 is greater than that of what he gives up, to at least one 
 of the two parties ; while the other, if he does not gain by 
 the exchange, yet does not lose by it. So far then every 
 step in the exchange increases the aggregate satisfaction 
 of the two parties. But when equilibrium has been 
 reached, demand price being now equal to supply price, there 
 is no room for any such surplus: the marginal utility of 
 what each receives no longer exceeds that of what he gives 
 up in exchange : and when the production increases beyond 
 the equilibrium amount, the demand price being now less 
 than the supply price, no terms can be arranged which will 
 be acceptable to the buyer, and will not involve a loss to the 
 seller. 
 
 It is true then that a position of equilibrium of demand 
 and supply is a position of maximum satisfaction in this 
 limited sense, that the aggregate satisfaction of the two 
 parties concerned increases until that position is reached ; 
 and that any production beyond the equilibrium amount 
 could not be permanently maintained so long as buyers and 
 sellers acted freely as individuals, each in his own interest. 
 
 1 Unstable equilibrium may now be left out of account. 
 
DOCTRINE OF MAXIMUM SATISFACTION. 527 
 
 But occasionally it is stated, and very often it is implied, BOOK v. 
 
 that a position of equilibrium of demand and supply is one ' *"' 
 of maximum aggregate satisfaction in the full sense of the 
 
 term : that is, that an increase of production beyond the in this 
 equilibrium level would directly (i.e. independently of the sense, the 
 difficulties of arranging for it, and of any indirect evils it O pen 
 might cause) diminish the aggregate satisfaction of both exceptions 
 parties. The doctrine so interpreted is not universally 
 true. 
 
 In the first place it assumes that all differences in wealth it assumes 
 between the different parties concerned may be neglected, sums e of Ua 
 and that the satisfaction which is rated at a shilling by any measure 
 one of them, may be taken as equal to one that is rated at 
 a shilling by any other. Now it is obvious that, if the to all 
 producers were as a class very much poorer than the con- c 
 sumers, the aggregate satisfaction might be increased by 
 a stinting of supply when it would cause a great rise in 
 demand price (i.e. when the demand is inelastic) ; and that 
 if the consumers were as a class much poorer than the 
 producers, the aggregate satisfaction might be increased by 
 extending the production beyond the equilibrium amount 
 and selling the commodity at a loss. This point however 
 may well be left for future consideration. It is in fact only 
 a special case of the broad proposition that the aggregate 
 satisfaction can primd facie be increased by the distribution, 
 whether voluntarily or compulsorily, of some of the property 
 of the rich among the poor; and it is reasonable that the 
 bearings of this proposition should be set aside during the 
 first stages of an inquiry into existing economic conditions. 
 This assumption therefore may be properly made, provided 
 only it is not allowed to slip out of sight. 
 
 But in the second place the doctrine of maximum satis- and it 
 faction assumes that every fall in the price which producers ffcthat a 6 
 
 receive for the commodity, involves a corresponding loss to 
 
 them ; and this is not true of a fall in price which results im P rove - 
 
 . ... . ments 
 
 from improvements in industrial organization. When a benefits 
 
 j-r- - a- , , , ,. . : : consum 
 
 commodity obeys the law of increasing return, an increase in without 
 its production beyond equilibrium point may cause the supply 
 price to fall much ; and though the demand price for the 
 
528 
 
 CHANGES IN NORMAL DEMAND AND SUPPLY. 
 
 Aggregate 
 tion can 
 
 increased amount may be reduced even more, so that the 
 production would result in some loss to the producers, yet 
 this loss may be very much less than that money value of the 
 gain to purchasers which is represented by the increase of 
 consumers' rent. 
 
 In the case then of commodities with regard to which 
 the law of increasing return acts at all sharply, or in other 
 wor ds, for which the normal supply price diminishes rapidly 
 as ^ e amount produced increases, the direct expense of a 
 
 De in- 
 creased 
 
 beyond the bounty sufficient to call forth a greatly increased supply at 
 attained a much lower price, would be much less than the consequent 
 pfay of ree increase of consumers' rent. And if a general agreement 
 
 demand 
 
 and 
 
 supply. 
 
 We are 
 not here 
 
 with the 
 indirect 
 evils of 
 artificial 
 arrange- 
 ments for 
 this 
 purpose. 
 
 could be obtained among consumers, terms might be arranged 
 which would make such action amply remunerative to the 
 producers, at the same time that they left a large balance of 
 advantage to the consumers 1 . 
 
 - 6. One simple plan would be the levying of a tax by 
 concerned the community on their own incomes, or on the production 
 of goods which obey the law of diminishing return, and 
 devoting the tax to a bounty on the production of those 
 goods with regard to which the law of increasing return acts 
 sharply. But before deciding on such a course they would 
 have to take account of considerations, which are not within 
 the scope of the general theory now before us, but are yet of 
 great practical importance. They would have to reckon up 
 the direct and indirect costs of collecting a tax and adminis- 
 tering a bounty ; the difficulty of securing that the burdens 
 of the tax and the benefits of the bounty were equitably 
 distributed ; the openings for fraud and corruption ; and the 
 danger that in the trade which had got a bounty and in other 
 trades which hoped to get one, people would divert their 
 
 1 Though not of great practical importance, the case of multiple positions 
 of (stable) equilibrium offers a good illustration of the error involved in the 
 doctrine of maximum satisfaction when stated as a universal truth. For the 
 position in which a small amount is produced and is sold at a high price would 
 be the first to be reached, and when reached would be regarded according to that 
 doctrine as that which gave the absolute maximum of aggregate satisfaction. 
 But another position of equilibrium corresponding to a larger production and 
 a lower price would be equally satisfactory to the producers, and would be much 
 more satisfactory to the consumers ; the excess of consumers' rent in the second 
 case over the first would represent the increase in aggregate satisfaction. 
 
 
 
 ,J 
 
DOCTRINE OF MAXIMUM SATISFACTION. 
 
 529 
 
 energies from managing their own businesses to managing 
 those persons who control the bounties. 
 
 Besides these semi-ethical questions there will arise others 
 of a strictly economic nature, relating to the effects which 
 any particular tax or bounty may exert on the interests of 
 landlords, urban or agricultural, who own land adapted for 
 the production of the commodity in question. These are 
 questions which must not be overlooked ; but they differ so 
 much in their detail that they cannot fitly be discussed 
 here 1 . 
 
 1 The incidence of a tax on agricultural produce will be discussed later on 
 by the aid of diagrams similar to those used to represent the fertility of laud 
 (Book iv. Ch. in.). Landlords' rent absorbs a share of the aggregate selling price 
 of almost all commodities : but it is most prominent in the case of those which 
 obey the law of diminishing return ; and an assumption of no extreme violence will 
 enable fig. 34 on p. 524 to represent roughly the leading features of the problem. 
 
 We have already seen (Note on p. 503) that we are not properly at liberty 
 to assume that the expenses of raising the produce from the richer lands and 
 under the more favourable circumstances are independent of the extent to which 
 the production is carried; since an increased production is likely to lead to an 
 improved organization, if not of farming industries themselves, yet of those 
 subsidiary to them, and especially of the carrying trade. We may however 
 permit ourselves to make this assumption provisionally, so as to get a clear view 
 of the broad outlines of the problem; though we must not forget that in any ap- 
 plications of the general reasonings based on it account must be taken of the facts 
 which we here ignore. On this assumption then SS' 
 being the supply curve before the imposition of a tax, 
 landlords' rent is represented by C8A. After the tax 
 has been imposed and the supply curve raised to ss' 
 the landlords' rent becomes the amount by which c Oka, 
 the total price got for Oh produce sold at the rate ha, 
 exceeds the total tax cFEa, together with OhES the 
 total expenses of production, exclusive of rent, for Oh 
 produce: that is, it becomes FSE. (In the figure the 
 curve ss' has the same shape as SS', thereby implying 
 that the tax is specific; that is, is a uniform charge 
 on each unit of the commodity whatever be its value. 
 The argument so far does not depend on this assump- 
 tion, but if it is made we can by a shorter route 
 get the new landlords' rent at csa, which then is equal 
 to FSE.) Thus the loss of landlords' rent is CFEA ; 
 
 and this added to cCAa the loss of consumers' rent, makes up cFEAa, which 
 exceeds the gross tax by aAE. 
 
 On the other hand, the direct payments under a bounty would exceed the 
 increase of consumers' rent, and of landlords' rent calculated on the above 
 assumptions. For taking ss' to be the original position of the supply curve, and 
 SS' to be its position after the bounty, the new landlords' rent on these assump- 
 tions is CSA, or which is the same thing RsT; and this exceeds the old landlords' 
 rent csa by RcaT. The increase of consumers' rent is c CA a; and therefore the 
 
 M. 34 
 
 BOOK V. 
 CH. XII. 
 
 Fig. 34. 
 
 h K 
 
530 CHANGES IN NORMAL DEMAND AND SUPPLY. 
 
 BOOK v. 7. Enough has been said to indicate the character of 
 
 c _! _ ' the second great limitation which has to be introduced into 
 ^ e doctrine of Economic Harmony, which asserts truly that 
 
 fade the Maximum Satisfaction is generally to be attained by 
 
 exceptions . . f . 
 
 to the encouraging each individual to spend his own resources m 
 Economic that way which suits him best. We have already noticed 
 
 if he spends his income in such a way as to increase 
 best for all the demand for the services of the poor and to increase their 
 
 that each . 
 
 should incomes, he adds something more to the total happiness than 
 mcomeas if he adds an equal amount to the incomes of the rich, 
 he pleases. |j ecause the happiness which an additional shilling brings to 
 a poor man is much greater than that which it brings to a 
 rich one ; and that he does good by buying things the pro- 
 duction of which raises, in preference to things the pro- 
 duction of which lowers the character of those who make 
 them. But further, even if we assume that a shilling's worth 
 of happiness is of equal importance to whomsoever it comes, 
 and that every shilling's worth of consumer's rent is of equal 
 importance from whatever commodity it is derived, we have 
 to admit that the manner in which a person spends his 
 income is a matter of direct economic concern to the com- 
 munity. For in so far as he spends it on things which obey 
 the law of diminishing return, he makes those things more 
 difficult to be obtained by his neighbours, and thus lowers 
 the real purchasing power of their incomes ; while in so far 
 as he spends it on things which obey the law of increasing 
 return, he makes those things more easy of attainment to 
 others, and thus increases the real purchasing power of their 
 incomes. 
 
 Again, it is commonly argued that an equal ad valorem 
 tax levied on all economic commodities (material and imma- 
 terial), or which is the same thing a tax on expenditure, is 
 primd fade the best tax ; because it does not divert the 
 expenditure of individuals out of its natural channels : we 
 have now seen that this argument is invalid. But ignoring 
 
 total bounty, which is EC AT, exceeds the gain of consumers' rent and landlords' 
 rent together by TaA. 
 
 For reasons stated in the Note on pp. 503 4, the assumption on which this 
 reasoning proceeds is inapplicable to cases in which the supply curve is inclined 
 negatively. 
 
DOCTRINE OF MAXIMUM SATISFACTION. 531 
 
 for the time the fact that the direct economic effect of a tax BOOK v. 
 
 or a bounty never constitutes the whole, and very often not 
 
 even the chief part of the considerations which have to be 
 weighed before deciding to adopt it, we have found : firstly, 
 that a tax on expenditure generally causes a greater destruc- 
 tion of consumers' rent than one levied exclusively on com- 
 modities as to which there is but little room for the economies 
 of production on a large scale, and which obey the law of 
 diminishing return ; and secondly, that it might even be for 
 the advantage of the community that the Government should 
 levy taxes on commodities which obey the law of diminish- 
 ing return, and devote part of the proceeds to bounties on 
 commodities which obey the law of increasing return. 
 
 These conclusions, it will be observed, do not by themselves 
 afford a valid ground for Government interference, for the in- 
 direct evils of that are likely to outweigh any direct good 
 that it may do. But they show that much remains to be 
 done, by a careful collection of the statistics of demand and 
 supply, and a scientific interpretation of their results, in 
 order to discover what are the limits of the work that society 
 can with advantage do towards turning the economic actions 
 of individuals into those channels in which they will add the 
 most to the sum total of happiness 1 . 
 
 1 It is remarkable that Malthus, Political Economy, Ch. in. 9, argued that, 
 though the difficulties thrown in the way of importing foreign corn during the 
 great war turned capital from the more profitable employment of manufacture to 
 the less profitable employment of agriculture, yet if we take account of the conse- 
 quent increase of agricultural rent, we may conclude that the new channel may 
 have been one of " higher national, though not higher individual profits." In 
 this no doubt he was right; but he overlooked the far more important injury 
 inflicted on the public by the consequent rise in the price of corn, and the 
 consequent destruction of consumers' rent. Senior takes account of the in- 
 terests of the consumer in his study of the different effects of increased demand 
 on the one hand and of taxation on the other in the case of agricultural and 
 manufactured produce (Political Economy, pp. 118 123). Advocates of Protection 
 in countries which export raw produce have made use of arguments tending in 
 the same direction as those given in this Chapter ; and similar arguments are now 
 used, especially in America (as for instance by Mr H. C. Adams), in support of the 
 active participation of the State in industries which conform to the law of in- 
 creasing return. The graphic method has been applied, in a manner somewhat 
 similar to that adopted in the present Chapter, by Dupuit in 1844 ; and, indepen- 
 dently, by Fleeming Jenkin (Edinburgh Philosophical Transactions) in 1871. 
 
 342 
 
CHAPTER XIII. 
 
 THE THEORY. OF MONOPOLIES. 
 
 BOOKV. 1. THE doctrine of Maximum Satisfaction has never 
 CH^XIII. k een a ppii ec j to the demand for a supply of monopolized 
 We are commodities. It has never been supposed that the monopo- 
 compare list in seeking his own advantage is naturally guided in that 
 poiist's course which is most conducive to the wellbeing of society 
 a a Mgh fr n regarded as a whole, he himself being reckoned as of no 
 thebenefits more importance than any other member of it. But there 
 to the is much to be learnt from a study of the relations in which 
 low price, his interests stand to those of the rest of society, and of 
 the general conditions under which it might be possible to 
 make arrangements more beneficial to society as a whole 
 than those which he would adopt if he consulted only his 
 own interests : and with this end in view we are now to seek 
 for a scheme for comparing the relative quantities of the 
 benefits which may accrue to the public and to the mono- 
 polist from the adoption of different courses of action by him. 
 At a later stage we shall have to study the Protean shapes 
 of modern trade combinations and monopolies, some of the 
 most important of which, as for example "Trusts," are of 
 very recent growth. At present we have to consider only 
 those general causes determining monopoly values, that can 
 be traced with more or less distinctness in every case in 
 which a single person or association of persons has the power 
 of fixing either the amount of a commodity that is offered for 
 sale or the price at which it is offered. 
 
 Net 2. The primd facie interest of the owner of a 
 
 Revenue! monopoly is clearly to adjust the supply to the demand, 
 
 not in such a way that the price at which he can sell his 
 
AMBIGUITY OF THE TERM NET REVENUE. 533 
 
 commodity shall just cover its expenses of production, but BOOKV. 
 
 in such a way as to afford him the greatest possible total J 
 
 net revenue. 
 
 But here we meet with a difficulty as to the meaning 
 of the term Net revenue. For the supply price of a freely- 
 produced commodity includes normal profits, the whole of 
 which, or at all events what remains of them after deducting 
 interest on the capital employed and insurance against loss, 
 is often classed indiscriminately as net revenue. And when a 
 man manages his own business, he often does not distinguish 
 carefully that portion of his profits, which really is his own 
 earnings of management, from any exceptional gains arising 
 from the fact that the business is to some extent of the 
 nature of a monopoly. 
 
 This difficulty however is in a great measure avoided in 
 the case of a public company ; where all, or nearly all, the 
 expenses of management are entered in the ledger as de- 
 finite sums, and are subtracted from the total receipts of 
 the company before its net income is declared. 
 
 The net income divided among the shareholders includes 
 interest on the capital invested and insurance against risk of 
 failure, but little or no earnings of management ; so that 
 the amount by which the dividends are in excess of what 
 may fairly be allowed as interest and insurance, is the Mono- 
 poly Revenue which we are seeking. 
 
 Since then it is much easier to specify exactly the amount 
 of this net revenue when a monopoly is owned by a public 
 company than when it is owned by an individual or private 
 firm, let us take as a typical instance the case of a gas 
 company that has the monopoly of the supply of gas to 
 a town. For the sake of simplicity the company may be 
 supposed to have already invested the whole of its own 
 capital in fixed plant, and to borrow any more capital, that it 
 may want to extend its business, on debentures at a fixed 
 rate of interest. 
 
 3. The demand schedule for gas remains the same The 
 as it would be if gas were a freely-produced commodity ; schedule 
 it specifies the price per thousand feet at which consumers 1S as usual 
 in the town will among them use any given number of 
 
534 
 
 THEORY OF MONOPOLIES. 
 
 BOOK V. 
 CH. XIII. 
 
 but the 
 supply 
 schedule 
 must be 
 drawn 
 on a 
 special 
 plan. 
 
 The 
 
 Monopoly 
 
 Revenue 
 
 Schedule. 
 
 feet. But the supply schedule must represent the normal 
 expenses of production of each several amount supplied ; and 
 these include interest on all its capital, whether belonging 
 to its shareholders or borrowed on debentures, at a fixed 
 normal rate; they include also the salaries of its directors, 
 and permanent officials adjusted (more or less accurately) to 
 the work required of them, and therefore increasing with an 
 increase in the output of gas. A Monopoly Revenue Schedule 
 may then be constructed thus: Having set against each 
 several amount of the commodity its demand price, and its 
 supply price estimated on the plan just described, subtract 
 each supply price from the corresponding demand price and 
 set the residue in the monopoly revenue column against 
 the corresponding amount of the commodity. 
 
 Thus for instance if a thousand million feet could be sold 
 annually at a price of 3s. per thousand feet, and the supply 
 price for this amount were 2s. 9d. per thousand feet, the 
 monopoly revenue schedule would show 3d. against this 
 amount: indicating an aggregate net revenue when this 
 amount was sold, of three million pence, or 12,500. The 
 aim of the company having regard only to their own im- 
 mediate dividends will be to fix the price of their gas at such 
 a level as to make this aggregate net revenue the largest 
 possible 1 . 
 
 1 Thus DD' being the demand curve, and SS' the curve corresponding to the 
 supply schedule described in the text, let MP 2 P l be drawn vertically from any 
 point M in Ox, cutting 88' in P 2 and DD' in P l ; and from it cut off JfP 3 = P 2 P l , 
 then the locus of P 3 will be our third curve, QQ', which we may call the 
 monopoly revenue curve. The supply price for a small quantity of gas will of 
 course be very high ; and in the neighbourhood of Oy the supply curve will be 
 above the demand curve, and therefore the net revenue curve will be below Ox. 
 It will cut Ox in K and again in H, points which are vertically under B and 
 A, the two points of intersection of the demand and supply curves. The maxi- 
 mum monopoly revenue will then be obtained by finding a point q 3 on QQ' 
 such that Lq 3 being drawn perpendicular to Ox, OL x Lq 3 is a maximum. 
 Lq 3 being produced to cut SS' in q% and DD' in q l , the company, if desiring to 
 obtain the greatest immediate monopoly revenue, will fix the price per thousand 
 feet at Lq l , and consequently will sell OL thousand feet; the expenses of pro- 
 duction will be Lq<i per thousand feet, and the aggregate net revenue will be 
 OL x q<fl\ , or which is the same thing OL x Lq a . 
 
 The dotted lines in the diagram are known to mathematicians as rectangular 
 hyperbolas; but we may call them constant revenue curves: for they are 
 such that if from a point on any one of them lines be drawn perpendicular to Ox 
 
DEFINITION OF NET MONOPOLY REVENUE. 
 
 535 
 
 BOOK V. 
 CH. XIII. 
 
 4. Now suppose that a change takes place in the 
 conditions of supply ; some new expense has to be incurred, 
 or some old expense can be avoided ; or perhaps a new tax 
 is imposed on the undertaking or a bounty is awarded to it. 
 
 First let this increase or diminution of the expenses be A tax, fixed 
 a fixed sum, bearing on the undertaking as one undivided amount, 
 whole and not varying with the amount of the commodity monopoly, 
 produced. Then, whatever be the price charged and the 
 
 and Oy respectively (the one representing revenue per thousand feet and the 
 other representing the number of thousand feet sold), then the product of these 
 
 Fig. 36, 
 
 will be a constant quantity for every point on one and the same curve. This 
 product is of course a smaller quantity for the inner curves, those nearer Ox and 
 Oy, than it is for the outer curves. And consequently since P 3 is on a smaller 
 constant revenue curve than q a is, OM x MP 3 is less than OL x Lq 3 . It will be 
 noticed that g 3 is the point in which QQ' touches one of these curves. That 
 is, q a is on a larger constant revenue curve than is any other point on QQ' ; 
 and therefore OL x Lq 3 is greater than OM x MP 3 , not only in the position 
 given to M in the figure, but also in any position that M can take along Ox. 
 That is to say, q a has been correctly determined as the point on QQ' correspond- 
 ing to the maximum total monopoly revenue. And thus we get the rule: 
 If through that point in which QQ' touches one of a series of constant revenue 
 curves, a line be drawn vertically to cut the demand curve, then the distance of 
 that point of intersection from Ox will be the price at which the commodity 
 should be offered for sale in order that it may afford the maximum monopoly 
 revenue. (See Mathematical Note xxn.) 
 
536 THEORY OF MONOPOLIES. 
 
 BOOKV. amount of the commodity sold, the monopoly revenue will 
 
 J ' be increased or diminished, as the case may be, by this sum ; 
 
 Eo^- UC anc * tnere f re that selling price which afforded the maximum 
 monopoly revenue before the change will afford it after- 
 wards ; the change therefore will not offer to the monopolist 
 any inducement to alter his course of action. Suppose for 
 instance that the maximum monopoly revenue is got when 
 twelve hundred million cubic feet are sold annually ; and 
 that this is done when the price is fixed at SOd. per thousand 
 feet : suppose that the expenses of production for this amount 
 are at the rate of 26c?., leaving a monopoly revenue at the 
 rate of four pence per thousand feet, that is 20,000 in all. 
 This is its maximum value : if the company fixed the price 
 higher at, say, 31 d. and sold only eleven hundred million feet, 
 they would perhaps get a monopoly revenue at the rate of 
 4*2 pence per thousand feet, that is 19,250 in all; while in 
 order to sell thirteen hundred millions they would have to 
 lower their price to, say, 28d and would get a monopoly 
 revenue at the rate of perhaps 3'Qd. per thousand feet, that 
 is 19,500 in all. Thus by fixing the price at 30d they 
 get 750 more than by fixing it at Bid., and 500 more 
 than by fixing it at 2Sd. Now let a tax of 10,000 a year 
 be levied on the gas company as a fixed sum independent 
 of the amount they sell. Their monopoly revenue will be- 
 come 10,000 if they charge 30d, 9,250 if they charge 
 31d, and 9,500 if they charge 2Sd. They will therefore 
 continue to charge SQd. 
 
 nor will The same is true of a tax or a bounty proportioned not 
 
 tioned to to the gross receipts of the undertaking, but to its monopoly 
 revenue, y revenue. For suppose next that a tax is levied, not of one 
 fixed sum, but a certain percentage, say 50 per cent, of the 
 monopoly revenue. The company will then retain a mono- 
 poly revenue of 10,000 if they charge 30d, of 9,625 if they 
 charge 31d, and of 9,750 if they charge 2Sd. They will 
 therefore still charge 30c l 
 
 1 If to the expenses of working a monopoly there be added (by a tax or 
 otherwise) a lump sum independent of the amount produced, the result will 
 be to cause every point on the monopoly revenue curve to move downwards 
 to a point on a constant revenue curve representing a constant revenue smaller 
 
EFFECTS OF A TAX OR A BOUNTY. 537 
 
 It should however be noticed that if a tax or other new BOOK v. 
 additional expense exceeds the maximum monopoly revenue, c ^J^ n " 
 it will prevent the monopoly from being worked at all ; it will 
 convert the price which had afforded the maximum monopoly 
 revenue into the price which would reduce to a minimum 
 the loss that would result from continuing to work the 
 monopoly : and conversely with regard to a fixed bounty or 
 other fixed diminution of aggregate working expenses. 
 
 But a change in the total expenses of working a mono- but it will 
 poly, whether due to a tax, a bounty, or any other cause, is effect if it 
 more likely than not to vary in the same direction as the 
 amount of the commodity produced : and then it will affect 
 the monopolist's action. A tax proportional to the amount produced 
 produced causes a greater total loss of monopoly revenue 
 when the amount produced is large than when it is small ; 
 and we shall find that it causes the sales which afford the 
 maximum revenue to be somewhat smaller than before, 
 and offers an inducement to the monopolist to raise his 
 price and contract his sales. If before the imposition of 
 the tax, the net revenue was only a little greater than that 
 which would have been afforded by much smaller sales, then 
 the monopolist would gain by reducing his production very 
 greatly ; and hence in such cases as this, the change is likely 
 to cause a very great diminution of production and rise of 
 price. The opposite effects will be caused by a change 
 which diminishes the expense of working the monopoly 
 by a sum that varies directly with the amount produced 
 under it. 
 
 In the last example, for instance, a tax of 2d. on each 
 thousand feet sold would have reduced the monopoly revenue 
 to 10,083 if the company charged 3ld. per thousand feet 
 and therefore sold eleven hundred millions ; to 10,000 if 
 they charged 30c. and therefore sold twelve hundred millions, 
 and to 8,666 if they charged 28d. and therefore sold thirteen 
 hundred million feet. Therefore the tax would induce the 
 
 by a fixed amount than that on which it lies. Therefore the maximum revenue 
 point on the new monopoly revenue curve lies vertically below that on the 
 old: that is, the selling price and the amount produced remain unchanged. 
 As to the effects of a tax proportional to monopoly revenue, see Mathematical 
 Note xxin. 
 
538 
 
 BOOK V. 
 CH. XIII. 
 
 THEORY OF MONOPOLIES. 
 
 company to raise the price to something higher than 3Qd. ; 
 they would perhaps go to 31d, perhaps somewhat higher ; for 
 the figures before us do not show exactly how far it would be 
 their interest to go. 
 
 On the other hand, if there were a bounty of 2d. on 
 the sale of each thousand feet, the monopoly revenue would 
 rise to 28,416 if they charged 31d, to 30,000 if they 
 charged 3Qd., and to 30,333 if they charged 28d : it would 
 therefore cause them to lower the price 1 . 
 
 1 Iii the text it is supposed that the tax or bounty is directly proportional to 
 the sales : but the argument, when closely examined, will be found to involve no 
 further assumption than that the aggregate tax or bounty increases with every 
 increase in that amount: the argument does not really require that it should 
 increase in exact proportion to that amount. 
 
 Much instruction is to be got by drawing diagrams to represent various conditions 
 of demand and of (monopoly) supply, with the resultant shapes of the monopoly 
 revenue curve. A careful study of the shapes thus obtained will give more 
 assistance than any elaborate course of reasoning in the endeavour to realize the 
 multiform action of economic forces in relation to monopolies. A tracing may be 
 made on thin paper of the constant revenue curves in one of the diagrams; 
 and this, when laid over a monopoly revenue curve, will indicate at once the 
 point, or points, of maximum revenue. For it will be found, not only when 
 the demand and supply curves cut one another more than once, but also when 
 
 Fig. 37. 
 
 they do not, there will often be, as in fig. 87, several points on a monopoly 
 revenue curve at which it touches a constant revenue curve. Each of these 
 
MONOPOLY PRICE AND COMPETITION PRICE. 539 
 
 5. The monopolist would lose all his monopoly revenue BOOK v. 
 
 if he produced for sale an amount so great that its supply J _ 
 price, as here denned, was equal to its demand price : the 
 
 amount which gives the maximum monopoly revenue is monopoly 
 
 i * price with 
 
 always considerably less than that. It may therefore appear cpmpeti- 
 as though the amount produced under a monopoly is always 
 less and its price to the consumer always higher than if 
 there were no monopoly. But this is not the case. 
 
 For when the production is all in the hands of one per- it must be 
 
 . , ! 11 remember - 
 
 son or company, the total expenses involved are generally e d that a 
 less than would have to be incurred if the same aggre- 
 gate production were distributed among a multitude of 
 
 comparatively small rival producers. They would have to economi- 
 struggle with one another for the attention of consumers, 
 and would necessarily spend in the aggregate a great deal 
 more on advertising in all its various forms than a single 
 firm would ; and they would be less able to avail -themselves 
 of the many various economics which result from production 
 on a large scale. In particular they could not afford to 
 spend as much on improving methods of production and 
 the machinery used in it, as a single large firm which knew 
 
 points will show a true maximum monopoly revenue; but one of them will 
 generally stand out pre-eminent as being on a larger constant revenue curve 
 than any of the others and therefore indicating a larger monopoly revenue than 
 they. 
 
 If it happens, as in fig. 37, that this chief maximum q' 3 lies a long way 
 to the right of a smaller maximum q a , then the imposition of a tax on the 
 commodity, or any other change that raised its supply curve throughout, 
 would lower by an equal amount the monopoly revenue curve. Let the supply 
 curve be raised from 88' to the position SS'; and in consequence let the mono- 
 poly revenue curve fall from its old position QQ' to ZZ' ; then the chief point 
 of maximum revenue will move from q' a to z 3 , representing a great diminution of 
 production, a great rise of price and a great injury to the consumers. The con- 
 verse effects of any change, such as a bounty on the commodity, which lowers its 
 supply price throughout and raises the monopoly revenue curve, may be seen by 
 regarding ZZ' as the old and QQ' as the new position of that curve. It will 
 be obvious on a little consideration (but the fact may with advantage be 
 illustrated by drawing suitable diagrams), that the more nearly the monopoly 
 revenue curve approximates to the shape of a constant revenue curve, the 
 greater will be the change in the position of the maximum revenue point which 
 results from any given alteration in the expenses of production of the commodity 
 generally. This change is great in fig. 37 not because DD' and 88' intersect 
 more than once, but because two parts of QQ', one a long way to the right of 
 the other, lie in the neighbourhood of the same constant revenue curve. 
 
540 THEORY OF MONOPOLIES. 
 
 BOOKV. that it was certain itself to reap the whole benefit of any 
 
 CH. XIII. , . 
 
 advance it made. 
 
 This argument does indeed assume the single firm to be 
 managed with ability and enterprise, and to have an un- 
 limited command of capital an assumption which cannot 
 always be fairly made. But where it can be made, we may 
 generally conclude that the supply schedule for the com- 
 modity if not monopolized would show higher supply prices 
 than those of our monopoly supply schedule ; and therefore 
 the equilibrium amount of the commodity produced under 
 free competition would be less than that for which the 
 demand price is equal to the monopoly supply price 1 . 
 And the 8 (J. go far we have supposed the owner of a monopoly 
 
 monopolist . 
 
 may lower to fix the price of his commodity with exclusive reference to 
 wftha 1Ce the immediate net revenue which he can derive from it. 
 future the But, * n f act > even if ne does n k con cern himself with the 
 develop- interests of the consumers, he is likely to reflect that the 
 
 ment 
 
 demand for a thing depends in a great measure on people's 
 familiarity with it ; and that if he can increase his sales 
 by taking a price a little below that which would afford 
 him the maximum net revenue, the increased use of his 
 commodity will before long recoup him for his present loss. 
 The lower the price of gas, the more likely people are to 
 have it laid on to their houses ; and when once it is there, 
 they are likely to go on making some use of it, even though 
 a rival, such as mineral oil, may be competing closely with it. 
 The case is stronger when a railway company has a practical 
 monopoly of the transport of persons and goods to a sea-port, 
 or to a suburban district which is as yet but partly built 
 over ; the railway company may then find it worth while, as 
 
 1 In other words, though L lies necessarily a good deal to the left of H, 
 according to the notation in fig. 36 ; yet the supply curve for the commodity, if 
 there were no monopoly, might lie so much above the present position of SS' 
 that its point of intersection with DD' would lie much to the left of A in the 
 figure, and might not improbably lie to the left of L. Something has already 
 been said (Book iv. Ch. xi. and xn.), as to the advantages which a single powerful 
 firm has over its smaller rivals in those industries in which the law of increasing 
 return acts strongly; and as to the chance which it might have of obtaining a 
 practical monopoly of its own branch of production, if it were managed for many 
 generations together by people whose genius, enterprise and energy equalled those 
 of the original founders of the business. 
 
ALLOWANCE FOE THE INTERESTS OF CONSUMERS. 541 
 
 a matter of business, to levy charges much below those which BOOK v. 
 would afford the maximum net revenue, in order to get J _ ' 
 merchants into the habit of using the port, to encourage 
 the inhabitants of the port to develop their docks and 
 warehouses; or to assist speculative builders in the new 
 suburb to build houses cheaply and to fill them quickly with 
 tenants, thus giving to the suburb an air of early prosperity 
 which goes far towards insuring its permanent success. 
 
 In such cases as these a railway company though not 
 pretending to any philanthropic motives, yet finds its own 
 interests so closely connected with those of the purchasers of 
 its services, that it gains by making some temporary sacrifice 
 of net revenue with the purpose of increasing consumers' 
 rent. And an even closer connection between the interests 
 of the producers and the consumers is found when the land- 
 owners of any district combine to make a branch railway 
 through it, without much hope that the traffic will afford 
 the market rate of interest on the capital which they 
 invest that is, without much hope that the monopoly 
 revenue of the railway, as we have defined it, will be other 
 than a negative quantity but expecting that the railway 
 will add so much to the value of their property as to make 
 their venture on the whole a profitable one. And when or from 
 a municipality undertakes the supply of gas or water, or interest 
 facilities for transport by improved roads, by new bridges, welfare of 
 
 or by tramways, the question always arises whether the scale 
 of charges should be high, so as to afford a good net revenue 
 and relieve the pressure on the rates ; or should be low, so as 
 to increase consumers' rent. 
 
 7. It is clear then that some study is wanted of 
 calculations by which a monopolist should govern his actions, 
 should he regard an increase of consumers' rent as equally 
 desirable to him, if not with an equal increase of his own 
 monopoly revenue, yet with an increase, say, one-half or one- 
 quarter as great. 
 
 If the consumers' rent which arises from the sale of the The Total 
 commodity at any price, is added to the monopoly revenue of i* 
 derived from it, the sum of the two is the money measure of m ^ poly 
 the net benefits accruing from the sale of the commodity to sum of the 
 
542 
 
 THEORY OF MONOPOLIES. 
 
 and con- 
 rent. 
 
 producers and consumers together, or as we may say the 
 yi Q t a l Benefit of its sale. And if the monopolist regards a 
 a * n to t ^ ie consumers as of equal importance with an equal 
 g a i n to himself, his aim will be to produce just that amount 
 of the commodity which will make this total benefit a 
 maximum 1 . 
 
 i In fig. 38 DD', SS', and QQ' represent the demand, supply, and monopoly 
 revenue curves drawn on the same plan as in fig. 36. From PI draw P 1 F 
 perpendicular to Oy ; then DFP^ is the consumers' rent derived from the sale of 
 OM thousand feet of gas at the price MP^ In MP V take a point P 4 such that 
 OM x MP 4 = the area DFP\ : then as M moves from along Ox, P 4 will trace 
 out our fourth curve, OR, which we may call the Consumers' Rent Curve. (Of 
 course it passes through 0, because when the sale of the commodity is reduced 
 to nothing, the consumers' rent also vanishes.) 
 
 Fig. 38. 
 
 Next from P 3 P, cut off P 3 P 5 equal to MP 4 , so that MP 5 = M 
 Then OM x MP 5 = OM x MP 3 + OM x MP 4 : but OM x MP 3 is the total monopoly 
 revenue when an amount OM is being sold at a price MP V , and OM x MP is the 
 corresponding consumers' rent. Therefore OMx MP 5 is the sum of the monopoly 
 revenue and the consumers' rent, that is the (money measure of the) total benefit 
 which the community will derive from the commodity when an amount OM is 
 produced. The locus of P 5 is our fifth curve, QT, which we may call the Total 
 Benefit Curve. It touches one of the constant revenue curves at 5 , and this shows 
 
ALLOWANCE FOR THE INTERESTS OF CONSUMERS. 543 
 
 BOOK V. 
 CH. 
 
 But it will seldom happen that the monopolist can and 
 will treat 1 of consumers' rent as equally desirable with ^ a _^ i " 
 1 of monopoly revenue. Even a Government which con- ^Burners' 
 siders its own interests coincident with those of the people rent be , 
 
 counted 
 
 has to take account of the fact that, if it abandons one source at only a 
 of revenue, it must in general fall back on others which have its actual 
 
 their own disadvantages. For they will necessarily involve 
 friction and expense in collection, together with some injury 
 to the public, of the kind which we have described as a loss Compro- 
 of consumers' rent : and they can never be adjusted with Benefit. 
 perfect fairness, especially when account is taken of the 
 unequal shares that different members of the community 
 will get of the benefits for the sake of which it is proposed 
 that the Government should forego some of its revenue. 
 
 Suppose then that the monopolist makes a compromise, 
 and reckons 1 of consumers' rent as equivalent to say 10s. 
 of monopoly revenue. Let him calculate the monopoly 
 revenue to be got from selling his commodity at any given 
 price, and to it let him add one half the corresponding 
 consumers' rent : the sum of the two may be called the 
 Compromise Benefit ; and his aim will be to fix on that 
 price which will make the compromise benefit as large as 
 possible 1 . 
 
 The following general results are capable of exact proof ; General 
 but on a little consideration they will appear so manifestly 
 true as hardly to require proof. Firstly, the amount which 
 the monopolist will offer for sale will be greater (and the 
 price at which he will sell it will be less) if he is to any 
 
 that the (money measure of the) total benefit is a maximum when the amount 
 offered for sale is W ; or, which is the same thing, when the price of sale is 
 fixed at the demand price for OW. 
 
 1 If he compromises on the basis that 1 of consumers' rent is equally 
 desirable with n of monopoly revenue, n being a proper fraction, let us take a 
 point P 6 in P 3 P 5 such that P 3 P 6 =n.P 3 P !t , or, which is the same thing, nMP. 
 Then OM x MP 6 = OM x MP 3 , + nOM x MP* ; that is, it is equal to the monopoly 
 revenue derived from selling an amount OM l of the commodity at the price 
 MPii+n times the consumers' rent derived from this sale: and is therefore 
 the compromise benefit derived from that sale. The locus of P 6 is our sixth 
 curve, QU, which we may call the compromise benefit curve. It touches one 
 of the constant revenue curves in u 6 ; which shows that the compromise benefit 
 attains its maximum when amount OY .is sold; or which is the same thing, 
 when the selling price is fixed at the demand price for the amount Y. 
 
544 
 
 THEORY OF MONOPOLIES. 
 
 BOOK V. 
 CH. XIII. 
 
 The im- 
 portance 
 of the 
 interests 
 of con- 
 sumers has 
 been 
 under- 
 estimated, 
 
 because 
 
 direct 
 
 personal 
 
 extent desirous to promote the interests of consumers than 
 if his sole aim is to obtain the greatest possible monopoly 
 revenue ; and secondly, the amount produced will be greater 
 (and the selling price will be less) the greater be the desire 
 of the monopolist to promote the interests of consumers ; i.e., 
 the larger be the percentage of its actual value at which he 
 counts in consumers' rent with his own revenue 1 . 
 
 8. Not many years ago there were many who con- 
 tended that: "An English ruler, who looks upon himself 
 as the minister of the race .he rules, is bound to take care 
 that he impresses their energies in no work that is not worth 
 the labour that is spent upon it, or to translate the senti- 
 ment into plainer language that he engages in nothing that 
 will not produce an income sufficient to defray the interest 
 on its cost 2 ." Such phrases as this may sometimes have 
 meant little more than that a benefit which consumers were 
 not willing to purchase at a high price and on a large scale, 
 was likely to exist for the greater part only in the specious 
 counsels of those who had some personal interest in the 
 proposed undertakings ; but probably they more often indi- 
 cated a tendency to under-estimate the magnitude of that 
 interest which consumers have in a low price, and which we 
 call consumers' rent 3 . 
 
 One of the chief elements of success in private business 
 is the faculty of weighing the advantages and disadvantages 
 
 1 That is to say, firstly, OF fig. 38 is always greater than OL ; and secondly, 
 the greater n is, the greater OY is. (See Mathematical Note xxm.) 
 
 2 The words are quoted from a leading article in The Times for July 30, 1874 : 
 they fairly represent a great body of public opinion. 
 
 3 Fig. 39 may be taken to represent the case of a proposed Government 
 undertaking in India. The supply curve is above the demand curve during 
 its whole length, showing that the enterprise to which it refers is unremunera- 
 tive, in the sense that whatever price the producers fix, they will lose money ; 
 their monopoly revenue will be a negative quantity. But QT the total benefit 
 curve rises above Ox; and touches a constant revenue curve in t 5 . If then 
 they offer for sale an amount OW (or, which is the same thing, fix the price 
 at the demand price for OW), the resultant consumers' rent, if taken at its 
 full value, will outweigh the loss on working by an amount represented by 
 OWx Wt s . But suppose that, in order to make up the deficiency, Government 
 must levy taxes, and that taking account of all indirect expenses and other 
 evils, these cost the public twice what they bring in to the Government, it 
 will then be necessary to count two rupees of the consumers' rent as com- 
 pensating for a Government outlay of only one rupee ; and the net gain of the 
 
IMPORTANCE OF WELL-ORGANIZED PUBLIC STATISTICS. 
 
 545 
 
 of any proposed course, and of assigning to them their true BOOK v. 
 
 relative importance. He who by practice and genius has J ' 
 
 acquired the power of attributing to each factor its right ^^ ace 
 quantity, is already well on the way to fortune; and the helps much 
 increase in the efficiency of our productive forces is in a great forming 
 measure due to the large number of able minds who are estimates 
 devoting themselves ceaselessly to acquiring these business of them ' - 
 instincts. But unfortunately the advantages thus weighed 
 against one another are nearly all regarded from one point of 
 view, that of the producer; and there are not many who concern 
 themselves to weigh against one another the relative quan- 
 tities of the interests which the consumers and the producers 
 have in different courses of action. For indeed the requisite 
 facts come within the direct experience of only a very few 
 persons, and even in the case of those few, only to a very 
 
 undertaking will then be represented by the compromise benefit curve QU, 
 drawn midway between the monopoly revenue (negative) curve QQ' and the 
 total benefit curve QT. This touches a constant revenue curve in 6 , showing 
 
 Fig. 39. 
 
 that, if the amount OY is offered for sale, or, which is the same thing, if the 
 price is fixed at the demand price for OY, there will result a net gain to 
 India represented by OY x Yti 6 . 
 
 M. 35 
 
546 THEORY OF MONOPOLIES. 
 
 BOOKV. limited extent and in a very imperfect way. Moreover 
 cn^xni. w j ien a g rea t administrator has acquired those instincts with 
 regard to public interests which able business men have with 
 regard to their own affairs, he is not very likely to be able to 
 carry his plans with a free hand. At all events in a demo- 
 cratic country no great public undertaking is secure of being 
 sustained on consistent lines of policy, unless its advantages 
 can be made clear, not only to the few who have direct ex- 
 perience of high public affairs, but also to the many who have 
 no such experience and have to form their judgment on the 
 materials set before them by others. 
 
 and our Judgments of this kind must always be inferior to those 
 
 statistics which an able business man forms, by the aid of instincts 
 properiy jet based on long experience with regard to his own business, 
 organized. jj u j. tnev mav ^ e ma( ^ e mucn more trustworthy than they 
 are at present, if they can be based on statistical measures of 
 the relative quantities of the benefits and the injuries which 
 different courses of public action are likely to cause to the 
 several classes of the community. Much of the failure and 
 much of the injustice, in which the economic policies of 
 Governments have resulted, have been due to the want of 
 statistical measurement. A few people who have been 
 strongly interested on one side have raised their voices 
 loudly, persistently and all together; while little has been 
 heard from the great mass of people whose interests have 
 lain in the opposite direction ; for, even if their attention has 
 been fairly called to the matter, few have cared to exert 
 themselves much for a cause in which no one of them has 
 more than a small stake. The few therefore get their way, 
 although if statistical measures of the interests involved were 
 available, it might prove that the aggregate of the interests 
 of the few was only a tenth or a hundredth part of the aggre- 
 gate of the interests of the silent many. 
 
 Statistical No doubt statistics can be easily misinterpreted ; and are 
 are often often very misleading when first applied to new problems. 
 a?first^ ng B ut many of the worst fallacies involved in the misapplica- 
 discussion tions of statistics are definite and can be definitely exposed, 
 clears till at last no one ventures to repeat them even when 1 ad- 
 dressing an uninstructed audience : and on the whole argu- 
 
IMPORTANCE OF WELL-ORGANIZED PUBLIC STATISTICS. 547 
 
 ments which can be reduced to statistical forms, though still BOOK v. 
 in a backward condition, are making more sure and more CH ' XIII> 
 rapid advances than any others towards obtaining the general 
 acceptance of all who have studied the subjects to which they 
 refer. The rapid growth of collective interests, and the 
 growing tendency towards collective action in economic 
 affairs, make it every day more important that we should 
 know what quantitative measures of public interests are most 
 needed and what statistics are required for them, and that 
 we should set ourselves to obtain these statistics. 
 
 It is perhaps not unreasonable to hope that as time goes Hopes for 
 on, the statistics of consumption will be so organized as to 
 afford demand schedules sufficiently trustworthy, to show in 
 
 diagrams that will appeal to the eye, the quantities of con- demand 
 
 sumers' rent that will result from different courses of public 
 and private action. By the study of these pictures the mind rent * 
 may be gradually trained to get juster notions of the relative 
 magnitudes of the interests which the community has in 
 various schemes of public and private enterprise; and sounder 
 doctrines may replace those traditions of an earlier genera- 
 tion, which had perhaps a wholesome influence in their time, 
 but which damped social enthusiasm by throwing suspicion 
 on all projects for undertakings by the public on its own 
 behalf which would not show a balance of direct pecuniary 
 profit. 
 
 The practical bearings of many of the abstract reasonings 
 in which we have recently been engaged will not be fully 
 apparent till we approach the end of this treatise. But 
 there seemed to be advantages in introducing them thus 
 early, partly because of their close connection with the main 
 theory of equilibrium of demand and supply, and partly 
 because they throw side lights on the character and the 
 purposes of that investigation of the causes which determine 
 Distribution and Exchange on which we are about to enter. 
 
 352 
 

 CHAPTER XIV. 
 
 SUMMARY OF THE GENERAL THEORY OF EQUILIBRIUM 
 OF DEMAND AND SUPPLY. 
 
 BOOK V. 
 CH. XIV. 
 
 Ch. I. 
 On 
 
 markets 
 
 Ch. II. 
 
 1. IN the present Book we have studied the theory of 
 the mutual relations of demand and supply in their most 
 general form; taking as little account as possible of the 
 special incidents of particular applications of the theory, and 
 leaving over for the following Book the study of the bearings 
 of the general theory on the special features of the several 
 agents of production, Labour, Capital, and Land. 
 
 The difficulties of the problem depend chiefly on varia- 
 tions in the area of space, and the period of time over which 
 the market in question extends ; the influence of time being 
 more fundamental than that of space. 
 
 Even in a market of very short period, such as that of a 
 provincial corn-exchange on market-day, the " higgling and 
 bargaining " might probably oscillate about a mean position, 
 and supply, which would have some sort of a right to be called the 
 equilibrium price : but the action of dealers in offering one 
 price or refusing another would depend little, if at all, on 
 calculations with regard to cost of production. They would 
 look chiefly at present demand on the one hand, and on the 
 other at the stocks of the commodity already available. It 
 is true that they would pay some attention to such movements 
 of production in the near future as might throw their shadow 
 before ; but in the case of perishable goods they would look 
 only a very little way beyond the immediate present. Cost 
 of production has for instance no perceptible influence on the 
 day's bargaining in a fish-market. 
 
 brium of 
 
EQUILIBRIUM OF DEMAND AND SUPPLY. SUMMARY. 549 
 
 v. 
 
 CH. XIV. 
 
 Passing from these temporary equilibria to the stable BOOK 
 equilibria of normal demand and normal supply, we find that 
 in the language both of professed writers on economics and Chs - II 
 of men of business, there is much elasticity in the use of the Equili- 
 term Normal when applied to the causes that determine 
 
 value : but there is one division which, though it has no demand 
 
 , XT L. r i 11 i j andsupply. 
 
 sharp outlines, is yet fairly well marked. The 
 
 On the one side of this division are long periods, in which 
 
 the normal action of economic forces has time to work itself Long 
 out more fully ; in which therefore a temporary scarcity of f?uenor^ 
 skilled labour, or of any other of the agents of production, mal pnce< 
 can be remedied ; and in which those economies that normally 
 result from an increase in the scale of production normally, 
 that is without the aid of any substantive new invention 
 have time to develop themselves. The expenses of a re- 
 presentative firm, managed with normal ability and having 
 normal access to the internal and external economies of 
 production on a large scale, may be taken as a standard for 
 estimating normal expenses of production: and when the 
 period under survey is long enough to enable the investment 
 of capital in building up a new business to complete itself 
 and to bear full fruits ; then the marginal supply price is 
 that, the expectation of which in the long run just suffices 
 to induce capitalists to invest their material capital, and 
 workers of all grades to invest their personal capital in the 
 trade. 
 
 . On the other side of the line of division are periods of short 
 time long enough to enable producers to adapt their produc- 
 tion to changes in demand, in so far as that can be done with 
 the existing provision of specialized skill, specialized capital, P rice - 
 and industrial organization ; but not long enough to enable 
 them to make any important changes in the supplies of these 
 factors of production. For such periods the stock of material 
 and personal appliances of production has to be taken in a 
 great measure for granted ; and the marginal increment of 
 supply is determined by estimates of producers as to the 
 amount of production it is worth their while to get out of 
 those appliances. If trade is brisk all energies are strained 
 to their utmost, overtime is worked, and then the limit to 
 
550 SUMMARY OF THE GENERAL THEORY OF 
 
 BOOK v. production is given by want of power rather than by want of 
 CH ' XIV ' will to go further or faster. But if trade is slack every pro- 
 ducer has to make up his mind how near to prime cost it is 
 worth his while to take fresh orders. And here there is no 
 definite law, the chief operative force is the fear of spoiling the 
 market ; and that acts in different ways and with different 
 strengths on different individuals and different industrial 
 groups. For the chief motive of all open combinations and 
 of all informal silent and "customary" understandings whether 
 among employers or employed is the need for preventing 
 individuals from spoiling the common market by action that 
 may bring them immediate gains, but at the cost of a greater 
 aggregate loss to the trade. No doubt this aggregate loss to 
 the trade may be compensated by a much greater aggregate 
 gain to consumers as a body ; and one of the most urgent 
 economic problems of the present day is to inquire in what 
 classes of cases it is desirable that a trade should continue to 
 produce boldly with but little reference to the danger of 
 spoiling the market. Some side lights are thrown on this 
 question by the investigations of consumers' rent in the last 
 two chapters of this Book ; but a full study of it is deferred 
 to a later stage. 
 
 Ch. VI. 2. We next turned aside to consider the relations of 
 
 demand and supply with reference to things that need to be 
 
 demand combined together for the purposes of satisfying a joint de- 
 mand ; of which the most important instance is that of the 
 specialized material capital, and the specialized personal skill 
 that must work together in any trade. For there is no direct 
 demand on the part of consumers for either alone, but only 
 for the two conjointly; the demand for either separately is a 
 derived demand, which rises, other things being equal, with 
 every increase in the demand for the common products, and 
 with every diminution in the supply price of the joint factors 
 of production. In like manner commodities of which there 
 is a joint supply, such as gas and coke, or beef and hides, can 
 each of them have only a derived supply price, governed by 
 the expenses of the whole process of production on the one 
 hand, and on the other by the demand for the remaining 
 joint products. 
 
EQUILIBRIUM OF DEMAND AND SUPPLY. 551 
 
 The composite demand for a thing, resulting from its being 
 used for several different purposes, and the composite supply / cfi ' XIV ' 
 of a thing, that has several sources of production, present no 
 great difficulty ; for the several amounts demanded for the 
 different purposes, or supplied from different sources, can be 
 added together, on the same plan as was adopted in Book in., 
 for combining the demands of the rich, the middle classes 
 and the poor for the same commodity. 
 
 Next we made some study of the division of the supple- Ch. vn. 
 mentary costs of a business, and especially those connected 
 with building up a trade connection, with marketing, and with 
 insurance among the various products of that business. costs. 
 
 3. Returning to those central difficulties of the equi- c&s. vm. 
 librium of normal demand and supply which are connected 
 with the element of time, we investigated more fully the of an 
 relation between the value of an appliance for production 
 and that of the things produced by it. 
 
 When different producers have different advantages for tjjjj f the 
 producing a thing, its price must be sufficient to cover produced 
 the expenses of production of those producers who have no ^ e ' 
 special and exceptional facilities ; for if not they will with- ^ 
 
 hold or diminish their production, and the scarcity of the natural 
 amount supplied, relatively to the demand, will raise the affords to 
 
 price. When the market is in equilibrium, and the thing is 
 being sold at a price which covers these expenses, there re- 
 mains a surplus beyond their expenses for those who have 
 the assistance of any exceptional advantages. If these 
 advantages arise from the command over free gifts of nature, 
 the surplus is called a producer's surplus or producer's rent : 
 there is a surplus in any case, and if the owner of a free gift 
 of nature lends it out to another, he can generally get for its 
 use a rent equivalent to this surplus. 
 
 Ricardo argued that rent does not enter into cost ofy ic f r . do ' s 
 
 o doctrine 
 
 production, having in view on the one hand the rent of farm- that rent 
 
 _ n . i i j i r j .j. does not 
 
 ing land in general, and on the other the cost 01 production en t er into 
 of agricultural produce in general : and in this connection the 
 doctrine cannot easily be misunderstood. But when applied 
 
 * ^ 
 
 to the cost of production of one particular crop, though still but when 
 literally true as it stands, experience shows that it is liable to inter- 7 
 
552 SUMMARY OF THE GENERAL THEORY OF 
 
 BOOK v. be interpreted in senses in which it is not true. For if land 
 
 J * which had been used for growing hops, is found capable of 
 
 applicable yielding a higher rent as market-garden land, the area under 
 to all hops will undoubtedly be diminished; and this will raise their 
 of rents, marginal cost of production and therefore their price. The 
 rent which land will yield for one kind of produce, though 
 it does not directly enter into those expenses, yet does act as 
 the channel through which a demand for the land for that 
 kind of produce increases the difficulties of supply of other 
 kinds ; and thus does indirectly affect their expenses of pro- 
 duction. A mining royalty is not a rent, and enters into 
 expenses of production. Ricardo's doctrine requires to be 
 carefully interpreted even with regard to farm rents; but, 
 when so interpreted, it is applicable to other classes of rents, 
 and, subject to some further conditions, to the income yielded 
 by appliances for production which man has made, and 
 especially such of them as are durable, and the supply of 
 which cannot be rapidly increased. 
 
 The Thus when we are taking a broad view of normal value, 
 
 derived when we are investigating the causes which determine normal 
 
 appliances va <l ue " i n ^ ne l n g run," when we are tracing the " ultimate " 
 
 for pro- effects of economic causes, then the income that is derived 
 
 which have from capital in these forms enters into the payments by which 
 
 been made, the expenses of production of the commodity in question have 
 
 theTimea ^ be covered, and it directly controls the action of the pro- 
 
 bianceto ducers wno are on ^ ne margin of doubt as to whether to 
 
 rent, which increase the means of production or not. But, on the other 
 
 closer hand, when we are considering the causes which determine 
 
 durable normal prices for a period which is short relatively to that 
 
 they are. re q u i re( j f or largely increasing the supply of those appliances 
 
 for production, then their influence on value is chiefly indirect 
 
 and more or less similar to that exerted by the free gifts of 
 
 nature. The shorter the period which we are considering, 
 
 and the slower the process of production of those appliances, 
 
 the less part will variations in the income derived from them 
 
 play in checking or increasing the supply of the commodity 
 
 produced by them, and in raising or lowering its supply 
 
 price; and the more nearly true will it be that, for the 
 
 period under discussion, the net income to be derived 
 
EQUILIBRIUM OF DEMAND AND SUPPLY. 553 
 
 from them is to be regarded as a producer's surplus or BOOKV. 
 
 quasi-rent. CH ' XIV ' 
 
 In passing from the free gifts of nature through the more Situation 
 
 ,i M , i , . rent is the 
 
 permanent improvements in the soil, to less permanent im- type of a 
 provements, to farm and factory buildings, to steam-engines, oTfncomes. 
 &c., and finally to the less durable and less slowly made 
 implements, we find a continuous series. And even that part 
 of the rental value of land which is derived from advantages 
 of situation situation rent as it may be called passes by 
 imperceptible gradations from the character of a pure rent, 
 in cases in which the owners of the land have had no direct 
 part in improving its environment, to that of a quasi-rent or 
 even profits when the conditions of the environment, to which 
 the land owes its situation value, were deliberately brought 
 about by, and at the expense of, the owners of that land in 
 order to raise its value. Thus the situation rent of land 
 presents close analogies to many different classes of income 
 derived from advantages of the environment, or conjuncture. 
 Later on we shall find that many of the most interesting 
 applications of the principle which we have just discussed 
 are to human agents of production; but in the present 
 Book we confine our attention to the material agents of pro- 
 duction. 
 
 The supply of durable appliances for production, or goods The supply 
 
 / . i IT- 11 ' ii of durable 
 
 of the second order, is governed by estimates that generally requisites 
 reach forward over a longer time, and are therefore more tiouTs not 
 liable to error than those which govern the immediate ^apted to 
 adaptation of supply to demand with regard to goods ready for demand, 
 immediate consumption. But further, the supply of these 
 appliances depends partly on the supply of appliances for 
 making them, that is, of things removed by two stages from 
 the commodity with which we started. The demand for these 
 appliances for making appliances is derived ultimately from 
 the demand for the finished commodity ; and the adjustment 
 of supply to demand in their case is a still more difficult 
 process ; it ranges over a still longer period of time, and is 
 still more liable to error : and so on, backwards, without 
 limit. 
 
 4. The terms " aggregate " and " average " cost of Ch. xi. 
 
554 SUMMARY OF THE GENERAL THEORY OF 
 
 BOOK v. production can have no precise meaning in a world of rapid 
 _! _ ' change such as that in which we live ; since the quasi-rents 
 relations ^ ^e a ppli ances of production, both material and personal, 
 between are governed for short periods more by the value of the things 
 ratf rormai4<hey produce, than by their own cost of production. For 
 production, instance, machinery of a pattern on which improvements 
 have been made, has its value determined by capitalizing the 
 quasi-rents it can earn ; and to count profits on this value as 
 part of the aggregate expenses of production of the com- 
 modities it produces, is to reason in a circle. In a rigidly 
 stationary state however in which supply could be perfectly 
 \ adjusted to demand in every particular, the normal expenses 
 \ of production, the marginal expenses, and the average 
 \ \ expenses (rent being counted in) would be one and the same 
 thing. This point is dwelt on in order to show clearly what 
 the normal supply schedule does mean, and what it does 
 not mean. 
 
 The in- This brings us to consider some difficulties of a rather 
 
 the 6 law of technical character connected with the marginal expenses of 
 return^? production of a commodity that obeys the law of increasing 
 thereia- return. The difficulties arise from the attempt to represent 
 tween supply price as dependent on the amount produced, without 
 produced allowing for the length of time that is necessarily occupied 
 price S does y ^J eacn individual business in extending its internal, and 
 more ^ ts external organization; and in consequence 
 
 
 character they have been most conspicuous in mathematical and semi- 
 periods. mathematical discussions of the theory of value. For when 
 changes of supply price and amount produced are regarded 
 as dependent exclusively on one another without any refer- 
 ence to gradual growth, it appears reasonable to argue 
 that the marginal supply price for each individual pro- 
 ducer is the addition to his aggregate expenses of pro- 
 duction made by producing his last element; that this 
 marginal price is likely in many cases to be diminished by 
 an increase in his output much more than the demand price 
 in the general market would be by the same cause ; and that 
 therefore the statical theory of equilibrium is inapplicable to 
 commodities which obey the law of increasing return. 
 
 To this argument it may be replied that in many industries 
 
EQUILIBRIUM OF DEMAND AND SUPPLY. 555 
 
 each producer has a special market in which he is well known, BOOK v. 
 and which he cannot extend quickly; and that therefore, H ' XIV> 
 though it might be physically possible for him to increase 
 his output rapidly, he would run the risk of forcing down 
 very much the demand price in his special market, or else of 
 being forced to sell his surplus production outside on less 
 favourable terms. And though there are industries in which 
 each producer has access to the whole of a large market, yet 
 in these there remain but few internal economies to be got 
 by an increase of output, when the existing plant is already 
 well occupied. No doubt there are industries as to which 
 neither of these statements is true : they are in a transitional 
 state, and it must be conceded that the statical theory of 
 equilibrium of normal demand and supply cannot be pro- 
 fitably applied to them. But such cases are not numerous ; 
 and with regard to the great bulk of manufacturing in- 
 dustries, the connection between supply price and amount 
 showed a fundamentally different character for short periods 
 and for long. 
 
 For short periods, the difficulties of adjusting the internal 
 and external organization of a business to rapid changes in 
 output are so great that the supply price must generally be 
 taken to rise with an increase and to fall with a diminution 
 in the amount produced. 
 
 But in long periods both the internal and the external Its 
 
 ' , . . operation 
 
 economies of production on a large scale have time to develop in lot 
 
 themselves; the marginal supply price is not the expenses 
 of production of any particular bale of goods, but it is the 
 whole expenses (including insurance, and gross earnings of 
 management) of a marginal increment in the aggregate pro- 
 cess of production and marketing. This supply price falls 
 generally with an increase in the amount normally produced ; 
 if it falls more rapidly than the demand price in the neigh- 
 bourhood of the position of equilibrium, the equilibrium is 
 unstable, in the opposite case it is stable. 
 
 Under certain possible, though rather improbable, con- j^. ^ 
 ditions there may be two or more positions of equilibrium multiple 
 alternately stable and unstable. But this portion of the eqim 8 
 theory, though necessary for logical completeness, rests on brmm - 
 
556 SUMMARY OF THE GENERAL THEORY OF 
 
 BOOK v. rigid and artificial assumptions, and has but little practical 
 
 CH. XIV. . 6 
 
 importance. 
 
 Ch. xii. 5. Some study of the effects of a tax ; regarded as a 
 
 norm!? 8 "* s P ec i a l case f a change in the general conditions of demand 
 demand an( j supply suggests that, when proper allowance is made for 
 with some' the interests of consumers, in the form of consumers' surplus 
 to the or rent, there is less primd facie cause than the earlier 
 Maximum 1 economists supposed, for the general doctrine of so-called 
 Satisfac- Maximum Satisfaction " ; i.e. for the doctrine that the free 
 pursuit by each individual of his own immediate interest, 
 will lead producers to turn their capital and labour, and 
 consumers to turn their expenditure into such courses as 
 are most conducive to the general interests. We have 
 nothing to do at this stage of our inquiry, limited as it 
 is to analysis of the most general character, with the im- 
 portant question how far, human nature being constituted as 
 it is at present, collective action is likely to be inferior to 
 individualistic action in energy and elasticity, in inventiveness 
 and directness of purpose ; and whether it is not therefore 
 likely to waste through practical inefficiency more than it 
 could save by taking account of all the interests affected by 
 any course of action. But even without taking account of 
 the evils arising from the unequal distribution of wealth, 
 there is primd facie reason for believing that the aggregate 
 satisfaction, so far from being already a maximum, could be 
 much increased by collective action in promoting the pro- 
 duction and consumption of things in regard to which the 
 law of increasing return acts with especial force. 
 
 Ch. xm. This position is confirmed by the study of the theory of 
 
 Theory of monopolies. It is the immediate interest of the monopolist 
 poiies. so to adjust the production and sale of his wares as to 
 obtain for himself the maximum net revenue, and the course 
 which he thus adopts, is unlikely to be that which affords the 
 aggregate maximum satisfaction. The divergence between 
 individual and collective interests is primd facie less impor- 
 tant with regard to those things which obey the law of 
 diminishing return, than with regard to those which obey the 
 law of increasing return : but, in the case of the latter, there 
 is strong primd facie reason for believing that it might often 
 
EQUILIBRIUM OF DEMAND AND SUPPLY. 557 
 
 CH. XIV. 
 
 be to the interest of the community directly or indirectly to BOOK v. 
 intervene, because a largely increased production would add 
 much more to consumers' rent than to the aggregate ex- 
 penses of production of the goods. More exact notions on the 
 relations of demand and supply, particularly when expressed 
 in the form of diagrams, may help us to see what statistics 
 should be collected, and how they should be applied in the 
 attempt to estimate the relative magnitudes of various 
 conflicting economic interests, public and private. 
 
 NOTE ON RICARDO'S THEORY OF VALUE. 
 
 Ricardo's theory of cost of production in relation to value occupies General 
 so important a place in the history of economics that any misunder- dr j ft of 
 standing as to its real character must necessarily be very mischievous ; 
 and unfortunately it is so expressed as almost to invite misunder- 
 standing. In consequence there is a widely spread belief that it has 
 needed to be reconstructed by the present generation of economists. 
 The purpose of the present Note is to show cause for not accepting this 
 opinion ; and for holding on the contrary that the foundations of the 
 theory as they were left by Ricardo remain intact, that much has 
 been added to them, and that very much has been built upon them, 
 but that little has been taken from them. 
 
 When Ricardo was addressing a general audience, he drew largely Ricardo 
 upon his wide and intimate knowledge of the facts of life, using them h jjj. tica i 
 " for illustration, verification, or the premises of argument." But in experience, 
 his Principles of Political Economy "the same questions are treated with b v* t wa ![ 
 a singular exclusion of all reference to the actual world around him " and un- 
 
 (see an admirable article on Ricardo's Use of Facts in the first volume s y stematic 
 
 as a 
 of the Harvard Quarterly Journal of Economics, edited by Prof, writer. 
 
 Dunbar). And he wrote to Malthus in May, 1820 (the same year in 
 which Malthus published his Principles of Political Economy considered 
 with a view to their practical application}, "Our differences may in 
 some respects, I think, be ascribed to your considering my book as 
 more practical than I intended it to be. My object was to elucidate 
 principles, and to do this I imagined strong cases, that I might show 
 the operation of those principles." His book makes no pretence to be 
 systematic. He was with difficulty induced to publish it ; and if in 
 writing it he had in view any readers at all, they were chiefly those 
 
558 
 
 NOTE ON RICARDO'S THEORY OF VALUE. 
 
 BOOK V. 
 CH. XIV. 
 
 He took 
 utility for 
 granted, 
 because its 
 influence 
 was re- 
 latively 
 simple ; 
 
 and he 
 analysed 
 cost of 
 production 
 because its 
 influence 
 is less 
 obvious. 
 
 statesmen and business men with whom he associated. So he pur- 
 posely omitted many things which were necessary for the logical 
 completeness of his argument, but which they would regard as 
 obvious. And further, as he told Malthus in the following October, 
 he was "but a poor master of language." His. exposition is as con- 
 fused as his thought is profound ; he uses words in artificial senses 
 which he does not explain, and to which he does not adhere ; and he 
 changes from one hypothesis to another without giving notice. 
 
 If then we seek to understand him rightly, we must interpret him 
 generously, more generously than he himself interpreted Adam Smith. 
 When his words are ambiguous,, we must give them that interpretation 
 which other passages in his writings indicate that he would have wished 
 us to give them. If we do this with the desire to ascertain what he 
 really meant, his doctrines, though very far from complete, are free 
 from many of the errors that are commonly attributed to them. 
 
 He considers, for instance (Principles, Ch. i. 1), that utility is 
 " absolutely essential " to (normal) value though not its measure ; while 
 the value of things "of which there is a very limited quantity... varies 
 with the wealth and inclinations of those who are desirous to possess 
 them." And elsewhere (/&. Ch. iv.) he insists on the way in which the 
 market fluctuations of prices are determined by the amount available 
 for sale on the one hand, and "the wants and wishes of mankind" 
 on the other. 
 
 Again, in a profound, though very incomplete, discussion of the 
 difference between " Value and Riches " he seems to be feeling his way 
 towards the distinction between marginal and total utility. For by 
 Riches he means total utility, and he seems to be always on the point 
 of stating that value corresponds to the increment of Riches which 
 results from that part of the commodity which it is only just worth 
 the while of purchasers to buy ; and that when the supply runs short, 
 whether temporarily in consequence of a passing accident, or per- 
 manently in consequence of an increase in cost of production, there is a 
 rise in that marginal increment of Riches which is measured by value, 
 at the same time that there is a diminution in the aggregate Riches, 
 the total utility, derived from the commodity. Throughout the whole 
 discussion he is trying to say, though (being ignorant of the terse lan- 
 guage of the differential calculus) he did not get hold of the right 
 words in which to say it neatly, that marginal utility is raised and 
 total utility is lessened by any check to supply. 
 
 But while not thinking that. he had much to say that was of great 
 importance on the subject of utility, he believed that the connection 
 between cost of production and value was imperfectly understood ; 
 and that erroneous views on this subject were likely to lead the 
 country astray in practical problems of taxation and finance ; and so 
 he addressed himself specially to this subject. But here also he made 
 short cuts. 
 
NOTE ON RICARDOS THEORY OF VALUE. 559 
 
 For, though he was aware that commodities fall into three classes BOOK v. 
 according as they obey the law of diminishing, of constant, or of in- CH - XIV - 
 creasing return ; yet he thought it best to ignore this distinction in a 
 theory of value applicable to all kinds of commodities. A commodity 
 chosen at random was just as likely to obey one as the other of the 
 two laws of diminishing and of increasing return ; and therefore he 
 thought himself justified in assuming provisionally that they all obeyed 
 the law of constant return. In this perhaps he was justified, but he 
 made a mistake in not stating explicitly what he was doing. 
 
 He argued in the first Section of his first Chapter that " in the 1. Cost of 
 early stages of society " where there is scarcely any use of capital, and Dependent 1 
 where any one man's labour has nearly the same price as any other on quantity 
 man's, it is, broadly speaking, true that "the value of a commodity, or use^ "* 
 the quantity of a commodity for which it will exchange, depends on directly ; 
 the relative quantity of labour which is necessary for its production." 
 That is, if two things are made by four and twelve men's labour for 
 a year all the men being of the same grade, the normal value of the 
 former will be three times that of the latter. For if ten per cent, has 
 to be added for profits on the capital invested in the one case, ten 
 per cent, will need to be added in the other also. [If w be a year's 
 wages of a worker of this class, the costs of production will be 4w . |Jg, 
 and 12w }#o : and the ratio of these is 4 : 12, or 1 : 3.] 
 
 But he went on to show that these assumptions cannot be properly 2, also on 
 made in later stages of civilization, and that the relation of value to j|JJjJ lty f 
 cost of production is more complex than that with which he started ; labour ; 
 and his next step was to introduce in Section ir. the consideration 
 that "labour of different qualities- is differently rewarded." If the 
 wages of a jeweller are twice as great as those of a working labourer, 
 an hour's work of the one must count for two hours' work of the other. 
 Should there be a change in their relative wages, there will of course 
 be a corresponding change in the relative values of things made by 
 them. But instead of analysing, as economists of this generation do, 
 the causes which make (say) jewellers' wages change from one gene- 
 ration to another relatively to those of ordinary labourers, he contented 
 himself with stating that such variations cannot be great. 
 
 Next in Section in. he urged that in reckoning the cost of pro- 3, on 
 duction of a commodity, account must be taken not only of the labour ^^ 
 applied immediately to it, but also of that which is bestowed on the previously 
 implements, tools and buildings with which such labour is assisted ; 
 and here the element of time which he had carefully kept in the 
 background at starting, was necessarily introduced. 
 
 Accordingly in Section iv. he discusses more fully the different 4, on the 
 influences exerted on the value of " a set of commodities " [he uses this 
 simple method sometimes to evade the difficulties of the distinctions must 
 between prime cost and total cost] : and especially he takes account j^JP^ the 
 of the different effects of the application of circulating capital which is goods can 
 
560 
 
 NOTE ON RICARDO'S THEORY OF VALUE. 
 
 BOOK V. 
 CH. XIV. 
 
 be brought 
 to. market; 
 
 5, on the 
 consequent 
 influence 
 of the rate 
 of profits 
 on relative 
 value. 
 
 He 
 
 corrects 
 Malthus' 
 anticipa- 
 tion of 
 Marx's 
 misunder- 
 standing. 
 
 But he 
 was too 
 spare of 
 words. 
 
 consumed in a single use, and fixed as durable capital ; and again of 
 the time for which labour must be invested in making machinery to 
 make commodities. If that be long, they will have a greater cost of 
 production and be "more valuable to compensate for the greater length 
 of time, which must elapse before they can be brought to market." 
 
 And lastly in Section v. he sums up the influence which different 
 lengths of investment, whether direct or indirect, will have upon 
 relative values ; arguing correctly that if wages all rise and fall 
 together the change will have no permanent effect on the relative ' 
 values of different commodities. But he argues if the rate of profits 
 falls it will lower the relative values of those commodities the 
 production of which requires capital to be invested a long while 
 before they can be brought to market. For if in one case the average 
 investment is for a year and requires ten per cent, to be added to the 
 wages bill for profits ; and in another is for two years and requires 
 twenty per cent, to be added ; then a fall of profits by one-fifth will 
 reduce the addition in the latter case from 20 to 16, and in the former 
 only from 10 to 8. [If their direct labour cost is equal the ratio of 
 their values before the change will be ff$ or 1-091 ; and after the 
 change ^f or 1'074 ; a fall of nearly two per cent.] His argument is 
 avowedly only provisional ; in later chapters he takes account of other 
 causes of differences in profits in different industries, besides the period 
 of investment. But it seems difficult to imagine how he could more 
 strongly have emphasized the fact that Time or Waiting as well as 
 Labour is an element of cost of production than by occupying his first 
 chapter with this discussion. Unfortunately however he delighted in 
 short phrases, and he thought that his readers would always supply 
 for themselves the explanations of which he had given them a hint. 
 
 Once indeed, in a note at the end of the sixth Section of his first 
 Chapter, he says : " Mr Malthus appears to think that it is a part of 
 my doctrine that the cost and value of a thing should be the same ; 
 it is, if he means by cost, ' cost of production ' including profits. In 
 the above passage, this is what he does not mean, and therefore lie has 
 not clearly understood me." And yet Rodbertus and Karl Marx claim 
 Ricardo's authority for the statement that the natural value of things 
 consists solely of the labour spent on them ; and even those German 
 economists who most strenuously combat the conclusions of these 
 writers, are often found to admit that they have interpreted Ricardo 
 rightly, and that their conclusions follow logically from his. 
 
 This and other facts of a similar kind show that Ricardo's reticence 
 was an error of judgment. It would have been better if he had 
 occasionally repeated the statement that the values of two commodities 
 are to be regarded as in the long run proportionate to the amount 
 of labour required for making them, only on the condition that other 
 things are equal : i.e., that the labour employed in the two cases is 
 equally skilled, and therefore equally highly paid ; that it is assisted 
 
NOTE ON RICARDO'S THEORY OF VALUE. 561 
 
 by proportionate amounts of capital, account being taken of the period BOOK v. 
 of its investment ; and that the rates of profits are equal. He does not CH - XIV - 
 state clearly, and in some cases he perhaps did not fully and clearly 
 perceive how, in the problem of normal value, the various elements 
 govern one another mutually, and not successively in a long chain of 
 causation. And he was more guilty than almost anyone else of the 
 bad habit of endeavouring to express great economic doctrines in short 
 sentences. 
 
 [Prof. Ashley in a suggestive criticism of this Note, as part of an 
 attempted "Rehabilitation of Ricardo" (Economic Journal, Vol. i.) 
 insists that it has been commonly believed that Ricardo did in fact 
 habitually think of mere quantities of labour as constituting cost of 
 production, and governing value, subject only to " slight modifications" ; 
 and that this interpretation of him is the most consistent with his 
 writings as a whole. It is not disputed that this interpretation has 
 been accepted by many able writers : otherwise there would have been 
 little need for rehabilitating, i.e. clothing more fully his somewhat 
 too naked doctrines. But the question whether Ricardo is to be 
 supposed to have meant nothing by the first chapter of his book, 
 merely because he did not constantly repeat the interpretation clauses 
 contained in it, is one which each reader must decide for himself 
 according to his temperament : it does not lend itself to be solved by 
 argument. It is claimed not that his doctrines contained a complete 
 theory of value : but only that they were in the main true as far as 
 they went. Rodbertus and Marx interpreted Ricardo's doctrine, to 
 mean that interest does not enter into that cost of production which 
 governs (or takes part in governing) value : and as regards this Prof. 
 Ashley appears to concede all that is claimed here when (p. 480) he 
 takes it as beyond question that Ricardo "regarded the payment of 
 interest, that is, of something more than the mere replacement of 
 capital, as a matter of course."] 
 
 There are few writers of modern times who have approached as The 
 near to the brilliant originality of Ricardo as Jevons has done. But he 
 appears to have judged both Ricardo and Mill harshly, and to have ness of 
 attributed to them doctrines narrower and less scientific than those J evons 
 which they really held. And his desire to emphasize an aspect of 
 value to which they had given insufficient prominence, was probably in 
 some measure accountable for his saying, "Repeated reflection and 
 inquiry have led me to the somewhat novel opinion that value depends 
 entirely upon utility" (Theory, p. 1). This statement seems to be no less 
 one-sided and fragmentary, and much more misleading, than that into 
 which Ricardo often glided with careless brevity, as to the dependence 
 of value on cost of production ; but which he never regarded as more than 
 a part of a larger doctrine, the rest of which he had tried to explain. 
 
 Jevons continues : "We have only to trace out carefully the natural 
 laws of variation of utility as depending upon the quantity of com- 
 
 M. 36 
 
562 
 
 NOTE ON RICARDO'S THEORY OF VALUE. 
 
 BOOK V. 
 CH. XIV. 
 
 Jevons' 
 central 
 position. 
 
 Jevons 
 implies 
 that the 
 things 
 balanced 
 against one 
 another in 
 a market 
 are utili- 
 ties, really 
 they are 
 indirect 
 measures 
 of utility. 
 
 modity in our possession, in order to arrive at a satisfactory theory of 
 exchange, of which the ordinary laws of supply and demand are a neces- 
 sary consequence.... Labour is found often to determine value, but only 
 in an indirect manner by varying the degree of utility of the com- 
 modity through an increase or limitation of the supply." As we shall 
 presently see, the latter of these two statements had been made before 
 in almost the same form, loose and inaccurate as it is, by Ricardo and 
 Mill ; but they would not have accepted the former statement. For 
 while they regarded the natural laws of variation of utility as too 
 obvious to require detailed explanation, and while they admitted that 
 cost of production could have no effect upon exchange value if it could 
 have none upon the amount which producers brought forward for sale ; 
 their doctrines imply that what is true of supply, is true mutatis 
 mutandis of demand, and that the utility of a commodity could have no 
 effect upon its exchange value if it could have none on the amount 
 which purchasers took off the market. Let us then turn to examine 
 the chain of causation in which Jevons' central position is formulated 
 in his Second Edition, and compare it with the position taken up by 
 Eicardo and Mill. He says (p. 179) : 
 
 " Cost of production determines supply. 
 
 Supply determines final degree of utility. 
 
 Final degree of utility determines value." 
 
 Now if this series of causations really existed, there could be no great 
 harm in omitting the intermediate stages and saying that cost of 
 production determines value. For if A is the cause of B, which is the 
 cause of C, which is the cause of Z), then A is the cause of D. But in 
 fact there is no such series. 
 
 A preliminary objection might be taken to the ambiguity of the 
 terms "cost of production" and "supply"; which Jevons ought to 
 have avoided, by the aid of that technical apparatus of semi-mathe- 
 matical phrases, which was at his disposal, but not at Eicardo's. A 
 graver objection lies against his third statement. For the price which 
 the various purchasers in a market will pay for a thing, is determined 
 not solely by the final degrees of its utility to them, but by these in 
 conjunction with the amounts of purchasing power severally at their 
 disposal. The exchange value of a thing is the same all over a market ; 
 but the final degrees of utility to which it corresponds are not equal 
 at any two parts. Jevons supposed himself to be getting nearer the 
 foundations of exchange value when in his account of the causes 
 which determine it, he substituted the phrase " final degree of utility," 
 for "the price which consumers are only just willing to pay," the phrase 
 which in the present treatise is condensed into "marginal demand 
 price." When for instance describing (Second Edition, p. 105) the 
 settlement of exchange between "one trading body possessing only 
 corn, and another possessing only beef," he makes his diagram represent 
 " a person " as gaining a " utility " represented by one line and losing a 
 
XOTE ON RICARDO'S THEORY OF VALUE. 563 
 
 "utility" represented by another. But that is not what really happens ; BOOK v. 
 a trading body is not " a person," it gives up things which represent CH - x*** 
 equal purchasing power to all of its members, but very different 
 utilities. It is true that Jevons was himself aware of this ; and that 
 his account can be made consistent with the facts of life by a series of 
 interpretations, which in effect substitute "demand -price" and "supply- 
 price " for " utility " and " disutility " : but when, so amended, they lose 
 much of their aggressive force against the older doctrines and if both 
 are to be held severely to a strictly literal interpretation, then the older 
 method of speaking, though not perfectly accurate, appears to be nearer 
 the truth than that which Jevons and some of his followers have en- 
 deavoured to substitute for it. 
 
 But the greatest objection of all to his formal statement of his He sub- 
 central doctrine is that it does not represent supply price, demand J Catena 
 price and amount produced as mutually determining one another of causes 
 (subject to certain other conditions), but as determined one by another causation 
 in a series. It is as though when three balls A, B, and C rest against 
 one another in a bowl, instead of saying that the position of the three 
 mutually determines one another under the action of gravity, he had / / 
 said that A determines B, and B determines 0. Some one else however 
 with equal justice might say that C determines B and B determines A. 
 And in reply to Jevons a catena rather less untrue than his can be 
 made by inverting his order and saying : 
 
 Utility determines the amount that has to be supplied, 
 
 The amount that has to be supplied determines cost of production, 
 
 Cost of production determines value, 
 
 because it determines the supply price which is required to make the 
 producers keep to their work. 
 
 Let us then turn to Ricardo's doctrine which, though unsystematic Ricardo's 
 and open to many objections, seems to be more philosophic in principle though 
 and closer to the actual facts of life. He says, in the letter to inadequate 
 Malthus already quoted: "M. Say has not a correct notion of O f Utility, 
 what is meant by value when he contends that a commodity is took some 
 valuable in proportion to its utility. This would be true if buyers the element 
 only regulated the value of commodities ; then indeed we might of time, 
 expect that all men would be willing to give a price for things in 
 proportion to the estimation in which they held them ; but the fact 
 appears to me to be that the buyers have the least in the world to do 
 in regulating price ; it is all done by the competition of the sellers, 
 and, however really willing the buyers might be to give more for iron 
 than for gold, they could not, because the supply would be regulated 
 by cost of production. . . . You say demand and supply regulates value 
 [sic] ; this 1 think is saying nothing, and for the reason I have given 
 in the beginning of this letter : it is supply which regulates value, 
 and supply is itself controlled by comparative cost of production. 
 Cost of production, in money, means the value of labour as well as of 
 
 362 
 
564 
 
 NOTE ON RICARDO'S THEORY OF VALUE. 
 
 BOOK V. 
 CH. XIV. 
 
 Jevons' 
 
 position 
 
 less 
 
 different 
 
 than it 
 
 appears, 
 
 and he un- 
 derrated 
 
 profits." (See pp. 173 6 of Dr Bonar's excellent edition of these 
 letters.) And again in his next letter, "I do not dispute either the 
 influence of demand on the price of corn or on the price of ail other 
 things : but supply follows close at its heels and soon takes the power 
 of regulating price in his [sic] own hands, and in regulating it he is 
 determined by cost of production." 
 
 These letters were not indeed published when Jevons wrote, but 
 there are very similar statements in Ricardo's Principles. Mill also, 
 when discussing the value of money (Book in. Ch. ix. 3), speaks of 
 "the law of demand and supply which is acknowledged to be ap- 
 plicable to all commodities, and which in the case of money as of most 
 other things, is controlled but not set aside by the law of cost of 
 production, since cost of production would have no effect on value if 
 it could have none on supply." And again, when summing up his 
 theory of value (Book in. Ch. xvi. 1), he says: "From this it 
 appears that demand and supply govern the fluctuations of prices in 
 all cases, and the permanent values of all things of which the supply 
 is determined by any agency other than that of free competition : 
 but that, under the regime of free competition, things are, on the 
 average, exchanged for each other at such values and sold for such 
 prices as afford equal expectation of advantage to all classes of 
 producers ; which can only be when things exchange for one another 
 in the ratio of their cost of production." And, on the next page, speak- 
 ing of commodities which have a joint cost of production, he says, 
 "since cost of production here fails us we must resort to a law of 
 value anterior to cost of production and more fundamental, the law of 
 demand and supply." 
 
 Jevons (p. 215), referring to this last passage, speaks of "the fallacy 
 involved in Mill's idea that he is reverting to an anterior law of value, 
 the law of supply and demand, the fact being that in introducing 
 the cost of production principle, he has never quitted the law of 
 supply and demand at all. The cost of production is only one circum- 
 stance which governs supply and thus indirectly influences values." 
 
 This criticism seems to contain an important truth ; though the 
 wording of the last part is open to objection. If it had been made in 
 Mill's time he would probably have accepted it ; and would have 
 withdrawn the word "anterior" as not expressing his real meaning. 
 The cost of production principle " and the " final utility " principle 
 are undoubtedly component parts of the one all-ruling law of supply 
 and demand ; each may be compared to one blade of a pair of scissors. 
 When one blade is held still, and the cutting is effected by moving the 
 other, we may say with careless brevity that the cutting is done by the 
 second ; but the statement is not one to be made formally, and defended 
 deliberately. [See above, Ch. in. 7.] 
 
 Perhaps Jevons' antagonism to Ricardo and Mill would have been 
 less if he had not himself fallen into the habit of speaking of relations 
 
NOTE ON RICARDO'S THEORY OF VALUE. 565 
 
 which really exist only between demand price and value as though BOOK v. 
 they held between utility and value ; and if he had emphasized as CH - XIV - 
 Cournot had done, and as the use of mathematical forms might have tlie broad 
 been expected to lead him to do, that fundamental symmetry of the symmetry 
 general relations in which demand and supply stand to value, which 
 coexists with striking differences in the details of those relations. We 
 must not indeed forget that, at the time at which he wrote, the demand 
 side of the theory of value had been much neglected ; and that he did 
 excellent service by calling attention to it and developing it. There 
 are few thinkers whose claims on our gratitude are as high and as 
 various as those of Jevons : but that must not lead us to accept 
 hastily his criticisms on his great predecessors. (See an article on 
 Jevons' Theory by the present writer in the Academy for April 1, 
 1872.) 
 
 It seemed right to select Jevons' attack for reply, because, in other 
 England at all events, it has attracted more attention than any other. CI> itics 
 But somewhat similar attacks on Ricardo's theory of value had been 
 made by many other writers. Among them may specially be mentioned 
 Mr Macleod, whose writings before 1870 anticipated much both of the 
 form and substance of recent criticisms on the classical doctrines of 
 value in relation to cost, by Profs. Walras and Carl Menger, who were 
 contemporary with Jevons, and Profs, v. Bohm-Bawerk and Wieser, 
 who were later. 
 
 The carelessness of Ricardo with regard to the element of Time has have 
 been imitated by his critics, and has thus been the twofold source of g^itated 
 misunderstanding. It has done, and is doing, much to hinder, and careless- 
 hide from view, the continuity of the development of economic science. ness H 1 
 For they attempt to disprove doctrines as to the ultimate tendencies, as to the 
 the causes of causes, the causce causantes, of the relations between cost element of 
 of production and value, by means of arguments based on the causes of have' 
 
 temporary changes, and short-period fluctuations of value. Doubtless f a ^ e< * to _ 
 nearly everything they say when expressing their own opinions is true central 
 in the sense in which they mean it ; some of it is new and much of it doc trine. 
 is improved in form. But they do not appear to make any progress 
 towards establishing their claim to have discovered a new doctrine of 
 value which is in sharp contrast to the old ; or which calls for any 
 considerable demolition, as distinguished from development and ex- 
 tension, of the old doctrine. 
 
BOOK VI. 
 
 VALUE, 
 
 OR 
 
 DISTRIBUTION AND EXCHANGE. 
 CHAPTER I. 
 
 PRELIMINARY SURVEY OF DISTRIBUTION AND EXCHANGE. 
 
 BOOK vi. 1. THE simplest account of the causes which determine 
 
 LJ the distribution of the national income is that given by the 
 
 Socrat? French economists who just preceded Adam Smith, and it is 
 assumed, in based upon the peculiar circumstances of France in the latter 
 
 accordance , , - - , .-,, . 
 
 with the half of last century. The taxes, and other exactions levied 
 
 ch-cum- r from the French peasant, were then limited only by his 
 
 thSr time a ^^y * P a J5 an( ^ ^ ew f tne labouring classes were far from 
 
 and coun- starvation. So the Economists or Physiocrats, as they were 
 wages were called, assumed for the sake of simplicity, that there was a 
 
 lowesT natural law of population according to which the wages of 
 
 lble labour were kept at starvation limit 1 . They did not suppose 
 
 1 Thus Turgot, who for this purpose may be reckoned with the Physiocrats, 
 says (Sur la Formation et Distribution cles Richesses, vi.) "In every sort of 
 occupation it must come to pass, and in fact it does come to pass, that the wages 
 of the artisan are limited to that which is necessary to procure him a subsistence 
 ...He earns no more than his living (II ne gagne que sa vie).' 1 When however Hume 
 wrote, pointing out that this statement led to the conclusion that a tax on wages 
 must raise wages ; and that it was therefore inconsistent with the observed fact 
 that wages are often low where taxes are high and vice versa, Turgot replied 
 (March, 1767) to the effect that his iron law was not supposed to be fully operative 
 in short periods, but only in long. See Say's Turgot, English Ed. pp. 53, &c. 
 
PHYSIOCRATIC DOCTRINE OF WAGES. 567 
 
 that this was true of the whole working population, but the BOOK vi. 
 
 exceptions were so few, that they thought that the general CH ' *' 
 
 impression given by their assumption was true: somewhat in 
 
 the same way as it is well to begin an account of the shape 
 
 of the earth, by saying that it is an oblate spheroid, although 
 
 a few mountains do project as much as a thousandth part of 
 
 its radius beyond the general level. 
 
 Again, they knew that the rate of interest in Europe had and that 
 fallen during the five preceding centuries, in consequence of same was 
 the fact that "economy had in general prevailed over luxury." 
 But they were impressed very much by the sensitiveness of Ca P ital 
 capital, and the quickness with which it evaded the oppres- 
 sions of the tax-gatherer by retiring from his grasp; and they 
 therefore concluded that there was no great violence in the 
 supposition that if its profits were reduced below what they 
 then were, capital would speedily be consumed or migrate. 
 Accordingly they assumed, again for the sake of simplicity, 
 that there was something like a natural, or necessary rate of 
 profit, corresponding in some measure to the natural rate of 
 wages ; that if the current rate exceeded this necessary level, 
 capital would grow rapidly, till it forced down the rate of 
 profit to that level; and that, if the current rate went 
 below that level, capital would shrink quickly, and the 
 rate would be forced upwards again. They thought that, 
 wages and profits being thus fixed by natural laws, the 
 natural value of everything was governed simply as the 
 sum of wages and profits required to remunerate the pro- 
 ducers 1 . 
 
 Adam Smith worked out this conclusion more fully than 
 
 1 From these premisses the Physiocrats logically deduced the conclusion that 
 the only net produce of the country disposable for the purposes of taxation is the 
 rent of land ; that when taxes are placed on capital or labour, they make it shrink 
 till its net price rises to the natural level. The landowners have, they argued, to 
 pay a gross price which exceeds this net price by the taxes together with all the 
 expenses of collecting them in detail, and an equivalent for all the impediments 
 which the tax-gatherer puts in the way of the free course of industry ; and there- 
 fore the landowners would lose less in the long run if, being the owners of the only 
 true surplus that exists, they would undertake to pay direct whatever taxes the 
 King required; especially if the King would consent to "laisser faire, laisser 
 passer," that is, to let every one make whatever he chose, and take his labour 
 and send his goods to whatever market he liked. 
 
568 
 
 PRELIMINARY SURVEY OF DISTRIBUTION AND EXCHANGE. 
 
 BOOK VI. 
 CH. I. 
 
 relaxed 
 by Adam 
 Smith, 
 
 the Physiocrats did ; though it was left for Ricardo to make 
 clear that the labour and capital needed for production must 
 These rigid b e estimated at the margin of cultivation, so as to avoid the 
 
 assump- 
 tions were element of rent. But Adam Smith saw also that labour and 
 
 partially ...,, 
 
 capital were not at the verge of starvation in England, as 
 they were in France. In England the wages of a great part 
 of the working classes were sufficient to allow much more 
 than the mere necessaries of existence ; and capital had too 
 rich and safe a field of employment there to be likely to go 
 out of existence, or to emigrate. So when he is carefully 
 weighing his words, his use of the terms " the natural rate of 
 wages," and " the natural rate of profit," has not that sharp 
 definition and fixedness which it had in the mouths of the 
 Physiocrats ; and he goes a good way towards explaining how 
 they are determined by the ever-fluctuating conditions of 
 demand and supply. He even insists that the liberal reward 
 of labour " increases the industry of the common people " ; 
 that " a plentiful subsistence increases the bodily strength of 
 the labourer ; and the comfortable hope of bettering his con- 
 dition, and of ending his days perhaps in ease and plenty, 
 animates him to exert that strength to the utmost. Where 
 wages are high, accordingly, we shall always find the work- 
 man more active, diligent and expeditious, than where they 
 are low ; in England, for example, than in Scotland ; in the 
 neighbourhood of great towns than in remote country places 1 ." 
 And yet he sometimes fell back into the old way of speaking, 
 and thus caused careless readers to suppose that he believed 
 the mean level of the wages of labour to be fixed by an iron 
 law at the bare necessaries of life. 
 
 Malthus again, in his admirable survey of the course of 
 wages in England from the thirteenth to the eighteenth 
 centuries, showed how their mean level oscillated from cen- 
 tury to century, falling sometimes down to about half a peck 
 of corn a day, and rising sometimes up to a peck and a half or 
 even, in the fifteenth century, to about two pecks : a height 
 beyond which they have never passed except in our own day. 
 But although he observed that " an inferior mode of living 
 may be a cause as well as a consequence of poverty," he traced 
 
 1 Wealth of Nations, Bk. i. Ch. vm. 
 
 and by 
 Malthus. 
 
ADAM SMITH, MALTHUS AND KICARDO. 569 
 
 this effect almost exclusively to the consequent increase of BOOKVI. 
 numbers ; he did not anticipate the stress which economists CH '*' 
 of our own generation lay on the influence which habits of 
 living exercise on the efficiency, and therefore on the earning 
 power of the labourer 1 . 
 
 Ricardo's language was even more unguarded than that Ricardo 
 of Adam Smith and Mai thus. It is true, indeed, that he said unguarded 
 distinctly 2 : "It is not to be understood that the natural language 
 price of labour estimated in food and necessaries is absolutely 
 fixed and constant... It essentially depends on the habits and 
 customs of the people." But, having said this once, he did 
 not take the trouble to repeat it constantly ; and most of his but there 
 readers forgot that he ever said it. In the course of his good cause 
 argument he frequently adopted a mode of speaking similar bTthijfto 
 to that of the Physiocrats ; and seemed to imply that the h a e belief 
 tendency of population to increase rapidly as soon as wages so-called 
 
 ,-T , f !. , "iron law 
 
 rise above the bare necessaries of life, causes wages to be of wages." 
 fixed by "a natural law" to the level of these bare necessaries. 
 This law has been called, especially in Germany, Ricardo's 
 " iron ' or " brazen " law : many German socialists believe 
 that this law is in operation now, and will continue to be so, 
 as long as the plan on which production is organized remains 
 "capitalistic" or "individualistic"; and they claim Ricardo 
 as an authority on their side 3 . 
 
 In fact, however, Ricardo was not only aware that the 
 necessary or natural limit of wages was fixed by no iron law, 
 but is determined by the local conditions and habits of each 
 place and time : he was further keenly sensitive to the im- 
 portance of a higher " standard of living," and called on the 
 friends of humanity to exert themselves to encourage the 
 growth of a resolve among the working classes not to allow 
 their wages to fall anywhere near the bare necessaries of life 4 . 
 
 1 Political Economy, Ch. iv. 2. 2 Principles, Ch. v. 
 
 3 Some German economists, who are not socialists, and who believe that no 
 such law exists, yet maintain that the doctrines of Ricardo and his followers stand 
 or fall with the truth of this law; while others (e.g. Roscher, GescJi. der Nat. Oek. 
 in Deutsddand, p. 1022) protest against the socialist misunderstandings of 
 Ricardo. 
 
 4 It may be well to quote his words. " The friends of humanity cannot but 
 wish that in all countries the labouring classes should have a taste for comforts 
 and enjoyments, and that they should be stimulated by all legal means in their 
 
570 PRELIMINARY SURVEY OF DISTRIBUTION AND EXCHANGE. 
 
 BOOK vi. The persistency with which many writers continue to 
 
 ' attribute to him a belief in the " iron law " can be accounted 
 
 for only by his delight " in imagining strong cases," and his 
 
 habit of not repeating a hint, which he had once given, that 
 
 he was omitting for the sake of simplicity the conditions and 
 
 limitations that were needed to make his results applicable 
 
 to real life 1 . 
 
 Mill also Mill did not make any great advance in the theory of 
 
 insisted on , -i -i i , p , i , i 
 
 the pro- wages beyond his predecessors, m spite ot the care with 
 deteriora- which he set himself to emphasize the distinctly human 
 tion caused e l em ent in economics. He, however, followed Malthus in 
 
 by unduly 
 
 low wages, dwelling on those lessons of history which show that, if a fall 
 of wages caused the labouring classes to lower their standard 
 of comfort " the injury done to them will be permanent, and 
 their deteriorated condition will become a new minimum 
 
 exertions to procure them. There cannot be a better security against a super- 
 pvbundant population. In those countries, where the labouring classes have the 
 fewest wants, and are contented with the cheapest food, the people are exposed 
 to the greatest vicissitudes and miseries. They have no place of refuge from 
 calamity; they caunot seek safety in a lower station; they are already so low, 
 that they can fall no lower. On any deficiency of the chief article of their 
 subsistence, there are few substitutes of which they can avail themselves, and 
 dearth to them is attended with almost all the evils of famine." (Principles, 
 Ch. v.) 
 
 It is noteworthy that McCulloch, who has been charged, not altogether unjustly, 
 with having adopted the extremest tenets of Ricardo, and applied them harshly 
 and rigidly, yet chooses for the heading of the fourth Chapter of his Treatise On 
 Wages : " Disadvantage of Low Wages, and of having the Labourers habitually 
 fed on the cheapest species of food. Advantage of High Wages." 
 
 1 This habit of Ricardo's has already been discussed in the Note at the end of 
 the last Chapter. Prof. Brentauo, in his inaugural address at Vienna, gives as a 
 reason for believing that the English classical economists really held the iron law 
 of wages, the fact that they frequently speak of the minimum of wages as depend- 
 ing on the price of corn. But the term "corn" was used by them, as it was 
 by Petty, when ( Taxes and Contributions, Ch. xiv.) he speaks of " the Husbandry 
 of Corn, which we will suppose to contain all necessaries of life, as in the Lord's 
 Prayer we suppose the word Bread doth ; and let the production of a bushel of 
 this Corn be supposed of equal labour to that of producing an ounce of silver." Of 
 course Ricardo took a less hopeful view of the prospects of the working classes than 
 we do now. Even the agricultural labourer can now feed his family well and have 
 something to spare : while even the artisan would then have required the whole of 
 his wages, at all events after a poor harvest, to buy abundant and good food for 
 his family. Prof. Ashley (in the article referred to above, p. 561) insists on the 
 narrowness of Ricardo's hopes as compared with those of our own age; he describes 
 instructively the history of the passage quoted in the text ; and shows that even 
 Lassalle did not attribute absolute rigidity to his brazen law. 
 
TRANSITION TO MODERN DOCTRINES. 571 
 
 tending to perpetuate itself as the more ample minimum BOOKVI. 
 did before 1 ." 
 
 But it is only in our own generation that a careful study But our 
 has begun to be made of the effects that high wages have in f' 
 increasing the efficiency not only of those who receive them, tlie first to 
 
 study care- 
 
 but also of their children and grand-children. In this matter fu% the 
 the lead has been taken by General Walker and other wages on 
 American economists ; and the application of the com para- ef 
 tive method of study to the industrial problems of different 
 countries of the Old and New Worlds is forcing constantly 
 more and more attention to the fact that highly paid labour 
 is generally efficient and therefore not dear labour; a fact 
 which, though it is more full of hope for the future of the 
 human race than any other that is known to us, will be found 
 to exercise a very complicating influence on the theory of 
 Distribution. 
 
 2. Since Mill's time much progress has been made. The 
 More careful analysis has shown that no simple solution of the Sistrib?- 
 problem of Distribution can be valid ; and that attempts to 
 make a short cut to the solution must necessarily cause 
 confusion, if they are put forward as anything more than cases, 
 illustrations based on fancied hypotheses, and designed to 
 throw light not on the problem as a whole, but on some par- 
 ticular difficulty in it. This and the following three sections 
 will accordingly be given to a series of illustrations of the 
 influence of demand on the earnings of labour, drawn from an 
 imaginary world in which everyone owns the capital that 
 aids him in his labour ; so that the problem of the relations 
 of capital and labour does not arise in it. 
 
 There is a sense in which the agents of production may Com- 
 be regarded as two, Nature and man. In return to the men t of a 
 labour of men, Nature yields resources varying with his ^otiie- 
 diligence and with the advance made by the arts of produc- tica i illus - 
 
 ,. . , . trations 
 
 tion ; and these resources are divided out among mankind drawn 
 
 , . ^i i i from a 
 
 in a manner that is very complex when the problem is society 
 
 1 Book ii. Ch. xi. 2. He had just complained that Ricardo supposed the 
 standard of comfort to be invariable, having apparently overlooked passages such 
 as that quoted in the last note but one. He was .however well aware that 
 Ricardo's "minimum rate of wages" depended on the prevalent Standard of 
 Comfort, and had no connection with the bare necessaries of life. 
 
72 PRELIMINARY SURVEY OF DISTRIBUTION AND EXCHANGE. 
 
 BOOK vi. obscured by difference in industrial rank and ability, by sub- 
 ^ll' division into trades, and above all by the ownership of private 
 
 biem of the To make the central notion stand out clearly, let us then 
 between start not with the actual conditions of modern life, but with 
 labour do** an imaginary society, in which but little capital is used, and 
 not exist. ever y Olie owns that which he uses : and in which the gifts of 
 
 First case, J , , 
 
 in which nature are so abundant that they are free and unappro- 
 
 priated. Let us suppose that everyone is not only of equal 
 men are in* ca P ac ity> but f equal willingness to work, and does in fact 
 dustriaiiy work equally hard : also that all work is unskilled, or rather 
 unspecialized in this sense, that if any two people were to 
 change occupations, each would do as much and as good 
 work as the other had done. We may suppose also that 
 everyone produces things ready for sale without the aid of 
 others, and that he himself disposes of them to their ultimate 
 consumers : so. that the demand for everything is direct. In 
 this case the problem of value is very simple. Things 
 exchange for one another in proportion to the labour spent 
 in producing them. If the supply of any one thing runs 
 short, it may for a little time sell for more than its normal 
 price : it may exchange for things the production of which 
 had required more labour than it had. But people will at 
 once leave other work to produce it, and in a very short 
 time its value will fall to the normal level. There may be 
 slight temporary disturbances, but as a rule anyone's earnings 
 will be equal to those of anyone else. In other words, each 
 will have an equal share in the net sum total of things and 
 services produced ; or, as we may say, the National Dividend. 
 This will constitute the demand for labour; and might be 
 called the common Wages-Fund, or Earnings-Fund ; or 
 better still Earnings-stream, since a Fund fails to suggest 
 the constant flow of new goods into the world through 
 supply, which flow out again through demand and con- 
 sumption. 
 
 If now a new invention doubles the efficiency of work in 
 any trade, so that a man can make twice as many things of 
 a certain kind in a year without requiring additional appli- 
 ances, then those things will fall to half their old exchange 
 
HYPOTHETICAL CASES ILLUSTRATING THE ACTION OF DEMAND. 573 
 
 value. The effective demand for everyone's labour will be a BOOK vi. 
 little increased, and the share which he can draw from the ^fll' 
 common earnings-stream will be a little larger than before. 
 He may if he chooses take twice as many things of this 
 particular kind, together with his old allowance of other 
 things : or he may take somewhat more than before of every- 
 thing. If there be an increase in the efficiency of production 
 in many trades the common earnings-stream or dividend 
 will be considerably larger; the commodities produced by 
 those trades will constitute a considerably larger demand for 
 those produced by others, and increase the purchasing power 
 of everyone's earnings. 
 
 3. Nor will the position be greatly changed if we also iu tlle 
 suppose that some specialised skill is required in each trade, in which ' 
 provided other things remain as before : that is, provided the I^Sation? 
 workers are still supposed to be all of equal capacity and JSftJJj^. 
 industry ; and all trades to be equally agreeable and equally dustriaiiy 
 easy to be learnt. The normal rate of earnings will still not inter- 
 be the same in all trades ; for if a day's labour in one trade abfef C 
 produces things that sell for more than a day's labour 
 in others, and this inequality shows any. signs of lasting, 
 people will bring up their children by preference to the 
 favoured trade. It is true that there may be some slight 
 irregularities. The drifting from one trade to another must 
 occupy time; and some trades may for a while get more 
 than their normal share of the earnings-stream, while 
 others get less, or even lack work. But in spite of these 
 disturbances, the current value of everything will fluctuate 
 about its normal value; which will in this case, as in the I 
 preceding, depend simply on the amount of labour spent on 
 the thing : for the normal value of all kinds of labour will 
 still be equal. The productive power of the community will 
 have been increased by the division of labour ; the common 
 national dividend or earnings-stream will be larger; and 
 as all will, putting aside passing disturbances, share alike in 
 it, each will be able to buy with the fruits of his own labour 
 things more serviceable to him than he could have produced 
 for himself. 
 
 In this stage, as in those considered before, it is still 
 
574 PRELIMINARY SURVEY OF DISTRIBUTION AND EXCHANGE. 
 
 BOOK vi. true that the value of each thing corresponds closely to the 
 <"' amount of labour spent upon it ; and that the earnings of 
 everyone vary with the demand for man's work offered by 
 Nature, in the then existing state of the arts of production. 
 
 4. We have seen how, in some extreme doctrines as to 
 population, it was supposed that the real cost of rearing 
 a family was a fixed quantity ; that, if earnings rose above 
 this sum population increased rapidly, pressed against 
 Nature's steady diminishing demand for man, and forced 
 wages down. On this supposition the cost of rearing a 
 family was the absolute governor of wages, subject only 
 to slight disturbances, under an iron or brazen law. It will 
 be of service to balance against this an equally extreme 
 supposition, in which the cost of rearing and training workers 
 exercises no influence on their numbers. This case is one 
 step nearer to reality than the supposition that the numbers 
 of the people are rigidly fixed. 
 
 ami Let us conceive then that the growth of population 
 
 population proceeds at a rate, which is either fixed, or governed wholly 
 
 by other than economic causes. Thus it may be influenced 
 by changes in custom, in moral opinion and in medical 
 economic knowledge. But we are to suppose that the earnings of 
 parents are always sufficient for the immediate needs of 
 themselves and their children; that no change in their 
 earnings affects either way birth-rate or death-rate; and, 
 a more violent supposition still, that it does not affect either 
 their own willingness to work, or the physical, mental, and 
 moral strength of the rising generation. We are still sup- 
 posing all labour to be of the same grade, and the national 
 dividend to be divided out equally to each family, save for 
 some slight passing inequalities. In this case every improve- 
 ment in the arts of production or transport, every new 
 discovery, every new victory over Nature will increase equally 
 the comforts and luxuries at the command of each family. 
 
 But on the other hand, the growth of population, if 
 even a very slow rate of increase is maintained long enough, 
 must ultimately outgrow the improvements in the arts of 
 production, and cause the law of diminishing return to assert 
 itself; and the value of any kind of produce must equal 
 
HYPOTHETICAL CASES ILLUSTRATING THE ACTION OF DEMAND. 575 
 
 that of the labour, aided on our supposition by a uniform BOOKVI. 
 quantity of capital throughout, which is required to produce !_' 
 it on the margin of cultivation. (The marginal application 
 of labour may be on land that will barely repay any labour 
 at all ; or it may be that cultivation of fertile land which 
 is only just remunerative.) The surplus which is returned 
 by Nature to the labour applied under advantageous cir- 
 cumstances, may conceivably be appropriated to public uses : 
 or conceivably everyone may have an equal share of land ; 
 and in either case there will be a true surplus. But the 
 problem of Distribution and Exchange will present the 
 simple form of Nature's offering for man's labour a demand, 
 which, at all events after some considerable applications of 
 labour have been made, will be at a diminishing rate. The 
 aggregate produce is the national dividend, in which each 
 gets an equal share ; each standing to gain equally by any 
 improvement in the arts of production whether in his own 
 trade or any other 1 . 
 
 5. Next suppose that labour is not all of one industrial The same 
 grade ; but of several 2 . Suppose also that parents always 
 
 bring up their children to an occupation in their own grade, of lnauv 
 having a free choice within that grade, but not outside it. but the 
 
 . . numbers 
 
 Further, suppose that the increase of population in each grade in each 
 is governed by other than economic causes ; as before it may fJJ s e t iu 
 be fixed, or it may be influenced by changes in custom, in j^^ 8 ^ 
 moral opinion &c. In this case also the aggregate national governed 
 
 by econo- 
 
 dividend will still be governed by the abundance of Nature's mic causes. 
 return to man's work in the existing state of the arts of 
 production; but the distribution of that dividend between the 
 different grades will be unequal, and governed by demand. 
 
 For instance if artists form a grade or caste by them- 
 selves ; then, their number being fixed, or at least controlled 
 by causes independent of their earnings, their earnings will 
 be governed by the resources which the population have 
 available for spending on such gratifications as artists can 
 
 1 This illustrative case will perhaps help to bring out more clearly the 
 parallelism between a man's demand for anything, and nature's demand for man's 
 work; which are represented in outline by the laws of diminishing iitility, and 
 diminishing retui-n respectively: see footnotes on pp. 169, 235. 
 
 - Either four as Mill suggested, or any other number (see above, p. 301). 
 
576 PRELIMINARY SURVEY OF DISTRIBUTION AND EXCHANGE. | 
 
 BOOK vi. supply for them, and their desire for such gratifications. 
 Given the abundance of the national dividend, the earnings 
 of artists will be governed simply by the demand for their? 
 efforts; under some conditions of demand these earnings 
 might rise very high ; under others they might fall very low. 
 It may so happen that the progress of invention is always 
 finding new openings for one particular grade of labour, and 
 making a little of its work go further relatively to other 
 grades than before. It will then be paid at an ever in- 
 creasing rate; and as, by hypothesis, this will exercise no 
 influence on the number of people in the grade, their earnings 
 will rise without ceasing. This however is likely to be held 
 in check by the competition of some other grade of labour, 
 which may be made available in substitution for it, the 
 earnings of each being proportional to their (marginal) 
 efficiency. But we must not pursue this further just now. 
 Return to 6. We may now leave the imaginary world, in which 
 conditions everyone owns the capital that aids him in his work; and 
 which* are return to our own > wnere ^ ne relations of labour and capital 
 however pl av a great part in the problem of distribution. But let us 
 
 considered ^ J 6 \. . 
 
 only on the still, for the sake of simplicity, confine our attention to the 
 demand, manner in which the national dividend is distributed among 
 the various agents of production, in accordance with the 
 quantity of each several agent, and the services which it 
 renders. The other side of the problem, viz. the reflex in- 
 fluence which the remuneration of each agent exerts on the 
 supply of that agent, is as important as that which we are 
 discussing, though we leave it on one side for the present, to 
 be taken up in the next chapter. 
 
 butio^of 1 ^ n ^ e world to which we thus return, the action of 
 resources economic forces is largely directed by a set of men who 
 
 between . ,. jf . ~. 
 
 different specialize themselves in the organization of business, and 
 through whose agency the principle to which we have given 
 the name of the law of Substitution becomes effective. 
 
 That fundamental principle is most clearly seen when 
 we consider the distribution of the resources of an indi- 
 vidual between their various uses 1 , or to take one step 
 further, the investment of his resources for a distant return 2 . 
 
 1 Book in. Ch. v. 2 Book v. Ch. v. 
 
ACTION OF THE LAW OF SUBSTITUTION. 577 
 
 The conclusion we reached in the latter case was that each BOOK vi. 
 
 CH I 
 
 man, taking account of his own means, will push the invest- !_' 
 
 ment of his resources in each several direction until what 
 appears in his judgment to be the margin of profitableness is 
 reached ; that is, until there seems to him no good reason for 
 thinking that the gains resulting from any further invest- 
 ment in that particular direction would compensate him for 
 his outlay. The margin of profitableness is not to be 
 regarded as a mere point on any one fixed line of possible 
 investment; but as a boundary line of irregular shape cutting 
 one after another every possible line of investment 1 . 
 
 In modern life however the distribution of people's re- The 
 sources among the various agents of production is practically S "ub? 6 
 effected through the co-operation of the managers of business ^ked" 
 enterprises, and the general action of the principle ofjj irou 8 h 
 substitution may be thus described : So far as the know- of business 
 ledge and business enterprise of the producers reach, they 
 will in each case choose those factors of production which 
 are best for their purpose : the sum of the prices which they 
 pay for those factors which are used is, as a rule, less than 
 the sum of the prices which they would have to pay for any 
 other set of factors which could be substituted for them: 
 whenever it appears to the producers that this is not the 
 case, they will, as a rule, set to work to substitute the less 
 expensive method 2 . The principle thus expressed in techni- 
 cal language is in close harmony with such common sayings 
 of every-day life, as that " everything tends to find its own 
 level," that " most men earn just about what they are worth," 
 that "if one man can earn twice as much as another, that 
 shows that his work is worth twice as much," that " machi- 
 nery will displace manual labour whenever it can do the 
 work cheaper." This tendency does not indeed act without 
 hindrance. It may be restricted by custom or law, by pro- 
 fessional etiquette or trade-union regulation : it may be 
 weakened by want of enterprise, or it may be softened by a 
 generous unwillingness to part with old associates. But it 
 
 1 See p. 433. But only by mathematical language can all the many sides of 
 this problem be expressed at once with precision and brevity ; as e.g. in Note xiv. 
 
 2 See p. 419. 
 
 M. 37 
 
578 PRELIMINARY SURVEY OF DISTRIBUTION AND EXCHANGE. 
 
 BOOK vi. never ceases to act and it permeates all the economic adjust- 
 
 CH ' 1 ' ments of the modern world. 
 
 iiiustra- Thus in building there are some purposes for which bricks 
 
 tions ' would be used, even if they were much dearer relatively to 
 wood than they are ; and others for which wood would be 
 used, even if it were much dearer relatively to bricks than it 
 is : but the applications of each material will be carried just 
 so far that it would no longer be cheaper than the other 
 relatively to the advantages gained by using it. Again, 
 there are some kinds of field work for which horse-power 
 is clearly more suitable than steam-power, and vice versa: 
 but we may now suppose that there have been no great 
 recent improvements in horse or steam machinery, and that 
 therefore the experience of the past has enabled farmers 
 gradually to apply the law of substitution; and on this 
 supposition the application of steam-power will have been 
 pushed just so far that any further use of it in the place 
 of horse-power would bring no net advantage. There will 
 however remain a margin on which they could be indiffer- 
 ently applied (as Jevons would have said); and on that 
 margin the net efficiency of either will be proportionate to 
 the net cost of applying it \ 
 
 Similarly, if there are two methods of obtaining the same 
 result, one by skilled and the other by unskilled labour, that 
 one will be adopted which is the more efficient in proportion 
 to its cost. There will be a margin on which either will be 
 indifferently applied 2 . On that line the efficiency of each 
 will be in proportion to the price paid for it, account being 
 taken of the special circumstances of different districts and of 
 different workshops in the same district. In other words, 
 
 1 This margin will vary with local circumstances, as well as with the habits, 
 inclinations, and resources of individual farmers. The difficulty of applying 
 steam machinery in small fields and on rugged ground would be overcome more 
 generally in those districts in which labour is scarce than in those in which it is 
 plentiful; especially if, as is probable, coal be cheaper, and the feed of horses 
 dearer in the former than the latter. 
 
 2 Skilled manual labour being generally used for special orders and for things 
 of which not many are required of the same pattern ; and unskilled labour aided 
 by specialized machinery being used for others. The two methods are to be seen 
 side by side on similar work in every large workshop : but the position of the line 
 between them will vary a little from one workshop to another. 
 
ACTION OF THE LAW OF SUBSTITUTION. 579 
 
 the wages of skilled and unskilled labour will bear to BOOKVI. 
 one another the same ratio that their efficiencies do at ' 
 the margin of indifference. 
 
 Again, there will be a rivalry between hand-power and 
 machine-power similar to that between two different kinds 
 of hand-power or two different kinds of machine-power. 
 Thus hand-power has the advantage for some operations, as, 
 for instance, for weeding out valuable crops that have an 
 irregular growth ; horse-power in its turn has a clear ad- 
 vantage for weeding an ordinary turnip field ; and the 
 application of each of them will be pushed in each district 
 till any further use of it would bring no net advantage there. 
 On the margin of indifference between hand-power and 
 horse-power their prices must be proportionate to their 
 efficiency ; and thus the law of substitution will have esta- 
 blished directly a relation between the wages of labour and 
 the price that has to be paid for horse-power. 
 
 If we neglected differences between the grades of labour, Explicit 
 and regarded all labour as of one kind, or at least as all tS^of 
 expressed in terms of a certain kind of labour of standard to distribu- 
 efficiency, we might look for the margin of indifference jgJJ ^ e 
 between the direct application of labour and that of material b y .y on 
 capital ; and we might say shortly, to quote von Thiinen's 
 words, that " the efficiency of capital must be the measure 
 of its earnings, since if the labour of capital were cheaper 
 than that of men, the undertaker would dismiss some of his 
 workmen, and in the opposite case he would increase their 
 number 1 ." 
 
 1 Der Isolirte Staat, II. i. p. 123. He argues (ib. p. 124) that therefore " the 
 rate of interest is the element by which the relation of the efficiency of capital to 
 that of human labour is expressed"; and finally, in words which have recently 
 become famous, though he himself has gained but little credit for them, he says 
 (p. 162) : "Die Nutzung des zulezt angelegten Kapitaltheilchens bestimmt die Hb'he 
 des Zinsfusses." He had already (p. 96) enunciated a general law of diminishing 
 return for successive doses of capital in any branch of production; and what 
 he says on this subject has much historic interest, though it does not show 
 how to reconcile the fact that an increase in the capital employed in an industry 
 may increase the output more than in proportion, with the fact that a continued 
 influx of capital into an industry must ultimately lower the rate of profits earned 
 in it. His treatment of these and other great economic principles, though 
 primitive in many respects, yet stands on a different footing from his fanciful 
 and unreal assumptions as to the causes that determine the accumulation of 
 
 372 
 
580 PRELIMINARY SURVEY OF DISTRIBUTION AND EXCHANGE. 
 
 BOOK vi. But, of course, the increased competition of capital in 
 CH -*- general for employment is of a different character from the 
 competition of machinery for employment in any single 
 trade. The latter may push a particular kind of labour out 
 of employment altogether; the former cannot displace 
 labour in general, for it must cause an increased employment 
 of the makers of those things which are used as capital. 
 And in fact, the substitution of capital for labour is really 
 the substitution of labour, combined with much waiting, in 
 the place of other forms of labour combined with little 
 waiting 1 . We shall return to this subject at the end of 
 next chapter. 
 
 Marginal 7. Thus the margins of the applications of each agent 
 govern D0t of production, including land, are determined, in the sense of 
 but U are being governed, by the general conditions of demand and 
 
 ' rned supply : that is, on the one hand by the urgency of all the 
 value uses to which the agent can be put, taken together with the 
 general means at the command of those who need it; and, on the 
 of^mand other hand, by the available supplies of it, whether these are 
 and supply, fix^ as m the case of land, or capable of increase, as in the 
 case of labour. In the very act of governing the marginal uses 
 of each agent, these general conditions govern also its mar- 
 ginal net efficiency in each use ; and therefore its exchange 
 value in each use : while equality is maintained between its 
 values for each use by the constant tendency of the law of 
 substitution to shift it from uses in which its services are of 
 less value to others in which they are of greater 2 . 
 
 capital, and as to the relations in which wages stand to the stock of capital. From 
 these he deduces the quaint result that the natural rate of wages of labour is 
 the geometric mean between the labourer's necessaries, and that share of the pro- 
 duct which is due to his labour when aided by capital. By the natural rate he 
 means the highest that can be sustained ; if the labourer were to get more than 
 this for a tune, the supply of capital would, von Thiinen argues, be so checked as 
 to cause him in the long run to lose more than he gained. 
 
 1 As von Thiinen was well aware. Ib. p. 127. 
 
 a An objection raised by some critics that the part played by the marginal use 
 of an agent of production is represented, in modern economics, as governing the 
 whole, is thus seen to rest on a misapprehension. The withdrawal of iron from 
 any of its necessary uses would have just the same influence on its value as its 
 withdrawal from its marginal uses ; in the same way as in the case of a boiler for 
 cooking under high pressure, the pressure in the boiler would be affected by the 
 escape of any other steam just as it would by the escape of the steam in one of 
 
RELATION OF MARGINAL USES TO VALUE. 581 
 
 As a rule many kinds of labour, of raw material, of BOOKVI. 
 
 machinery and other plant, and of business organization both U 
 
 internal and external, go to the production of a commodity : 
 and the advantages of economic freedom are never more 
 strikingly manifest than when a business man endowed with 
 genius is trying experiments, at his own risk, to see whether 
 some new method, or combination of old methods will not be 
 more efficient than the old. Every business man indeed accord- 
 ing to his energy and ability is constantly endeavouring to 
 obtain a notion of the relative efficiency of every agent of pro- 
 duction that he employs, as well as of others that might possibly 
 be substituted for some of them. He works generally by trained 
 instinct rather than formal calculation ; but his processes are 
 substantially similar to those indicated in our study of derived 
 demand. That is, he estimates as best he can how much 
 net addition to the value of his total product will be caused 
 by a certain extra use of any one agent ; net that is after 
 deducting for any extra expenses that may be indirectly 
 caused by the change, and adding for any incidental savings. 
 The result is the net product of that agent, and he endeavours 
 to employ each up to that margin at which its net product 
 would no longer exceed the price he would have to pay 
 for it 1 . 
 
 8. We have already followed some simple estimates lliustra- 
 of this sort. We have noticed, for instance, how the propor- the way 
 
 in which 
 the net 
 
 the safety valves : but in fact the steam does not escape except through the safety 
 valves; and iron, or any other agent of production, is not thrown out of use 
 except at points on its marginal use. See above, p. 475, and compare the 
 illustration taken from the derived demand for plasterers' labour, in Book v. 
 Ch. vi. 
 
 1 The change might be such as could only be made on a large scale ; as for 
 instance the substitution of steam power for hand power in a certain factory ; and 
 in that case there would be a certain element of uncertainty and risk in the 
 change. Such breaches of continuity are however inevitable both in production 
 and consumption if we regard the action of single individuals. But as there is a 
 continuous demand in a large market for hats and watches and wedding cakes, 
 though no individual buys many of them (see Book in. Ch. in. 5), so there will 
 always be trades in which small businesses are most economically conducted 
 without steam power, and larger businesses with ; while businesses of intermediate 
 size are on the margin. Again there will always be some things done by hand 
 power even in large establishments in which steam is already in use, which are 
 done by steam power elsewhere (see above, 6). 
 
BOOK vi. 
 CH - T - 
 
 582 PRELIMINARY SURVEY OF DISTRIBUTION AND EXCHANGE. 
 
 tion of hops and malt in ale can be varied, how the extra 
 price which can be got for ale by increasing the quantity of 
 product hops i n it is a representative of the causes which govern the 
 agent of demand price for hops. Assuming that no further trouble or 
 ?n^ U be tlOU expense of any kind is involved by this additional use of 
 estimated. ^^ aiid ^^ ^ ex p e( jiency of using this extra amount is 
 doubtful, the extra value thus given to the ale is the marginal 
 net product of the hops of which we are in search 1 . In this 
 case, as in most others, the net product is an improvement 
 in quality or a* general contribution to the value of the 
 product ; it is not a definite part of the produce which can 
 be separated from the rest. But in exceptional cases that 
 can be done. 
 
 Thus suppose an employer in doubt whether he has enough 
 labour to turn his stock, machinery and other trade appli- 
 ances to good account ; and whether he could not, by hiring 
 one more man, increase the production by more than the 
 equivalent of his wages, without having to supply additional 
 capital in any other way. A sheep farmer, for instance, 
 may be in doubt whether his staff of shepherds is suffi- 
 cient. He may find that if he hired an additional man, 
 without making any other change, and without incurring 
 any extra expenditure for implements, buildings &c., then 
 so many more lambs will be kept alive, and the flocks 
 generally so much better cared for, that he may expect to 
 send to market twenty more sheep every year. This man will 
 require no extra plant on which interest has to be charged ; 
 and he may be supposed to save the farmer himself just 
 as much trouble in some ways as he gives in others, so that 
 nothing has to be allowed for earnings of management (even 
 when these are interpreted broadly so as to include insurance 
 against risk &c.). Then the net produce of that shepherd's 
 labour will be twenty sheep : if the farmer can hire him for 
 ever so little less than the price of twenty sheep, he will 
 decide to do so; otherwise not. The shepherd who is on 
 the margin of not being employed the marginal shepherd, 
 
 1 See p. 457, and Mathematical Note xvi. See also other illustrations in 
 Book v. Ch. vi. and vn. 
 
NET PRODUCT OF AN AGENT OF PRODUCTION. 583 
 
 as we may call him adds to the total produce a net value BOOK vi. 
 
 J CH. I. 
 
 just equal to his own wages 1 . 
 
 It must however be remembered that the price which it 
 is just worth while for the farmer to pay for this labour, 
 merely gauges the outcome of multitudinous causes which 
 between them govern the wages of shepherds ; as the move- 
 ments of a safety valve may gauge the outcome of the multi- 
 tudinous causes that govern the pressure in a boiler 2 . 
 
 This illustration has been chosen from a simple industry ; 
 but, though the form may be different, the substance of the 
 problem is the same in every industry. Subject to conditions 
 
 1 Theoretically a deduction from this has to be made for the fact that 
 by throwing twenty extra sheep on the market, the farmer will lower the 
 price of sheep generally, and therefore lose a little on his other sheep. This 
 correction may be of appreciable importance in special cases. But in general 
 discussions such as this, in which we are dealing with a very small addition to the 
 supply thrown by one of many producers on a large market, it becomes very 
 small (mathematically a small quantity of the second order), and may be 
 neglected. In the case of a monopolist who supplied the whole of a market, we 
 had to take account of it ; and also when discussing the considerations that induce 
 any producer, or association of producers to abstain from "spoiling" that par- 
 ticular branch of a large market with which they are directly connected, especially 
 in times of depression. This point is discussed at some length in Mathematical 
 Note xrv. ; the whole of which has a close bearing on this section, and the reader 
 may be asked to reckon it in as part of the present discussion. 
 
 2 The fact that this marginal shepherd added twenty to the sheep whom the 
 farmer could send to market rested no doubt on physical laws, given the conditions 
 under which he worked. But those conditions include the amount of land at the 
 farmer's disposal which is influenced by the demand for land for raising timber, oats, 
 deer etc. Again the conditions include the number of shepherds that the farmer 
 already has ; and that is governed by the general conditions of the broad problem 
 of distribution and exchange, and in particular by the number of those from whom 
 the ranks of shepherds could have been recruited during the current generation, 
 by the demand for mutton and wool and by the area from which supplies of them 
 can be obtained, and by the effectiveness of the shepherds on all other farms. 
 
 Further the net product of the shepherd in the exceptional case which we 
 have chosen, plays no greater part in governing the wages of shepherds, than 
 does that of any of the last (marginal) shepherds on farms where they cannot 
 be profitably employed without considerable extra outlay in other directions, as for 
 land, buildings, implements, labour of management, &c. Thus the net product of 
 such shepherds cannot be ascertained simply ; but it is a case of derived demand 
 (see Book v. Ch. vi.), and requires us to take account of the prices which have 
 to be paid for the aid of all these other agents of production. It will be noticed 
 that this holds with regard to all agents of production, however they may differ 
 from one another on the side of supply. It is as true of " land," which is of fixed 
 aggregate quantity, and of which the value is uninfluenced even in the long run 
 by cost of production ; as it is of labour and capital, of which the ultimate values 
 are determined by laws of demand and supply co-ordinately. 
 
584 
 
 BOOK vi. 
 CH - T - 
 
 The 
 use of C 
 
 merits 
 
 PRELIMINARY SURVEY OF DISTRIBUTION AND EXCHANGE. 
 
 which are indicated in the foot-note, but are not important 
 for our main purpose, the wages of every class of labour tend 
 to be equal to the net produce due to the additional labour 
 of the marginal labourer of that class \ 
 
 It may be objected that the doctrine that the earnings of 
 a worker tend to be equal to the net produce of his work, 
 has by itself no real meaning ; since in order to estimate " net 
 produce," we have to take for granted all the expenses of 
 production of the commodity on which he works, other than 
 his own wages. The objection is valid against a claim that 
 it contains a theory of wages ; but not against a claim that 
 the doctrine throws into clear light the action of one of the 
 causes that govern wages. For indeed it is always a difficult 
 task to hold in mind at one and the same time all the actions 
 and reactions of a great number of causes which mutually 
 determine one another ; and although the able business man 
 
 1 This method of illustrating the net produce of a man's labour is not easily 
 applicable to industries in which a great deal of capital and effort has to be 
 invested in gradually building up a trade connection, and especially if they are 
 such as obey the law of increasing return. In both cases there is a difficulty of 
 accounts, making it almost impossible to decide what part of the gains of the 
 business would have been lost for want of the services of any individual worker. 
 (See Book v. ch. vn. 1, 2 and ch. xi. 2.) But in the latter case there is 
 a second and more .fundamental difficulty. For the employer, in taking on an 
 additional worker, may estimate only for the direct good that that man's work 
 will do to his business : whereas to find the total net product of the man's work, 
 even from the employer's point of view, account should also be taken of the part 
 which it plays in enabling the business to avail itself of the economies of 
 production on a large scale. The employer, if of an enterprising temperament, 
 may take account of these also : but there is still something omitted. The increase 
 in the size of that business will tend to increase the demand for subsidiary 
 industries ; and in other ways to increase the (external) economies available for 
 other businesses in the same trade: and, since this additional gain to the 
 community will not accrue to the employer himself, it cannot be expected that he 
 should hand it on to the workman. The question why this extra gain, accruing 
 to the undertaker in such an industry from an increase in his business, does not 
 ultimately cause the whole industry to fall into the hands of one large firm, has 
 been discussed in Book rv. Ch. xn. On the whole subject see Book v. Ch. xi. and 
 the summary of that chapter on pp. 554 6. 
 
 This is indeed a special application of that general failure of the so-called 
 doctrine of Maximum Satisfaction which we have already noticed (Book v. 
 Ch. xn.). For independently of such considerations as that a great benefit to 
 a poor man will be outweighed in the balance of market exchange by a small 
 benefit to a rich man, that doctrine fails in the case of industries which obey the 
 law of increasing return; because the payment which any particular worker or 
 employer receives in those industries is less than the true equivalent of the net 
 product of his services to the community. 
 
THE DEMAND FOR CAPITAL. 585 
 
 acquires a sort of instinct that enables him to do it as regards BOOK vi. 
 his own affairs, and much of the higher training of science ' 
 is devoted to acquiring a more general power of the kind ; yet 
 everyone finds his task lightened, when he breaks up a diffi- 
 cult problem, and takes one part of it at a time. The strain 
 necessarily involved by the problem of Distribution and Ex- 
 change, is so great that we should avail ourselves of every aid. 
 
 9. In later chapters we shall need to take other Remarks 
 illustrations for special purposes of the principle illustrated fSSar 7 
 in the last section from the case of manual labour; and in 
 particular to show how the value of some parts of the work 
 of business management can be measured, when it is found 
 that the effective output of a business is increased as much 
 by some additional superintendence, as it would be by the hire 
 of an additional ordinary worker. Again, the earnings of a 
 machine can sometimes be estimated by the addition to the 
 output of a factory which it might effect in certain cases with- 
 out involving any incidental extra expense. 
 
 Generalizing from the work of a particular machine to 
 that of machinery of a given aggregate value, it may be 
 said that in a certain factory an extra 100 worth of 
 machinery can be applied so as not to involve any other 
 extra expense, and so as to add annually 3 worth to the 
 net output of the factory, after allowing for its own wear and 
 tear. If the investors of capital push it into every occupation 
 in which it seems likely to gain a high reward ; and if, after 
 this has been done and equilibrium has been found, it still 
 pays and only just pays to employ this machinery, we can 
 infer from this fact that the yearly rate of interest is three 
 per cent. But illustrations of this kind merely indicate part 
 of the action of the great causes which govern value. They 
 cannot be made into a theory of interest, any more than into 
 a theory of wages, without reasoning in a circle, 
 
 It may however be well to push a little further our illus- 
 tration of the nature of the demand for capital for any use ; 
 and to observe the way in which the aggregate demand for 
 it is made up of the demands for many different uses. 
 
 To fix the ideas, let us take some particular trade, say nius- 
 that of hat-making, and inquire what determines the amount o 
 
586 PRELIMINARY SURVEY OF DISTRIBUTION AND EXCHANGE. 
 
 BOOK vi. of capital which it absorbs. Suppose that the rate of interest 
 is 3 per cent. 1 per annum on perfectly good security; and 
 
 capital * ^at tne h at - makm g trade absorbs a capital of one million 
 na . pounds. This implies that the hat-making trade can turn 
 trade CU * * the whole million pounds' worth of capital to so good account 
 that they would pay 3 per cent, per annum net for the use 
 of it rather than go without any of it. 
 
 Some things are necessary to them ; they must have 
 not only some food, clothing, and house room, but also some 
 Circulating capital, such as raw material, and some Fixed 
 capital, such as tools and perhaps a little machinery. And 
 though competition prevents anything more than the ordinary 
 trade profit being got by the use of this necessary capital ; yet 
 the loss of it would be so injurious that those in the trade 
 would have been willing to pay 50 per cent, on it, if they 
 could not have got the use of it on easier terms. There 
 may be other machinery which the trade would have refused 
 to dispense with if the rate of interest had been 20 per cent. 
 per annum, but not if it had been higher. If the rate had 
 been 10 per cent., still more would have been used ; if it had 
 been 6 per cent., still more ; if 4 per cent., still more ; and 
 finally the rate being 3 per cent, they use more still. When 
 they have this amount, the marginal utility of the machinery, 
 i.e. the utility of that machinery which it is only just worth 
 their while to employ, is measured by 3 per cent. 
 
 A rise in the rate of interest would diminish their use 
 of machinery ; for they would avoid the use of all that did 
 not give a net annual surplus of more than 3 per cent, on its 
 value. And a fall in the rate of interest would lead them to 
 demand the aid of more capital, and to introduce machinery 
 which gave a net annual surplus of something less than 3 per 
 cent, on its value. Again, the lower the rate of interest, the 
 more substantial will be the style of building used for the 
 hat-making factories and the homes of the hat-makers ; and 
 a fall in the rate of interest will lead to the employment of 
 more capital in the hat-making trade in the form of larger 
 
 1 The charge made to traders for loans is generally much more than 3 per cent. 
 per annum ; but as we shall see in Chapter vi. it includes other things besides time 
 Net interest. 
 

 THE DEMAND FOR CAPITAL. 587 
 
 stocks of raw material, and of the finished commodity in the BOOK vi. 
 hands of retail dealers 1 . ' 
 
 The methods in which capital will be applied may vary The 
 much even within the same trade. Each undertaker having demand for 
 regard to his own means, will push the investment of capital ca P ltal - 
 in his business in each several direction until what appears in 
 his judgment to be the margin of profitableness is reached ; 
 and that margin is, as we have said, a boundary line cutting 
 one after another every possible line of investment, and 
 moving irregularly outwards in all directions whenever there 
 is a fall in the rate of interest at which extra capital can 
 be obtained. Thus the demand for the loan of capital is the 
 aggregate of the demands of all individuals in all trades; 
 and it obeys a law similar to that which holds for the sale 
 of commodities : just as there is a certain amount of a 
 commodity which can find purchasers at any given price. 
 When the price rises the amount that can be sold diminishes, 
 and so it is with regard to the use of capital. 
 
 And as with borrowings for productive purposes, so with 
 those of spendthrifts or Governments who mortgage their 
 
 1 Compare Book v. Ch. iv., and Jevons's Theory, Chapter vn. on the " Advan- 
 tage of Capital to Industry." Jevons however, like some later writers, appears 
 to have regarded this doctrine as reaching further than it does towards a 
 complete theory of the causes which govern interest; and in view of recent 
 discussions it may be permissible to reproduce from the Academy for April 1, 1872, 
 a criticism of his " General expression for the rate of interest " in the same chapter. 
 "To put part of [Jevons'] argument in another way: Suppose that A and B 
 employ the same capital in producing hats by different processes. If A's process 
 occupies a week longer than B's, the number of hats he obtains, in excess of the 
 number obtained by B, must be the interest for a week on the latter number. 
 Thus the rate of interest is expressed as the ratio of two numbers without the aid 
 of any theory of value : expressed but not determined " [in the sense of governed].... 
 ' The relative productiveness of slow and rapid processes of manufacture is but one 
 of the determining causes of the rate of interest : if any other cause made this fall, 
 .B's process would be abandoned. The rate of interest affects the duration of the 
 remunerative processes of manufacture, no less than it is affected by it. Just as 
 the motion of every body in the solar system affects and is affected by the motion 
 of every other, so it is with the elements of the problem of political economy. It 
 is right and necessary to break up the problem; to neglect for the time the 
 influence of some elements; to investigate the variations of any one element 
 which must, cceteris paribus, accompany certain assumed variations in one or 
 more others. Such investigations give results which, even as they stand, are 
 roughly applicable to certain special cases. But this does not justify us in 
 speaking, in general, of one element as determined by another ; as for instance, of 
 value as determined by cost of production, or of wages as determined by value." 
 
588 
 
 PRELIMINARY SURVEY OF DISTRIBUTION AND EXCHANGE. 
 
 BOOK VI. 
 CH. I. 
 
 Further 
 
 general 
 of the 
 dividend, 
 
 future resources in order to obtain the means of immediate 
 expenditure. It is true that their actions are often but 
 little governed by cool calculation, and that they frequently 
 decide how much they want to borrow with but little 
 reference to the price they will have to pay for the loan ; 
 but still the rate of interest exercises a perceptible influence 
 on borrowings even of this kind. 
 
 10. There is one more difficulty connected with the 
 demand for the various agents of production, which we must 
 consider before we end this chapter and enter on the study 
 of the mutual relations of demand and supply for those 
 agents. The difficulty relates to the mode of estimating 
 the national dividend. 
 
 When we speak of the national dividend, or distributable 
 net income of the whole nation, as divided into the shares of 
 land, labour and capital, we must be clear as to what things 
 we are including, and what things we are excluding. It will 
 seldom make very much difference to our argument whether 
 we use all the terms broadly, or all the terms narrowly. 
 But it is essential that our usage should be consistent 
 throughout any one argument ; and that whatever is in- 
 cluded on one side of the account of the demand for, and 
 supply of, capital should be included also on the other. 
 
 The labour and capital of the country, acting on its 
 natural resources, produce annually a certain net aggre- 
 gate of commodities, material and immaterial, including 
 services of all kinds. This is the true net annual income, 
 or revenue, of the country; or, the national dividend. We 
 may, of course, estimate it for a year or for any other period ; 
 the important point is, as already hinted, that it is a con- 
 tinuous stream always flowing, and not a reservoir or store, 
 or in the narrower sense of the word a " Fund 1 /' The 
 terms National Income and National Dividend are con- 
 vertible; only the latter is the more convenient when we 
 are looking at the national income in the character of the 
 sum of the new sources o.f enjoyments that are available for 
 distribution. 
 
 1 See above, p. 572. In Prof. Newcomb's words it is a Flow and not a Fund. 
 (See his Political Economy, Book iv. Ch. i.) 
 
CORRELATIVE DEFINITIONS OF INCOME, LABOUR AND CAPITAL. 589 
 
 We have already noticed that many of the services which BOOK vi. 
 a person renders to himself are not in practice counted as CH ' *' 
 part of his income ; though if they were performed for him ^g^?, 11 
 by a valet or hairdresser they would be reckoned among the followed in 
 
 J-.L- / j \ I_-T_I_ i- delimiting 
 
 commodities (or economic goods) on which he spent his income, 
 
 means : that is, they would be reckoned as part of his real 
 income. We have noticed also that though the benefits which 
 a man derives from living in his own house are commonly which 
 reckoned as part of his real income, and estimated at the from the 
 net rental value of his house ; the same plan is not followed 
 with regard to the benefits which he derives from the use of 
 his furniture and clothes. It is best here to follow the 
 common practice, and not count as part of the national 
 income or dividend anything that is not commonly counted 
 as part of the income of the individual. Thus, unless any- 
 thing is said to the contrary, the services which a person 
 renders to himself, and those which he renders gratuitously 
 to members of his family or friends ; the benefits which he 
 derives from using his own personal goods, or public property 
 such as toll-free bridges, are not reckoned as parts of the 
 national dividend, but are left to be accounted for separately 1 . 
 
 1 It would be possible, and, for some theoretical purposes, it would be best to 
 include them : but if they are included in the national dividend, the efforts and 
 the material wealth which are their sources must be counted as part of the labour 
 and capital which are agents of production; and the services and the benefits 
 themselves must be counted as earnings of labour or interest on capital as the 
 case may be. It will be recollected that in Book n. Ch. iv., the standard delimita- 
 tions of Capital and Income were chosen specially with reference to this their 
 most important use. 
 
 ; It is to be understood that the excess of profits over interest is here provi- 
 
 \sionally reckoned among earnings, subject to a stricter analysis at a later stage. 
 
 Speaking broadly, taxes may be regarded as those parts of the national dividend 
 
 .which the community elects to devote to the expenses of Government ; the share 
 
 | of taxes which the merchant pays may be regarded as coming out of his profits, 
 
 those which the working-man pays as coming out of his wages ; and so on. There 
 
 are, however, some cases in which it is convenient to regard taxes as a distinct 
 
 share of the Dividend ; and to regard the other shares as modified accordingly. 
 
CHAPTER II. 
 
 PRELIMINARY SURVEY OF DISTRIBUTION AND EXCHANGE, 
 CONTINUED. 
 
 BOOK vi. 1. Ricardo and the able business men who followed in 
 CH ' n> his wake were familiar with such facts as those which we 
 
 have been considering. But they took the operation of 
 followers demand too much for granted as a thing which did not 
 familiar need to be explained: they did not emphasize it, nor did 
 actiorfof they make clear the important position which it really holds 
 the law of m their doctrine of value, and did not even trouble them- 
 
 SUDStltU- 
 
 tion, but selves to work out its more remote results. And they seem 
 
 tllGV Ifticl 
 
 insufficient to have been rightly guided by their intuitions, when they 
 tke^idsof silently determined that the forces of supply were those, the 
 and""" 1 ' ^dy f which was the more urgent and involved the greater 
 th . e difficulty. But it must be confessed that their partial neglect 
 
 reaction . m 
 
 too ex- of the forces of demand has given occasion to much confusion, 
 
 elusive 
 
 importance and has obscured important truths. And in the reaction, as 
 assigned we nave j ust seen, too much insistence has been laid on the 
 fact that the earnings of every agent of production come 
 from, and are for the time mainly governed by the value of 
 the product which it takes part in producing ; its earnings 
 being so far governed on the same principle as the rent of 
 land. And some have even thought it possible to constitute 
 a complete theory of Distribution out of multifold applications 
 of the law of rent. But they will not reach to that end. 
 
 When we inquire what it is that determines the marginal 
 efficiency of a factor of production, whether it be any kind of 
 labour or material capital, we find that the immediate solu- 
 tion requires a knowledge of the available supply of that 
 
INFLUENCES OF DEMAND AND SUPPLY ARE COORDINATE. 591 
 
 factor ; and that the ultimate solution requires a knowledge BOOK vi. 
 also of the causes that determine that supply. The nominal f^- 
 value of everything, whether it be a particular kind of labour 
 or capital or anything else, rests, like the keystone of an arch, 
 balanced in equilibrium between the contending pressures of 
 its two opposing sides; the forces of demand press on the 
 one side, and those of supply on the other. 
 
 The production of everything, whether an agent of pro- The 
 duction or a commodity ready for immediate consumption, is and prices 
 carried forward up to that limit or margin at which there is 
 
 equilibrium between the forces of demand and supply. The agents of 
 
 . rr J production 
 
 amount of the thing and its price, the amounts of the several mutually 
 factors or agents of production used in making it, and their one"" 
 prices all these elements mutually determine one another, another - 
 and if an external cause should alter any one of them the 
 effect of the disturbance extends to all the others. 
 
 In the same way, when several balls are lying in a bowl, Parallel 
 they mutually determine one another's positions ; and again 
 when a heavy weight is suspended by several elastic strings 
 of different strengths and lengths attached to different points 
 in the ceiling, the equilibrium positions of all the strings and 
 of the weight mutually determine one another. If any one 
 of the strings that is already stretched is shortened, every- 
 thing else will change its position, and the length and the 
 tension of every other string will be altered also. 
 
 And though (if we neglect certain elements of prime cost) 
 the earnings of each agent are for the time of the nature 
 of a rent: yet those earnings react on the supply of the 
 agent; and therefore on the amount and therefore on the 
 value of the produce raised by it ; and therefore on the 
 demand for the agent itself, and therefore on its earnings, 
 and thus the chain of reciprocal influences is complete. But 
 the doctrine of rent, properly so called, relates to those agents 
 of production of which the supply cannot be increased, and 
 is unaffected by the earnings to be gained by increasing the 
 supply. And those earnings of agents of production which 
 we have called quasi-rents, because they are mainly governed 
 for short periods by the value of the products, are governed 
 ultimately by the laws of supply at least as much as by the 
 
592 PRELIMINARY SURVEY OF DISTRIBUTION AND EXCHANGE. 
 
 BOOK vi. laws of demand. To make this clear, it will be well to turn 
 CH ' "' back and recall the substance of our studies of the supply of 
 
 the agents of production in Books iv. and v. 
 influence R 2. We have seen that the effective supply of any 
 
 of his re- * . i . / - i i 
 
 numeration agent of production at any time depends firstly on the stock 
 of it in existence, and secondly on the willingness of those, 
 
 1 w ^ ose cnar > e ^ i s > to a PPty i fc m Production. This 
 willingness is not decided simply by the immediate return 
 which is expected; though there may be a lower limit, which 
 in some cases may be described as a prime cost, below which 
 no work will be done at all. A manufacturer for instance 
 has no hesitation in declining to put his machinery in 
 motion for an order that will not cover the extra direct 
 money outlay caused by the work, together with the actual 
 wear and tear of the machinery; while there are somewhat 
 similar considerations with regard to the wear and tear of the 
 worker's own strength and to the fatigue and other discom- 
 modities of his work. And, though for the present we are con- 
 cerned with cost and remuneration under normal conditions 
 rather than with the direct cost to the individual of any par- 
 ticular piece of work that he does : yet it may be well to 
 make a short statement about them here in order to avoid 
 misconceptions 1 . 
 
 Sometimes! It has already been noticed 2 that when a man is fresh and 
 
 Deration 1 "/ eager, and doing work of his own choice, it really costs him 
 
 super"** ! notnm g- For as some socialists have urged with pardonable 
 
 fluous, exaggeration, few people know how much they enjoy mode- 
 
 rate work, till something occurs to prevent them from 
 
 working altogether. But rightly or wrongly, most persons 
 
 believe that the greater part of the work which they do, 
 
 when earning their living, yields them no surplus of pleasure ; 
 
 but on the contrary costs them something. They are glad 
 
 when the hour for stopping arrives: perhaps they forget that 
 
 the earlier hours of their work have not cost them as much 
 
 as the last : they are rather apt to think of nine hours' work 
 
 as costing them nine times as much as the last hour ; and 
 
 lit seldom occurs to them to think of themselves as reaping 
 
 1 Especially in view of some recent discussions in Austria and America. 
 
 2 See Book i. Ch. v. 6, Book n. Ch. m. 2, and Book iv. Ch. i. 2, and Ch. xi. 1. 
 
INFLUENCE OF REMUNERATION ON WILLINGNESS TO WORK. 593 
 
 a producer's surplus or rent, through being paid for every BOOKVI. 
 hour at a rate sufficient to compensate them for the last, and ^fll 1 ' 
 most distressing hour 1 . 
 
 The longer a man works, or even is on duty, the greater but 
 is his desire for a respite, unless indeed he has become though not 
 numbed by his work ; while every hour's additional work Ceased 
 gives him more pay, and brings him nearer to the stage at jemunera- 
 which his most urgent wants are satisfied ; and the higher stimulate^ 
 the pay, the sooner this stage is reached. It depends then creased 
 on the individual, whether with growing pay new wants arise, exert 
 and new desires to provide comforts for others or for himself 
 in after years ; or he is soon satiated with those enjoyments 
 that can be gained only by work, and then craves more rest, and 
 
 1 Recent discussions on the eight hours day have often turned very little on 
 the fatigue of labour; for indeed there is much work in which there is so 
 little exertion, either physical or mental, that what exertion there is counts 
 rather as a relief from ennui than as fatigue. A man is on duty, bound to be 
 ready when wanted, but perhaps not doing an hour's actual work in the day; and 
 yet he will object to very long hours of duty because they deprive his life of 
 variety, of opportunities for domestic and social pleasures, and perhaps of 
 comfortable meals and rest. 
 
 If a man is free to cease his work when he likes, he does so when the advan- 
 tages to be reaped by continuing seem no longer to over-balance the disadvantages. 
 If he has to work with others, the length of his day's work is often fixed for him ; 
 and in some trades the number of days' work which he does in the year is practically 
 fixed for him. But there are scarcely any trades, in which the amount of exertion 
 which he puts into his work is rigidly fixed. If he be not able or willing to work up 
 to the minimum standard that prevails where he is, he can generally find employment 
 in another locality where the standard is lower ; while the standard in each place is 
 set by the general balancing of the advantages and disadvantages of various in- 
 tensities of work by the industrial populations settled there. The cases therefore 
 in which a man's individual volition has no part in determining the amount of 
 work he does in a year, are as exceptional as the cases in which a man has to live in 
 a house of a size widely different from that which he prefers, because there is none 
 other available. It is true that a man who would rather work eight hours a day 
 than nine at the same rate of tenpence an hour, but is compelled to work nine hours 
 or none, suffers a loss from the ninth hour, or reaps a negative rent from it ; and 
 that in such cases one must take the day as the unit. But the general law of costs 
 is not disturbed by this fact, any more than the general law of utility is disturbed 
 by the fact that a concert or a cup of tea has to be taken as a unit : and that a 
 person who would rather pay five shillings for half a concert than ten for a whole, 
 or twopence for half a cup of tea than fourpence for a whole cup, incurs a loss on 
 the second half. There seems therefore to be no good foundation for the sugges- 
 tion made by Prof. v. Bbhm-Bawerk (The Ultimate Standard of Value, iv. 
 published in the Zeitschrift fur Volkswirtschaft, vol. n. and again in the Annals 
 of American Academy, vol. v.), that value must be determined generally by demand, 
 without direct reference to cost, because the effective supply of labour is a fixed 
 quantity. 
 
 M. 38 
 
594 
 
 PRELIMINARY SURVEY OF DISTRIBUTION AND EXCHANGE. 
 
 BOOK VI. 
 CH. II. 
 
 The de- 
 
 in the 
 long run 
 of the 
 supply of 
 efficient 
 labour on 
 the rate of 
 earnings 
 and the 
 manner 
 in which 
 they are 
 spent. 
 
 more opportunities For activities, that are themselves pleasur- 
 able. No universal rule can be laid down; but experience 
 seems to show that the more ignorant and phlegmatic of 
 races and of individuals, especially if they live in a southern 
 clime, will stay at their work a shorter time, and will exert 
 themselves less while at it, if the rate of pay rises so as to 
 give them their accustomed enjoyments in return for less work 
 than before. But those whose mental horizon is wider, and 
 who have more firmness and elasticity of character, will work 
 the harder and the longer the higher the rate of pay which 
 is open to them ; unless indeed they prefer to divert their 
 activities to higher aims than work for material gain. But 
 this point will need to be discussed more fully under the head 
 of the influence of progress on value 1 . 
 
 3. When however we turn from the immediate influence 
 exerted by a rise in wages on the work done by an individual 
 to its ultimate effect after a generation or two, the result is 
 less uncertain. It is indeed true that a permanent increase 
 of prosperity is quite as likely to raise as to lower the birth- 
 rate ; though a temporary improvement will give a good many 
 young people the opportunity to marry and set up house, for 
 which they have been waiting. But on the other hand, an 
 increase of wages is almost certain to diminish the death-rate, 
 unless it has been obtained at the price of the neglect by 
 mothers of their duties to their children. And the case is 
 much stronger when we look at the influence of high wages 
 on the physical and mental vigour of the coming generation. 
 For each grade of work there is a certain consumption 
 
 1 See Ch. xn. Bad harvests, war prices, and convulsions of credit have at 
 various times compelled some workers, men, women and children, to over-work 
 themselves. And cases of ever-increasing exertion in return for a constantly 
 sinking wage, though not as numerous now as is often alleged, have not been very 
 rare in past times. They may be compared with the exertions of a failing firm 
 to secure some return for their outlay by taking contracts at little more than 
 enough to recompense them for their prime, or special and direct cost. And on 
 the other hand almost every age, our own perhaps less than most others, has stories 
 of people who in a sudden burst of prosperity, have contented themselves with the 
 wages to be earned by very little work, and have thus contributed to bring the 
 prosperity to a close. But such matters must be deferred till after a study of 
 commercial fluctuations. In ordinary times the artisan, the professional man or 
 the capitalist undertaker decides, as an individual or as a member of a trade 
 association, what is the lowest price against which he will not strike. 
 
INFLUENCE OF REMUNERATION ON POWER TO WORK. 595 
 
 which is strictly speaking necessary in this sense, that if any of BOOK vi. 
 it is curtailed the work cannot be done efficiently : the adults __' 
 might indeed take good care of themselves at the expense of 
 their children, but that would only defer the decay of effici- 
 ency for one generation. Further there are conventional 
 necessaries, which are so strictly demanded by custom and 
 habit, that in fact people generally would give up much of 
 their necessaries strictly so called rather than go without the 
 greater part of these. Thirdly there are habitual comforts, 
 which some, though not all, would not entirely relinquish even 
 when hardly pressed. Many of these conventional necessaries 
 and customary comforts are the embodiment of material and 
 moral progress. Their extent varies from age to age and 
 place to place ; and with its variations there is a corre- 
 sponding but inverse variation in the extent to which man, 
 himself always the sole end of all production, is also an 
 economical agent of production. 
 
 Any increase in consumption that is strictly necessary to The 
 efficiency pays its own way and adds to, as much as it draws labour 
 from, the national dividend. But an increase of consumption, 
 that is not thus necessary, can be afforded only through an 
 increase in man's command over nature : and that can come for it when 
 
 11 t> there is 
 
 about through advance in knowledge and the arts of no great 
 production, through improved organization and access to 
 larger and richer sources of raw material, and lastly through 
 the growth of capital and the material means of attaining necessary 
 
 & for efficient 
 
 desired ends in any form. work. 
 
 Thus the question how closely the supply of labour 
 responds to the demand for it, is in a great measure resolved 
 into the question how great a part of the present consumption 
 of the people at large consists of necessaries, strictly so called, 
 for the life and efficiency of young and old ; how much consists 
 of conventional necessaries which theoretically could be dis- 
 pensed with, but practically would be preferred by the majority 
 of the people to some of those things that were really necessary 
 for efficiency ; and how much is really superfluous regarded 
 as a means towards production, though of course part of it 
 may be of supreme importance regarded as an end in itself. 
 
 The earlier French and English economists, as we noted 
 
 382 
 
596 PRELIMINARY SURVEY OF DISTRIBUTION AND EXCHANGE. 
 
 BOOK vi. at the beginning of this chapter, classed nearly all con- 
 CH ' "' sumption under the first head. They did so, partly for 
 M S cTt X simplicity, and partly because the working classes were then 
 of the poor in England and very poor in France, and they inferred 
 classes 8 that the supply of labour would correspond to changes in the 
 tTefficf- 8 effective demand for it in the same way, though of course 
 backward no ^ Q^e as fast as that of machinery would. And an 
 countries, answer not very different from theirs must be given to the 
 question with regard to the less advanced countries even now : 
 for throughout the greater part of the world the working 
 classes can afford but few luxuries and not even many con- 
 ventional necessaries ; and any increase in the demand for 
 them made by the other agents of production would result in 
 so great an increase of their numbers as to bring down their 
 earnings quickly to nearly the old level at their mere 
 expenses of rearing. Over a great part of the world wages 
 are governed, nearly after the so-called iron or brazen law, 
 which ties them close to cost of rearing, and sustaining 
 a rather inefficient class of labourers. 
 
 and even As regards the modern western world the answer is 
 western materially different ; so great has been the recent advance in 
 knowledge and freedom, in vigour and wealth, and in the 
 easy access to rich distant fields for the supply of wealth and 
 raw material. But it is still true even in England to-day 
 that much the greater part of the consumption of the main 
 body of the population conduces to sustain life and vigour ; 
 not perhaps in the most economical manner, but yet without 
 any great waste. Doubtless some indulgences are positively 
 harmful ; but these are diminishing relatively to the rest 1 . 
 Most of that expenditure which is not strictly economical as 
 a means towards efficiency, yet helps to form habits of ready 
 resourceful enterprise, and gives that variety to life without 
 which men become dull and stagnant, and achieve little 
 though they may plod much ; and it is well recognized that 
 even in western countries skilled labour is generally the 
 cheapest where wages are the highest. It may be admitted 
 that the industrial development of Japan is tending to show 
 that some of the more expensive conventional necessaries 
 
 1 The chief exception perhaps being that of gambling. 
 
INFLUENCE OF REMUNERATION ON POWER TO WORK. 597 
 
 might conceivably be given up without a corresponding BOOKVI. 
 
 diminution of efficiency : but, though this experience may be _! ' 
 
 fruitful of far-reaching results in the future, yet it has little 
 bearing on the past and the present. It remains true that, 
 taking man as he is, and has been hitherto, in the western 
 world the earnings that are got by efficient labour are not 
 much above the lowest that are needed to cover the expenses 
 of rearing and training efficient workers, and of sustaining and 
 bringing into activity their full energies 1 . 
 
 We conclude then that an increase of wages, unless earned General 
 under unwholesome conditions, almost always increases the cc 
 strength, physical, mental and even moral of the coming 
 generation; and that, other things being equal, an increase 
 in the earnings that are to be got by labour increases its rate 
 of growth ; or, in other words, a rise in its demand price in- 
 creases the supply of it. If the state of knowledge, and of 
 social and domestic habits be given; then the vigour of 
 the people as a whole if not their numbers, and both the 
 numbers and vigour of any trade in particular, may be said 
 to have a supply price in this sense, that there is a certain 
 level of the demand price which will keep them stationary ; 
 that a higher price would cause them to increase, and that 
 a lower price would cause them to decrease 2 . 
 
 Thus demand and supply exert co-ordinate influences on 
 wages ; neither has a claim to predominance ; any more than 
 has, to use an old simile once more, either blade of a pair of and ^PP^ 
 
 on wages 
 
 scissors, or either pier of an arch. Wages tend to equal the are co- 
 ordinate. 
 
 1 On all locomotives there is some brass or copper work designed partly for 
 ornament, and which could be omitted or displaced without any loss to the 
 efficiency of the steam-engine. Its amount does in fact vary with the taste of the 
 officials who select the patterns for the engines of different railways. But it 
 might happen that custom required a great deal of such expenditure of a definite 
 character: that the custom would not yield to argument, and that the railway 
 companies could not venture to offend against it. In that case, when dealing 
 with periods during which the custom ruled, we should have to include the cost of 
 that ornamental metal work in the cost of producing a certain amount of loco- 
 motive horse-power, on the same level with the cost of the piston itself. And 
 there are many practical problems, especially such as relate to periods of but 
 moderate length, in which conventional and real necessaries may be placed on 
 nearly the same footing. 
 
 2 This sentence is repeated with the requisite corrections (see the Corrigenda) 
 from p. 301. 
 
598 PRELIMINARY SURVEY OF DISTRIBUTION AND EXCHANGE. 
 
 BOOK vi^net product, or to correspond to the marginal productivity 
 c ^Tvrhich rules their demand price ; and wages tend to retain a 
 close though indirect and intricate relation with the cost of 
 rearing, training and sustaining the energy of efficient labour. 
 The various elements of the problem mutually determine (in 
 the sense of governing) one another; and incidentally this 
 secures that supply-price and demand-price tend to equality : 
 wages are not governed by demand-price nor by supply-price, 
 but by the whole set of causes which govern demand and 
 supply 1 . 
 
 The 4. In the last section we spoke frequently of the 
 
 general general rate of wages, or of the wages of labour in general 
 
 wages* Such phrases are convenient in a broad view of distribution, 
 
 difficulties an( * especially when we are considering the general relations 
 
 of capital and labour. But in fact there is no such thing 
 
 in modern civilization as a general rate of wages. Each of 
 
 a hundred or more groups of workers has its own wage 
 
 problem, its own set of special causes, natural and artificial, 
 
 controlling the supply price, and limiting the number of its 
 
 members; each has its own demand price governed by the 
 
 need that other agents of production have of its services. 
 
 There are The case is rather different with regard to capital in 
 
 but less general. It is true that some forms of capital are more 
 
 iirthe 1 * 168 narrow ly specialized than any forms of labour, and that they 
 
 phrase are ev en more liable to violent variations of value in conse- 
 
 a general 
 
 rate of quence of economic changes. But those individuals, who are 
 most affected by such changes, are those whose special role it 
 is to bear the brunt of economic vicissitudes and risks and to 
 gain in the long run by doing so; and important as they 
 are for subsequent stages of our inquiry, they may be 
 
 1 The reiteration in this section has seemed to be unavoidable in consequence 
 of the misunderstandings of the main argument of the present Book by various 
 critics; among whom must be included even the acute Prof. v. Bohm-Bawerk. For 
 in the article recently quoted (see especially Section v.), he seems to hold that a self- 
 contradiction is necessarily involved in the belief that wages correspond both to 
 the net product of labour and also to the cost of rearing and training labour and 
 sustaining its efficiency (or, more shortly, though less appropriately, the cost of 
 production of labour). On the other hand the mutual interactions of the chief 
 economic forces are set forth in an able article by Prof. Carver on The theory of 
 wages adjusted to recent theories of value in the Quarterly Journal of Economics 
 for July 1894. 
 
INTEREST IN RELATION TO NEW AND OLD INVESTMENTS. 599 
 
 neglected just now. No social or economic issue, that is BOOKVI. 
 vital for our immediate purpose, is confused by ignoring the f^' 
 influence of economic change on the relative values of 
 different kinds of machinery and so on. 
 
 The flow of investment of resources for future needs 
 consists of two streams. The smaller consists of new 
 additions to the accumulated stock : the larger merely 
 replaces that which is destroyed; whether by immediate 
 consumption, as in the case of raw material, fuel, etc. ; by 
 wear and tear, as in that of railway irons ; by the lapse of 
 time, as in that of a thatched roof or a trade directory ; or by 
 all these combined. The annual flow of this second stream 
 is probably not less than a quarter of the total stock of capital, 
 even in a country in which the prevailing forms of capital are 
 as durable as in England. It is therefore not unreasonable to 
 assume for the present that the owners of capital in general 
 have been able in the main to adapt its forms to the normal 
 conditions of the time, so as to derive as good a net income 
 from their investments in one way as another. On that 
 supposition we may speak of capital in general as being 
 accumulated under the expectation of a certain net interest 
 which is the same for all its forms 1 . 
 
 But we must recollect that we can properly speak of the The rate 
 
 . . . . c r . , , , of interest 
 
 rate of interest on any save new investments of capital only applies 
 in a very limited sense. For instance, we may perhaps esti- ^Jw hf- t0 
 mate that a trade capital of some seven thousand millions f ^he* 
 is invested in the different trades of this country at about value of 
 three per cent, net interest. But such a method of speak- ments is 
 ing, though convenient and justifiable for many purposes, byTiTSr 
 
 earnings. 
 1 As Prof. Clark says, the second stream may be regarded from two points of 
 
 view. First there is something permanent, a body of "pure capital" to use his 
 phrase, like the permanent body of a waterfall; and secondly there are the 
 particular machines, raw material &c., which are ever coming, passing away and 
 being replaced, like the particular drops of water that pass through the permanent 
 fall. 
 
 Among the questions which are here left on one side for future study are the 
 way in which the net interest of capital is to be distinguished not only from gross 
 profits but from much that is frequently reckoned under the head of interest, 
 though it really contains elements of earnings of management and insurance 
 against risk : and again how changes in the general purchasing power of money 
 cause the net interest that is really being earned by capital to be sometimes 
 higher than it appears and sometimes lower. 
 
600 PRELIMINARY SURVEY OF DISTRIBUTION AND EXCHANGE. 
 
 BOOK vi. is not accurate. What ought to be said is that, taking 
 CH - "' the rate of net interest on the. marginal investments, or 
 on the investments of new capital in each of those trades, 
 to be about three per cent., then the aggregate net income 
 rendered by the whole of the trade-capital invested in the 
 various trades is such that, if capitalized at 33 years' purchase 
 (that is on the basis of interest at three per cent.), it would 
 amount to some seven thousand million pounds. For the 
 capital already invested in improving land and erecting 
 buildings, and in making railways and machinery, has its 
 value determined by the net income (or quasi-rent) which it 
 will produce : and if its prospective income-yielding power 
 should diminish, its value would fall accordingly and would 
 be the capitalized value of that smaller income after allowing 
 for depreciation 1 . 
 
 Summary \y e have seen 2 how the accumulation of wealth is governed 
 con- by a great variety of causes: by custom, by habits of 
 self-control and of realizing the future, and above all by the 
 power of family affection: security is a necessary condition 
 for it, and the progress of knowledge and intelligence furthers 
 it in many ways. But though affected by many causes other 
 than the rate of interest ; and though the rate of saving of 
 many people is but little affected by the rate of interest, 
 while a few who have determined to secure an income of a 
 certain fixed amount for themselves or their family will save 
 less with a high rate than with a low rate of interest ; yet a 
 strong balance of evidence seems to rest with the opinion 
 that a rise in the rate of interest, or demand price for saving, 
 tends to increase the volume of saving. 
 
 The rate of Thus then interest, being the price paid for the use 
 determined of capital in any market, tends towards an equilibrium level 
 sucn tnat * ne aggregate demand for capital in that market, 
 ra * e ^ ^ n * eres ^ i 8 equal to the aggregate stock forth- 
 
 forces of coming there at that rate. If the market, which we are con- 
 
 demand re- sidering, is a small one say a single town, or a single trade 
 
 vely ' in a progressive country an increased demand for capital in 
 
 1 The same result is of course got by aggregating the discounted values of all 
 its probable future net incomes on the plan discussed in Bk. v. Ch. iv. 2. 
 
 2 Book rv. Ch. vn., summarized in 10. 
 
GENERAL CONCLUSIONS AS TO INTEREST. 601 
 
 it will be promptly met by an increased supply drawn BOOKVI. 
 from surrounding districts or trades. But if we are con- ' 
 sidering the whole world, or even the whole of a large 
 country as one market for capital, we cannot regard the 
 aggregate supply of it as altered quickly and to a consider- 
 able extent by a change in the rate of interest. For the 
 general fund of capital is the product of labour and waiting ; 
 and the extra work, and the extra waiting, to which a rise in 
 the rate of interest would act as an incentive, would not 
 quickly amount to much as compared with the work and 
 waiting, of which the total existing stock of capital is the 
 result. An extensive increase in the demand for capital 
 in general will therefore be met for a time not so much by 
 an increase of supply, as by a rise in the rate of interest ; 
 which will cause capital to withdraw itself partially from 
 those uses in which its marginal utility is lowest. It is only 
 slowly and gradually that the rise in the rate of interest will 
 increase the total stock of capital. 
 
 5. Land, by which is here meant all those agents 
 
 production which are supplied freely by nature in quantities footing 
 less than man needs, is on a different footing from man agents of** 
 
 himself and those agents of production which are made by ] 
 man ; among which are included improvements made by him 
 on the land itself 1 . For while the supplies of all other chapter 
 agents of production respond in various degrees and various 
 ways to the demand for their services, land makes no such 
 response. Thus if the earnings of any class of labour rise, 
 a compensatory action tends to increase its numbers, or 
 efficiency, or both ; and, if not to lower again its rate of 
 earnings per head, yet at least to enable them to be paid 
 from an increased national dividend, and not at the expense 
 of other agents of production. And the same is true as 
 regards capital: but it is not true as regards land. While 
 
 1 It is not necessary to repeat here the discussion of the difficulties which 
 surround any attempt to "separate practically the "inherent" properties of the 
 land in an old country from those which it has derived from man's action (see 
 Book iv. Ch. ii. 1) : nor to dwell on the special circumstances of land in a new 
 country, in which the cultivator may obtain land not from another cultivator, but 
 direct from nature herself, and in which therefore the rent of land has not yet 
 acquired its special features (see Book v. Ch. ix. 1). 
 
602 PRELIMINARY SURVEY OF DISTRIBUTION AND EXCHANGE. 
 
 BOOK vi. therefore the value of land, in common with the values of 
 
 CH ' n - other agents of production, is subject to those influences 
 
 which were discussed towards the end of the preceding 
 
 chapter; it is not subject to those which have been brought 
 
 into the reckoning in the present discussion. 
 
 it shares Land shares the influences of the laws of demand and of 
 
 agent ther substitution which were discussed in the last chapter, because 
 influences tne existing stock of it, like the existing stock of capital 
 which were or o f labour of any kind, tends to be shifted from one use to 
 in S the SS iast another till nothing could be gained for production by any 
 further shifting. For indeed, as we have seen, a manufacturer 
 or a cultivator, owning both land and buildings (or any other 
 plant), regards the two as bearing similar relations to his 
 business. Either will afford him aid and accommodation at 
 first liberally and afterwards with diminishing return as he 
 endeavours to force more and more from them ; till at last 
 he will doubt whether the overcrowding of his workshops or 
 his storerooms is not so great a source of trouble that it would 
 answer his purpose to save by obtaining more space. And 
 when he comes to decide whether to obtain that space by 
 taking in an extra piece of land or by building his factory a 
 floor higher, he weighs the net product of more capital applied 
 in building against the net product of more land; just as he 
 might weigh it against the net product of any other agent of 
 production. Land is in short but a particular form of capital 
 from the point of view of the individual manufacturer 1 . 
 
 And the same is substantially true of the individual 
 cultivator. The question whether he has carried his cultiva- 
 tion of a particular piece of land as far as he profitably can, 
 and whether he should try to force more from it or to take 
 in another piece of land, is of the same kind as the question 
 whether he should buy a new plough or try to get a little 
 more work out of his present stock of ploughs, using them 
 sometimes when the soil is not in a very favourable condition, 
 and feeding his horses a little more lavishly. He, like the 
 manufacturer, weighs the net product of a little more land 
 against the other uses to which he could put the capital sum 
 that he would have to expend in order to obtain it. Thus 
 
 1 Book v. Ch. vni. 5. See also Book vi. Ch. ix. 5. 
 
LAND CLASSED WITH CAPITAL FOR SHORT PERIODS, NOT LONG. 603 
 
 the income that is derived from a factory, a warehouse, or a BOOK vi. 
 plough (allowance being made for wear and tear, etc.) is ' 
 governed, so far as the stage which we considered in the last 
 chapter is concerned, in the same way as is the income from 
 land. In each case the income tends to equal the value of 
 the marginal net product of the agent : in each case this is 
 governed for the time by the total stock of the agent and 
 the need that other agents have of its aid. 
 
 That is one side of the question. The other is that land But its 
 (in an old country) does not share the reflex influences, features 
 
 discussed in this chapter, which a high rate of earnings * ^ 
 exerts on the supply of other agents of production ; and pb?em of 
 consequently on their contributions to the national dividend ; distribu- 
 
 tion as a 
 
 and consequently on the real cost at which their services are whole. 
 purchased by other agents of production. We have seen that 
 this difference is not important in connection with the quickly 
 passing changes of the market ; for relatively to them the 
 stocks of nearly all agents of production are approximately 
 fixed, and their earnings are therefore in part at least of the 
 nature of a quasi-rent. But the stock of land (in an old 
 country) at any time is the stock for all time : and when a 
 manufacturer or cultivator decides to take in a little more 
 land to his business, he decides in effect to take it away from 
 someone else's business : though he adds a little more land 
 to his business, yet the nation adds no land to its business. 
 In contrast with this, the building an additional floor on one 
 factory or putting an extra plough on one farm does not 
 generally take a floor from another factory or a plough from 
 another farm : the nation adds a factory floor or a plough 
 to its business as the individual does to his : there is 
 an increase of the national dividend which is to be shared 
 out; and in the long run the increased earnings of the 
 manufacturer or farmer are not as a rule at the cost of 
 other producers. We conclude then that the peculiarity 
 in the earnings from land and other gifts of nature which 
 arises from the fact that their stock cannot be increased 
 by man, is seldom of much importance as regards the 
 affairs of any individual trader, nor even as regards market 
 fluctuations of wages and prices; but that it is of vital 
 
604 
 
 BOOK VI. 
 CH. II. 
 
 The 
 
 earnings of 
 the several 
 agents of 
 produc- 
 tion, ac- 
 cording to 
 their 
 marginal 
 services, 
 exhaust 
 the 
 
 national 
 dividend. 
 
 PRELIMINARY SURVEY OF DISTRIBUTION AND EXCHANGE. 
 
 importance relatively to the broad central problem of normal 
 distribution 1 . 
 
 6. This part of the argument may be seen from another 
 side in a study of the relations in which the different kinds 
 of surpluses that we have considered at various stages 
 of our inquiry stand to the national dividend and to one 
 another. The argument of this section is however difficult, 
 and almost exclusively of academic interest ; and it should be 
 omitted by the general reader. 
 
 The net aggregate of all the commodities produced is 
 itself the true source from which flow the demand prices for 
 all these commodities, and therefore for the agents of produc- 
 
 i As has been intimated in Book v. Ch. vm x., part of the argument of which 
 has been reproduced in this section, the difference between rent and the earnings 
 of other agents of production is nowhere more conspicuous nor more important 
 than in the applications of the theory of value to the incidence of taxation : (see 
 especially p. 478) ; a point to which we shall need frequently to recur in the second 
 volume of this treatise. Some parts of the general argument of this section will 
 be further developed in Book vi. Ch. ix. The position that rent of land stands on 
 a similar footing to the hire of a pony for a particular day, but not to the hire of 
 ponies in general, when account is taken of the possibilities of increasing or 
 diminishing their number, is maintained, in opposition to a part of the argument 
 of the Duke of Argyll's Unseen Foundations of Society, in an article by the present 
 writer in the Economic Journal, Vol. HI. 
 
 The tendency of Austrian economists to minimise the influence which cost of 
 production exerts on value naturally leads them to give little prominence to the 
 differences between land and other agents of production. And a similar position hi 
 this respect has been taken by some of those who have applied mathematical 
 expressions to the theory of value. They have laid stress on the fact that the land 
 turned to account by the individual undertaker appears on the same footing with 
 the other agents of production in the general function which expresses his output ; 
 (the differential coefficient of this function with regard to that or any other agent 
 corresponding equally to the net product or earnings for him of a unit of that 
 agent, see the foot-note on p. 464) ; and they have apparently inferred that land 
 and its earnings figure hi the general doctrine of distribution on a like footing 
 with other agents of production and their earnings. They have applied a 
 proposition, which is true and important in one class of problems, to a 
 problem which would appear to belong to a different class ; (see the review by 
 Mr Flux of Mr Wicksteed's interesting Co-ordination of the Laws of Distribution 
 in the Economic Journal, Vol. iv., especially p. 312). 
 
 Mr H. M. Thompson (Theoi-y of Wages, Chapter iv.) also inclines against a 
 distinctive treatment of the share which land receives of the National Dividend, 
 and he lays stress on the elasticity of man's resources in subjugating te his use 
 new and distant lands and developing old lands. But where we are contrasting 
 the fixity of the supply of land in an old country with the elasticity of the supplies 
 of labour and capital, it would seem that we must not class with the former the 
 results of improvements in agriculture and transport: for they belong to the 
 latter. 
 

 RELATIONS BETWEEN DIFFERENT KINDS OF SURPLUSES. 605 
 
 ,tion used in making them. Or, to put the same thing in BOOKVI. 
 another way, this national dividend is at once the aggregate CH ' "' 
 net product of, and the sole source of payment for, all the 
 agents of production within the country: it is divided up into 
 earnings of labour, interest of capital, and lastly the pro- 
 ducer's surplus, or rent, of land and of other differential 
 advantages for production. It constitutes the whole of them 
 and the whole of it is distributed among them; and the 
 larger it is, the larger, other things being equal, will be the 
 share of each of them. Further it is distributed among 
 them, speaking generally, in proportion to the need which 
 people have for their several services i.e. not the total 
 need, but the marginal need. By this is meant the need at 
 that point, at which people are indifferent whether they 
 purchase a little more of the services (or the fruits of the 
 services) of one agent, or devote their further resources to 
 purchasing the services (or the fruits of the services) of other 
 agents 1 . 
 
 While the national dividend is thus completely absorbed But yet 
 in remunerating the owner of each agent of production at 
 its marginal rate, it yet generally yields him a surplus which 
 
 has two distinct, though not independent sides. It yields to . f satisfac- 
 him, as consumer, a surplus consisting of the excess of the over Ms 
 
 total utility to him of the commodity over the real value to at 
 him of what he paid for it. For his marginal purchases, those rates 
 which he is only just induced to buy, the two are equal : 
 but those parts of his purchases for which he would gladly 
 have paid a higher price than go without them, yield him a 
 surplus of satisfaction : a true net benefit which he, as con- 
 sumer, derives from the facilities offered to him by his sur- 
 roundings or conjuncture. He would lose this surplus, if his 
 surroundings were so altered as to prevent him from obtaining 
 any supplies of that commodity, and to compel him to divert 
 the means which he spends on that to other commodities (one 
 of which might be increased leisure) of which at present he 
 does not care to have further supplies at their respective 
 prices. 
 
 Another side of the surplus which a man derives from his 
 
 1 Compare Mr Wicksteed's Co-ordination of the Laws of Distribution, p. 46. 
 
606 
 
 BOOK VI. 
 CH. II. 
 
 and a 
 surplus of 
 satisfac- 
 tion 
 accrues 
 from pay- 
 ment at 
 these rates 
 to most 
 workers, 
 and to 
 most 
 savers. 
 
 These 
 surpluses 
 must be 
 distin- 
 guished 
 from the 
 
 PRELIMINARY SURVEY OF DISTRIBUTION AND EXCHANGE. 
 
 surroundings is better seen when he is regarded as producer, 
 whether by direct labour, or by the accumulated, that is 
 acquired and saved, material resources in his possession. As 
 a worker, he derives a workers surplus, through being re- 
 munerated for all his work at the same rate as for that last 
 part, which he is only just willing to render for its reward; 
 though much of the work may have given him positive 
 pleasure. As capitalist (or generally as owner of accumulated 
 wealth in any form) he derives a savers surplus through 
 being remunerated for all his saving, that is waiting, at the 
 same rate as for that part which he is only just induced to 
 undergo by the reward to be got for it. And he generally is 
 remunerated at that rate even though he would still have 
 made some savings if he had been compelled to pay for their 
 safe keeping, and had reaped a negative interest from them 1 . 
 A great part of a worker's earnings are of the nature of a 
 deferred return to the trouble and expense of preparing him 
 for his work; and there is therefore a great difficulty in 
 estimating his surplus. Nearly all his work may be pleasur- 
 
 1 This point was emphasized by Gossen and Jevons ; and among the many 
 interesting American and Austrian writings on it, special reference may be 
 made to Prof. Clark's Surplus Gains of Labour. See also above, Book iv. Ch. i. 
 
 These two sets of surpluses are not independent: and it would be easy to 
 reckon them up so as to count the same thing twice. For when we have reckoned 
 the producer's surplus at the value of the general purchasing power which he derives 
 from his labour or saving, we have reckoned implicitly his consumer's surplus too, 
 provided his character and the circumstances of his environment are given. This 
 difficulty might be avoided analytically; but in no case would it be practically 
 possible to estimate and add up the two series. The consumer's surplus, the 
 worker's surplus, and the waiter's surplus, which any one is capable of deriving 
 from his surroundings, depend on his individual character. They depend in part 
 on his general sensibility to the satisfactions and dissatisfactions o* consumption 
 and of working and waiting severally; and in part also on the elasticity of his 
 sensibilities, that is on the rates at which they change with an increase of con- 
 sumption, of work and of waiting respectively. Consumer's surplus has relation 
 in the first instance to individual commodities, and each part of it responds 
 directly to changes in the conjuncture affecting the terms on which that commodity 
 is to be had: while the two kinds of producer's surplus appear always in terms 
 of the general return that the conjuncture gives to a certain amount of purchasing 
 power. The two kinds of producer's surplus are independent and cumulative, and 
 they stand out distinct from one another in the case of a man working and saving 
 things for his own use. While the intimate connection between both of them and 
 consumer's surplus is shown by the fact that, in estimating the weal and woe in the 
 life of a Robinson Crusoe, it would be simplest to reckon his producer's surpluses 
 on such a plan as to include the whole of his consumer's surplus. 
 
RELATIONS BETWEEN DIFFERENT KINDS OF SURPLUSES. 607 
 
 able ; and he may be earning a good wage for the whole of BOOK vi. 
 it : but in reckoning up the balance of human weal and CH ' "' 
 endurance we must set off against this much effort and exce ? s of 
 
 earnings 
 
 sacrifice endured by his parents and by himself in past time : of an 
 but we cannot say clearly how much. In a few lives there oFproduc- 
 may be a balance of evil : but there is reason to think that 
 there is a balance of good in most lives, and a large balance f 
 
 in some. The problem is as much philosophical as economic ; Tne line 
 it is complicated by the fact that man's activities are ends easily 
 in themselves as well as means of production, and also by human r 
 the difficulty of dividing clearly the immediate and direct agents - 
 (or prime) cost of human effort from its total cost; and it 
 must be left imperfectly solved 1 . 
 
 The case is in some respects simpler when we pass to But as 
 consider the earnings of material appliances for production, nmteriai 
 The work and the waiting by which they have been provided, s^jf 8 
 yield their own worker's and waiter's surplus just mentioned, additional 
 and in addition a surplus (or quasi-rent) of the excess of vanishes 
 total money returns over direct outlay ; provided we confine outlay's are 
 our attention to short periods only. But for long periods, l^ 
 that is, in all the more important problems of economic 
 science, and especially in the problems discussed in this 
 chapter, there is no distinction between immediate outlay 
 and total outlay. And in the long run the earnings of each 
 agent are, as a rule, sufficient only to recompense at their 
 marginal rates the sum total of the efforts and sacrifices 
 required to produce them. If less than these marginal rates 
 had been forthcoming the supplies would have been di- 
 minished; and on the whole therefore there is in general 
 no extra surplus in this direction. 
 
 This last statement applies in a sense to land which has with 
 been but recently taken up ; and possibly it might apply exception 
 to much land in old countries, if we could trace its records 
 back to their earliest origins. But the attempt would raise 
 controversial questions in history and ethics, as well as in eco- 
 nomics; and the aims of our present inquiry are prospective 
 rather than retrospective. Looking forward rather than 
 backwards, and not concerning ourselves with the equity and 
 
 1 But see below, Ch. v. 
 
BOOK VI. 
 CH. II. 
 
 608 PRELIMINARY SURVEY OF DISTRIBUTION AND EXCHANGE. 
 
 the proper limits of the present private property in land, it 
 is important for us to note that that part of the national 
 dividend which goes as earnings of land is a surplus in a sense 
 in which the earnings from other agents are not a surplus 1 . 
 
 This concludes the main body of our preliminary discus- 
 sion of distribution and exchange. But there are some 
 points on which a little more should be said here. The first 
 relates to the mutual interactions of various groups of the 
 agents of production ; with special reference to the fact that 
 the bond between the earnings of workers in the same grade 
 is generally stronger than that between the earnings of 
 workers in different grades. The second relates to the 
 nature of the influences which the supply of capital exerts on 
 wages in general: and will bring us near to the so-called 
 Wages-Fund theory. 
 
 1 The argument again is given at some length above, Book v.*Ch. vin. x., and 
 in the article On Sent in reply to the Duke of Argyll already referred to; and some 
 parts of it will be further developed below in Ch. ix., x. : moreover its substance 
 has much in common with that near the end of the last chapter. But yet it relates 
 to a matter on which misunderstandings are so frequent, that it should perhaps be 
 set out clearly here. 
 
 All appliances of production, whether machinery, or factories with the land on 
 which they are built, or farms, are alike in yielding large surpluses over the prime 
 costs of particular acts of production to a man who owns and works them : also 
 in yielding him normally no special surplus in the long run above what is 
 required to remunerate him for his trouble and sacrifice and outlay in purchasing 
 and working them (no special surplus, as contrasted with his general worker's 
 and waiter's surplus). But there is this difference between land and other agents 
 of production, that if a tax, or combination to raise wages, or his own preference for 
 an easy life with a small income over a hard life with a large income, had deterred 
 the manufacturer from building or buying the factory, there might probably 
 have been one factory the less in the world, or at best an inferior one in place 
 of his: in the long run there is no disposable surplus on factory buildings. 
 But if he had not bought the land on which the factory was built, the land 
 with its permanent convenience of space, its permanent income of sunlight 
 and air, and (though that may be of much less importance) those properties 
 of its soil which are indestructible, would have remained for others to use. 
 From a social point of view land yields a permanent surplus, which perishable 
 things made by man do not. The more nearly it is true that the earnings of any 
 agent of production are required to keep up the supply of it, the more closely will 
 its supply so vary that the share which it is able to draw from the national 
 dividend conform to the cost of maintaining the supply: and in an old country 
 land stands in an exceptional position, because its earnings are not affected by this 
 cause. The difference between land and other durable agents is however mainly 
 one of degree : and a great part of the interest of the study of the rent of land 
 arises from the illustrations which it affords of a great principle that permeates 
 every part of economics. 
 
EFFICIENCY OF A TRADE INFLUENCES EARNINGS OF OTHERS. 609 
 
 7. In studying the influence which increased efficiency BOOK vi. 
 
 and increased earnings in one trade exert on the condition _J _ " 
 of others we may start from the general fact that, other 
 
 things being equal, the larger the supply of any agent of between 
 production, the further will it have to push its way into and cam- 
 uses for which it is not specially fitted ; the lower rent groups" 
 
 will be the demand price with which it will have to be t ^ r 
 contented in those uses in which its employment is on the j 5 * 6 ^ 
 verge or margin of not being found profitable ; and, in so supply of 
 
 ~!.. ,. . , . , ., -11 any agent 
 
 tar as competition equalizes the price which it gets in all will benefit 
 
 uses, this price will be its price for all uses. The extra pro- 
 duction resulting from the increase in that agent of produc- 
 tion will go to swell the national dividend, and other agents of all 
 of production will benefit thereby : but that agent itself will 
 have to submit to a lower rate of pay. 
 
 For instance, if without any other change, capital increases 
 fast, the rate of interest must fall; if without any other 
 change, the number of those ready to do any particular kind 
 of labour increases, their wages must fall. In either case 
 there will result an increased production, and an increased 
 national dividend: in either case the loss of one agent of 
 production must result in a gain to others; but not neces- 
 sarily to all others. Thus the opening up of rich quarries of 
 slate or the increase in numbers or efficiency of quarrymen, 
 would tend to improve the houses of all classes; and it 
 would tend to increase the demand for bricklayers' and car- 
 penters' labour, and raise their demand-price. But it would 
 injure the makers of roofing tiles as producers of building 
 materials, more than it benefited them as consumers. The 
 increase in the supply of this one agent increases the demand 
 for many others by a little, and for some others by much ; 
 but for some it lessens the demand. 
 
 Now we know that the wages of any worker, say for Wages of a 
 
 worker ex- 
 
 mstauce a shoemaker, tend to be equal to the net product of pressed 
 his labour : and that since the wages of all workers in the 
 same grade tend to be equal to one another, therefore in a 
 state of equilibrium every worker will be able with the products 
 
 of workers 
 
 earnings of a hundred days' labour to buy the net products in the same 
 of a hundred days' labour of other workers in the same grade gl 
 M. 39 
 
610 PRELIMINARY SURVEY OF DISTRIBUTION AND EXCHANGE. 
 
 BOOK VI. 
 CH. II. 
 
 with himself: he may select them in whatever way he 
 ' chooses, so as to make up that aggregate sum 1 , 
 or of other If the normal earnings of workers in another grade are 
 grades. half ag high a g a i n as his own, the shoemaker must spend 
 three days' wages in order to get the net product of two 
 days' labour of a worker in that grade ; and so in proportion. 
 The de- Thus, other things being equal, every increase in the net 
 
 of w^geT efficiency of labour in any trade, including his own, will raise 
 the in the same proportion the real value of that part of his 
 
 efficiency JT j. 
 
 of labour, wages which the shoemaker spends on the products of that 
 trade; and other things being equal, the equilibrium level 
 of the real wages of the shoemaker depends directly on, 
 and varies directly with, the average increase in the efficiency 
 of the trades, including his own, which produce those things 
 on which he spends his wages. Conversely, if any trade 
 rejects an improvement by which its efficiency could be 
 increased ten per cent., it inflicts on the shoemaker an injury 
 measured by ten per cent, of that part of his wages which 
 he spends on the products of that trade. But an increased 
 efficiency on the part of workers, whose products compete 
 with his own, may injure him temporarily at least, especially 
 if he is not himself a consumer of those products. 
 The re- Again, the shoemaker will gain by anything that changes 
 
 between the relative positions of different grades in such a way as to 
 ra i se Q i s grade relatively to others. He will gain by an in- 
 
 business* crease ^ medical men whose aid he occasionally needs. And 
 
 raises 7 the ^ e W ^ ^ am more ^ those grades which are occupied chiefly 
 
 wages of with the tasks of managing business, whether manu- 
 
 labour. facturing, trading or any other, receive a great influx from 
 
 other grades: for then the earnings of management will 
 
 be lowered permanently relatively to the earnings of manual 
 
 work, there will be a rise in the net product of every kind of 
 
 manual labour ; and, other things being equal, the shoemaker 
 
 will get more of every commodity on which he spends those 
 
 wages that represent his own net product. 
 
 1 It will be recollected that the net product of an individual agent of produc- 
 tion cannot as a rule be separated mechanically from that of other agents 
 which co-operate with it: see p. 482. 
 
LIMITATIONS OF THE ACTION OF SUBSTITUTION. 611 
 
 8. The process of Substitution, of which we have been BOOK vi. 
 discussing the tendencies, is one form of Competition ; and CH ' "' 
 it may be well to insist again that we do not assume that We do not 
 
 * assume 
 
 competition is perfect. Perfect competition requires a perfect perfect 
 knowledge of the state of the market ; and though no great and free- 
 departure from the actual facts of life is involved in assuming 
 
 this knowledge on the part of dealers when we are consider- tion> 
 ing the course of business in Lombard Street, the Stock 
 Exchange, or in a wholesale Produce Market ; it would be 
 an altogether unreasonable assumption to make when we 
 are examining the causes that govern the supply of labour 
 in any of the lower grades of industry. For if a man had 
 sufficient ability to know everything about the market for 
 his labour, he would have too much to remain long in a low 
 grade. The older economists, in constant contact as they 
 were with the actual facts of business life, must have known 
 this well enough ; but partly for brevity and simplicity, partly 
 because the term " free competition " had become almost a 
 catchword, partly because they had not sufficiently classified 
 and conditioned their doctrines, they often seemed to imply 
 that they did assume this perfect knowledge. 
 
 It is therefore specially important to insist that we do but only 
 not assume the members of any industrial group to be endowed 
 with more ability and forethought, or to be governed by 
 motives other than those which are in fact normal to, and 
 
 in fact 
 
 would be attributed by every well-informed person to, the normal to 
 
 Gticll S6- 
 
 members of that group ; account being taken of the general verai rank 
 conditions of time and place. There may be a good deal of of mdustry - 
 wayward and impulsive action, sordid and noble motives 
 may mingle their threads together ; but there is a constant 
 tendency for each man to select such occupations for himself 
 and his children as seem to him on the whole the most ad- 
 vantageous of those which are within the range of his 
 resources, and of the efforts which he is able and willing to 
 make in order to reach them. 
 
 9. The last group of questions, which still remain to We pass 
 be discussed, is concerned with the relation of capital in relations 
 general to wages in general 1 . It is obvious that though 
 
 1 In Section 4 we noticed that the study of Distribution is much more 
 
 392 
 
BOOK vi. 
 
 CH - " 
 
 in general. 
 
 18 * 
 
 nSnt y 
 between 
 
 612 PRELIMINARY SURVEY OF DISTRIBUTION AND EXCHANGE. 
 
 capital in general is constantly competing with labour for 
 the field of employment in particular trades; yet since 
 ca pit a l itself is the embodiment of labour as well as of 
 waiting, the competition is really between some kinds of 
 labour aided by a good deal of waiting, and other kinds of 
 labour aided by less waiting. On the one side, for instance, 
 are man y wno make snoes ty h an d, and a very few who 
 make awls and other simple implements, aided by a little 
 waiting; on the other are a relatively small number 
 who work powerful sewing-machines which were made 
 by engineers, aided by a -good deal of waiting. There 
 is a real and effective competition between labour in 
 general and waiting in general. But it covers a small part 
 of the whole field ; and is of small importance relatively to 
 the benefits which labour derives from obtaining cheaply 
 the aid of capital, and therefore of efficient methods in the 
 production of things that it needs 1 . 
 
 For speaking generally, an increase in the power and 
 the willingness to save, will cause the services of waiting to 
 be pushed constantly further, so as to obtain employment 
 at a rate of interest, which will constantly fall unless 
 invention opens new advantageous uses of roundabout 
 methods of production. In either case, but especially in the 
 latter, the growth of capital increases the national dividend ; 
 and thus opens out new and rich fields for the employment 
 of labour in other directions, which more than compensate 
 for the partial displacement of the services of labour by 
 those of waiting in particular trades. 
 
 The increase of the national dividend owing to the 
 growth of capital and invention is certain to affect all classes 
 
 An 
 
 of capital 
 
 concerned with the causes that govern the earnings of each of many different 
 groups of labour, than with causes that affect them all in approximately the same 
 manner. But yet these latter have some interest even for the modern economist. 
 And the fact that the earh'er economists, partly in consequence of the special in- 
 dustrial conditions of their time, gave great prominence to discussions of general 
 wages, makes it important to lay considerable stress on them in the interest 
 of the continuity of the science. 
 
 1 We are leaving on one side here the competition for employment between 
 labour in the narrower sense of the term and the work of the undertaker himself 
 and his assistant managers and foremen. A great part of Ch. vii. and vm. is 
 given to this difficult and important problem. 
 
RELATIONS OF CAPITAL AND LABOUR IN GENERAL. 613 
 
 of commodities ; and to enable the shoemaker, for instance, to BOOK vi. 
 purchase with his earnings more food and clothes, more and H ' "' 
 better supplies of water, artificial light and heat, travel, and ^ r er - s n t ^ e 
 so on. It may be admitted that a few improvements affect charge for 
 only commodities consumed by the rich, in the first instance and raises 
 at least ; that no part of the corresponding increase of the r 
 national dividend goes directly to the labouring classes ; 
 and that they do not at once gain anything to com- 
 pensate for the probable disturbance of some of their 
 members in particular trades. But such cases are rare, and 
 generally on a small scale : and even in them there is nearly 
 always some indirect compensation. For improvements, de- 
 signed for the luxuries of the rich, soon spread themselves 
 to the comforts of other classes. And, though it is not a 
 necessary consequence, yet in fact a cheapening of luxuries 
 does generally lead in various ways to increased desires on 
 the part of the rich for things made by hand and for personal 
 services, and increases also the means at their disposal 
 for gratifying those desires. This points to another aspect 
 of the relation between capital in general and wages in 
 general. 
 
 10. It is commonly said that, though those workers who The 
 have little or no accumulated wealth of their own, have 
 much to gain by an increase of the capital in that narrower wage " 
 sense of the term in which it is nearly convertible with trade derive 
 capital that supports and aids them in their work ; yet they increase 
 have little to gain from an increase of other forms of wealth 
 not in their own hands. No doubt there are a few kinds 
 of wealth the existence of which scarcely affects the working the form 
 classes ; while they are directly affected by every increase of capital, 
 (trade) capital, the greater part of which is constantly passing 
 through their hands as implements or materials of their 
 work; while part of the rest is directly used or even con- 
 sumed by them 1 . And from this it seems natural to conclude 
 
 1 At all events according to most definitions. There are some indeed who 
 confine capital to "intermediate goods," and must therefore exclude hotels, and 
 lodging-houses and workmen's cottages, at all events as soon as they are used. 
 But grave objections to the adoption of this definition have already been indicated 
 (Book ii. Ch. rv. 8). 
 
614 PRELIMINARY SURVEY OF DISTRIBUTION AND EXCHANGE. 
 
 CH. II. 
 
 BOOK vi. that the working classes must gain when other forms of wealth 
 become trade capital and vice versa. But if private people 
 generally gave up keeping carriages and yachts, and hired 
 them out from capitalist undertakers, there would result a 
 smaller demand for hired labour. For part of what would 
 have been paid as wages would go as profits to a middleman 1 . 
 It may be objected that if other forms of wealth take the 
 place of trade capital on a large scale, there may be a scarcity 
 of the things needed to aid labour in its work and even of those 
 needed to support it. This may be a real danger in some 
 oriental countries. But in the western world, and especially 
 in England, the total stock of capital is equal in value to the 
 aggregate of the commodities consumed by the working 
 classes during many years : and a very small increase in the 
 demand for those forms of capital, that minister directly to 
 labour's needs, relatively to other forms, would quickly bring 
 forward an increased supply of them, either imported from 
 some other part of the world, or specially produced to meet 
 the new demand. There is therefore no necessity to trouble 
 ourselves much on this score. If the marginal efficiency 
 of labour is kept high, its net product will be high; 
 and so will therefore its earnings : and the constantly 
 flowing stream of the national dividend will divide itself up 
 in corresponding proportions, giving always an adequate 
 supply of commodities for immediate consumption by the 
 workers, and assigning to the production of those com- 
 modities an adequate stock of implements. When the 
 general conditions of demand and supply have decided what 
 part of the national dividend the other classes of society are 
 free to spend as they will; and when the inclinations of 
 those classes have decided the mode in which they will 
 distribute their expenditure between present and deferred 
 
 1 See above, p. 145. Again, an increased use of brass furniture that needs 
 much cleaning, and generally of modes of living that require the assistance of 
 many indoor and outdoor servants, operates on the demand for labour in the 
 same way as the use of hand-made goods in place of goods made by expensive 
 machinery and other fixed capital. It may be true that the employment of a 
 great number of domestic servants is an ignoble and wasteful use of a large 
 income: but there is no other equally selfish method of spending it which tends so 
 directly to increase the share of the national dividend which goes to the working 
 classes. 
 
RELATIONS OF CAPITAL AND LABOUR IN GENERAL. 615 
 
 gratifications, etc., it matters not to the working classes BOOKVI. 
 whether orchids come from private conservatories, or from fl^' 
 the glass houses which belong to professional florists, and 
 which are therefore trade capital. . 
 
 11. It is to be understood that the share of the national Further 
 dividend, which any particular industrial class receives tkms. na 
 during the year, consists either of things that were made 
 during the year, or of the equivalents of those things. For 
 many of the things made, or partly made, during the year 
 are likely to remain in the possession of capitalists and 
 undertakers of industry and to be added to the stock of 
 capital ; while in return they, directly or indirectly, hand 
 over to the working classes some things that had been made 
 in previous years. 
 
 The ordinary bargain between labour and capital is that The sense 
 the wage-receiver gets command over commodities in a form i s true 
 ready for immediate consumption, and in exchange carries earnings 
 his employer's goods a stage further towards being ready for f lal) our 
 immediate consumption. But while this is true of most advances 
 employees, it is not true of those who finish the processes of capital. 7 
 production. For instance, those who put together and finish 
 watches, give to their employers far more commodities in a 
 form ready for immediate consumption, than they obtain as 
 wages. And if we take one season of the year with another, 
 so as to allow for seed and harvest time, we find that work- 
 men as a whole hand over to their employers more finished 
 commodities than they receive as wages. But to say nothing 
 of machinery and factories, of ships and railroads the 
 houses loaned to workmen, and even the raw materials in 
 various stages which will be worked up into commodities 
 consumed by them, represent a far greater provision of 
 capital for their use than the equivalent of the advances 
 which they make to the capitalist, even when they work for 
 a month for him before getting any wages. And in this 
 sense we are justified in saying that the earnings of labour 
 depend upon advances made to labour by capita] *. 
 
 1 The details of this doctrine, and the exaggerated importance attached to 
 it by English economists early in this century, are described in the Note at the 
 end of this Chapter. 
 
616 PRELIMINARY SURVEY OF DISTRIBUTION AND EXCHANGE. 
 
 BOOK vi. Some German economists have argued that the resources 
 
 c !fl n ' with which the employer pays wages come from consumers. 
 
 resources But ^ s a PP ears * involve a misapprehension. It might be 
 
 resources 
 
 of indivi- true o f au individual employer if the consumer paid him in 
 
 pioyers advance for what he produced : but in fact the rule goes 
 
 returned the other way ; the consumer's payments are more often in 
 
 though arrear > an d merely give deferred command over ready corn- 
 
 sales to modities in return for ready commodities. It may be admitted 
 
 customers. * 
 
 that if the producer could not sell his goods, he might not 
 be able for the time to hire labour; but that would only 
 mean that the organization of production was partially out 
 of gear: a machine may stop if one of its connecting rods 
 gets out of order, but that does not mean that the driving 
 force of the machine is to be found in the rod. 
 But in a Nor again is the amount which the employer pays as 
 
 broad view . r J r J 
 
 all are wages at any time governed by the price which consumers 
 andToTay' do pay him for his wares; though it generally is largely in- 
 resources fluenced by his expectations of the price they will pay him. 
 
 ducers "^ * s ^ n( ^ ee( ^ ^ rue * na ^ ^ n ^ ne l n g run an( ^ un der normal con- 
 come from ditions, the prices which consumers do pay him and those 
 
 consumers, , . , , -n i 11 
 
 is but to which they will pay him are practically the same. But 
 they come wnen we pass from the particular payments of an individual 
 StSnaf em P lo y er to tne normal payments of employers generally 
 dividend, and it is really only with these latter that we are now con- 
 cerned consumers cease to form a separate class, for every 
 one is a consumer. The national dividend goes exclusively 
 to consumers, and these consumers are also the producers, 
 that is the owners of the agents of production, labour, capital 
 and land. Children and others who are supported by them, 
 and the government which levies taxes on them, do but 
 expend part of their income for them 1 . To say therefore that 
 the resources of employers generally are ultimately drawn 
 from those of consumers generally, is undoubtedly true. But 
 it is only another way of saying that all resources have been 
 parts of the national dividend, which have been directed into 
 forms suitable for deferred, instead of immediate use; and if 
 
 and other benefits which government provid 
 
RELATIONS OF CAPITAL AND LABOUR IN GENERAL. 61*7 
 
 any of them are now applied to any other purpose than BOOKVI. 
 immediate consumption, it is in the expectation that their _ ' 
 place will be taken (with increment or profit) from the 
 incoming flow of the national dividend 1 . 
 
 In all this then there is nothing to make the relations be- The older 
 tween capital in general and labour in general differ widely wages were 
 from those between any other two agents of production, in their ^fy 
 
 the general scheme of distribution already explained. The 
 modern doctrine is the outcome to which all the earlier doctrine. 
 theories of the relations between labour or capital were 
 working their way ; and differs only in its greater exactness, 
 completeness and homogeneity, from that given by Mill in 
 the third chapter of his fourth book ; the only place in which 
 he collects together all the various elements of the problem. 
 
 Capital in general and labour in general are agents The broad 
 co-operating in the production of the national dividend, and distribu- 
 drawing from it their earnings in the measure of their already 
 
 respective (marginal) efficiencies in production. No doubt f. K tlie 
 
 their mutual dependence is of the closest ; capital without general 
 labour is dead : the labourer without the aid of his own or of capital 
 someone else's capital would not long be alive. Where 
 labour is energetic, capital reaps a high reward and grows 
 apace; and, thanks to capital and knowledge, the ordinary 
 labourer in the western world is in many respects better fed, 
 clothed and even housed than were princes in earlier times. 
 The co-operation of capital and labour is as essential as that 
 of the spinner of yarn and the weaver of cloth : there is a 
 little priority on the part of the spinner ; but that gives him 
 no pre-eminence. The prosperity of each is bound up with 
 the strength and activity of the other; though each may 
 gain temporarily, if not permanently, a somewhat larger share 
 of the national dividend at the expense of the other. 
 
 In the modern world, the employer or undertaker, who 
 
 1 In an interesting article in the Quarterly Journal of Economics for January 
 1895, Prof. Taussig explains how Hermann and some other German economists 
 have endeavoured to modify the old English Wages-fund doctrine that wages are 
 dependent on the resources of the employer, by tracing the dependence of these on 
 the resources of consumers: and he indicates how,jyhen account is taken of the 
 fact that there is no general class of consumers, the old doctrine is thus made 
 imperceptibly to merge into its modern form. 
 
618 PRELIMINARY SURVEY OF DISTRIBUTION AND EXCHANGE. 
 
 BOOK vi. may have but little capital as his own, acts as the boss of 
 
 CH ' n - the great industrial wheel. The interests of owners of 
 
 though capital and of workers radiate towards him and from him : 
 
 of the and he holds them all together in a firm grip. He will 
 
 undertf ar t k ere f ore ta ^ e a predominant place in those discussions of 
 
 fmport? fluctuations of employment and of wages, which are deferred 
 
 ance - to the second volume of this treatise; and a prominent, 
 
 though not predominant, place in those, discussions of the 
 
 secondary features in the mode of action of demand and 
 
 supply peculiar to labour, capital and land respectively, 
 
 which will occupy the next eight chapters. 
 
 NOTE ON THE DOCTRINE OF THE WAGES-FUND. 
 
 Early in At the beginning of this century, great as was the poverty of the 
 
 this English people, foreign countries were poorer still. In most of them 
 
 special population was sparse, and therefore food was cheap ; but for all that 
 causes em- they were underfed, and could not provide themselves with the sinews 
 th^de- 6 f war - France, after her first victories, helped herself along by the 
 pendence forced contributions of others. But the countries of Central Europe 
 on the'aid could not support their own armies without England's aid. Even 
 of capital, America with all her energy and national resources, was not rich ; 
 she could not have subsidised Continental armies. The economists 
 looked for the explanation, and found it chiefly in England's accu- 
 mulated capital, which, though small when judged by our present 
 standard, was very much greater than that of any other country. 
 Other nations were envious of England, and wanted to follow in her 
 steps ; but they were unable to do so, partly indeed for other reasons, 
 but chiefly because they had not capital enough. Their annual income 
 was required for immediate consumption. There was not in them a 
 large class of people who had a good store of wealth set by, which 
 they did not need to consume at once, and which they could devote 
 to making machines and other things that would aid labour and 
 enable it to produce a larger store of things for future consumption. 
 A special tone was given to their arguments by the facts that capital 
 was scarce everywhere, even in England ; that the efficiency of labour 
 was becoming more and more dependent on the machinery by which 
 it was aided ; and lastly, that some foolish followers of Rousseau 
 were telling the working classes that they would be better off without 
 any capital at all. 
 
 In consequence, the economists gave extreme prominence to the 
 statements : first, that labour requires the support of capital, i.e. of 
 
NOTE ON THE DOCTRINE OF THE WAGES FUND. 619 
 
 good clothes, &c., that have been already produced ; and secondly, BOOK vi. 
 that labour requires the aid of capital in the form of factories, stores CH - n - 
 of raw material, &c. Of course the workman might have supplied 
 his own capital, but in fact he seldom had more than a little store 
 of clothes and furniture, and perhaps a few simple tools of his own 
 he was dependent for everything else on the savings of others. The 
 labourer received clothes ready to wear, bread ready to eat, or the 
 money with which he could purchase them. The capitalist received 
 a spinning of wool into yarn, a weaving of yarn into cloth, or a 
 ploughing of land, and only in a few cases commodities ready for use, 
 coats ready to be worn, or bread ready to be eaten. There are, no 
 doubt, important exceptions, but the ordinary bargain between em- 
 ployers and employed is that the latter receives things ready for 
 immediate use and the former receives help towards making things 
 that will be of use hereafter. These facts the economists expressed by 
 saying that all labour requires the siipport of capital, whether owned 
 by the labourer or by someone else ; and that when anyone works for 
 hire, his wages are, as a rule, advanced to him out of his employer's 
 capital advanced, that is, without waiting till the things which he 
 is engaged in making are ready for use. These simple statements 
 have been a good deal criticised, but they have never been denied by 
 anyone who has taken them in the sense in which they were meant. 
 
 The older economists, however, went on to say that the amount of but this 
 jvages was limited by the amount of capital ; and this statement cannot J^ e gj euce 
 be defended ; at best it is but a slovenly way of talking. It has aggerated 
 suggested to some people the notion that the total amount of wages ^rele^s ex 
 that could be paid in a country in the course of, say a year, was a pressions. 
 fixed sum. If by the threat of a strike, or in any other way, one 
 body of workmen got an increase of wages, they would be told that in 
 consequence other bodies of workmen must lose an amount exactly 
 equal in the aggregate to what they had gained. Those who have 
 said this, have perhaps thought of agricultural produce, which has but 
 one harvest in the year. If all the wheat raised at one harvest is 
 sure to be eaten before the next, and if none can be imported, then it 
 is true that if anyone's share of the wheat is increased, there will be 
 just so much less for others to have. But this does not justify the 
 statement that the amount of wages payable in a country is fixed by 
 the capital in it, a doctrine which has been called ' the vulgar form of 
 the wages-fund theory 1 . 7 
 
 It has already been noticed (Book I. Ch. iv. 7) that Mill in his Mill 
 later years under the combined influence of Comte, of the Socialists, attempted 
 and of the general tendencies of public sentiment, set himself to bring wages be- 
 
 1 These three paragraphs are reproduced from a paper written in the Co-opera- 
 tive Anmtal, and reprinted in the Report of the Industrial Remuneration Conference, 
 1885, which contained the outlines of the central argument of this and the previous 
 chapter. 
 
620 NOTE ON THE DOCTRINE OF THE WAGES-FUND. 
 
 BOOK vi. m to prominence the human, as opposed to the mechanical, element 
 CH. ii. j n economics. He desired to call attention to the influences which are 
 fore he had exerted on human conduct by custom and usage, by the ever-shifting 
 reached arrangements of society, and by the constant changes in human nature ; 
 the pliability of which he agreed with Comte in thinking that the 
 earlier economists had underrated. It was this desire which gave the 
 chief impulse to his economic work in the latter half of his life, as distin- 
 guished from that in which he wrote his Essays on Unsettled Questions ; 
 and which induced him to separate Distribution from Exchange, and 
 to argue that the laws of Distribution are dependent on " particular 
 human institutions," and liable to be perpetually modified as man's 
 habits of feeling, and thought, and action pass from one phase to 
 another. He thus contrasted the laws of Distribution with those of 
 Production, which he regarded as resting on the immutable basis of 
 physical Nature ; and again with the laws of Exchange, to which he 
 attributed something very much like the universality of Mathematics. 
 It is true that he sometimes spoke as though Political Economy 
 consisted chiefly of discussions of the Production and Distribution 
 of Wealth, and thus seemed to imply that he regarded the theory of 
 Exchange as a part of the theory of Distribution. But yet he kept the 
 two separate from one another ; he treated of Distribution in his 
 second and fourth Books, and gave his third Book to the " Machinery 
 of Exchange" (compare his Principles of Political Economy, Book n. 
 Ch. i. 1, and Ch. xvi. 6). 
 
 He was In doing this he allowed his zeal for giving a more human tone to 
 
 drawn economics to get the better of his judgment, and to hurry him on to 
 on to an work with an incomplete analysis. For, by putting his main theory 
 statement 6 - f wa & es before his account of supply and demand, he cut himself off 
 and the ' from all chance of treating that theory in a satisfactory way ; and in 
 
 ofTtTnhS fact he was led on to sa ^ ( Pri nciples, Book n. Ch. xi. 1), that 
 fourth "Wages depend mainly upon... the proportion between population and 
 noUwjeif ca P itai ; " or rat her, as he explains later on, between " the number of 
 generally tce labouring class... who work for hire," and "the aggregate of what 
 noticed ; mav be called the Wages-Fund which consists of that part of circu- 
 lating capital... which is expended in the direct hire of labour." 
 
 The fact is that the theories of Distribution and Exchange are so 
 intimately connected as to be little more than two sides of the same 
 problem ; that in each of them there is an element of " mechanical " 
 precision and universality, and that in each of them there is an 
 element, dependent on "particular human institutions," which has 
 varied, and which probably will vary, from place to place and from age 
 to age. And if Mill had recognised this great truth, he would not 
 have been drawn on to appear to substitute, as he did in his second 
 Book, the statement of the problem of wages for its solution : but 
 would have combined the description and analysis in his second Book, 
 with the short but profound study of the causes that govern the 
 
NOTE ON THE DOCTRINE OF THE WAGES-FUND. 621 
 
 distribution of the national dividend, given in his fourth Book ; and BOOK vi. 
 the progress of economics would have been much hastened. CH - n - 
 
 As it was, when his friend Thornton, following in the wake of par tiy 
 Longe, Cliffe Leslie, Jevons and others, convinced him that the phrases because he 
 in his second Book were untenable, he yielded too much ; and overstated 
 
 the extent of his own past error and of the concessions which he was position 
 bound to make to his assailants. He said (Dissertations, Vol. iv. p. 46) : answers to 
 " There is no law of nature making it inherently impossible for wages Thornton. 
 to rise to the point of absorbing not only the funds which he (the 
 employer) had intended to devote to carrying on his business, but the 
 whole of what he allows for his private expenses beyond the necessaries 
 of life. The real limit to the rise is the practical consideration how 
 much would ruin him, or drive him to abandon the business, not the 
 inexorable limits of the Wages Fund." He did not make it clear 
 whether this statement refers to immediate or ultimate effects, to short 
 periods or long : but in either case it appears untenable. 
 
 As regards long periods it does not go far enough : for wages could The 
 not rise permanently so as to absorb nearly as large a share of the 
 national dividend as is here indicated. And for short periods, it goes of wages 
 too far : for a well-organized strike at a critical juncture may force from i 
 
 the employer for a short time more than the whole value of his output, particular 
 after paying for raw material during that time ; and thus make his conflicts is 
 gross profits for the time a negative quantity. And indeed the indirect 
 theory of wages whether in its older or newer form, has no remote 
 direct bearing on the issue of any particular struggle in the labour 
 market : that depends on the relative strength of the competing parties. 
 But it has much bearing on the general policy of the relation of capital 
 to labour ; for it indicates what policies do, and what do not, carry in 
 themselves the seeds of their own ultimate defeat; what policies can 
 be maintained, aided by suitable organization ; and what policies will 
 ultimately render either side weak, however well organized. 
 
 After a while Cairnes, in his Leading Principles, endeavoured to Cairnes 
 resuscitate the Wages-fund Theory by expounding it in a form, which e ^ lai ^ d 
 he thought would evade the attacks that had been made on it. But, crudities 
 though in the greater part of his exposition, he succeeded in avoiding ^ , 
 the old pitfalls, he did so only by explaining away so much which doctrine in 
 is characteristic of the doctrine, that there is very little left in it to 
 justify its title. He states however (p. 203) that "the rate of wages, 
 other things being equal varies inversely with the supply of labour;' 3 
 and this seems to point in a wrong direction. For an increase of labour 
 must increase the national dividend, which is one of the causes that 
 govern wages; and therefore if the supply of labour increases, other 
 things cannot be equal. He goes on to derive an " unexpected con- but his 
 sequence," that an increase in the supply of labour, when it is of a F s n ot 0n 
 kind to be used in conjunction with fixed capital and raw material, clear. 
 would cause the Wages-fund to undergo "diminution as the number 
 
622 NOTE ON THE DOCTRINE OF THE WAGES-FUND. 
 
 BOOK vi. wno are to snare it is increased." But that result would follow only 
 CH. ii. if the aggregate of wages were not influenced by the aggregate of pro- 
 duction ; and in fact this last cause is the most powerful of all those 
 which influence wages. 
 
 The wages- It may be noticed that the extreme forms of the Wages-fund 
 doctrine theory represent wages as governed entirely by demand ; though the 
 relates ' demand is represented crudely as dependent on the stock of capital, 
 demand the But some PP ular expositors of economics appear to have held at the 
 side of the same time both this doctrine and the iron law of wages, which re- 
 question. p resen t wages as governed rigidly by the cost of rearing human beings. 
 They might of course have softened each of them and then worked the 
 two into a more or less harmonious whole ; as Cairnes did later. Bui 
 it does not appear that they did so. 
 
 It was The proposition that industry is limited by capital, was often in- 
 
 terpreted so as to make it practically convertible with the Wages-fund 
 theory. It can be explained so as to be true : but a similar explanation 
 would make the statement that "capital is limited by industry" equally 
 true. It was however used by Mill chiefly in connection with the 
 argument that the aggregate employment of labour cannot generally be 
 increased by the simple plan of cutting people off, by Protective duties 
 or in other ways, from opportunities of satisfying their wants in that 
 manner which they would prefer. The effects of protective duties are 
 very complex and cannot be discussed here ; but Mill is clearly right 
 in saying that in general the capital, that is applied to support and aid 
 labour in any new industry created by such duties, " must have been 
 withdrawn or withheld from some other, in which it gave, or would 
 have given, employment to probably about the same quantity of labour 
 but they which it employs in its new occupation." Or to put the argument in a 
 defended more modern form, such legislation does not primd facie increase 
 without it. either the national dividend or the share of that dividend which goes 
 to labour. For it does not increase the supply of capital ; nor does it, 
 in any other way, cause the marginal efficiency of labour to rise 
 relatively to that of capital. The rate that has to be paid for the use 
 of capital is therefore not lowered ; the national dividend is not 
 increased (in fact it is almost sure to be diminished) ; and as neither 
 labour nor capital gets any new advantage over the other in bargaining 
 for the distribution of the dividend, neither can benefit by such legis- 
 lation. 
 
 Symmetry This doctrine of Mill's might indeed logically be inverted ; so as to 
 
 of some of assert that the labour required to give effect to capital in a new 
 
 tions be- industry created by protective duties must have been withdrawn or 
 
 ta\ een ^ a P i- withheld from some other, in which it gave, or would have given effect 
 
 labour. to probably about the same quantity of capital as in its new occupation. 
 
 But this statement though equally true would not appeal with equal 
 
 force to the minds of ordinary people. For as the buyer of goods is 
 
 commonly regarded as conferring a special benefit on the seller, 
 
NOTE ON THE DOCTRINE OF THE WAGES-FUND. 623 
 
 though in fact the services which buyers and sellers render to one BOOK vi. 
 another are in the long run co-ordinate ; so the employer is commonly CH> n - 
 regarded as conferring a special benefit on the worker, whose labour he 
 buys, though in the long run the services which the employers and 
 employees render to one another are co-ordinate. The causes and 
 consequences of this pair of facts will occupy us much at later stages of 
 our inquiry. 
 
 Some interesting contributions to the history of the Wages-fund 
 theory are to be found in the article by Prof. Taussig in the Quarterly 
 Journal of Economics already referred to, and in Mr Cannan's Production 
 and Distribution, 1776-1848. General Walker's writings have thrown 
 much light on the whole subject. The instances of employees rendering 
 their labour in advance of payment, which he has collected, are in- 
 structive in many ways ; and, though they do not perhaps much affect 
 the main issue, they bear effectively on some turns of the controversy. 
 
CHAPTER III. 
 
 DEMAND AND SUPPLY IN RELATION TO LABOUR. REAL 
 AND NOMINAL EARNINGS. 
 
 BOOK vi. I- WHEN discussing the general theory of equilibrium 
 CH. in. O f d eman (l and supply in the last Book, and the main outlines 
 The scope of the central problem of distribution and exchange in the 
 present first two chapters of this Book, we left on one side, as far as 
 fdfowin might be, all considerations turning on the special qualities 
 seven an <J incidents of the agents of production. We did not 
 inquire in detail how far the general theories of the relations 
 between the value of an appliance for production and that of 
 the product, which it helps to make, are applicable to the 
 incomes earned by natural abilities, or by skill and knowledge 
 acquired long ago, whether in the ranks of the employers, the 
 employed, or the professional classes. We avoided difficulties 
 connected with the analysis of Profits, paying no attention 
 to the many different scopes which the usage of the market- 
 place assigns to this term, and even the more elementary 
 term Interest; and we took no account of the influence of 
 varieties of tenure on the form of demand for land. These 
 and some other deficiencies will be made good by more 
 detailed analysis in the following three groups of chapters on 
 demand and supply in relation to labour, to capital and 
 business power, and to land, respectively. 
 
 The present chapter is devoted to methods of estimating 
 and reckoning earnings. It is mainly a mere formal question 
 of arithmetic or bookkeeping : but much error has arisen 
 from treating it carelessly. 
 
COMPETITION DOES NOT EQUALIZE WEEKLY WAGES. 625 
 
 2. When watching the action of demand and supply BOOK vi. 
 with regard to a material commodity, we are constantly met CH ' m ' 
 by the difficulty that two things which are being sold under S om ? etl ^ 
 the same name in the same market, are really not of the to make 
 same quality and not of the same value to the purchasers, wage/in 
 Or, if the things are really alike, they may be sold even in 
 the face of the keenest competition at prices which are nomi- 
 
 nally different, because the conditions of sale are not the tionate to 
 same : for instance, a part of the expense or risk of delivery ciency 
 which is borne in the one case by the seller may in the other 
 be transferred to the buyer. But difficulties of this kind are 
 much greater in the case of labour than of material commodi- 
 ties : the true price that is paid for labour often differs widely, 
 and in ways that are not easily traced, from that which is 
 nominally paid. 
 
 It is commonly said that the tendency of competition is 
 to equalize the earnings of people engaged in the same trade 
 or in trades of equal difficulty ; but this statement requires 
 to be interpreted carefully. For competition tends to make 
 the earnings got by two individuals of unequal efficiency in 
 any given time, say, a day or a year, not equal, but unequal ; 
 and, in like manner, it tends not to equalize, but to render 
 unequal the average weekly wages in two districts in which 
 the average standards of efficiency are unequal. Given that 
 the average strength and energy of the working-classes are 
 higher in the North of England than in the South, it then 
 follows that the more completely " competition makes things 
 find their own level," the more certain is it that average 
 weekly wages will be higher in the North than in the South. 
 Cliffe Leslie and some other writers have naively laid stress 
 on local variations of wages as tending to prove that there 
 is very little mobility among the working-classes, and that 
 the competition among them for employment is ineffective. 
 But most of the facts which they quote relate only to wages 
 reckoned by the day or week : they are only half-facts, and 
 when the missing halves are supplied, they generally support 
 the opposite inference to that on behalf of which they are 
 quoted. For it is found that local variations of weekly wages 
 and of efficiency generally correspond : and thus the facts 
 M. 40 
 
626 DEMAND AND SUPPLY IN RELATION TO LABOUR. 
 
 BOOK VI. 
 CH. III. 
 
 tend to prove the effectiveness of competition, so far as they 
 bear on the question at all. We shall however presently find 
 that the full interpretation of such facts as these is a task of 
 great difficulty and complexity. 
 
 The earnings, or wages, which a person gets in any given 
 time, such as a day, a week, or a year, may be called his 
 Time-earnings, or Time-wages: and we may then regard 
 competition, or to speak more exactly, economic freedom and 
 enterprise, as tending to make time-earnings in occupations 
 of equal difficulty and in neighbouring places not equal, but 
 proportionate to the efficiency of the workers. 
 
 Payment But this phrase, '' the efficiency of the workers," has some 
 
 ambiguity. When the payment for work of any kind is 
 apportioned to the quantity and quality of the work turned 
 out, it is said that uniform rates of Piece-work wages are 
 being paid; and if two persons work under the same con- 
 ditions and with equally good appliances, they are paid in 
 proportion to their efficiencies when they receive piece-work 
 wages calculated by the same lists of prices for each several 
 kind of work. If however the appliances are not equally 
 good, a uniform rate of piece-work wages gives results dis- 
 proportionate to the efficiency of the workers. If, for instance, 
 the same lists of piece-work wages were used in Lancashire 
 cotton mills supplied with old-fashioned machinery, as in 
 those which have the latest improvements, the apparent 
 equality would represent a real inequality. The more effec- 
 tive competition is, and the more perfectly economic freedom 
 and enterprise are developed, the more surely will the lists be 
 higher in the mills that have old-fashioned machinery than 
 in the others. 
 
 In order therefore to give its right meaning to the state- 
 ment that economic freedom and enterprise tend to equalize 
 wages in occupations of the same difficulty and in the same 
 neighbourhood, we require the use of a new term. We may 
 
 Efficiency- find it in Efficiency -wages, or more broadly Efficiency- 
 earnings. . , . . , * . 
 
 earnings', that is, earnings measured, not as time-earnings 
 
 are with reference to the time spent in earning them ; and not 
 as piece-work earnings are with reference to the amount of 
 output resulting from the work by which they are earned ; 
 
COMPETITION TENDS TO APPORTION WAGES TO EFFICIENCY. 627 
 
 but with reference to the exertion of ability and efficiency BOOKVI. 
 required of the worker 1 . CH.JII. 
 
 The tendency then of economic freedom and enterprise The law of 
 (or, in more common phrase, of competition), to cause every g^y en( 
 
 one's earnings to find their own level, is a tendency to ^J*j$ s o{ 
 equality of efficiency-earnings in the same district. This efficiency- 
 tendency will be the stronger, the greater is the mobility of 
 labour, the less strictly specialized it is, the more keenly 
 parents are on the look-out for the most advantageous 
 occupations for their children, the more rapidly they are 
 able to adapt themselves to changes in economic con- 
 ditions, and lastly the slower and the less violent these 
 changes are. 
 
 This statement of the law is, however, still subject to a Low- 
 slight correction. For we have hitherto supposed that it is Sour is 
 a matter of indifference to the employer whether he employs 
 
 few or many people to do a piece of work, provided his total working 
 wages-bill for the work is the same. But that is not the pensive 
 case. Those workers who earn most in a week when paid at m 
 a given rate for their work, are those who are cheapest to 
 their employers (and ultimately to the community, unless 
 indeed they overstrain themselves, and work themselves out 
 prematurely). For they use only the same amount of fixed 
 capital as their slower fellow workers ; and, since they turn 
 out more work, each part of it has to bear a less charge on 
 this account. The prime costs are equal in the two cases ; 
 but the total cost of that done by those who are more 
 efficient, and get the higher time- wages, is lower than that 
 
 1 In earlier editions the term Task-wages was given as an alternative to Efficiency - 
 ivayes ; but that term is in some trades applied to wages paid by the day on condi- 
 tion that a certain definite task be accomplished in it. If as generally is the case 
 the workman is at liberty to exceed the minimum task, and to be paid in propor- 
 tion, the system is really one of piece-work ; formal expression being given to the 
 condition latent in all piece-work in which expensive plant is used, that the plant 
 shall be turned to fairly good account. The variations in the conditions of 
 hiring in different trades and places are numerous, but. they bear more 
 intimately on labour politics than on normal wages; and what has to be said 
 about them may conveniently be deferred to a later stage. Meanwhile reference 
 may be made to a full discussion of them in Mr Schloss' Methods of Industrial 
 Remuneration; and an article by him in the Economic Joiimal, Vol. n. Many 
 interesting facts bearing on the matter are to be found in the Report of the Labour 
 Commission, and in Mr Charles Booth's Life and Labour in London. 
 
 402 
 
628 DEMAND AND SUPPLY IN RELATION TO LABOUR. 
 
 BOOK vi. done by those who get the lower time-wages at the same 
 
 CH ' m " rate of piece-work payment 1 . 
 
 This point is seldom of much importance in out-of-door 
 work, where there is abundance of room, and comparatively 
 little use of expensive machinery ; for then, except in the 
 matter of superintendence, it makes very little difference to 
 the employer, whose wages-bill for a certain piece of work is 
 100, whether that sum is divided between twenty efficient 
 or thirty inefficient workers. But when expensive machinery 
 is used which has to be proportioned to the number of 
 workers, the employer would often find the total cost of his 
 goods lowered if he could get twenty men to turn out for 
 a wages-bill of 50 as much work as he had previously got 
 done by thirty men for a wages-bill of 40. In all matters 
 of this kind the leadership of the world lies with America, 
 and it is not an uncommon saying there, that he is the best 
 business man who contrives to pay the highest wages. 
 
 The corrected law then stands that the tendency of 
 economic freedom and enterprise is generally to equalize 
 efficiency -earnings in the same district : but where much 
 expensive fixed capital is used, it would be to the advantage 
 of the employer to raise the time-earnings of the more 
 efficient workers more than in proportion to their efficiency. 
 
 Of course this tendency is liable to be opposed by special 
 customs and institutions, and, in some cases, by trades- union 
 regulations 2 . 
 
 1 This argument would be subject to corrections in cases in which the trade 
 admitted of the employment of more than one shift of workpeople. It would 
 often be worth an employer's while to pay to each of two shifts as much for an 
 eight hours' day as he now pays to one shift for a ten hours' day. For though 
 each worker would produce less, each machine would produce more on the former 
 than on the latter plan'. But to this point we shall return. 
 
 2 Ricardo did not overlook the importance of the distinction between variations 
 in the amount of commodities paid to the labourer as wages, and variations in the 
 profitableness of the labourer to his employer. He saw that the real interest of 
 the employer lay not in the amount of wages that he paid to the labourer, but in 
 the ratio which those wages bore to the value of the produce resulting from the 
 labourer's work: and he decided to regard the rate of wages as measured by this 
 ratio: and to say that wages rose when this ratio increased, and that they fell 
 when it diminished. It is to be regretted that he did not invent some new term 
 for this purpose ; for his artificial use of a familiar term has seldom been under- 
 stood by others, and was in some cases even forgotten by himself. (Compare 
 
REAL WAGES AND NOMINAL WAGES. 629 
 
 3. Thus much with regard to estimates of the work for BOOK vi. 
 which the earnings are given : but next we have to consider _] _ ' 
 more carefully the facts, that in estimating the real earnings 
 of an occupation account must be taken of many things 
 besides its money receipts, and that on the other side of the 
 account we must reckon for many incidental disadvantages 
 besides those indirectly involved in the strain and stress of 
 the work. 
 
 As Adam Smith says, " the real wages of labour may Real wages 
 be said to consist in the quantity of the necessaries and con- na i wages'. 
 veniences of life that are given for it ; its Nominal wages 
 in the quantity of money ...... The labourer is rich or poor, 
 
 is well or ill rewarded, in proportion to the real, not to the 
 nominal, wages of his labour 1 ." But the words "that are 
 given for it " must not be taken to apply only to the neces- 
 saries and conveniences that are directly provided by the 
 purchaser of the labour or its products; for account must 
 be taken also of the advantages which are attached to the 
 occupation, and require no special outlay on his part. 
 
 In endeavouring to ascertain the real wages of an occu- Allowance 
 pation at any place or time, the first step is to allow for made for 
 variations in the purchasing power of the money in which the^pur- 
 nominal wages are returned. This point cannot be tho- chasin g 
 roughly dealt with till we come to treat of the theory of money, 
 money as a whole. But it may be remarked in passing that special 
 this allowance would not be a simple arithmetical reckoning, t, the con- 
 
 even if we had perfectly accurate statistics of the history 
 the prices of all commodities. For if we compare distant 
 places or distant times, we find people with different wants, concerned. 
 and different means of supplying those wants: and even 
 when we confine our attention to the same time and place 
 
 Senior's Political Economy, pp. 142 8.) The variations in the productiveness of 
 labour which he had chiefly in view were those which result from improvements hi 
 the arts of production on the one hand, and on the other from the action of the 
 law of diminishing return, when an increase of population required larger crops to 
 be forced from a limited soil. Had he paid careful attention to the increase in the 
 productiveness of labour that results directly from an improvement hi the labourer's 
 condition, the position of economic science, and the real well-being of the country, 
 would in all probability be now much further advanced than they are. As it is, 
 his treatment of wages is less instructive than that of Malthus. 
 1 Wealth of Nations, Book i. Ch. v. 
 
($30 DEMAND AND SUPPLY IN RELATION TO LABOUR. 
 
 BOOK vi. we find people of different classes spending their incomes in 
 CHJEII. yer y Different W ays. For instance, the prices of velvet, of 
 operatic entertainments and scientific books are not very 
 important to the lower ranks of industry ; but a fall in the 
 price of bread or of shoe leather affects them much more 
 than it does the higher ranks. Differences of this kind 
 must always be borne in mind, and it is generally possible to 
 make some sort of rough allowance for them 1 . 
 
 4. We have already noticed 2 that a person's total real 
 income is found by deducting from his gross income the out- 
 goings that belong to its production ; and that this gross 
 income includes many things which do not appear in the 
 form of money payments and are in danger of being over- 
 looked. 
 
 Allowance Firstly, then, with regard to the outgoings. We do not 
 made for nere rec kon the expenses of education, general and special, 
 
 trade involved in the preparation for any trade : nor do we take 
 expenses. A A * 
 
 account of the exhaustion of a person's health and strength 
 in his work. Allowance for them may be best made in other 
 ways. But we must deduct all trade expenses, whether they 
 are incurred by professional men or artisans. Thus from 
 the barrister's gross income we must deduct the rent of his 
 office and the salary of his clerk : from the carpenter's gross 
 income we must deduct the expenses which he incurs for 
 
 1 The Report of the Poor Laio Commissioners on the Employment of Women 
 and Children in Agriculture, 1843, p. 297, contains some interesting specimens of 
 yearly wages paid in Northumberland in which very little money appeared. Here 
 is one: 10 bushels of wheat, 30 of oats, 10 of barley, 10 of rye, 10 of peas; a cow's 
 keep for a year; 800 yards of potatoes; cottage and garden; coal-shed; 3. 10,s. in 
 cash; and 2 bushels of barley in lieu of hens. 
 
 Many plans have been suggested for making a special estimate of the pur- 
 chasing power of money with regard to those things that are chiefly consumed by 
 the working classes, the importance of each thing being taken in such estimate as 
 proportionate to the amount spent on it in an average working class budget. Mr 
 Edward Atkinson has suggested that this measure of purchasing power should be 
 called "a standard ration." But at best it could only be approximate, partly 
 because the working classes contain within themselves several different grades, 
 with corresponding variations in the percentages of their incomes which they 
 devote to purchasing different things. (See the latter half of the Note at the end 
 of Book HI. Ch. iv.) General Walker's Treatise On Wages and Roscher's Politi- 
 cal Economy, contain many suggestive remarks and facts bearing on the subjects 
 of this section, and indeed of the whole chapter. 
 
 2 Book n. Ch. v. 
 
INCIDENTAL ADVANTAGES OF AN OCCUPATION. 631 
 
 tools ; and when estimating the earnings of quarrymen BOOK vi. 
 in any district we must find out whether local custom ' 
 assigns the expenses of tools and blasting powder to them 
 or their employers. Such cases are comparatively simple; 
 but it is more difficult to decide how large a part of the 
 expenses, which a medical man incurs for house and carriage 
 and social entertainments, are to be regarded as trade ex- 
 penses ; or how much of the charges to which a postman is 
 put for boots, or a domestic servant or an attendant in a 
 fashionable shop for clothes, should be deducted under this 
 head 1 . 
 
 5. Next let us take account of the different modes of Where 
 payment which are adopted in different occupations. We partly paid 
 may select for study the case of domestic servants. We allowances' 
 
 have already noticed that when they have to supply them- 
 selves at their own cost with expensive clothes, which they ]^ e 
 Avould not buy if free to do as they liked, the value of their who receive 
 wages to them is somewhat lowered by this compulsion. And attheircost 
 when the employer provides expensive liveries, houseroom wh^give 
 and food for his servants, these are generally worth much them< 
 less to them than they cost to him. It is therefore an error 
 to reckon the real wages of domestic servants, as some sta- 
 tisticians have done, by adding to their money wages the 
 equivalent of the cost to their employer of everything that he 
 provides for them 2 . 
 
 On the whole, when the Truck system prevails in any 
 
 1 This class of questions is closely allied to those raised when discussing the 
 definitions of Capital and Income in Book n. ; where a caution has already been 
 entered against overlooking elements of income that do not take the form of 
 money. Earnings of many even of the professional and wage -receiving classes 
 are in a considerable measure dependent on their being in command of some 
 material capital. 
 
 2 Again, when a farmer hauls coals free for his men, choosing, of course, times 
 when his horses have little to do, the real addition to their earnings is much 
 greater than the cost to him. The same applies to many perquisites and allow- 
 ances, as for instance, when the employer allows his men to have without payment 
 commodities which though useful to them, are almost valueless to him on account 
 of the great expenses involved in marketing them ; or, again, when he allows them 
 to buy for their own use at the wholesale price commodities which they have 
 helped to produce. When however this permission to purchase is changed into an 
 obligation to purchase, the door is opened to grave abuses. The farmer who 
 compels his men to take from him spoilt wheat at the wholesale price of good 
 wheat, is really paying them lower wages than he appears to be. 
 

 632 DEMAND AND SUPPLY IN RELATION TO LABOUR. 
 
 BOOK vi. trade in an old country, we may fairly assume that the real 
 CH " m> rate of wages is lower than the nominal. The most viru- 
 lent forms of the system have always been those which have 
 lain beneath the surface; and in our own day they still 
 flourish in those industries which retain a semi-mediaeval 
 character, while they seldom exist in those in which the 
 modern factory system prevails. The influence of the system 
 for evil in the past has been so great, that it may rank with 
 the old poor law and the unhealthy conditions of juvenile 
 labour early in the century as a chief cause of the degradation 
 of large numbers of the working classes : but its influence is 
 not now great save in a few trades 1 . 
 
 1 In a new country in which large agricultural, mining, and other businesses 
 often spring up at a great distance from any considerable town, the employers are 
 compelled to supply their workpeople with everything they want, either by paying 
 part of their wages in the form of allowances of food, clothing &c., or by opening 
 stores for them. Stores of this kind are generally managed on a straightforward 
 business-like principle, and wholesome customs and traditions thus started are 
 apt to survive even when the employers' shops have ceased to be necessary in 
 consequence of the growth of fairly good independent shops in the neighbourhood. 
 The shops remain an almost unmixed benefit to all concerned so long as dealing 
 at them is voluntary ; and, even when it becomes compulsory, they may be on the 
 whole a benefit to the workpeople, provided they are managed with ability and 
 honesty. For, since the employers ensure themselves prompt sales and certain 
 payments by contracting that a certain part of the wages paid by them shall be 
 taken out in purchases at the stores, they are able to work these stores more 
 cheaply than ordinary retail shops, and thus to pay, with an equal profit to them- 
 selves, higher real wages than would otherwise be possible. 
 
 But employers, whose main business is in a healthy condition, are generally 
 too busy to be willing to manage such shops unless there is some strong reason 
 for doing so ; and consequently in old countries those who have adopted the Truck 
 system have more often than not done so with the object of getting back by 
 underhand ways part of the wages which they nominally paid away. They have 
 compelled those who work at home to hire machinery and implements at exorbitant 
 rents ; they have compelled all their workpeople to buy adulterated goods at short 
 weights and high prices; and in some cases even to spend a very large part of 
 their wages on goods on which it was easiest to make the highest rate of profits, 
 and especially on spirituous liquors. Mr Lecky, for instance, records an amusing 
 case of employers who could not resist the temptation to buy theatre tickets 
 cheap, and compel their workpeople to buy them at full price (History of the 
 Eighteenth Century, vi. p. 158). The evil is however at its worst when the shop 
 is kept not by the employer, but by the foreman or by persons acting in concert 
 with him; and when he, without openly saying so, gives it to be understood 
 that those who do not deal largely at the shop will find it difficult to get his good 
 word. For an employer suffers more or less from anything that injures his work- 
 people, while the exactions of an unjust foreman are but little held in check by 
 regard for his own ultimate interest. 
 
 The story of the abuses of the Truck system in modern England is told in a 
 
UNCERTAINTY OF SUCCESS. IRREGULARITY OF EMPLOYMENT. 633 
 
 6. Next we have to take account of the influences BOOK vi. 
 exerted on the real rate of earnings in an occupation by J _ ' 
 the uncertainty of success and the inconstancy of employment J^y'of 
 in it. succe u ss 
 
 may be 
 
 We should obviously start by taking the earnings of an allowed for 
 occupation as the average between those of the successful a n average? 
 and unsuccessful members of it ; but care is required to get 
 the true average. For if the average earnings of those who 
 are successful are 2000 a year, and of those who are un- 
 successful are 400 a year, the average of the whole will be 
 1200 a year if the former group is as large as the latter; 
 but if, as is perhaps the case with barristers, the unsuccessful 
 are ten times as numerous as the successful, the true average 
 is but 550. And further, many of those who have failed 
 most completely, are likely to have left the occupation 
 altogether, and thus to escape being counted. 
 
 And again, though, by taking this average, we obviate but 
 the necessity of making any separate allowance for insurance allowance 
 against risk, account generally remains to be taken of the ^ade for 
 
 evil of uncertainty. For there are many people of a sober the evils of 
 steady -going temper, who like to know what is before tainty and 
 them, and who would far rather have an appointment which ai 
 offered a certain income of say 400 a year than one which 
 was not unlikely to yield 600, but had an equal chance of 
 affording only 200. Uncertainty, therefore, which does not 
 appeal to great ambitions and lofty aspirations, has special 
 attractions for very few ; while it acts as a deterrent to many 
 of those who are making their choice of a career. And as a 
 rule the certainty of moderate success attracts more than 
 an expectation of an uncertain success that has an equal 
 actuarial value. 
 
 But on the other hand, if an occupation offers a few Though 
 extremely high prizes, its attractiveness is increased out of extremely 
 
 long series of Parliamentary Reports, which come down to the present time : and 
 while the evil itself has been steadily diminishing, the intensity of the light 
 thrown on what remains has been increasing as steadily. An excellent account 
 of the payments in kind by which the agricultural labourer's wages are supple- 
 mented is given by Mr Kebbel (The Agricultural Labourer, 2nd Ed., Ch. n.). A 
 table to be found in Vol. xx. of the United States Census for 1880 shows that of 
 773 manufacturing firms which answer questions as to the mode of payment 
 adopted by them, 681, or 88 per cent., pay in cash : but in some of the States 
 which are thinly populated the proportion is not much more than one-half. 
 
634 DEMAND AND SUPPLY IN RELATION TO LABOUR. 
 
 BOOK vi. all proportion to their aggregate value. For this there 
 CH> m> are two reasons. The first is that young men of an ad- 
 high prizes venturous disposition are more attracted by the prospects 
 
 have a dis- i i ,1 ,- c 
 
 proportion- o f a great success than they are deterred by the tear 01 
 attractive* failure ; and the second is that the social rank of an occupa- 
 tion depends more on the highest dignity and the best 
 position which can be attained through it than on the 
 average good fortune of those engaged in it. It is an old 
 maxim of statecraft that a Government should offer a few 
 good prizes in every department of its service: and in 
 aristocratic countries the chief officials receive very high 
 salaries, while those of the lower grades are comforted in the 
 receipt of salaries below the market level for similar services 
 by their hopes of ultimately rising to a coveted post, and 
 by the social consideration which in such countries always 
 attends on public officers. This arrangement has the inci- 
 dental effect of favouring those who are already rich and 
 powerful ; and partly for that reason it is not adopted in 
 democratic countries. They often go to the opposite ex- 
 treme, and pay more than the market rates for their services 
 to the lower ranks, and less to the upper ranks. But that 
 plan, whatever be its merits on other grounds, is certainly 
 an expensive one. 
 
 irregu- We may next consider the influence which inconstancy of 
 
 employ- 1 employment exerts on wages. It is obvious that in those 
 
 occupations, in which employment is irregular, the pay must 
 
 allowed for be high in proportion to the work done : the medical man and 
 
 average the shoeblack must each receive when at work a pay which 
 
 cases 1 - 16 covers a sort of retaining fee for the time when he has nothing 
 
 to do. If the advantages of their occupations are in other 
 
 respects equal, and their work equally difficult, the bricklayer 
 
 when at work must be paid a higher rate than the joiner, and 
 
 the joiner than the railway guard. For work on the railways 
 
 is nearly constant all the year round ; while the joiner and 
 
 the bricklayer are always in danger of being made idle by 
 
 slackness of trade, and the bricklayer's work is further 
 
 interrupted by frost and rain. The ordinary method of 
 
 allowing for such interruptions is to add up the earnings for 
 
 a long period of time and to take the average of them ; but 
 
 this is not quite satisfactory unless we assume that the rest 
 
VARIOUS EFFECTS OF UNCERTAINTY. FAMILY EARNINGS. 635 
 
 and leisure, which a man gets when out of employment, are BOOK vi. 
 of no service to him directly or indirectly 1 . 
 
 This assumption may be fairly made in some cases ; for but not in 
 
 t i ^ i u A j aU; each 
 
 waiting for work often involves so much anxiety and worry case mus t 
 
 that it causes more strain than the work itself would do 2 . 
 But that is not always so. Interruptions of work that occur merits. 
 in the ordinary course of business, and raise no fears about 
 the future, give opportunity for the system to recruit itself 
 and lay in stores of energy for future exertions. The success- 
 ful barrister, for instance, is subject to a severe strain during 
 some parts of the year ; and that is itself an evil : but when 
 allowance has been made for it, he may be regarded as losing 
 very little in the long run by being prevented from earning 
 any fees during the legal vacations 3 . 
 
 7. Next we must take account of the opportunities Supple- 
 which a man's surroundings may afford of supplementing ^mings. 
 the earnings which he gets in his chief occupation, by doing 
 work of other kinds. And account may need to be taken 
 also of the opportunities which these surroundings offer for 
 the work of other members of his family. 
 
 Many economists have even proposed to take as their Family 
 unit the earnings of a family : and there is much to be said ea 
 for this plan with reference to agriculture and those old- 
 fashioned domestic trades in which the whole family works 
 together, provided that allowance is made for the loss result- 
 ing from any consequent neglect by the wife of her household 
 duties. But in modern England trades of this kind are 
 exceptional ; the occupation of the head of a family seldom 
 exerts much direct influence on those of its other members, 
 though of course when the place in which he works is fixed, 
 the employments, to which his family can get easy access, are 
 limited by the resources of the neighbourhood. 
 
 1 These considerations are specially important with regard to piece-work ; the 
 rate of earnings being in some cases much reduced by short supplies of material 
 to work on, or by other interruptions, avoidable or unavoidable. 
 
 2 The evils of irregularity of employment are well stated in a lecture on that 
 subject given by Prof. Foxwell in 1886. 
 
 3 Workers in the higher grades are generally allowed holidays with pay ; but 
 those in the lower grades generally forfeit their pay when they take holidays. 
 The causes of this distinction are obvious; but it naturally raises a feeling of 
 grievance of a kind, to which the inquiries by the Labour Commission gave vent. 
 See e.g. Group B. 24, 4316. 
 
DEMAND AND SUPPLY IN RELATION TO LABOUR. 
 
 BOOK vi. 8. Thus then the attractiveness of a trade depends on 
 
 CH ' m> many other causes besides the difficulty and strain of the 
 
 attractive wor ^ to be done in it on the one hand, and the money- 
 
 ness of a earnings to be got in it on the other. And when the earnings 
 
 depends in any occupation are regarded as acting on the supply of 
 
 money- 1 S labour in it, or when they are spoken of as being its supply 
 P r i ce > we nmst always understand that the term is only used 
 
 Net Ad- as a short expression for its Net Advantages 1 . We must 
 
 vantages, - 1 . 
 
 take account of the facts that one trade is healthier or clean- 
 lier than another, that it is carried on in a more wholesome 
 or pleasant locality, or that it involves a better social position ; 
 as is instanced by Adam Smith's well-known remark that the 
 aversion which many people have for the work of a butcher, 
 and to some extent for the butcher himself, raises the earnings 
 of butchers above those of bakers. 
 
 subject to Of course individual character will always assert itself in 
 bSweenLtt- estimating particular advantages at a high or a low rate. 
 dmduais, S ome persons, for instance, are so fond of having a cottage to 
 themselves that they prefer living on very low wages in the 
 country to getting much higher wages in the town ; while 
 others are indifferent as to the amount of houseroom they 
 get, and are willing to go without the comforts of life 
 provided they can procure what they regard as its luxuries. 
 This was the case, for example, with a family of whom the 
 Royal Commission on the Housing of the Working Classes in 
 1884 were told : their joint earnings were 7 a week, but 
 they chose to live in one room, so as to be able to spend 
 money freely on excursions and amusements. 
 
 Personal peculiarities, such as these, prevent us from 
 predicting with certainty the conduct of particular indi- 
 viduals. But if each advantage and disadvantage is reckoned 
 at the average of the money values it has for the class of 
 people who would be likely to enter an occupation, or to 
 bring up their children to it, we shall have the means of esti- 
 mating roughly the relative strengths of the forces that tend 
 to increase or diminish the supply of labour in that occu- 
 pation at the time and place which we are considering. For 
 it cannot be too often repeated that grave errors are likely to 
 result from taking over an estimate of this kind based on the 
 
 1 See Book n. Ch. v. S 2. 
 
INFLUENCE OF VARIETIES OF TEMPERAMENT. 637 
 
 circumstances of one time and place, and applying it without BOOK vi. 
 proper precaution to those of another time or another place. _J ' 
 
 In this connection it is interesting to observe the influence between 
 of differences of national temperament in our own time. rs 
 Thus in America we see Swedes and Norwegians drift to 
 agriculture in the North-west, while the Irish, if they go on 
 the land at all, choose farms in the older Eastern States. The 
 preponderance of Germans in the furniture and the brewing 
 industries, and of Irish and French Canadians in the textile 
 industries of the United States, and the preference of the 
 Jewish immigrants in London for the boot-making industries 
 and for retail trade all these are due partly to differences 
 in national aptitudes, but partly also to differences in the 
 estimates that people of different races form of the incidental 
 advantages and disadvantages of different trades. 
 
 Lastly, the disagreeableness of work seems to have very and 
 little effect in raising wages, if it is of such a kind that it industrial 
 can be done by those whose industrial abilities are of a very s rades - 
 low order. For the progress of sanitary science has kept 
 alive many people who are unfit for any but the lowest grade 
 of work. They compete eagerly for the comparatively small 
 quantity of work for which they are fitted, and in their urgent 
 need they think almost exclusively of the wages they can 
 earn : they cannot afford to pay much attention to incidental 
 discomforts, and indeed the influence of their surroundings 
 has prepared many of them to regard the dirtiness of an 
 occupation as an evil of but minor importance. 
 
 And from this arises the strange and paradoxical result An evil 
 that the dirtiness of some occupations is a cause of the p * 
 lowness of the wages earned in them. For employers find 
 that this dirtiness adds much to the wages they would have 
 to pay to get the work done by skilled men of high character 
 working with improved appliances ; and so they often adhere 
 to old methods which require only unskilled workers of but 
 indifferent character, and who can be hired for low (Time-) 
 wages, because they are not worth much to any employer. 
 There is no more urgent social need than that labour of this 
 kind should be made scarce and dear. 
 
CHAPTER IV. 
 
 DEMAND AND SUPPLY IN RELATION TO LABOUR, 
 CONTINUED. 
 
 BOOK vi. 1. THE action of demand and supply with regard to 
 
 CH> IV ' labour was discussed in the last chapter with reference to 
 
 importance ^ e difficulties of ascertaining the real as opposed to the 
 
 of many nominal price of labour. But some peculiarities in this action 
 
 ties in the remain to be studied which are of a more vital character : 
 
 demand* because they affect not merely the form, but also the substance 
 
 w^?hre P ard ^ ^ e action of the forces of demand and supply ; and to 
 
 to labour some extent they limit and hamper the free action of those 
 
 much on forces. We shall find that the influence of many of them is 
 
 latlveness not at a ll to be measured by their first and most obvious 
 
 effects 1 - effects: and that those effects which are cumulative are 
 
 generally far more important in the long run than those 
 
 which are not, however prominent the latter may appear. 
 
 thus re- The problem has thus much in common with that of tracing 
 
 thTmfhf- the economic influence of custom, For it has already 1 been 
 
 custom noticed, and it will become more clear as we go on, that the 
 
 direct effects of custom in causing a thing to be sold for a 
 
 price sometimes a little higher and sometimes a little lower 
 
 than it would otherwise fetch, are not really of very great 
 
 importance, because any such divergence does not, as a rule, 
 
 tend to perpetuate and increase itself; but on the contrary, 
 
 if it becomes considerable, it tends itself to call into action 
 
 forces that counteract it. Sometimes these forces break 
 
 down the custom altogether ; but more often they evade it 
 
 1 Book i. Ch. ii. S 2. 
 
CUMULATIVE INFLUENCES. 639 
 
 by gradual and imperceptible changes in the character of BOOKVI. 
 the thing sold, so that the purchaser really gets a new thing ' 
 at the old price under the old name. These direct effects 
 then are obvious, but they are not cumulative. On the 
 other hand, the indirect effects of custom in hindering the 
 methods of production and the character of producers from 
 developing themselves freely are not obvious ; but they 
 generally are cumulative, and therefore exert a deep and 
 controlling influence over the history of the world. If cus- 
 tom checks the progress of one generation, then the next 
 generation starts from a lower level than it otherwise would 
 have done ; and any retardation which it suffers itself is 
 accumulated and added to that of its predecessor, and so on 
 from generation to generation 1 . 
 
 And so it is with regard to the action of demand and 
 supply on the earnings of labour. If at any time it presses 
 hardly on any individuals or class, the direct effects of the 
 evils are obvious. But the sufferings that result are of 
 different kinds : those, the effects of which end with the evil 
 by which they were caused, are not generally to be com- 
 pared in importance with those that have the indirect effect 
 of lowering the character of the workers or of hindering 
 it from becoming stronger. For these last cause further 
 weakness and further suffering, which again in their turn 
 cause yet further weakness and further suffering, and so on 
 cumulatively. On the other hand, high earnings, and a strong 
 character, lead to greater strength and higher earnings, 
 which again lead to still greater strength and still higher 
 earnings, and so on cumulatively. 
 
 2. The first point to which we have to direct our First pecu- 
 attention is the fact that human agents of production are worker 
 not bought and sold as machinery and other material agents 
 
 of production are. The worker sells his work, but he him- retains 
 
 property in 
 
 self remains his own property : those who bear the expenses himself. 
 
 1 It ought, however, to be remarked that some of the beneficial effects of 
 custom are cumulative. For among the many different things that are included 
 under the wide term "custom" are crystallized forms of high ethical principles, 
 rules of honourable and courteous behaviour, and of the avoidance of troublesome 
 strife about paltry gains ; and much of the good influence which these exert on 
 race character is cumulative. 
 
640 DEMAND AND SUPPLY IN RELATION TO LABOUR, CONTINUED. 
 
 BOOK vi. of rearing and educating him receive but very little of the 
 CH ' IV " price that is paid for his services in later years 1 . 
 Conse- Whatever deficiencies the modern methods of business 
 
 may have, they have at least this virtue, that he who bears 
 *ke expenses of production of material goods, receives the 
 limited by price that is paid for them. He who builds factories or 
 
 the means, r . . / 
 
 the fore- steam-engines or nouses, or rears slaves, reaps the benefit of 
 and U t1ie ' all net services which they render so long as he keeps them 
 nessof S his ^ or nmise lf ; and when he sells them he gets a price which 
 parents. f s the estimated net value of their future services. The 
 stronger and the more efficient he makes them, the better 
 his reward; and therefore he extends his outlay until there 
 seems to him no good reason for thinking that the gains 
 resulting from any further investment would compensate 
 him. He must do this prudently and boldly, under the 
 penalty of finding himself worsted in competition with others 
 who follow a broader and more far-sighted policy, and of 
 ultimately disappearing from the ranks of those who direct 
 the course of the world's business. The action of competi- 
 tion, and the survival in the struggle for existence of those 
 who know best how to extract the greatest benefits for them- 
 selves from the environment, tend in the long run to put 
 the building of factories and steam-engines into the hands 
 of those who will be ready and able to incur every expense 
 which will add more than it costs to their value as pro- 
 ductive agents. But the investment of capital in the rearing 
 and early training of the workers of England is limited by 
 the resources of parents in the various grades of society, by 
 their power of forecasting the future, and by their willing- 
 ness to sacrifice themselves for the sake of their children. 
 This evil is This evil is indeed of comparatively small importance with 
 tiveiyTmaii regard to the higher industrial grades. For in those grades 
 higher most P eo ple distinctly realize the future, and " discount it at 
 sodety- f a ^ ow rate f i nteres t." They exert themselves much to 
 
 1 This is consistent with the well-known fact that slave labour is not economi- 
 cal, as Adam Smith remarked long ago that " The fund destined for replacing or 
 repairing, if I may say so, the wear-and-tear of the slave is commonly managed 
 by a negligent master or careless overseer. That destined for performing the 
 same office for the free man is managed by the free man himself... with strict 
 frugality and parsimonious attention." 
 
INVESTMENTS OF CAPITAL BY PARENTS IN CHILDREN. 641 
 
 select the best careers for their sons, and the best trainings BOOK vi. 
 for those careers ; and they are generally willing and able to C ^J- 
 incur a considerable expense for the purpose. The profes- 
 sional classes especially, while generally eager to save some 
 capital for their children, are even more on the alert for 
 opportunities of investing it in them. And whenever there 
 occurs in the upper grades of industry a new opening for 
 which an extra and special education is required, the future 
 gains need not be very high relatively to the present outlay, 
 in order to secure a keen competition for the post. 
 
 But in the lower ranks of society the evil is great. For but very 
 the slender means and education of the parents, and the fhe & iower 
 comparative weakness of their power of distinctly realizing ranks ' 
 the future, prevent them from investing capital in the edu- 
 cation and training of their children with the same free and 
 bold enterprise with which capital is applied to improving 
 the machinery of any well-managed factory. Many of the 
 children of the work ing- classes are imperfectly fed and 
 clothed; they are housed in a way that promotes neither 
 physical nor moral health ; they receive a school education 
 which, though in modern England it may not be very bad 
 so far as it goes, yet goes only a little way ; they have few 
 opportunities of getting a broader view of life or an insight 
 into the nature of the higher work of business, of science or 
 of art ; they meet hard and exhaustive toil early on the way, 
 and for the greater part keep to it all their lives. At last 
 they go to the grave carrying with them undeveloped abili- 
 ties and faculties ; which, if they could have borne full fruit, 
 would have added to the material wealth of the country to 
 say nothing of higher considerations many times as much 
 as would have covered the expense of providing adequate 
 opportunities for their development. 
 
 But the point on which we have specially to insist now and the 
 is that this evil is cumulative. The worse fed are the cumu- 
 children of one generation, the less will they earn when they 
 grow up, and the less will be their power of providing ade- 
 quately for the material wants of their children ; and so on : 
 and again, the less fully their own faculties are developed, 
 the less will they realize the importance of developing the 
 M. 41 
 
642 DEMAND AND SUPPLY IN RELATION TO LABOUR, CONTINUED. 
 
 'BOOK vi. best faculties of their children, and the less will be their 
 CH - IV ' power of doing so. And conversely any change that awards 
 to the workers of one generation better earnings, together 
 with better opportunities of developing their best qualities, 
 will increase the material and moral advantages which they 
 have the power to offer to their children: while by increasing 
 their own intelligence, wisdom and forethought, it will also 
 to some extent increase their willingness to sacrifice their 
 own pleasures for the well-being of their children ; though 
 there is much of that willingness now even among the 
 poorest classes, so far as their means and the limits of their 
 knowledge will allow. 
 
 The son of 3. The advantages which those born in one of the 
 has abettor higher grades of society have over those born in a lower, con- 
 than the ife B ^ m a ^ rea ^ measure of the better introductions and the 
 son of the better start in life which they receive from their parents; 
 
 unskilled . . 
 
 labourer ; and the importance of this good start in life is nowhere seen 
 more clearly than in a comparison of the fortunes of the sons 
 of artisans and of unskilled labourers. There are not many 
 skilled trades to which the son of an unskilled labourer can 
 get easy access ; and in the large majority of cases the son 
 follows the father's calling. In the old-fashioned domestic 
 industries this was almost a universal rule ; and, even under 
 modern conditions, the father has often great facilities for 
 introducing his son to his own trade. Employers and their 
 foremen generally give to a lad whose father they already 
 know and trust, a preference over one for whom they would 
 have to incur the entire responsibility. And in many trades 
 a lad, even after he has got entrance to the works, is not 
 very likely to make good progress and obtain a secure 
 footing, unless he is able to work by the side of his father, or 
 some friend of his father's, who will take the trouble to teach 
 him and to let him do work that requires careful supervision, 
 but has an educational value. 
 
 he is And the son of the artisan has further advantages. He 
 
 brought 
 
 up in a generally lives in a better arid cleaner house, and under 
 
 more re- 
 
 fined home material surroundings that are more consistent with refine- 
 more^a ment t ^ lan tnose Wlti which the ordinary labourer is familiar, 
 mother's His parents are likely to be better educated, and to have a 
 
INTERWEAVING OF ECONOMIC AND MORAL CAUSES. 643 
 
 higher notion of their duties to their children ; and, last but BOOK vi. 
 not least, his mother is likely to be able to give more of her c f^- 
 time to the care of her family. 
 
 If we compare one country of the civilized world with The great 
 another, or one part of England with another, or one trade o 
 in England with another, we find that the degradation of the element - 
 working-classes varies almost uniformly with the amount of 
 rough work done by women. The most valuable of all capital 
 is that invested in human beings; and of that capital the 
 most precious part is the result of the care and influence of 
 the mother, so long as she retains her tender and unselfish 
 instincts, and has not been hardened by the strain and stress 
 of unfeminine work. 
 
 This draws our attention to another aspect of the prin- 
 ciple already noticed, that in estimating the cost of pro- 
 duction of efficient labour, we must often take as our unit 
 the family. At all events we cannot treat the cost of pro- 
 duction of efficient men as an isolated problem ; it must be 
 taken as part of the broader problem of the cost of production 
 of efficient men together with the women who are fitted to 
 make their homes happy, and to bring up their children 
 vigorous in body and mind, truthful and cleanly, gentle and 
 brave 1 . 
 
 1 Sir William Petty discussed "The Value of the People" with much in- 
 genuity ; and the relation in which the cost of rearing an adult male stands to the 
 cost of rearing a family unit was examined in a thoroughly scientific manner by 
 Cantillon, Essai, Part i. Chap, xi., and again by Adam Smith, Wealth of Nations, 
 Book i. Ch. vni. : and in more recent times by Dr Engel, in his brilliant Essay 
 Der Preis der Arbeit, and by Dr Farr and others. Many estimates have been 
 made of the addition to the wealth of a country caused by the arrival of an 
 immigrant whose cost of rearing in his early years was defrayed elsewhere, and 
 who is likely to produce more than he consumes in the country of his adoption. 
 The estimates have been made on many plans, all of them rough, and some 
 apparently faulty in principle: but most of them find the average value of an 
 immigrant to be about 200. It would seem that, if we might neglect provision- 
 ally the difference between the sexes, we should calculate the value of the 
 immigrant on the lines of the argument of Book v. Ch. iv. 2. That is, we 
 should "discount" the probable value of all the future services that he might 
 render, add them together, and deduct from them the sum of the "discounted'* 
 values of all the wealth and direct services of other persons that he would con- 
 sume : and it may be noted that in thus calculating each element of production 
 and consumption at its probable value, we have incidentally allowed for the 
 chances of his premature death and sickness, as well as of his failure or success in 
 life. Or again we might estimate his value at the money cost of production 
 
 412 
 
644 DEMAND AND SUPPLY, IN RELATION TO LABOUR, CONTINUED. 
 
 BOOK vi. 4. As the youth grows up, the influence of his parents 
 
 CH. IV. 
 
 which his native country had incurred for him ; which would in like manner be 
 found by adding together the "accumulated" values of all the several elements of 
 his past consumption and deducting from them the sum of the "accumulated" 
 values of all the several elements of his past production. 
 
 So far we have taken no account of the difference between the sexes. But it 
 is clear that the above plans put the value of the male immigrants too high and 
 that of the female too low : unless allowance is made for the service which women 
 render as mothers, as wives and as sisters, and the male immigrants are charged 
 with having consumed these services, while the female immigrants are credited 
 with having supplied them. (See Mathematical Note XXIV.) 
 
 Many writers assume, implicitly at least, that the net production of an 
 average individual and the consumption during the whole of his life are equal ; or, 
 in other words, that he would neither add to nor take from the material well- 
 being of a country, in which he stayed all his life. On this assumption the above 
 two plans of estimating his value would be convertible; and then of course 
 we should make our calculations work by the latter and easier method. We 
 may, for instance, guess that the total amount spent on bringing up an average 
 child of the lower half of the labouring classes, say two-fifths of the population, is 
 100; for the next fifth we may put the sum at 175; for the next fifth at 300 ; 
 for the next tenth at 500, and the remaining tenth at 1200, or an average of 
 300. But of course some of the population are very young and have had but 
 little spent on them ; others have got nearly to their life's end ; and therefore, on 
 these assumptions, the average value of an individual is perhaps 200. 
 
 These estimates include large allowances for parental and other services, that 
 are not actually paid for by money. But it may be noted that, on the alternative 
 plan of capitalizing net productive power, we ought properly to count in all pro- 
 duction of real benefits, even though no money passes in exchange for them. 
 But, as Prof. R. Mayo Smith has well pointed out (Emigration and Immigration, 
 Chapter vi.), both of the suggested methods of valuation are open to great 
 objections when used as the basis of a public policy with regard to immigration. 
 For immigrants coming from a country in which the standard of life is low, to 
 one in which it is high, may injure it materially as well as morally even though 
 they carry in their own persons a good deal of invested capital, and produce in 
 the country of their adoption, more than they consume, before they die. But both 
 of these methods are much less misleading when applied to estimate the injury 
 done to a country, such as Ireland, by the loss through emigration of a great many 
 young people, whose bringing up has cost the country much, and who if they had 
 stayed would have produced more than they consumed; while the old and the 
 infirm stay behind to consume more than they produce. 
 
 Professor Nicholson (in the first number of the Economic Journal) estimates 
 the living capital of the United Kingdom at 47,000 millions, i.e. about 1,300 
 a head ; or, say, 33 years' purchase (equal to the value of a permanent annuity) 
 of the gross money income of the country exclusive of rent proper and 
 interest on capital (about 900 millions) ; together with half as much again added 
 in on account of the real income, consisting of private services and family offices 
 for which no money payment is made. (His own method of arriving at this result 
 is different.) But it seems doubtful whether an estimate of the capital value of 
 the population as a whole can serve any useful purpose ; and, if any is made at all, 
 it should perhaps be based on net, rather than on gross earning power. For the 
 outgoings of life, its pains and its efforts, have as good a right to enter into our 
 account as its incomings, its pleasures and enjoyments. 
 
EDUCATION IN THE WORKSHOP. 645 
 
 and his schoolmaster declines ; and thenceforward to the end BOOK vi. 
 of his life his character is moulded chiefly by the nature of c f^' 
 his work and the influence of those with whom he associates 
 for business, for pleasure and for religious worship. 
 
 A good deal has already been said of the technical The 
 training of adults, of the decadence of the old apprenticeship training of 
 
 system, and of the difficulty of finding anything to take 
 
 its place. Here again we meet the difficulty that whoever 
 
 may incur the expense of investing capital in developing measure 
 
 the abilities of the workman, those abilities will be the pro- selfishness 
 
 perty of the workman himself: and thus the virtue of those employer. 
 
 who have aided him must remain for the greater part its 
 
 own reward. 
 
 It is true that high-paid labour is really cheap to those 
 employers who are aiming at leading the race, and whose 
 ambition it is to turn out the best work by the most advanced 
 methods. They are likely to give their men high wages and 
 to train them carefully ; partly because it pays them to do 
 so, and partly because the character that fits them to take 
 the lead in the arts of production is likely also to make 
 them take a generous interest in the well-being of those who 
 work for them. But though the number of such employers 
 is increasing, they are still comparatively few. And even 
 they cannot always afford to carry the investment of capital 
 in the training of their men as far as they would have done, 
 if the results of the investment accrued to them in the same 
 way as the results of any improvements they might make in 
 their machinery. Even they are sometimes checked by the 
 reflection that they are in a similar position to that of a 
 farmer who, with an uncertain tenure and no security of 
 compensation for his improvements, is sinking capital in 
 raising the value of his landlord's property. 
 
 Again, in paying his workpeople high wages and in caring its benefits 
 for their happiness and culture, the liberal employer confers 
 benefits which do not end with his own generation. For 
 
 the children of his workpeople share in them, and grow up him or his 
 stronger in body and in character than otherwise they would 
 have done. The price which he has paid for labour will 
 have borne the expenses of production of an increased supply 
 
646 DEMAND AND SUPPLY, IN RELATION TO LABOUR, CONTINUED. 
 
 BOOK vi. of high industrial faculties in the next generation : but 
 CH ' IV ' these faculties will be the property of others, who will have 
 the right to hire them out for the best price they will fetch : 
 neither he nor even his heirs can reckon on reaping much 
 material reward for this part of the good that he has done. 
 Second 5. The next of those characteristics of the action of 
 
 in y * demand and supply peculiar to labour, which we have to 
 study, lies in the fact that when a person sells his services, he 
 has to present himself where they are delivered. It matters 
 nothing to the seller of bricks whether they are to be used in 
 building a palace or a sewer : but it matters a great deal to 
 The seller the seller of labour, who undertakes to perform a task of 
 must l given difficulty, whether or not the place in which it is to 
 ke done i s a wholesome and a pleasant one, and whether or 
 not his associates will be such as he cares to have. In those 
 yearly hirings which still remain in some parts of England, 
 the labourer inquires what sort of a temper his new employer 
 has, quite as carefully as what rate of wages he pays. 
 The effects This peculiarity of labour is of great importance in many 
 are not individual cases, but it does not often exert a broad and 
 
 ^ ee P m fl uence f tne same nature as that last discussed. 
 ^ e more disagreeable the incidents of an occupation, the 
 importance higher of course are the wages required to attract people 
 very great. m ^o it : but whether these incidents do lasting and wide- 
 spreading harm depends on whether they are such as to 
 undermine men's physical health and strength or to lower 
 their character. When they are not of this sort, they are 
 indeed evils in themselves, but they do not generally cause 
 other evils beyond themselves; their effects are seldom 
 cumulative. 
 
 Since however no one can deliver his labour in a market 
 in which he is not himself present, it follows that the mobility 
 of labour and the mobility of the labourer are convertible 
 terms : and the unwillingness to quit home, and to leave old 
 associations, including perhaps some loved cottage and burial- 
 ground, will often turn the scale against a proposal to seek 
 better wages in a new place. And when the different mem- 
 bers of a family are engaged in different trades, and a migra- 
 tion, which would be advantageous to one member, would be 
 
LABOUR'S DISADVANTAGES IN BARGAINING. 647 
 
 injurious to others, the inseparability of the worker from his BOOKVI. 
 work considerably hinders the adjustment of the supply of c f^J- 
 labour to the demand for it. But of this more hereafter. 
 
 6. Again, labour is often sold under special disadvan- Third and 
 tages, arising from the closely connected group of facts that pecuiiari- 
 labour power is " perishable," that the sellers of it are com- Labour is 
 monly poor and have no reserve fund, and that they cannot perishable, 
 easily withhold it from the market. 
 
 Perishableness is an attribute common to the labour of and the 
 all grades : the time lost when a worker is thrown out of are often 
 employment cannot be recovered, though in some cases his advantage 
 energies may be refreshed by rest 1 . It must however be* ubar g ain - 
 remembered that much of the working power of material But many 
 
 T i i i .LI r- material 
 
 agents ot production is perishable in the same sense ; lor a commodi- 
 great part of the income, which they also are prevented from perishable, 
 earning by being thrown out of work, is completely lost. 
 There is indeed some saving of wear-and--tear on a factory, 
 or a steam-ship, when it is lying idle : but this is often small 
 compared with the income which its owners have to forego : 
 they get no compensation for their loss of interest on the 
 capital invested, or for the depreciation which it undergoes 
 from the action of the elements or from its tendency to be 
 rendered obsolete by new inventions. 
 
 Again, many vendible commodities are perishable. In 
 the strike of dock labourers in London in 1889, the perish- 
 ableness of the fruit, meat, &c. on many of the ships told 
 strongly on the side of the strikers. 
 
 The want of reserve funds and of the power of long with- Disadvan- 
 holding their labour from the market is common to nearly bargaining 
 all grades of those whose work is chiefly with their hands. ai 'g atest 
 But it is especially true of unskilled labourers, partly because generally 
 
 r / among the 
 
 their wages leave very little margin for saving, partly because lowest 
 when any group of them suspends work, there are large fabour. 
 numbers who are capable of filling their places. And, as we 
 shall see presently when we come to discuss trade combina- 
 tions, it is more difficult for them than for skilled artisans to 
 form themselves into strong and lasting combinations ; and 
 so to put themselves on something like terms of equality in 
 
 1 See above, Ch. in. 6. 
 
648 DEMAND AND SUPPLY, IN RELATION TO LABOUR, CONTINUED. 
 
 BOOK vi. bargaining with their employers. For it must be remem- 
 CH^IV. kered ^af. a man wno employs a thousand others, is in himself 
 an absolutely rigid combination to the extent of one thousand 
 units among buyers in the labour market. 
 
 They do But these statements do not apply to all kinds of labour, 
 
 ^domestic Domestic servants though they have not large reserve funds, 
 servants, an( j se id om an y formal trades-union, are sometimes better 
 able than their employers to act in concert. The total 
 real wages of domestic servants of fashionable London are 
 very high in comparison with other skilled trades in 
 which equal skill and ability are required. But on the 
 other hand those domestic servants who have no specialized 
 skill, and who hire themselves to persons with very narrow 
 means, have not been able to make even tolerably good 
 terms for themselves : they work very hard for very low 
 wages. 
 
 nor to pro- Turning next to the highest grades of industry, we find 
 men. that as a rule they have the advantage in bargaining over 
 the purchaser of their labour. Many of the professional 
 classes are richer, have larger reserve funds, more know- 
 ledge and resolution, and much greater power of concerted 
 action, with regard to the terms on which they sell their 
 services, than the greater number of their clients and 
 customers. 
 
 Those If further evidence were wanted that the disadvantages 
 
 commodi- of bargaining under which the vendor of labour commonly 
 are poor suffers, depend on his own circumstances and qualities, and 
 and nu- no jj on ^he fact that the particular thing which he has to sell 
 
 merous . 
 
 relatively is labour; such evidence could be found by comparing the 
 
 to the pur- ' ... . . J 
 
 chasers are successful barrister or solicitor or physician, or opera singer 
 advantage or j oc key with the poorer independent producers of vendible 
 in g b ln g the g 00 ^ 8 - Those, for instance, who in remote places collect 
 same way shell-fish to be sold in the large central markets, have little 
 sellers of reserve funds or knowledge of the world, and of what other 
 producers are doing in other parts of the country : while 
 those to whom they sell, are a small and compact body of 
 wholesale dealers with wide knowledge and large reserve 
 funds ; and in consequence the sellers are at a great disad- 
 vantage in bargaining. And much the same is true of the 
 
LABOUR'S DISADVANTAGES IN BARGAINING. 
 
 women and children who sell hand-made lace, and of the BOOKVI. 
 garret masters of East London who sell furniture to large c f^- 
 and powerful dealers. 
 
 It is however certain that manual labourers as a class The dis- 
 are at a disadvantage in bargaining ; and that the disadvan- 
 tage wherever it exists is likely to be cumulative in its effects. 
 For though, so long as there is any competition among em- 
 ployers at all, they are likely to bid for labour something 
 not very much less than its real value to them, that is, some- 
 thing not very much less than the highest price they would 
 pay rather than go on without it ; yet anything that lowers 
 wages tends to lower the efficiency of the labourer's work, 
 and therefore to lower the price which the employer would 
 rather pay than go without that work. The effects of the 
 labourer's disadvantage in bargaining are therefore cumu- 
 lative in two ways. It lowers his wages; and as we have 
 seen, this lowers his efficiency as a worker, and thereby 
 lowers the normal value of his labour. And in addition 
 it diminishes his efficiency as a bargainer, and thus increases 
 the chance that he will sell his labour for less than its normal 
 value 1 . 
 
 1 On the subject of this Section compare Book v. Ch. n. 3, and the subsequent 
 Note on Barter. Prof. Brentano was the first to call attention to several of the 
 points discussed in this chapter. See also HowelTs Conflicts of Capital and 
 Labour. 
 
CHAPTER V. 
 
 DEMAND AND SUPPLY IN RELATION TO LABOUR, 
 CONCLUDED. 
 
 BOOK vi. 1. THE next peculiarity in the action of demand and 
 CH ~ v< supply with regard to labour, which we have to consider, 
 The fifth i s closely connected with some of those we have already 
 of labour discussed. It consists in the length of time that is required 
 the great" 1 to prepare and train labour for its work, and in the slowness 
 f the returns which result from this training. 
 
 * ne c l eares t signs of the deliberate adjustment 
 
 additional o f supply of expensively trained labour to the demand for 
 
 supplies of .... r t ..! , , /. ,. f ,t 
 
 specialized it, in the choice made by parents of occupations for their 
 llty ' children, and in their efforts to raise their children into a 
 
 higher grade than their own. 
 
 Adam It was these chiefly that Adam Smith had in view when 
 
 comparison ne sa ^ : " When any expensive machine is erected, the 
 
 incomes extraordinary work to be performed by it before it is worn 
 
 earned by out, it must be expected, will replace the capital laid out 
 
 and by a upon it, with at least the ordinary profits. A man educated 
 
 worker a ^ ^ ne expense of much labour and time to any of those 
 
 employments which require extraordinary dexterity and 
 
 skill, may be compared to one of those expensive machines. 
 
 The work which he learns to perform, it must be expected, 
 
 over and above the usual wages of common labour, will 
 
 replace to him the whole expense of his education, with at 
 
 least the ordinary profits of an equally valuable capital. It 
 
 must do this too in a reasonable time, regard being had to 
 
 the very uncertain duration of human life, in the same 
 
 manner as to the more certain duration of the machine." 
 
DIFFICULTY OF FORECASTING THE FUTURE. 651 
 
 But this statement is to be received only as a broad BOOKVI. 
 
 indication of general tendencies. For independently of the CH ' Y ' 
 fact that in rearing and educating their children, parents 
 
 are governed by motives different from those which induce account of 
 
 . the short- 
 
 a capitalist undertaker to erect a new machine, the period ness of the 
 over which the earning power extends is generally greater ^oat ma- 
 in the case of a man than of a machine ; and therefore the chmes ' 
 circumstances by which the earnings are determined are 
 less capable of being foreseen, and the adjustment of supply 
 to demand is both slower and more imperfect. For though though 
 factories and houses, the main shafts of a mine and the important 
 embankments of a railway may have much longer lives than exce P tlons - 
 those of the men who made them ; yet these are exceptions 
 to the general rule. 
 
 2. Not much less than a generation elapses between Parents in 
 the choice by parents of a skilled trade for one of their t?ades n for 
 children, and his reaping the full results of their choice. 
 
 And meanwhile the character of the trade may have been must look 
 almost revolutionized by changes, of which some probably a whole 
 threw long shadows before them, but others were such as 
 could not have been foreseen even by the shrewdest persons 
 and those best acquainted with the circumstances of the liable to 
 
 error. 
 
 trade. 
 
 The working classes in nearly all parts of England are 
 constantly on the look-out for advantageous openings for the 
 labour of themselves and their children ; and they question 
 friends and relations, who have settled in other districts, as 
 to the wages that are to be got in various trades, and as to 
 their incidental advantages and disadvantages. But it is 
 very difficult to ascertain the causes that are likely to 
 determine the distant future of the trades which they are 
 selecting for their children ; and there are not many who 
 enter on this abstruse inquiry. The majority assume without 
 a further thought that the condition of each trade in their 
 own time sufficiently indicates what it will be in the future ; 
 and, so far as the influence of this habit extends, the supply 
 of labour in a trade in any one generation tends to conform 
 to its earnings not in that but in the preceding generation. 
 
 Again, some parents, observing that the earnings in one 
 
652 DEMAND AND SUPPLY IN RELATION TO LABOUR, CONCLUDED. 
 
 trade have been for some years rising relatively to others 
 
 BOOK VI. 
 CH. V. 
 
 in the same grade, assume that the course of change is likely 
 to continue in the same direction. But it often happens 
 that the previous rise was due to temporary causes, and 
 that, even if there had been no exceptional influx of labour 
 into the trade, the rise would have been followed by a 
 fall instead of a further rise : and, if there is such an excep- 
 tional influx, the consequence may be a supply of labour so 
 excessive, that its earnings remain below their normal level 
 for many years. 
 
 in this Next we have to recall the fact that, although there are 
 
 some trades which are difficult of access except to the sons 
 of those already in them, yet the majority draw recruits 
 not a parti- f rom the sons of those in other trades in the same grade : 
 but a whole and therefore when we consider the dependence of the supply 
 5bour of labour on the resources of those who bear the expenses 
 of its education and training, we must often regard the 
 whole grade, rather than any one trade, as our unit ; and 
 say that, in so far as the supply of labour is limited by the 
 funds available for defraying its cost of production, the supply 
 of labour in any grade is determined by the earnings of that 
 grade in the last rather than in the present generation. 
 
 It must, however, be remembered that the birth-rate in 
 every grade of society is determined by many causes, among 
 which deliberate calculations of the future hold but a 
 secondary place: though, even in a country in which tra- 
 dition counts for as little as it does in modern England, 
 a great influence is exerted by custom and public opinion 
 which are themselves the outcome of the experience of past 
 generations. 
 
 Allowance 3. But we must not omit to notice those adjustments of 
 ever be the supply of labour to the demand for it, which are effected 
 the move- ^7 movements of adults from one trade to another, one 
 
 adult 80 * & ra d e to another, and one place to another. The move- 
 labour, ments from one grade to another can seldom be on a very 
 large scale ; although it is true that exceptional opportunities 
 may sometimes develop rapidly a great deal of latent ability 
 among the lower grades. Thus, for instance, the sudden 
 opening out of a new country, or such an event as the 
 
 
DIFFICULTY OF FORECASTING THE FUTURE. 653 
 
 American War, will raise from the lower ranks of labour BOOKVI. 
 many men who bear themselves well in difficult and re- _' 
 sponsible posts. 
 
 But the movements of adult labour from trade to trade which 
 and from place to place can in some cases be so large and creasing 
 so rapid as to reduce within a very short compass the period S^mise^ 6 
 which is required to enable the supply of labour to adjust ^^ e of 
 itself to the demand. That general ability which is easily creasing 
 transferable from one trade to another, is every year rising for general 
 in importance relatively to that manual skill and technical a 
 knowledge which are specialized to one branch of industry 1 . 
 And thus economic progress brings with it on the one hand 
 a constantly increasing changefulness in the methods of in- 
 dustry, and therefore a constantly increasing difficulty in 
 predicting the demand for labour of any kind a generation 
 ahead ; but on the other hand it brings also an increasing 
 power of remedying such errors of adjustment as have been 
 made. 
 
 4. Let us now revert to the principle that the income The 
 derived from the appliances for the production of a commodity of this 
 exerts a controlling influence in the long run over their j s occupied 
 own supply and price, and therefore over the supply and the 
 
 price of the commodity itself; but that within short periods between 
 
 . J the adjust- 
 
 there is not time for the exercise of any considerable influence ments of 
 
 of this kind. And let us inquire how this principle needs 
 to be modified when it is applied not to the material agents J|J 
 
 of production, which are only a means towards an end, and for long 
 which may be the private property of the capitalist, but to short 
 human beings who are ends as well as means of production p * 
 and who remain their own property. 
 
 To begin with we must notice that, since labour is slowly A "long 
 produced and slowly worn out, we must take the term " long wlthregard 
 
 period " more strictly, and regard it as generally implying 
 
 a greater duration, when we are considering the relations of labo } ir 
 
 must gene- 
 
 normal demand and supply for labour, than when we are con- rally be 
 
 very long. 
 
 1 On the subject of this section compare Book iv. Ch. vi., Mr Charles 
 Booth's Life and Labour in London and Mr H. LI. Smith's paper on Modem, 
 Changes in the mobility of labour. 
 
654 
 
 BOOK VI. 
 CH. V. 
 
 The case 
 of inde- 
 pendent 
 handi- 
 craftsmen : 
 
 but it can 
 also be 
 traced 
 under the 
 modern 
 system of 
 industry. 
 
 DEMAND AND SUPPLY IN RELATION TO LABOUR, CONCLUDED. 
 
 sidering them for ordinary commodities. There are many 
 problems, the period of which is long enough to enable the 
 supply of ordinary commodities, and even of most of the ma- 
 terial appliances required for making them, to be adjusted to 
 the demand; and long enough therefore to justify us in re- 
 garding the average prices of those commodities during the 
 period as "normal," and as equal to their normal expenses 
 of production in a fairly broad use of the term ; while yet the 
 period would not be long enough to allow the supply of labour 
 to be adjusted at all well to the demand for it. The average 
 earnings of labour during this period therefore would not be 
 at all certain to give about a normal return to those who 
 provided the labour; but they would rather have to be 
 regarded as determined by the available stock of labour on 
 the one hand, and the demand for it on the other. Let us 
 consider this point more closely. 
 
 5. Market variations in the price of a commodity are 
 governed by the temporary relations between demand and 
 the stock that is in the market or within easy access of it. 
 When the market price so determined is above its normal 
 level, those who are able to bring new supplies into the 
 market in time to take advantage of the high price receive 
 an abnormally high reward ; and if they are small handicrafts- 
 men working on their own account, the whole of this rise in 
 price goes to increase their earnings. 
 
 In the modern industrial world, however, those who 
 undertake the risks of production and to whom the benefits 
 of any rise in price, and the evils of any fall, come in the 
 first instance, are capitalist undertakers of industry. Their 
 net receipts in excess of the immediate outlay involved for 
 making the commodity, that is, its prime (money) cost, are 
 a return derived for the time being from the capital in- 
 vested in their business in various forms, including their 
 own faculties and abilities (and are of the nature of a quasi- 
 rent). But, when trade is good, the force of competition 
 among the employers themselves, each desiring to extend 
 his business, and to get for himself as much as possible of 
 this high return, makes them consent to pay higher wages 
 to their employees in order to obtain their services; and 
 
FLUCTUATIONS OF EARNINGS. 655 
 
 even if they act in concert, and refuse for a time any con- BOOK n. 
 
 cession, a combination among their employees may force it !_' 
 
 from them under penalty of foregoing the harvest, which the 
 favourable turn of the market is offering. The result gene- 
 rally is that before long a great part of the gains are being 
 distributed among the employees ; and that their earnings 
 remain above the normal level so long as the prosperity 
 lasts. 
 
 Thus the high wages of miners during the inflation, niustra- 
 which culminated in 1873, were governed for the time by thThSory 
 the relation in which the demand for their services stood f coal 
 to the amount of skilled mining labour available, the un- 
 skilled labour imported into the trade being counted as 
 equivalent to an amount of skilled labour of equal efficiency. 
 Had it been impossible to import any such labour at all, the 
 earnings of miners would have been limited only by the elas- 
 ticity of the demand for coal on the one hand, and the gradual 
 coming to age of the rising generation of miners on the 
 other. As it was, men were drawn from other occupations 
 which they were not eager to leave ; for they could have got 
 high wages by staying where they were, since the prosperity 
 of the coal and iron trades was but the highest crest of a 
 swelling tide of credit. These new men were unaccustomed 
 to underground work ; its discomforts told heavily on them, 
 while its dangers were increased by their want of tech- 
 nical knowledge, and their want of skill caused them to 
 waste much of their strength. The limits therefore which 
 their competition imposed on the rise of the special earnings 
 of miners' skill were not narrow : (its quasi-rent could become 
 very high). 
 
 When the tide turned those of the new-comers who were 
 least adapted for the work left the mines ; but even then the 
 miners who remained were too many for the work to be done, 
 and their wage fell, till it reached that limit at which they 
 could get more by selling their labour in other trades. And 
 that limit was a low one ; for the swollen tide of credit, which 
 culminated in 1873, had undermined solid business, impaired 
 the true foundations of prosperity, and left nearly every trade 
 in a more or less unhealthy and depressed condition. The 
 
656 
 
 DEMAND AND SUPPLY IN RELATION TO LABOUR, CONCLUDED. 
 
 BOOK VI. 
 CH. V. 
 
 In esti- 
 mating the 
 return 
 for the 
 labourer's 
 skill, ac- 
 count must 
 be taken 
 not only of 
 his wear- 
 and-tear, 
 
 but also 
 of his 
 fatigue, 
 and other 
 incon- 
 veniences 
 of his 
 work. 
 
 Conclu- 
 sion, and 
 re -state- 
 ment of the 
 argument 
 with regard 
 to the de- 
 pendence 
 of fluctua- 
 tions of 
 earnings on 
 
 miners had therefore to sell their skilled labour in markets 
 which were already over full, and in which their special skill 
 counted for nothing. 
 
 6. We have already remarked that only part of the 
 returns derived from an improvement which is being ex- 
 hausted can be regarded as being its special net earnings (or 
 quasi-rent) of it ; for a sum equivalent to the exhaustion of 
 the capital value of the improvement must be deducted from 
 these returns, before they can be counted as net income of 
 any kind. And similarly allowance must be made for the 
 wear-and-tear of a machine, as well as for the cost of 
 working it, before we can arrive at the quasi-rent earned 
 by it. But it is clear that the miner is liable to wear-and- 
 tear as much as machinery is, and in his case also a de- 
 duction must be made from his earnings on account of 
 wear-and-tear when the return of his special skill is being 
 estimated. 
 
 But in his case there is a further difficulty. For while 
 the owner of machinery does not suffer from its being kept 
 long at work when the expenses of working it, including 
 wear-and-tear, have once been allowed for; the owner of 
 skilled faculties does suffer when they are kept long at 
 work, and he suffers incidental inconveniences, such as loss 
 of recreation and of freedom of movement, &c. If the miner 
 has only four days' work in one week and earns 1, and in 
 the next week he has six days' work and earns 1. 10s.; only 
 part of this extra 105. can be regarded as return for his skill, 
 for the remainder must be reckoned as the recompense of his 
 additional fatigue as well as wear-and-tear 1 . 
 
 To conclude this part of our argument. The market price 
 of everything, i.e. its price for short periods, is determined 
 mainly by the relations in which the demand for it stands 
 to the available stocks of it ; and in the case of any agent 
 of production, whether it be a human or a material agent, 
 this demand is " derived " from the demand for those things 
 which it is used in making. In these relatively short periods 
 
 1 Compare above, Ch. n* 2. If they have any considerable stock of trade 
 implements, they are to that extent capitalists ; and part of their income is quasi- 
 rent on this capital. 
 
FLUCTUATIONS IN EARNINGS OF LABOUR DEPEND ON DEMAND. 657 
 
 fluctuations in wages follow, and do not precede, fluctuations BOOK vi. 
 in the selling prices of the goods produced. CH ' v ' 
 
 But the incomes which are being earned by all agents the state 
 of production, human as well as material, and those which market, 
 appear likely to be earned by them in the future, exercise a 
 ceaseless influence on those persons by whose action the 
 future supplies of these agents are determined. There is a 
 constant tendency towards a position of normal equilibrium, 
 in which the supply of each of these agents shall stand in 
 such a relation to the demand for its services, as to give to 
 those who have provided the supply a sufficient reward for 
 their efforts and sacrifices. If the economic conditions of 
 the country remained stationary sufficiently long, this ten- 
 dency would realize itself in such an adjustment of supply to 
 demand, that both machines and human beings would earn 
 generally an amount that corresponded fairly with their cost 
 of rearing and training, conventional necessaries as well as 
 those things which are strictly necessary being reckoned 
 for. But conventional necessaries might change under the 
 influence of non-economic causes, even while economic 
 conditions themselves were stationary : and this change 
 would affect the supply of labour, and would lessen the 
 national dividend and slightly alter its distribution. As it 
 is, the economic conditions of the country are constantly 
 changing, and the point of adjustment of normal demand 
 and supply in relation to labour is constantly being shifted. 
 
 7. We may now discuss the question under what head The extra 
 to class those high incomes which are earned by extraordi- earned by 
 nary natural abilities. Since they are not the result of the natural 
 investment of human effort in an agent of production for the jj^'be 8 
 purpose of increasing its efficiency, there is a strong primd regarded 
 facie cause for regarding them as of the nature of a rent, or 
 producer's surplus, resulting from the possession of a differen- 
 tial advantage for production, freely given by nature. This 
 analogy has been noticed by a long series of writers 1 : it is 
 instructive and suggestive ; but we must be on our guard 
 against the temptation to extend it beyond its proper scope, 
 
 1 See the references given in Book v. Ch. vm. 1. 
 
 M. 42 
 
658 DEMAND AND SUPPLY IN RELATION TO LABOUR, CONCLUDED. 
 
 BOOK vi. and to apply it without those conditions which are required 
 lT' to make it true. 
 
 so long as The analogy is valid and useful so long as we are merely 
 merely analysing the component parts of the income earned by 
 an individual. And there is some interest in the inquiry 
 
 incomes now nmch of the income of successful men is due to chance, 
 to opportunity, to the conjuncture, how much to the good 
 start that they have had in life; how much is profits on 
 the capital invested in their special training, how much is 
 the reward of exceptionally hard work; and how much re- 
 mains as a producer's surplus or rent resulting from the 
 possession of rare natural gifts. 
 
 But when we are considering the whole body of those 
 engaged in any occupation, we are not at liberty to 
 treat the exceptionally high earnings of successful men 
 as rent, without making allowance for the low earnings 
 of those who fail. 
 
 but not ;p or t ne supply of labour in any occupation is governed, 
 
 are con- other things being equal, by the earnings of which it holds 
 out the prospect. The future of those who enter the occu- 
 P at ion cannot be predicted with certainty : some, who start 
 with the least promise, turn out to have great latent ability, 
 and, aided perhaps by good luck, they earn large fortunes ; 
 while others, who made a brilliant promise at starting, come 
 to nothing. For the chances of success and failure are to 
 be taken together, much as are the chances of good and bad 
 hauls by a fisherman or of good and bad harvests by a farmer ; 
 and a youth when selecting an occupation, or his parents 
 when selecting one for him, are very far from leaving out of 
 account the fortunes of successful men. These fortunes are 
 therefore part of the price that is paid in the long run for 
 the supply of labour and ability that seeks the occupation : 
 they enter into the true or "long period" normal supply 
 price of labour in it. They are not, as some writers have 
 urged, a rent which does not enter into that price, and 
 which is rather determined by that price. 
 
 orconsi- It is true that, if we confined our attention to short 
 
 tiering 
 
 fluctu- periods, we might fairly say that the incomes earned by the 
 ings, natural genius already existing among those who had special- 
 
 earni 
 
THE SO-CALLED RENT OF LABOUR. 659 
 
 ized themselves in a certain trade, do not enter directly into BOOK vi. 
 the marginal expenses of production of the goods made in CH ' v ' 
 it, nor therefore into their price : they are governed by that 
 price (and therefore are rather to be regarded as a quasi- 
 rent). But the same is true, as we have just seen, of the 
 earnings of all who have acquired skill and aptitudes 
 specialized to the trade, even though they have no great 
 natural talents. 
 
 It may be conceded, again, that, if a certain class of save in the 
 people were marked out from their birth as having special case of a 
 gifts for some particular occupation, and for no other, so that persons 
 they would be sure to seek that occupation in any case, then 
 
 the earnings which such men would get might be left out o 
 
 5 . . specialized 
 
 account as exceptional, when we were considering the chances to parti- 
 of success or failure for ordinary persons. But as a matter of branches of 
 fact that is not the case ; for a great part of a person's sue- P roductlon - 
 cess in any occupation depends on the development of talents 
 and tastes, the strength of which cannot be clearly predicted 
 until he has already committed himself to a choice of occu- 
 pation. Such predictions are at least as fallible as those 
 which a new settler can make as to the future fertility and 
 advantages of situation of the various plots of land that are 
 offered for his selection 1 . And partly for this reason the 
 income derived from rare natural qualities bears a closer 
 analogy to the surplus produce from the holding of a settler 
 who has made an exceptionally lucky selection, than to the 
 rent of land in an old country. But land and human beings 
 differ in so many respects, that even that analogy, if pursued 
 very far, is apt to mislead : and the greatest caution is re- 
 quired in the application of the term Rent to the earnings of 
 extraordinary ability, 
 
 Finally, it may be observed that the argument of Book v. 
 Chapters vm. and IX., with regard to the special earnings 
 (whether of the nature of rents or quasi-rents) of appliances 
 capable of being used in several branches of production, is 
 applicable to the special earnings of natural abilities, and 
 of skill. When land capable of being used for producing 
 
 i Comp. Book v. Ch. ix. I. 
 
 422 
 
660 DEMAND AND SUPPLY IN EELATION TO LABOUR, CONCLUDED- 
 
 CH. V. 
 
 BOOK vi. one commodity is used for another, the supply price of the 
 first is raised, though not by an amount dependent on the 
 rent which the land would yield in this second use. So 
 when trained skill or natural abilities which could have 
 been applied to produce one commodity, are applied for 
 another, the supply price of the first is raised through the 
 narrowing of its sources of supply. 
 
CHAPTER VI. 
 
 DEMAND AND SUPPLY IN RELATION TO CAPITAL. 
 A FURTHER STUDY OF INTEREST. 
 
 1. THE relations between demand and supply can- BOOKVI. 
 not be studied by themselves in the case of capital any 
 more than they could in the case of labour. All the and nT 
 elements of the great central problem of distribution and 
 
 exchange mutually govern one another: and the first two cipiesofthe 
 chapters of this Book, and more especially the parts that demand 
 relate directly to capital, may be taken without rehearsal as fn relation 
 an introduction to this and the next two chapters. But ^Jow^o 
 before entering on the detailed analysis with which they to details. 
 will be mainly occupied, something may be said as to the 
 position which the modern study of capital and interest holds 
 in relation to earlier work. 
 
 The aid which economic science has given towards The in- 
 understanding the part played by capital in our industrial doctrines 
 system is solid and substantial; but it has made no startling nom lcsas 
 discoveries. Everything of importance which is now known a y e c n ^ tal 
 to economists has long been acted upon by able business new, but 
 men, though they may not have been able to express their basis of 
 knowledge clearly, or even accurately. ordinary 
 
 Everyone is aware that no payment would be offered for Ufe; 
 the use of capital unless some gain were expected from that 
 use ; and further that these gains are of many kinds. Some 
 borrow to meet a pressing need, real or imaginary, and pay 
 others to sacrifice the present to the future in order that 
 they themselves may sacrifice the future to the present. 
 Some borrow to obtain machinery, and other " intermediate " 
 goods, with which they may make things to be sold at a 
 
 
662 DEMAND AND SUPPLY IN RELATION TO CAPITAL. 
 
 CH. VI. 
 
 BOOK vi. profit; some to obtain hotels, theatres and other things 
 which yield their services directly, but are yet a source of 
 profit to those who control them. Some borrow houses for 
 themselves to live in, or else the means wherewith to buy or 
 build their own houses ; and the absorption of the resources 
 of the country in such things as houses increases, other things 
 being equal, with every increase in those resources and every 
 consequent fall in the rate of interest, just as does the 
 absorption of those resources in machinery or docks or 
 other intermediate goods 1 . 
 
 Everyone knows that people, who have the means of 
 lending, will not lend gratis as a rule ; because even if they 
 have not themselves some good use to which to turn the 
 capital or its equivalent, they are sure to be able to find 
 others to whom its use would be of benefit, and who would 
 pay for the loan of it : and they stand out for the best 
 market *. 
 
 Everyone knows that few, even among the Anglo-Saxon 
 and other steadfast and self-disciplined races, care to save a 
 large part of their incomes; and that many openings have 
 been made for the use of capital in recent times by the 
 progress of discovery and the opening up of new countries : 
 and thus everyone understands generally the causes which 
 have kept the supply of accumulated wealth so small relatively 
 to the demand for its use, that that use is on the balance a 
 source of gain, and can therefore require a payment when 
 loaned. Everyone is aware that the accumulation of wealth 
 is held in check, and the rate of interest so far sustained, by 
 the preference which the great mass of humanity have for 
 present over deferred gratifications. And indeed the true 
 work of economic analysis in this respect is, not to emphasize 
 this familiar truth, but to point out how much more numer- 
 
 1 The demand for durable stone houses in place of wood houses which give 
 nearly equal accommodation for the time is a sure sign that a country is growing 
 in wealth and that capital is to be had at a lower rate of interest ; and it acts on 
 the market for capital and on the rate of interest in the same way as would a 
 demand for new factories or railways. 
 
 2 That the supply of capital is held back by the prospectiveness of its uses, and 
 men's unreadiness to look forward, while the demand for it comes from its 
 productiveness, in the broadest sense of the term, is indicated in Book n. Ch. iv. 
 
CONTINUOUS DEVELOPMENT OF THE THEORY OF INTEREST. 663 
 
 ous are the exceptions to this general preference than would BOOK n. 
 appear at first sight 1 . ' 
 
 These truths are familiar ; and they are the basis of the But eco- 
 theory of capital and interest. But in the affairs of ordinary important 8 
 life truths are apt to present themselves in fragments. The JJJjJ ^" k 
 presentation may be vivid, but it is seldom complete. Particu- to do in 
 
 * . i connecting 
 
 lar relations are seen clearly one at a time ; but the inter- individual 
 actions of mutually self-determining causes are seldom ma ke an 
 grouped as a whole. The chief task of economics then ^Se^ 
 as regards capital is to set out in order and in their mutual 
 relations, all the forces which operate in the production and 
 accumulation of wealth and the distribution of income ; so 
 that as regards both capital and other agents of production 
 they may be seen mutually determining one another. 
 
 Next it has to analyse the influences which sway men in and in 
 their choice between present and deferred gratifications, 
 including leisure and opportunities for forms of activity 
 that are their own reward. But here the post of honour 
 lies with mental science ; the received doctrines of which 
 economics applies, in combination with other material, to its 
 special problems 2 . 
 
 Its work is therefore heavier in that analysis, on which especially 
 we are to be engaged in this and the next two chapters, of stituenti 
 the gains that are derived from the aid of accumulated wealth an 
 in the attainment of desirable ends, especially when that 
 wealth takes the form of trade capital. For these gains or 
 profits contain many elements, some of which belong to interest 
 for the use of capital in a broad sense of the term ; while 
 others constitute net interest, or interest properly so called. 
 Some constitute the reward of managing ability and of 
 
 1 See Book in. Ch. v. 3, 4; and Book iv. Ch. vn. 8. It is a good corrective 
 of this error to note how small a modification of the t conditions of our own world 
 would be required to bring us to another in which the mass of the people are so 
 anxious to provide for old age and for their families after them, and in which the 
 new openings for the advantageous use of accumulated wealth in any form are so 
 small, that the amount of wealth for the safe custody of which people are willing 
 to pay exceeds that which others desire to borrow; and where in consequence 
 even those who saw their way to make a gain out of the use of capital, would be 
 able to exact a payment for taking charge of it ; and interest would be negative 
 all along the line. 
 
 2 Compare Book i. Ch. v., Book ra. Ch. v., Book iv. Ch. vn. 
 
664 
 
 DEMAND AND SUPPLY IN RELATION TO CAPITAL. 
 
 BOOK VI. 
 CH. VI. 
 
 The eco- 
 nomic 
 doctrine of 
 capital has 
 progressed 
 continu- 
 ously and 
 without 
 abrupt 
 change. 
 
 enterprise, including the bearing of risks ; and others again 
 belong not so much to any one of these agents of production 
 but to their combination. 
 
 The scientific doctrine of capital has had a long history 
 of continuous growth and improvement in these three 
 directions during the last three centuries. Adam Smith 
 appears to have seen indistinctly, and Ricardo to have seen 
 distinctly, almost everything of primary importance in the 
 theory, very much as it is known now : and though one 
 writer has preferred to emphasize one of its many sides, and 
 another another, there seems no good reason for believing 
 that any great economist since the time of Adam Smith has 
 ever completely overlooked any side; and especially is it 
 certain that nothing which would be familiar to men of 
 business was overlooked by the practical financial genius 
 of Ricardo. But there has been progress; almost everyone 
 has improved some part, and given it a sharper and clearer 
 outline ; or else has helped to explain the complex relations 
 of its different parts. Scarcely anything done by any great 
 thinker has had to be undone, but something new has con- 
 stantly been added \ 
 
 1 The question has already been raised (p. 162) whether Prof. v. Bbhm-Bawerk 
 has not slightly underrated the acumen of his predecessors in their writings on 
 capital and interest; and whether what he regards as mere naive fragments of 
 theories were not rather the utterances of men well acquainted with the practical 
 workings of business ; and who partly for some special purpose, and partly through 
 want of system in exposition, gave such disproportionate stress to some elements 
 of the problem as to throw the others into the background. And perhaps part of 
 the air of paradox with which he invests his own theory of capital may be the 
 result of a similar disproportionate emphasis, and an unwillingness to recognize 
 that the various elements of the problem mutually govern one another. Attention 
 has already been called to the fact that, though he excludes houses and hotels, and 
 indeed everything that is not strictly speaking an intermediate good, from his 
 definition of capital, yet the demand for the use of goods, that are not inter- 
 mediate, acts as directly on the rate of interest, as does that for capital as defined 
 by him. Connected with this use of the term capital is a doctrine on which he 
 lays great stress, viz. that "methods of production which take time are more 
 productive" (Positive Capital, Book v. Ch. iv. p. 261), or again that "every 
 lengthening of a roundabout process is accompanied by a further increase in 
 the technical result" (16. Book n. Ch. n. p. 84). But is not this to treat as the 
 cause what is really an effect as much as a cause ? Are there not innumerable pro- 
 cesses which take a long time and are roundabout; but are not productive and 
 therefore are not used? Is it not the fact that because interest has to be paid for, 
 and can be gained by the use of capital, therefore those long and roundabout 
 
MEDIEVAL THEORIES OF INTEREST. 665 
 
 2. But if we go back to mediaeval and ancient history BOOK vi. 
 
 we certainly do seem to find an absence of clear ideas as to _J _ ' 
 the nature of the services which capital renders in production, 
 
 and for which interest is the payment ; and since this early known in 
 
 .. . . . . ,. . a , , J .the Middle 
 
 history is exercising an indirect influence on the problems of Ages. 
 our own age, something should be said of it here. 
 
 In primitive communities there were but few openings In early 
 for the employment of fresh capital in enterprise, and anyone civilization 
 who had property that he did not need for his own im- JJ ^J^ 8 ^ 
 mediate use, would seldom forego much by lending it on interest 
 
 J . may exceed 
 
 good security to others without charging any interest for the their uses ; 
 
 loan. Those who borrowed were generally the poor and the 
 weak, people whose needs were urgent and whose powers of 
 bargaining were very small. Those who lent were as a rule 
 either people who spared freely of their superfluity to help 
 their distressed neighbours, or else professional money-lenders. 
 To these last the poor man had resort in his need ; and they 
 frequently made a cruel use of their power, entangling him 
 in meshes from which he could not escape without great 
 suffering, and perhaps the loss of the personal freedom of 
 himself or his children. Not only uneducated people, but 
 the sages of early times, the fathers of the mediaeval church, 
 and the English rulers of India in our own time, have been 
 inclined to say, that money-lenders " traffic in other people's 
 misfortunes, seeking gain through their adversity: under the 
 pretence of compassion they dig a pit for the oppressed 1 ." 
 
 methods which involve much locking up of capital are avoided unless they are 
 more productive than others ? Should we not rather say that the fact that many 
 roundabout methods are in various degrees productive is one of the causes that 
 affect the rate of interest ; and that the rate of interest and the extent to which 
 roundabout methods are employed are two of the elements of the central problem 
 of distribution and exchange that mutually determine one another? See above, 
 p. 587 n. 
 
 1 From St Chrysostom's Fifth Homily, see above Book i. Ch. n. 8. Compare 
 also Ashley's Ecoiiomic History, Book vi. Ch. vi. ; and Bentham On Usury, 
 Lecky's Rationalism in Europe, the economic histories of Kautz, Ingram and 
 Cunningham, the economic treatises of Knies, Roscher and Nicholson, Thorburn's 
 3hisalmans and Money-lenders in the Punjab and several recent articles in the 
 Economic Review. The sentiment against usury had its origin in tribal relation- 
 ships, in many other cases besides that of the Israelites, perhaps in all cases ; and, 
 as Cliffe-Leslie remarks (Essays, 2nd Edition, p. 244) : It was " inherited from 
 pre-historic times, when the members of each community still regarded themselves 
 as kinsmen ; when communism in property existed at least in practice, and no one 
 
DEMAND AND SUPPLY IN RELATION TO CAPITAL. 
 
 BOOK vi. In such a state of society it may be a question for discussion, 
 CH ' VI ' whether it is to the public advantage that people should be 
 encouraged to borrow wealth under a contract to return it 
 with increase after a time : whether such contracts, taken 
 one with another, do not on .the whole diminish rather than 
 increase the sum total of human happiness. 
 
 and this But unfortunately attempts were made to solve this 
 
 id C the tald difficult and important practical question by a philosophical 
 dear th f distinction between the interest for the loan of money and 
 notions the rental of material wealth. Aristotle had said that money 
 nature was barren, and that to derive interest from lending it out 
 services was to put it to an unnatural use. And following his lead 
 Scholastic writers argued with much labour and ingenuity 
 that he who lent out a house or a horse might charge for its 
 use, because he gave up the enjoyment of a thing that was 
 directly productive of benefit. But they found no similar 
 excuse for the interest on money: that, they said, was wrong, 
 because it was a charge for a service which did not cost the 
 lender anything 1 . 
 
 Medieval If the loan really cost him nothing, if he could have made 
 of thought no use f tne money himself, if he was rich and the borrower 
 subject P oor an( * nee( ty> tnen i* m ight no doubt be argued that he 
 was morally bound to lend his money gratis: but on the 
 same grounds he would have been bound to lend without 
 charge to a poor neighbour a house which he would not him- 
 self inhabit, or a horse for a day's work of which he had 
 himself no need. The doctrine of these writers therefore 
 really implied, and in fact it did convey to people's minds 
 the mischievous fallacy that independently of the special 
 circumstances of the borrower and the lender the loan of 
 money, i.e. of command over things in general, is not a sacri- 
 fice on the part of the lender and a benefit to the borrower, 
 of the same kind as the loan of a particular commodity: 
 they obscured the fact that he who borrows money can buy, 
 
 who had more than he needed could refuse to share his superfluous wealth with a 
 fellow-tribesman in want." 
 
 1 They also made a distinction between hiring things which were themselves 
 to be returned, and borrowing things the equivalent of which only had to be re- 
 turned. This distinction, however, though interesting from an analytical point of 
 view, has very little practical importance. 
 
MEDIEVAL THEORIES OP-INTEREST. 667 
 
 for instance, a young horse, whose services he can use, and BOOK vi. 
 whom he can sell, when the loan has to be returned, at as _J _ ' 
 good a price as he paid for him. The lender gives up the 
 power of doing this, the borrower acquires it : there is no 
 substantial difference between the loan of the purchase price 
 of a horse and the loan of a horse 1 . 
 
 3. History has in part repeated itself: and in the in the 
 modern Western World a new reforming impulse has derived world 
 
 strength from, and given strength to, another erroneous ana- 
 lysis of the nature of interest. As civilization has progressed, 
 the loans of wealth to needy people have become steadily spread of 
 
 ... ni i erroneous 
 
 more rare, and a less important part of the whole ; while the analysis. 
 loans of capital for productive use in business have grown at 
 an ever-increasing rate. And in consequence, though the 
 borrowers are not now regarded as the subjects of oppression, 
 a grievance has been found in the fact that all producers, 
 whether working with borrowed capital or not, reckon interest 
 on the capital used by them as among the expenses which 
 they require to have returned to them in the long run in the 
 price of their wares as a condition of their continuing busi- 
 ness. On this account, and on account of the openings which 
 the present industrial system offers of amassing great wealth 
 by sustained good fortune in speculation, it has been argued 
 that the payment of interest in modern times oppresses the 
 working classes indirectly, though not directly;' and that it 
 deprives them of their fair share of the benefits resulting 
 from the growth of knowledge. And hence is derived the 
 practical conclusion that it would be for the general happi- 
 ness, and therefore right, that no private person should be 
 allowed to own any of the means of production, nor any direct 
 means of enjoyment, save such as he needs for his own use. 
 
 This practical conclusion has been supported by other Connection 
 arguments which will claim our attention; but at present 
 
 1 Prof. Cunningham has described well the subtleties by which the mediaeval 
 church explained away her prohibition of loans at interest, in most of those cases 
 in which the prohibition would have been seriously injurious to the body politic. 
 These subtleties resemble the legal fictions by which the judges have gradually 
 explained away the wording of laws, the natural interpretation of which seemed 
 likely to be mischievous. In both cases some practical evil has been avoided at 
 the expense of fostering habits of confused and insincere thought. 
 

 BOOK VI. 
 CH. VI. 
 
 668 DEMAND AND SUPPLY IN RELATION TO CAPITAL. 
 
 we are only concerned with the doctrine that has been used 
 by William Thompson 1 , Rodbertus, Karl Marx, and others in 
 theprac- SU pp O rt of it. They argued that labour always produces a 
 " Surplus " 2 above its wages and the wear-and-tear of capital 
 used in aiding it : and that the wrong done to labour lies in 
 and the exploitation of this surplus by others. But this assump- 
 
 doctrine of ^ion that the whole of this Surplus is the product of labour, 
 main already takes for granted what they ultimately profess to 
 
 conclusion p rov e by it ; they make no attempt to prove it ; and it is not 
 assumed true. It is not true that the spinning of yarn in a factory, 
 Sitrae after allowance has been made for the wear-and-tear of the 
 premiss. mac hinery, is the product of the labour of the operatives. It 
 is the product of their labour, together with that of the em- 
 ployer and subordinate managers, and of the capital employed; 
 and that capital itself is the product of labour and waiting : 
 and therefore the spinning is the product of labour of many 
 kinds, and of waiting. If we admit that it is the product of 
 labour alone, and not of labour and waiting, we can no doubt 
 be compelled by inexorable logic to admit that there is no 
 justification for Interest, the reward of waiting ; for the con- 
 clusion is implied in the premiss. Rodbertus and Marx do 
 indeed boldly claim the authority of Ricardo for their pre- 
 miss; but we have already seen (in the Note on Ricardo's 
 theory of value at the end of last Book), that it is really as 
 opposed to his explicit statement and the general tenor of 
 his theory of value, as it is to common sense. 
 
 To put the same thing in other words ; if it be true that 
 the postponement of gratifications involves in general a sacri- 
 fice on the part of him who postpones, just as additional 
 effort does on the part of him who labours ; and if it be true 
 that this postponement enables man to use methods of 
 production of which the first cost is great ; but by which the 
 aggregate of enjoyment is increased, as certainly as it would 
 
 1 Dr Anton Menger, in Das Recht aufden vollen Arbeitsertrag , has shown well 
 how both the practical conclusions as to the nationalization of the means of 
 production and the theoretical basis of the arguments of Rodbertus and Karl 
 Marx had been in a great measure anticipated in earlier works, and especially 
 William Thompson's Principles of tie Distribution of Wealth most conducive to 
 Human Happiness, 1824. 
 
 This is Marx's phrase. Rodbertus had caUed it a "Plus." 
 
DOCTRINES OF THOMPSON, RODBERTUS AND MARX. 669 
 
 be by an increase of labour ; then it cannot be true that the BOOK vi. 
 value of a thing depends simply on the amount of labour _! _ 
 spent on it. Every attempt to establish this premiss has 
 necessarily assumed implicitly that the service performed by 
 capital is a "free" good, rendered without sacrifice, and there- 
 fore needing no interest as a reward to induce its continu- 
 ance; and this is the very conclusion which the premiss is 
 wanted to prove. The strength of Rodbertus' and Marx's 
 sympathies with suffering must always claim our respect : 
 but what they regarded as the scientific foundation of their 
 practical proposals appears to be little more than a series of 
 arguments in a circle to the effect that there is no economic 
 justification for interest, while that result has been all along 
 latent in their premisses ; though, in the case of Marx, it was 
 shrouded by mysterious Hegelian phrases, with which he 
 "coquetted," as he tells us in his Preface. 
 
 4. We may now proceed with our analysis. The Net and 
 interest^of which we speak when we say that interest is interest. 
 the earnings of capital simply, or the reward of waiting 
 simply, is Net interest; but what commonly passes by the 
 name of Interest, includes other elements besides this, and 
 may be called Gross interest. 
 
 These additional elements are the more important, the 
 
 lower and more rudimentary the state of commercial security includes 
 and of the organization of credit. Thus, for instance, in 
 
 mediaeval times, when a prince wanted to forestall some 
 his future revenues, he borrowed perhaps a thousand ounces 
 of silver, and undertook to pay back fifteen hundred at the 
 end of a year. There was however no perfect security that he 
 would fulfil the promise ; and perhaps the lender would have 
 been willing to exchange that promise for an absolute cer- 
 tainty of receiving thirteen hundred at the end of the year. 
 In that case, while the nominal rate at which the loan was 
 made was fifty per cent., the real rate was thirty. 
 
 The necessity for making this allowance for insurance and also 
 against risk is so obvious, that it is not often overlooked. of a Sanage- 
 But it is less obvious that every loan causes some trouble m }nt> 
 to the lender ; that when, from the nature of the case, the 
 loan involves considerable risk, a great deal of trouble has 
 
BOOK VI. 
 CH. VI. 
 
 670 DEMAND AND SUPPLY IN KELATION TO CAPITAL. 
 
 often to be taken to keep these risks as small as possible ; 
 and that then a great part of what appears to the borrower 
 as interest, is, from the point of view of the lender, earnings 
 of management of a troublesome business. 
 
 and At the present time the net interest on capital in England 
 
 variefwith is a little under three per cent, per annum ; for no more than 
 
 Sances U o? *^ at can ^ e obtained ty r investing in such first-rate stock - 
 
 each loan, exchange securities as yield to the owner a secure income 
 
 without appreciable trouble or expense on his part. And 
 
 when we find capable business men borrowing on perfectly 
 
 secure mortgages, at (say) four per cent., we may regard that 
 
 gross interest of four per cent, as consisting of net interest, or 
 
 interest proper, to the extent of a little under three per cent., 
 
 and of earnings of management by the lenders to the extent 
 
 of rather more than one per cent. 1 
 
 Cases Again, a pawnbroker's business involves next to no risk ; 
 
 gross" 5 but his loans are generally made at the rate of 25 per cent. 
 P er ammm > or more 5 the greater part of which is really 
 earnings of management of a troublesome business. Or to 
 take a more extreme case, there are men in London and 
 Paris and probably elsewhere who make a living by lending 
 money to costermongers : the money is often lent at the 
 beginning of the day for the purchase of fruit, &c., and 
 returned at the end of the day, when the sales are over, at 
 a profit of ten per cent.; there is little risk in the trade, and 
 the money is seldom lost 2 . Now a farthing invested at ten 
 per cent, a day would amount to a billion pounds at the 
 
 1 Mortgages for long periods are sometimes more sought after by lenders than 
 those for short periods, and sometimes less. The former save the trouble of fre- 
 quent renewal, but they deprive the lender of command over his money for a long 
 tune, and thus limit his freedom. First-class stock-exchange securities combine 
 the advantages of very long and very short mortgages. For their holder can hold 
 them as long as he likes, and can convert them into money when he will ; though, 
 if at the time credit is shaken and other people want ready money, he will have 
 to sell at a loss. If they could always be realized without a loss, and if there were 
 no brokers' commissions to be paid on buying and selling, they would not yield a 
 higher income than money lent "on call " at the lender's choice of time ; and that 
 will always be less than the interest on loans for any fixed period, short or long. 
 
 2 Again, Dr Jessop (Arcady, p. 214) tells us " there are hosts of small money- 
 lenders in the purlieus of the cattle markets who make advances to speculators 
 ioith an eye" lending sums, amounting in exceptional cases up to 200, at a Gross 
 interest of ten per cent, for the twenty-four hours. 
 
GROSS AND NET INTEREST. 671 
 
 end of a year. But no one can become rich by lending to BOOK vi. 
 
 costermongers ; because no one can lend much in this way. ' 
 
 The so-called interest on the loans really consists almost en- 
 tirely of earnings of a kind of work for which few capitalists 
 have a taste. 
 
 5. It is then necessary to analyse a little more care- Further 
 fully the extra risks which are introduced into business when Jf gross 
 much of the capital used in it has been borrowed. Let us mterest - 
 suppose that two men are carrying on similar businesses, the 
 one working with his own, the other chiefly with borrowed 
 capital. 
 
 There is one set of risks which is common to both; which Trade 
 may be described as the Trade Risks of the particular 
 business in which they are engaged. They arise from fluctu- 
 ations in the markets for their raw materials and finished 
 goods, from unforeseen changes of fashion, from new inven- 
 tions, from the incursion of new and powerful rivals into their 
 respective neighbourhoods, and so on. But there is another 
 set of risks, the burden of which has to be borne by the man 
 working with borrowed capital, and not by the other ; and 
 we may call them Personal Risks. For he who lends Personal 
 capital to be used by another for trade purposes, has to 
 charge a high interest as insurance against the chances of 
 some flaw or deficiency in the borrower's personal character 
 or ability 1 . 
 
 The borrower may be less able than he appears, less Analysis of 
 energetic, or less honest. He has not the same inducements, risks, 
 as a man working with his own capital has, to look failure 
 straight in the face, and withdraw from a speculative enter- 
 prise as soon as it shows signs of going against him. On 
 the contrary, should his standard of honour not be high, he 
 may be not very keen of sight as to his losses. For if he 
 withdraws at once, he will have lost all he has of his own ; 
 and if he allows the speculation to run on, any additional 
 loss will fall on his creditors ; and any gain will come to him- 
 self. Many creditors lose through semifraudulent inertness 
 of this kind on the part of their debtors, and a few lose 
 through deliberate fraud : the debtor for instance may conceal 
 
 1 See also below, Ch. vm. 2. 
 
(372 DEMAND AND SUPPLY IN RELATION TO CAPITAL. 
 
 in subtle ways the property that is really his creditors', until, 
 
 BOOK VI. 
 CH. VI. 
 
 his bankruptcy being over, and he having entered on a new 
 business career, he can bring gradually into play his secret 
 reserve funds without exciting over-much suspicion. 
 Gross The price then that the borrower has to pay for the loan 
 
 d^eTnot of capital, and which he regards as interest, is from the point 
 e e uaiit f y i ew f t ^ ie l en( * er more P ro P ei% ly to be regarded as profits : 
 for it includes insurance against risks which are often very 
 heavy, and earnings of management for the task, which is 
 often very arduous, of keeping those risks as small as pos- 
 sible. Variations in the nature of these risks and of the 
 task of management will of course occasion corresponding 
 variations in the gross interest, so called, that is paid for the 
 use of money. The tendency of competition is therefore not 
 towards equalizing this gross interest: on the contrary, the 
 more thoroughly lenders and borrowers understand their 
 business, the more certainly will some classes of borrowers 
 obtain loans at a lower rate than others. 
 
 But the We must defer to a later stage our study of the marvel- 
 
 the modern lously efficient organization of the modern money market by 
 market which capital is transferred from one place where it is super- 
 tend to abundant to another where it is wanted ; or from one trade 
 
 equalize 
 
 rapidly the that is in the process of contraction to another which is being 
 
 net in- expanded : and at present we must be contented to take it 
 
 different f or granted that a very small difference between the rates of 
 
 capital net m terest * be got on the loan of capital in two different 
 
 modes of investment in the same Western country will cause 
 
 capital to flow, though perhaps by indirect channels, from 
 
 the one to the other. 
 
 It is true that if either of the investments is on a small 
 scale, and few people know much about it, the flow of capital 
 may be slow. One person, for instance may be paying five 
 per cent, on a small mortgage, while his neighbour is paying 
 four per cent, on a mortgage which offers no better security. 
 But in all large affairs the rate of net interest (so far as it 
 can be disentangled from the other elements of profits) is 
 nearly the same all over England. And further the diver- 
 gencies between the average rates of net interest in different 
 countries of the Western World are rapidly diminishing, as a 
 
NOTE ON THE PURCHASING POWER OF MONEY. 673 
 
 result of the general growth of intercourse, and especially of BOOK vi. 
 the fact that the leading capitalists of all these countries hold c ' 
 large quantities of stock-exchange securities, which yield the 
 same revenue and are sold practically at the same price on 
 the same day all over the world 1 . 
 
 NOTE ON CHANGES IN THE PURCHASING POWER OF MONEY IN 
 RELATION TO THE REAL RATE OF INTEREST. 
 
 Throughout the present volume we are supposing, in the absence of In reckon- 
 any special statement to the contrary, that all values are expressed in a " g co e ' 
 terms of money of fixed purchasing power, just as astronomers have trasted 
 taught us to determine the beginning or the ending of the day with ^o m j na i 
 reference not to the actual sun but to a mean sun which is supposed interest 
 to move uniformly through the heavens. (See Book I. Ch. I. 5.) J^JJJpf 
 Further, the influences which changes in the purchasing power of money tions as 
 do actually exert on the terms on which loans are arranged, are most p^chasimr 
 conspicuous in the market for short loans a market which differs power of 
 in many of its incidents from any other, and a full discussion of their m 
 influences must be deferred. Nevertheless it seems right to notice them 
 here in passing, at all events as a point of abstract theory. For the rate 
 of interest which the borrower is willing to pay measures the benefits 
 that he expects to derive from the use of the capital only on the as- 
 sumption that the money has the same purchasing power when it is 
 borrowed and when it is returned. 
 
 1 When we come to discuss the Money Market we shall have to study the 
 causes which render the supply of capital for immediate use much larger at some 
 times than at others ; and which at certain times make bankers and others con- 
 tented with an extremely low rate of interest, provided the security be good and 
 they can get their money back into their own hands quickly in case of need. At 
 such times they are willing to lend for short periods even to borrowers, whose 
 security is not first-rate, at a rate of interest that is not very high. For 
 their risks of loss are much reduced by then* power of refusing to renew the loan, 
 if they notice any indication of weakness on the part of the borrower ; and since 
 short loans on good security are fetching only a nominal price, nearly the whole 
 of what interest they get from him is insurance against risk, and remuneration of 
 then- own trouble. But on the other hand such loans are not really very cheap 
 to the borrower: they surround him by risks, to avoid which he would often 
 be willing to pay a much higher rate of interest. For if any misfortune should 
 injure his credit, or if a disturbance of the money market should cause a tem- 
 porary scarcity of loanable capital, he may be quickly brought into great straits. 
 He may not be able to obtain a renewal of the loan on moderate, or even on 
 any terms, and may thus be cut short in his most hopeful enterprises. One 
 of the chief symptoms of an impending commercial crisis is a rapid succession 
 of forced sales at a loss by those who have been trading with capital borrowed for 
 short periods. Loans to traders at nominally low rates of interest, if for short 
 periods only, do not therefore really form exceptions to the general rule discussed 
 in the text. 
 
 M. 43 
 
674 
 
 BOOK vi. 
 CH. vi.' 
 
 For~short 
 periods 
 
 measured 
 
 A rise in 
 
 of nume 6 
 makes the 
 
 oTfoterest 
 higher 
 
 nominal 6 
 
 Fluctua- 
 
 much les- 
 
 basing our 
 currency 
 
 metals 
 instead 
 
 g low ' 
 changes 
 
 different 
 footing. 
 
 DEMAND AND SUPPLY IN RELATION TO CAPITAL. 
 
 Let us suppose, for instance, that a man borrows 100 under 
 contract to pay back 105 at the end of the year. If meanwhile the 
 purchasing power of money has risen 10 per cent, (or which is the 
 same thing, general prices have fallen in the ratio of 10 to 11), he 
 cannot get the 105 which he has to pay back without selling one- 
 tenth more commodities than would have been sufficient for the pur- 
 
 pose at the beginning of the year. Assuming, that is, that the things 
 * i i i i i 
 
 which he handles have not changed m value relatively to things in 
 
 general, he must sell at the end of the year commodities which would 
 have cost him 115. 10s. at the beginning, in order to pay back with 
 interest nis loan of ^ 10 an(i tnerefore ne nas lost ground unless the 
 commodities have increased under his hands 15 per cent. While 
 nominally paying 5 per cent, for the use of his money, he has really 
 been paying 15 per cent. 
 
 On the other hand, if prices had risen so much that the purchasing 
 power of money had fallen 10 per cent, during the year, and he 
 could get 100 for things which cost him 90 at the beginning of the 
 year ; then, instead of paying 5 per cent, for the loan, he would really 
 be paid 5| per cent, for taking charge of the money. 
 
 When we come to discuss the causes of alternating periods of 
 inflation and depression of commercial activity, we shall find that they 
 are intimately connected with those variations in the real rate of 
 interest which are caused by changes in the purchasing power of money. 
 For when prices are likely to rise, people rush to borrow money and buy 
 goods, and thus help prices to rise ; business is inflated, and is managed 
 recklessly and wastefully ; those working on borrowed capital pay back 
 less real value than they borrowed, and enrich themselves at the expense 
 of the community. When afterwards credit is shaken and prices begin 
 to fall, everyone wants to get rid of commodities and get hold of money 
 which is rapidly rising in value ; this makes prices fall all the faster, 
 and the further fall makes credit shrink even more, and thus for a 
 long time prices fall because prices have fallen. 
 
 "We shall find that fluctuations in prices are caused only to a very 
 slight extent by fluctuations in the supply of the precious metals ; and 
 that they would not be much diminished by the adoption of gold and 
 silver instead of gold as the basis of our currency. But the evils which 
 they cause are so great, that it is worth while to do much in order to 
 diminish them a little. These evils however are not necessarily inherent 
 in those slow changes in the purchasing power of money which follow 
 the course of man's changing command over nature. During the last 
 fifty years improvements in the arts of production and in the access to 
 ^ch sources of supply of raw material, have doubled the efficiency of 
 man's labour in procuring the things which he wants : and an injustice 
 would have been done to those members of the working classes whose 
 money wages are much influenced by custom if the purchasing power 
 of a sovereign in terms of commodities had remained stationary, instead 
 of following, as it has, the increasing command by man over Nature. 
 
CHAPTER VII. 
 
 DEMAND AND SUPPLY IN RELATION TO CAPITAL, BUSINESS 
 POWER AND INDUSTRIAL ORGANIZATION. 
 
 1. IN the concluding chapters of Book IV. we made BOOKVI. 
 some study of the various forms of business management, c f^ L 
 and the faculties required for them ; and we saw how the 8 ter 
 supply of business power in command of capital may be and tlie 
 
 r ; following 
 
 regarded as consisting of three elements, the supply of continue 
 
 capital, the supply of the business power to manage it, and 
 the supply of the organization by which the two are brought 
 together and made effective for production. In the last xin 
 chapter we were concerned mainly with interest, the earn- 
 ings of the first of these elements. In this chapter we are 
 mainly occupied with the earnings of the second and third 
 taken together, which we have called Gross earnings of man- 
 agement ; ahd with the relation in which this stands to the 
 earnings of the second taken by itself which we have called 
 Net earnings of management 1 . We are to cany this study 
 further ; and to inquire more closely into the nature of the 
 services which the business undertaker renders to society, and 
 the rewards of this work ; and we shall find that the causes 
 by which these are governed are less arbitrary, and present 
 closer analogies to those which govern other kinds of earnings, 
 than is commonly supposed. 
 
 We must however make a distinction at starting. We The 
 must call to mind 2 the fact that the struggle for survival 
 tends to make those methods of organization prevail, which 
 are best fitted to thrive in their environment ; but not neces- 
 
 i See p. 392. 2 See Book iv. Ch. vm. 
 
 432 
 
676 DEMAND AND SUPPLY IN RELATION TO CAPITAL CONTINUED. 
 
 BOOK vi. sarily those best fitted to benefit their environment, unless it 
 CH - VII- happens that they are duly rewarded for all the benefits 
 nientintbe -wh^ they confer, whether direct or indirect. And in fact 
 survival this is not so. For as a general rule the law of substitution 
 morTon which is nothing more than a special and limited applica- 
 diauTeffi- ti n f tne ^ aw ^ surv i ya l f tne fittest tends to make one 
 dencythan me thod of industrial organization supplant another when it 
 
 on the i 
 
 remote offers a direct and immediate service at a lower price. The 
 which ft indirect and ultimate services which either will render have, 
 
 as a general rule, little or no weight in the balance ; and as a 
 methods resu lt many businesses languish and die, which might in the 
 long run have done good work for society if only they could 
 have obtained a fair start. This is especially true of some 
 forms of co-operative associations. 
 
 In this connection we may divide employers and other 
 undertakers into two classes, those who open out new and 
 improved methods of business, and those who follow beaten 
 tracks. The services which the latter perform for society are 
 chiefly direct and seldom miss their full reward : but it is 
 otherwise with the former class. 
 
 For instance, economies have lately been introduced into 
 some branches of iron manufacture by diminishing the 
 number of times which the metal is heated in passing from 
 pig iron to its final form ; and some of these new inventions 
 have been of such a nature that they could neither be patented 
 nor kept secret. Let us suppose then that a manufacturer 
 with a capital of 50,000 is getting in normal times a net 
 profit of 4,000 a year, 1,500 of which we may regard as 
 his earnings of management, leaving 2,500 for the other 
 two elements of profits. We assume that he has been work- 
 ing so far in the same way as his neighbours, and showing an 
 amount of ability which, though great, is no more than the 
 normal or average ability of the people who fill such ex- 
 ceptionally difficult posts ; that is, we assume that 1,500 
 a year is the normal earnings for the kind of work he has 
 been doing. But as time goes on, he thinks out a way of 
 dispensing with one of the heatings that have hitherto been 
 customary; and in consequence, without increasing his ex- 
 penses, he is able to increase his annual output by things 
 
DIRECT AND INDIRECT SERVICES. 677 
 
 which can be sold for 2,000 net. So long, therefore, as he BOOK vi. 
 can sell his wares at the old price, his earnings of manage- - _ ' 
 ment will be 2,000 a year above the average ; and he will 
 earn the full reward of his services to society. His neigh- 
 bours however will copy his plan, and probably make more 
 than average profits for a time. But soon competition will 
 increase the supply, and lower the price of their wares, 
 until their profits fall to about their old level ; for no one 
 could get extra high wages for making eggs stand on their 
 ends after Columbus's plan had become public property. 
 
 Many business men whose inventions have in the long run 
 been of almost priceless value to the world, have earned even 
 less by their discoveries than Milton by his Paradise Lost or 
 Millet by his Angelus', and while many men have amassed 
 great wealth by good fortune, rather than by exceptional 
 ability in the performance of public services of high importance, 
 it is probable that those business men who have pioneered 
 new paths have often conferred on society benefits out of all 
 proportion to their own gains, even though they have died 
 millionaires. Although then we shall find that the rewards 
 of every business undertaker tend to be proportionate to the 
 direct services he renders to the community, this will by 
 itself go but a small way towards proving that the existing 
 industrial organization of society is the best conceivable, or 
 even the best attainable ; and it must not be forgotten that 
 the scope of our present inquiry is limited to a study of the 
 action of causes that determine the earnings of business under- 
 taking and management under existing social institutions. 
 
 We will begin by tracing the action of the law of substitu- 
 tion in adjusting the rewards of the services rendered to 
 society by ordinary workmen, by foremen, and by employers 
 of different grades. 
 
 2. We have already noticed that a great part of the The law 
 work done by the head of a small business himself, is rele- stitution 
 
 gated in a large business to salaried heads of departments, 
 managers, foremen and others. And this thread will guide for t . he 
 
 rrn - Services of 
 
 us to much that is useful for our present inquiry. The sim- foremen 
 plest case is that of the earnings of the ordinary foreman ; 
 with which we may begin. 
 
678 DEMAND AND SUPPLY IN KELATION TO CAPITAL CONTINUED. 
 
 BOOK vi. Let us suppose, for instance, that a railway contractor or 
 CH - vn - a dockyard manager finds that it answers best to have one 
 as com- foreman to every twenty labourers, and to pay him twice the 
 those of wages of one of them. This means that, if he found himself 
 workmen, with 500 labourers and 24 foremen, he would expect to get 
 just a little more work done at the same expense by adding 
 one more foreman, than by adding two more ordinary 
 labourers: while if he had had 490 labourers and 25 fore- 
 men, he would have found it better to add two more 
 labourers. If he could have got his foreman for one and a 
 half times the wages of a labourer, perhaps he would have 
 employed one foreman to every fifteen labourers. But, as it 
 is, the number of foremen employed is determined at one- 
 twentieth of that of the labourers, and their demand price at 
 twice the labourers' wages \ 
 
 In exceptional cases the foremen may earn their wages 
 by overdriving those whose work they superintend. But we 
 may now suppose them to contribute to the success of the 
 undertaking in a legitimate way, by securing a better orga- 
 nization of its details; so that fewer things are done amiss 
 and need to be undone ; so that everyone finds the help that 
 he wants in moving heavy weights, &c., ready for him just 
 when he wants it ; so that all machinery and implements are 
 kept in good working order, and no one has to waste his time 
 and strength by working with inadequate appliances, and so 
 on. The wages of foremen who do work of this kind may 
 be taken as typical of a great part of the earnings of man- 
 agement: society, acting through the individual employer, 
 offers an effective demand for their services until that margin 
 is reached at which the aggregate efficiency of industry would 
 be increased by adding workers of some other grade more 
 than by adding the foremen whose wages would add an equal 
 amount to the expenses of production. 
 
 So far the employer has been regarded as the agent 
 through whom the law of substitution acts in contriving 
 and arranging the factors of production so that the maximum 
 of direct services (estimated by their money measure) should 
 be performed at a minimum money cost. But now w r e have 
 
 1 With this argument may be compared that of Book vi. Ch. i. 8. 
 
BALANCING THE SERVICES OF WORKMEN AND FOREMEN. 679 
 
 to look at the work of the employers themselves being BOOKVI. 
 
 CH VII 
 
 contrived and arranged for them, though of course in a _ 
 more haphazard fashion, by the immediate action of their 
 own competition. 
 
 3. Let us then look next at the way in which the work The law 
 of foremen and salaried managers is constantly being weighed tution ad- 
 against that of the heads of businesses. It will be interest- earnings 
 ing to watch the course of a small business as it gradually 
 
 expands. A house carpenter, for instance, steadily increases a business 
 his stock of tools, till he can hire a small workshop, and of fore- 
 undertake odd jobs for private persons, who have to agree Managers. 
 
 with him as to what is to be done. The work of management n 
 and of undertaking what little risks there are, is shared the gradual 
 between them and him ; and, as this gives them a great Corking 
 deal of trouble, they are not willing to pay him at a high car P enter - 
 rate for what work of management he does 1 . 
 
 So his next step is to undertake all the different sides of His work 
 small repairs. He has now entered on the career of a master- master 1 -* 
 builder ; and if his business grows, he gradually withdraws buUder - 
 himself from manual labour, and to some extent even from 
 the superintendence of its details. Substituting for his own 
 work that of hired men, he has now to deduct their wages 
 from his receipts, before he can begin to reckon his profits : 
 and unless he proves himself to have a business ability up to 
 the normal level of that grade of industry which he has now 
 entered, he will probably soon lose all the little capital which 
 he has gained, and after a short struggle return to that 
 humbler rank of life in which he has prospered. Should his 
 ability be just about that level, he will, with average good 
 fortune, retain his position and perhaps gain a little ground : 
 and the excess of his receipts over his outgoings will be 
 representative of the normal earnings of management in his 
 grade. 
 
 If his ability be greater than that which is normal in Changes 
 his grade, he will be able to obtain as good a result with character 
 a given outlay for wages and other expenses, as most o 
 
 his rivals can with a larger outlay : he will have substituted of his 
 
 ,.,.. .. i business 
 
 his extra ability m organization for some of their outlay ; increases. 
 1 Comp. Book iv. Ch. xii. 3. 
 
680 DEMAND AND SUPPLY IN RELATION TO CAPITAL CONTINUED. 
 
 BOOK vi. and his earnings of management will include the value 
 cH^vn. ^ t ^ at out j a y W j t j 1 w hi c h he has dispensed. He will thus 
 increase his capital and his credit: and be able to borrow 
 more, and at a lower rate of interest. He will obtain a wider 
 business acquaintanceship and connection; and he will get an 
 increased knowledge of materials and processes, and opportu- 
 nities for bold but wise and profitable adventure; until at 
 last he has delegated to others nearly all those duties 
 which occupied his whole time even after he had ceased to 
 do manual work himself 1 . 
 
 The ad- 4. Having watched the law of substitution adjusting 
 
 between the earnings of foremen and of ordinary workmen, and again 
 ing s e of rn " f employers and foremen, we may now look at its action in 
 MM?" on ^justing the earnings of employers on a small scale and 
 a large and those on a large scale. 
 
 scale. Our carpenter having become a master-builder on a very 
 
 large scale, his undertakings will be so many and so great as 
 to have occupied the time and energies of some scores of 
 employers who superintended all the details of their several 
 businesses. Throughout this struggle between large busi- 
 nesses and small, we see the law of substitution constantly 
 in operation ; the large employer substituting a little of his 
 own work and a good deal of that of salaried managers and 
 foremen for that of a small employer. When, for instance, 
 tenders are invited for erecting a building, a builder with a 
 
 1 The employer of a large number of workmen has to economize his energies 
 on the same plan that is followed by the leading officers of a modern army. For 
 as Mr Wilkinson says (The Brain of an Army, pp. 42 6) : " Organization im- 
 plies that every man's work is defined, that he knows exactly what he must 
 answer for, and that his authority is coextensive with his responsibility... [In the 
 German army] every commander above the rank of a captain deals with a body 
 composed of units, with the interior affairs of none of which he meddles, except 
 in the case of failure on the part of the officer directly responsible... .The general 
 commanding an army corps has to deal directly with only a few subordinates.... 
 He inspects and tests the condition of all the various units, but. ..he is as far 
 as possible unhampered by the worry of detail. He can make up his mind coolly." 
 Bagehot in characteristic fashion had remarked (Lombard Street, Ch. vm.) that 
 if the head of a large business "is very busy, it is a sign of something wrong; " 
 and had compared (Essay on the Transferdbility of Capital) the primitive em- 
 ployer with a Hector or Achilles mingling in the fray, and the typical modem 
 employer with " a man at the far end of a telegraph wire a Count Moltke with 
 his head over some papers who sees that the proper persons are slain, and who 
 secures the victory." 
 
BALANCING THE SERVICES OF SMALL AND LARGE EMPLOYERS. 681 
 
 large capital often finds it worth his while to enter the lists, BOOK vi. 
 even though he lives at a distance. The local builders secure _ 
 great economies in having workshops and men whom they 
 can trust already near the spot ; while he gains something 
 through buying his materials on a large scale, through his 
 command of machinery, especially for woodwork, and perhaps 
 through being able to borrow what capital he wants on 
 easier terms. These two sets of advantages frequently about 
 balance one another ; and the contest for the field of employ- 
 ment often turns on the relative efficiencies of the undivided 
 energies of the small builder, and of that slight supervision, 
 which is all that the abler but busier large builder can afford 
 to give himself, though he supplements it by the work of his 
 local manager and of the clerks in his central office 1 . 
 
 5. We mav next watch the action of the law of An under- 
 taker 
 substitution in pushing forward undertakers working chiefly working 
 
 with their own capital in some trades, and in others those 
 working chiefly with borrowed capital. The personal risks, JjJ 1 ^ ais" 
 against which the lender of capital to be used in business advantage 
 requires to be indemnified, vary to some extent with the trades. 
 nature of that business, as well as with the circumstances of 
 the individual borrower. They are very high in some cases, 
 as for instance when a man is starting in a new branch of 
 the electrical trades, in which there is very little past ex- 
 perience to go by, and the lender cannot easily form any 
 independent judgment as to the progress which is being 
 made by the borrower ; and in all such cases the man work- 
 ing with borrowed capital is at a great disadvantage; the 
 rate of profit is determined chiefly by the competition of 
 those who apply their own capital. It may happen that not 
 many such men have access to the trade ; and in that case 
 the competition may not be keen, and the rate of profit may 
 be high ; that is, it may exceed considerably net interest on 
 the capital together with earnings of management on a 
 scale commensurate with the difficulty of the business done, 
 though that difficulty will probably be above the average. 
 
 And again, the new man with but little capital of his 
 own is at a disadvantage in trades which move slowly 
 
 1 Comp. Book iv. Ch. xi. 4. 
 
682 DEMAND AND SUPPLY IN RELATION TO CAPITAL CONTINUED. 
 
 BOOK vi. and in which it is necessary to sow a long time before one 
 c !l^ reaps. 
 
 But in But in all those industries in which bold and tireless 
 
 piays S a he enterprise can reap a quick harvest ; and in particular wher- 
 leaduig ever high profits are to be made for a time by cheaper repro- 
 ductions of costly wares, there the new man is in his element : 
 it is he who by his quick resolutions and dexterous contri- 
 vances, and perhaps also a little by his natural recklessness, 
 " forces the pace." 
 
 for he will ^cl he often holds his own with great tenacity even under 
 Forli small considerable disadvantages ; for the freedom and dignity of 
 reward. his position are very attractive to him. Thus the peasant 
 proprietor whose little plot is heavily mortgaged, the small 
 so-called " sweater " or " garret master " who takes out a sub- 
 contract at a low price, will often work harder than the 
 ordinary workman, and for a lower net income. And the 
 manufacturer who is doing a large business with compara- 
 tively little capital of his own will reckon his labour and 
 anxiety almost as nothing, for he knows that he must any- 
 how work for his living, and he is unwilling to go into service 
 to another : he will therefore work feverishly for a gain that 
 would not count much in the balance with a wealthier rival, 
 who, being able to retire and live in comfort on the interest 
 of his capital, may be doubting whether it is worth while to 
 endure any longer the wear-and-tear of business life. 
 
 The inflation of prices which culminated in 1873, enriched 
 borrowers in general, and in particular business undertakers, 
 at the expense of other members of society. New men there- 
 fore found their way into business made very smooth; and 
 those who had already made or inherited business fortunes, 
 found their way made smooth for retiring from active work. 
 Thus Bagehot, writing about that time 1 , argued that the 
 growth of new men was making English business increasingly 
 democratic: and, though admitting that "the propensity to 
 variation in the social as in the animal kingdom is the prin- 
 ciple of progress," he pointed out regretfully how much the 
 country might have gained by the long duration of families of 
 merchant princes. But in recent years there has been some 
 
 1 Lombard Street, Introductory chapter. 
 
BUSINESSES WORKED WITH BORROWED CAPITAL. 683 
 
 ' 
 
 reaction, due partly to social causes, and partly to the influ- BOOK vi. 
 ence of a continued fall in prices. The sons of business men 
 are rather more inclined than they were a generation ago to 
 take pride in their fathers' callings ; and they find it harder 
 to satisfy the demands of an ever-increasing luxury on the 
 income which would be theirs if they withdrew from business. 
 
 6. But the weighing in the balance of the services and The 
 therefore the earnings of employees against the earnings of 
 management of business men is in some ways best illustrated 
 by reference to Joint-stock companies. For in them most of earn . their 
 the work of management is divided between salaried directors by labour 
 (who indeed hold a few shares themselves) and salaried S11 
 managers and other subordinate officials, most of whom have 
 little or no capital of any kind; and their earnings, being 
 almost the pure earnings of labour, are governed in the long 
 run by those general causes which rule the earnings of labour 
 of equal difficulty and disagreeableness in ordinary occu- 
 pations. 
 
 Joint-stock companies are hampered by internal frictions, Disad- 
 and conflicts of interest between shareholders and debenture of'puSic 
 holders, between ordinary and preferred shareholders, and companies, 
 between all these and the directors ; and by the need for an 
 elaborate system of checks and counterchecks. They seldom 
 have the enterprise, the energy, the unity of purpose and 
 the quickness of action of a private business. 
 
 But these disadvantages are of relatively small import- and their 
 ance in some trades. That publicity, which is one of the tagea!" 
 chief drawbacks of public companies in many branches of 
 manufacture and of speculative commerce, is a positive ad- 
 vantage in ordinary banking and insurance and kindred 
 businesses; while in these, as well as in most of the trans- 
 port industries (railways, tramways, canals, and the supply of 
 gas, water, and electricity), their unbounded command over 
 capital gives them almost undisputed sway. 
 
 A peculiar feature of this latter class of industries is that The largest 
 their fixed capital is large relatively to their circulating, and companies 
 
 the prime cost of the goods produced or the services rendered 
 by them is small relatively to the total (or true normal) cost 
 which must be defrayed in the long run in order to make their prices are 
 
684 DEMAND AND SUPPLY IN RELATION TO CAPITAL CONTINUED. 
 
 BOOK vi. business remunerative. When several companies whose busi- 
 CH ' vn ' ness is of this kind are in keen competition, they are under a 
 naturally g reat temptation to attract custom by selling at much less 
 But on the than normal cost ; but probably they do not yield to this 
 temptation more than, or even as much as, private capitalists 
 
 steadying wou jd under similar circumstances. And on the whole those 
 
 influence 
 
 on employ- powerful joint-stock companies, which have great traditions 
 and look forward to a distant future, pursue a far-seeing if 
 a sluggish policy. They are seldom willing to sacrifice their 
 reputation for the sake of a temporary gain ; they are not 
 inclined to drive such hard bargains with their employees as 
 will make their service unpopular; and they exercise gene- 
 rally a steadying influence on the demand for capital, and 
 on the demand for labour of all kinds, and especially for the 
 services of those who, having business ability but no capital 
 of their own, desire to reap some earnings of management 
 
 Co-opera- as salaried officials of a great undertaking. And as has 
 already been observed, co-operation promises, more than any 
 other form of business association, to turn to good account 
 the capabilities of the working man for the higher posts of 
 business management 1 . 
 
 Modem 8 7. Thus then each of the many modern methods of 
 
 methods of P ~. ... 
 
 business business has its own advantages and disadvantages : and its 
 
 application is extended under the action of the law of sub- 
 powerful stitution in every direction until that limit or margin is 
 tendency reached, at which its special advantages for that use no 
 
 to adjust . 
 
 earnings longer exceed its disadvantages. Or, to put the same thing 
 
 1 another way, the margin of profitableness of different 
 k f metn ds of business organization for any particular purpose, 
 done. i s to be regarded not as a point on any one line, but a 
 boundary line of irregular shape cutting one after another 
 every possible line of business organization; and these 
 modern methods, partly on account of their great variety, 
 but partly also on account of the scope which many of them 
 offer to men of business ability who have no capital, render 
 possible a much closer correspondence between the earnings 
 
 1 Some aspects of joint-stock companies and of co-operative associations 
 have been indicated in Book iv. Ch. xn. 9, 10; and others will be discussed 
 later on. 
 
COMPETITION FOR POSTS OF BUSINESS MANAGEMENT. 685 
 
 of undertaking and management and the services by which BOOK vi. 
 
 those earnings are got than could be generally attained under ' 
 
 the primitive system in which capital was scarcely ever applied 
 to production by any save its owners. For then it could only 
 be by a fortunate accident that those who had the capital 
 and the opportunity for carrying on any trade or performing 
 any service, of which the public was in need, had the apti- 
 tudes and the abilities required for the task. But, as it is, that 
 share of the normal expenses of production of any commodity 
 which is commonly classed as profits, is so controlled on every 
 side by the action of the law of substitution, that it cannot 
 long diverge from the normal supply price of the capital 
 needed, added to the normal supply price of the ability and 
 energy required for managing the business, and lastly the 
 normal supply price of that organization by which the appro- 
 priate business ability and the requisite capital are brought 
 together. 
 
 The supply of business power is large and elastic, since The supply 
 the area from which it is drawn is wide. Everyone has the ability is 
 
 business of his own life to conduct ; and in this he can gain 
 
 some training for business management, if he has the natural wide area ' 
 
 aptitudes for it. There is therefore no other kind of useful 
 
 rare and therefore highly-paid ability which depends so little 
 
 on labour and expense applied specially to obtaining it, and 
 
 so much on "natural qualities." And, further, business and . is .. non - 
 
 \ ,. . . ., i specialized. 
 
 power is highly non-specialized; because in the large ma- 
 jority of trades, technical knowledge and skill become every 
 day less important relatively to the broad and non-specialized 
 faculties of judgment, promptness, resource, carefulness and 
 steadfastness of purpose 1 . 
 
 It is true that in small businesses, in which the master is 
 little more than the head workman, specialized skill is very 
 important. And it is true that "each sort of trade has a 
 tradition of its own, which is never written, probably could 
 
 1 Book IT. Ch. xii. 12. As General Walker has well said ( Wages Question, 
 ch. xiv.). When the forms of productions cease to be few and simple, it becomes 
 " no longer true that a man becomes an employer because he is a capitalist. Men 
 command capital because they have the qualifications to profitably employ labour. 
 To these captains of industry... capital and labour resort for opportunity to per- 
 form their several functions." 
 
686 DEMAND AND SUPPLY IN RELATION TO CAPITAL CONTINUED. 
 
 BOOK vi. not be written, which can only be learnt in fragments, and 
 CH - vn - which is best taken in early life, before the mind is shaped 
 and the ideas fixed. But each trade in modern commerce 
 is surrounded by subsidiary and kindred trades, which fami- 
 liarize the imagination with it, and make its state known 1 ." 
 Moreover those general faculties, which are characteristic of 
 the modern business man, increase in importance as the scale 
 of business increases. It is they which mark him out as a 
 leader of men ; and which enable him to go straight to the 
 kernel of the practical problems with which he has to deal, 
 to see almost instinctively the relative proportions of things, 
 to conceive wise and far-reaching policies, and to carry them 
 out calmly and resolutely 2 . 
 
 Difficulties It must be admitted indeed that the adjustment of 
 jgaccu^ supply to demand in the case of business ability is somewhat 
 ledgers to hindered by the difficulty of ascertaining exactly what is the 
 the true price that is being paid for it in any trade. It is compara- 
 of manage- tively easy to find out the wages of bricklayers or puddlers 
 different by striking an average between the wages that are earned 
 trades. ^ men Q var i ous degrees of efficiency, and allowing for the 
 inconstancy of their employment. But the gross earnings of 
 management which a man is getting, can only be found after 
 making up a careful account of the true profits of his busi- 
 ness, and deducting interest on his capital. The exact state 
 of his affairs is often not known by himself ; and it can seldom 
 be guessed at all accurately even by those who are in the 
 same trade with himself. It is not true even in a little 
 village at the present day that everyone knows all his 
 neighbour's affairs. As Cliffe Leslie said, " The village inn- 
 
 1 Bagehot, Postulates, p. 75. 
 
 2 Bagehot (1. c. pp. 94 5) says that the great modern commerce has " certain 
 general principles which are common to all kinds of it, and a person can be of 
 considerable use in more than one kind if he understands these principles and has 
 the proper sort of mind. But the appearance of this common element is in com- 
 merce, as in politics, a sign of magnitude, and primitive commerce is all petty. In 
 early tribes there is nothing but the special man the clothier, the mason, the 
 weapon-maker. Each craft tried to be, and very much was, a mystery except to 
 those who carried it on. The knowledge required for each was possessed by few, 
 kept secret by these few, and nothing else was of use but this monopolised and 
 often inherited acquirement; there was no 'general' business knowledge. The 
 idea of a general art of money making is very modern ; almost everything ancient 
 about it is individual and particular." 
 
ADJUSTMENT ON THE WHOLE FAIRLY ACCURATE. 687 
 
 keeper, publican or shopkeeper, who is making a small BOOKVI. 
 fortune does not invite competition by telling his neigh- J _ ' 
 bours of his profits, and the man who is not doing well 
 does not alarm his creditors by exposing the state of 
 his affairs 1 ." 
 
 But though it may be difficult to read the lessons of an They do 
 individual trader's experience, those of a whole trade can far ; 
 never be completely hidden, and can not be hidden at all for 
 long. Although one cannot tell whether the tide is rising or 
 falling by merely watching half-a-dozen waves breaking on 
 the seashore, yet a very little patience settles the question ; 
 and there is a general agreement among business men that 
 the average rate of profits in a trade cannot rise or fall much 
 without general attention being attracted to the change 
 before long. And though it may sometimes be a more diffi- 
 cult task for a business man than for a skilled labourer, to 
 find out whether he could improve his prospects by changing 
 his trade, yet the business man has great opportunities for 
 discovering whatever can be found out about the present and 
 future of other trades ; and if he should wish to change his 
 trade, he will generally be able to do so more easily than the 
 skilled workman could. 
 
 On the whole then we may conclude that the rarity of and on the 
 the natural abilities and the expensiveness of the special adjust- 
 
 training required for the work affect normal earnings of 
 management in much the same way as they do the normal 
 wages of skilled labour. In either case, a rise in the income cnity and 
 to be earned sets in operation forces tending to increase the of the work 
 
 supply of those capable of earning it ; and in either case, the 
 extent to which the supply will be increased by a given rise accurate - 
 of income, depends upon the social and economic condition 
 of those from whom the supply is drawn. For though it is 
 true that an able business man who starts in life with a great 
 deal of capital and a good business connection is likely to 
 obtain higher earnings of management than an equally able 
 man who starts without these advantages ; yet there are 
 similar, though smaller, inequalities between the earnings of 
 
 1 Fortnightly Revieiv, June 1879, reprinted in his Essays^. 
 
688 DEMAND AND SUPPLY IN RELATION TO CAPITAL CONTINUED. 
 
 CH. VII. 
 
 BOOK vi. professional men of equal abilities who start with unequal 
 social advantages ; and the wages even of a working man 
 depend on the start he has had in life almost as much as on 
 the expense which his father has been able to afford for his 
 education 1 . 
 
 1 See Book vi. Ch. iv. 3. 
 
CHAPTER VIII. 
 
 DEMAND AND SUPPLY IN RELATION TO CAPITAL AND 
 BUSINESS POWER, CONCLUDED. 
 
 1. THE causes that govern earnings of management BOOKVI. 
 have not been studied with any great care till within the last 
 fifty years. The earlier economists did not do much good 
 work in this direction because they did not adequately 
 distinguish the component elements of profits, but searched of tlae rate 
 for a simple general law governing the average rate of profits to equality. 
 a law which, from the nature of the case, cannot exist. 
 
 In analysing the causes that govern profits the first diffi- in a large 
 culty which we meet is in some measure verbal. It arises som^earn- 
 from the fact that the head of a small business does him- manage- 
 self much of the work which in a large business is done ent re 
 
 . . classed as 
 
 by salaried managers and foremen, whose earnings are de- salaries; 
 ducted from the net receipts of the large business before its 
 profits are reckoned, while the earnings of the whole of his 
 labour are reckoned among his profits. This difficulty has labour is 
 long been recognized. Adam Smith himself pointed out profits, 
 that : " The whole drugs which the best employed apothe- 
 cary in a large market-town will sell in a year may not 
 perhaps cost him above thirty or forty pounds. Though he 
 should sell them, therefore, for three or four hundred or a 
 thousand per cent, profit this may frequently be no more 
 than the reasonable wages of his labour in the only way in 
 which he can charge them, upon the price of the drugs. The 
 greater part of the apparent profit is real wages disguised in 
 the garb of profit. In a small seaport town a little grocer 
 will make forty or fifty per cent, upon a stock of a single 
 M. 44 
 
690 DEMAND AND SUPPLY IN RELATION TO CAPITAL, CONCLUDED. 
 
 BOOK vi. hundred pounds, while a considerable wholesale merchant in 
 CH ' vm ' the same place will scarce make eight or ten per cent, upon 
 
 a stock of ten thousand 1 ." 
 
 Profits It is here important to distinguish between the annual 
 
 and^S rate of profits on the capital invested in a business, and the 
 
 turnover. Tg ^ Q Q f p ro fi ts that are made every time the capital of the 
 
 business is turned over; that is, every time sales are made 
 
 equal to that capital, or the rate of profits on the turnover. 
 
 At present we are concerned with profits per annum. 
 
 A correc- The greater part of the nominal inequality between the 
 
 anomaly of normal rates of profit per annum in small businesses and in 
 
 rem^e? large would disappear, if the scope of the term profits were 
 
 the chief na rrowed in the former case or widened in the latter, so that 
 
 source of 
 
 the opinion it included in both cases the remuneration of the same classes 
 are high in of services. There are indeed some trades in which the rate 
 busTness. of profit, rightly estimated, on large capitals tends to be 
 higher than on small, though if reckoned in the ordinary 
 way it would appear lower. For of two businesses com- 
 peting in the same trade, that with the larger capital can 
 nearly always buy at the cheaper rate, and can avail itself of 
 many economies in the specialization of skill and machinery 
 and in other ways, which are out of the reach of the smaller 
 business : while the only important special advantage, which 
 the latter is likely to have, consists of its greater facilities for 
 getting near its customers and consulting their individual 
 In some wants. In trades in which this last advantage is not im- 
 thVare portant, and especially in some manufacturing trades in 
 lower in wn ih the l ar g e fi rm can se ll afc a better price than the 
 Snesses small one, the outgoings of the former are proportionately 
 than in less and the incomings larger ; and therefore, if profits are so 
 reckoned as to include the same elements in both cases, the 
 rate of profit in the former case must be higher than in the 
 latter. 
 
 1 Wealth of Nations, Book i. Ch. x. Senior, Outlines, p. 203, puts the normal 
 rate of profits on a capital of 100,000 at less than 10 per cent., on one of 10,000 
 or 20,000 at about 15 per cent., on one of 5,000 or 6,000 at 20 per cent., and 
 "a much larger per-centage" on smaller capitals. Compare also 4 of the 
 preceding Chapter of the present Book. It should be noted that the nominal rate 
 of profits of a private firm is increased when a manager, who brings no capital 
 with him, is taken into partnership and rewarded by a share of the profits instead 
 of a salary. 
 
PROFITS IN LARGE AND SMALL BUSINESSES. 691 
 
 But these are the very businesses in which it most BOOKVI. 
 frequently happens that large firms after first crushing out ' VI *' 
 small ones, either combine with one another and thus secure l^"^ 11686 
 for themselves the gains of a limited monopoly, or by keen J here ar ?_ 
 
 , , few small 
 
 competition among themselves reduce the rate of profit very businesses 
 low. There are many branches of the textile, the metal, and 
 the transport trades in which no business can be started at 
 all except with a large capital ; while those that are begun 
 on a moderate scale struggle through great difficulties, in the 
 hope that, after a time, it may be possible to find employment 
 for a large capital, which will yield earnings of management 
 high in the aggregate though low in proportion to the 
 capital. 
 
 There are some trades which require a very high order and in 
 of ability, but in which it is nearly as easy to manage a very these 
 large business as one of moderate size. In rolling mills, for 
 
 instance, there is little detail which cannot be reduced- to rat of . i 
 routine, and a capital of 1,000,000 invested in them can be very low. 
 controlled by one able man. A rate of profits of 20 per 
 cent., which is not a very high average rate for some parts of 
 the iron trade, would give the owner of such works earnings 
 of management amounting to more than 150,000 a year. 
 And since iron-masters can with so little additional effort 
 get the earnings of management on an increased capital, 
 wealthy men remain in business longer than in most others ; 
 and the competition of the great iron-masters with one 
 another is said to have reduced the average rate of profits in 
 their trade below the ordinary level. 
 
 The rate of profits is low in nearly all those trades which 
 require very little ability of the highest order, and in which 
 a public or private firm with a good connection and a large 
 capital can hold its own against new-comers, so long as it is 
 managed by men of industrious habits with sound common 
 sense and a moderate share of enterprise. And men of this 
 kind are seldom wanting either to a well-established public 
 company or to a private firm which is ready to take the 
 ablest of its servants into partnership. 
 
 On the whole, then, we may conclude firstly that the true General 
 rate of profits in large businesses is higher than at first sight thTcom- 
 
 442 
 
692 DEMAND AND SUPPLY IN RELATION TO CAPITAL, CONCLUDED. 
 
 BOOK vi. appears, because much that is commonly counted as profits 
 
 CH - Yin ' in the small business ought to be classed under another head, 
 
 betJveeli before the rate of profits in it is compared with that in a 
 
 large busi- large business : and secondly that, even when this correction 
 
 smSh ai has been made, the rate of profit reckoned in the ordinary 
 
 way declines generally as the size of the business increases. 
 
 Profits per | 2. The normal earnings of management are of course 
 
 generally high in proportion to the capital, and therefore the rate of 
 
 Se^in profits per annum on the capital is high, when the work of 
 
 workof he management is heavy in proportion to the capital. The 
 
 manage- WO rk of management may be heavy because it involves great 
 
 difficult mental strain in organizing and devising new methods; or 
 
 18 y ' because it involves great anxiety and risk : and these two 
 
 things frequently go together. Individual trades have indeed 
 
 peculiarities of their own, and all rules on the subject are 
 
 liable to great exceptions. But the following general pro- 
 
 positions will be found to be valid, other things being equal, 
 
 and to explain many inequalities in the normal rates of profit 
 
 in different trades. 
 
 Avherethe Firstly, the extent of the work of management needed 
 capital iT in a business depends more on the amount of the circulating 
 
 capital used than on that of the fixed. The rate of profit 
 the fixed; tends therefore to be low in trades in which there is a 
 disproportionately large amount of durable plant, that 
 requires but little trouble and attention when once it has 
 been laid down. As we have seen, these trades are likely 
 to get into the hands of joint-stock companies : and the 
 aggregate salaries of the directors and higher officials bear a 
 very small proportion to the capital employed in the case of 
 railway and water companies, and, even in a more marked 
 degree, of companies that own canals and docks and bridges 1 . 
 and 'ail Next, given the proportion between the fixed and circu- 
 
 where the lating capital of a business ; the work of management will 
 
 1 A manufacturer, who owns the factory he uses, has generally to he contented 
 with a lower rate of profit per annum on his capital, than another who works in a 
 hired factory ; for the profits on capital invested in buildings are low, because no 
 great trouble is involved by owning them and letting them out. More generally, 
 if a man has borrowed much of the capital he uses in business, his profits even 
 after he has paid a rather high interest on his borrowings, will as a rule be large 
 in proportion to his own capital. 
 
VARIATIONS IN THE RATE OF PROFITS PER ANNUM. 693 
 
 generally be the heavier, and the rate of profits the higher, BOOK vi. 
 
 the more important the wages-bill is relatively to the cost of J _ ' 
 material and the value of the stock in trade. In trades that 
 
 handle costly materials, success depends very much upon large rela- 
 good fortune and ability in buying and selling ; and the the capital. 
 order of mind required for interpreting rightly and reducing 
 to their proper proportions the causes that are likely to 
 affect price is rare, and can command high earnings. The Risk as an 
 allowance to be made for this is so important in certain promts 1 and 
 trades as to have induced some American writers to regard of cost * 
 profits as remuneration of risk simply ; and as consisting of 
 what remains after deducting interest and earnings of man- 
 agement from gross profits. But this use of the term seems 
 on the whole not advantageous, because it tends to class the 
 work of management with mere routine superintendence. It 
 is of course true that as a rule a person will not enter on a 
 risky business, unless, other things being equal, he expects to 
 gain from it more than he would in other trades open to him, 
 after his probable losses had been deducted from his probable 
 gains on a fair actuarial estimate. If there were not a 
 positive evil in such risk, people would not pay premia to 
 insurance companies, which they know are calculated on a 
 scale sufficiently above the true actuarial value of the risk to 
 pay the companies' great expenses of advertising and work- 
 ing and yet to yield a surplus of net profits. And where 
 the risks are not insured for, they must be compensated in 
 the long run on a scale about as high as would be required 
 for the premia of an insurance company, if the practical 
 difficulties of insurance against business risks could be over- 
 come. But further many of those who would be most 
 competent to manage difficult businesses with wisdom and 
 enterprise, are repelled from great risks, because their own 
 capital is not large enough to bear great losses. Thus a risky 
 trade is apt to get into the hands of rather reckless people ; 
 or perhaps into the hands of a few powerful capitalists, 
 who work it ably, but arrange among themselves that the 
 market shall not be forced so as to prevent them from having 
 a high rate of profit on the average 1 . 
 
 1 On risk as an element of cost see Book v. Ch. vn. 4. There would be an 
 
694 DEMAND AND SUPPLY IN RELATION TO CAPITAL, CONCLUDED. 
 
 BOOK vi. In trades in which the speculative element is not very 
 
 CH.JTII. important^ so that the work of management consists chiefly 
 
 in ordinary O f superintendence, the earnings of management will follow 
 
 profits pretty closely on the amount of work done in the business ; 
 
 ntarVwith and a very rough but convenient measure of this is found in 
 
 tbe wages- ^ wa ges-bill. And perhaps the least inaccurate of all the 
 
 broad statements that can be made with regard to a general 
 
 tendency of profits to equality in different trades, is that where 
 
 equal capitals are employed, profits tend to be a certain 
 
 percentage per annum on the total capital, together with a 
 
 certain percentage on the wages-bill 1 . 
 
 advantage in a careful analytical and inductive study of the attractive or repellent 
 force which various kinds of risks exert on persons of various temperaments, and 
 as a consequence on earnings and profits in risky occupations ; it might start from 
 Adam Smith's remarks on the subject. The influence of joint-stock companies on 
 the investment of capital in risky trades will be discussed in the second volume., 
 
 1 There is a great difficulty in ascertaining even approximately the amounts of 
 capital of different kinds invested in different classes of business ; for much of it 
 is always shifting from one use to another ; much of it is constantly changing in 
 value, as the result of new improvements and many other causes ; a good deal 
 of it is apt to be overlooked, and a good deal more to be counted twice over (this 
 applies especially to buildings and other capital that are owned by one person and 
 used by another) ; and finally business men are seldom willing to publish the best 
 guess they can make as to the amount of their capital. But guided mainly by the 
 valuable statistics of American Bureaux, inexact as they avowedly are in this 
 particular matter, we may conclude that the annual output is less than the 
 capital in industries where the industry is very expensive, and the processes 
 through which the raw material has to go are very long, as watch and cotton 
 factories : but that it is more than four times the capital in businesses in which 
 the raw material is expensive and the process of production rapid, as e.g. boot 
 factories ; as well as in some industries, which make only a slight change in the form 
 of their material, such as sugar-refining, and slaughtering and meat-packing. 
 
 Next, analysing the turnover of circulating capital and comparing the cost of 
 raw material to the wages-bill, we find that the former is much less than the 
 latter in watch-factories, where the bulk of the material is small, and in stone, 
 brick and tile works, where it is of a common sort : but in the large majority of 
 industries the cost of material is much greater than the wages-bill ; and on the 
 average of all the industries it is three and a-half times as great. And in the 
 Slight-change industries it is generally from twenty-five to fifty tunes as great. 
 
 Many of these inequalities disappear if the value of the raw material, coal, etc. 
 used in a business is deducted before reckoning its output. This plan is commonly 
 followed by careful statisticians in estimating the manufacturing output of a 
 country, so as to avoid counting say yarn and cloth, twice over, and similar 
 reasons should make us avoid both cattle and fodder crops in the agricultural 
 product of a country. This plan is however not quite satisfactory. For logically 
 one ought to deduct the looms which a weaving factory buys as well as its yarn. 
 Again, if the factory itself was reckoned as a product of the building trades, its 
 value should be deducted from the output (over a term of years) of the weaving 
 trade. Similarly with regard to farm buildings. Farm horses ought certainly 
 
PROFITS ON THE TURNOVER. 695 
 
 3. We may now pass from profit per annum and ex- BOOK vi. 
 amine the causes that govern profit on the turnover. It is H ' Y ' 
 obvious that while the normal rate of profit per annum varies ^Sitfon^ 
 within narrow limits, the profit on the turnover may vary very the turn- 
 
 over varies 
 
 widely from one branch of trade to another, because they much more 
 
 depend on the length of time and the amount of work than the 
 
 required for the turnover. Thus wholesale dealers, who buy ^ a profits^ 
 
 and sell large quantities of produce in single transactions, on capital. 
 
 and who are able to turn over their capital very rapidly, may 
 
 make large fortunes though their average profit on the 
 
 turnover is less than one per cent.; and, in the extreme 
 
 case of large stock-exchange dealings, even when it is 
 
 only a small fraction of one per cent. But a shipbuilder who Illustrative 
 
 has to put labour and material into the ship, and to provide m 
 
 a berth for it, a long while before it is ready for sale, and 
 
 who has to take care for every detail connected with it, must 
 
 add a very high percentage to his direct and indirect outlay 
 
 in order to remunerate him for his labour, and the locking 
 
 up of his capital 1 . 
 
 Again, in the textile industries some firms buy raw 
 material and turn out finished goods, while others confine 
 themselves to spinning, to weaving, or to finishing : and it is 
 obvious that the rate of profit on the turnover of one of the 
 first class must be equal to the sum of the rates of profit of 
 one of each of the three other classes 2 . Again, the retail 
 
 not to be counted, nor for some purposes any horses used in trade. But the plan 
 of deducting simply raw material has its uses, if its inaccuracy is clearly 
 recognized. 
 
 1 He would however not need to charge a high rate of profits per annum on 
 that part of his capital which he had sunk in the earlier stages of building the 
 ship; for that capital, when once invested, would no longer require any special 
 exercise of his ability and industry, and it would be sufficient for him to 
 reckon his outlay "accumulated" at a high rate of compound interest; but in 
 that case he must count the value of his own labour as part of his early outlay. 
 On the other hand, if there be any trade in which a continuous and nearly uni- 
 form expenditure of trouble is called for on all the capital invested, then it 
 would be reasonable in that trade to find the "accumulated" value of the 
 earlier investments by the addition of a "compound" rate of profit (i.e. a rate 
 of profit increasing geometrically as compound interest does). And this plan is 
 frequently adopted in practice for the sake of simplicity even where it is not 
 theoretically quite correct. (Compare foot-note on p. 431.) 
 
 2 Strictly speaking it will be a little greater than the sum of these three, 
 because it will include compound interest over a longer period. 
 
696 DEMAND AND SUPPLY IN RELATION TO CAPITAL, CONCLUDED. 
 
 BOOK vi. dealer's profit on the turnover is often only five or ten per 
 CH ' vm ' cent, for commodities which are in general demand, and 
 which are not subject to changes of fashion; so that while the 
 sales are large, the necessary stocks are small, and the capital 
 invested in them can be turned over very rapidly, with very 
 little trouble and no risk. But a profit on the turnover of 
 nearly a hundred per cent, is required to remunerate the 
 retailer of some kinds of fancy goods which can be sold but 
 slowly, of which varied stocks must be kept, which require a 
 large space for their display, and which a change of fashion 
 may render unsaleable except at a loss ; and even this high 
 rate is often exceeded in the case of fish, fruit, flowers and 
 vegetables 1 . 
 
 But each 4. We see then that there is no general tendency of 
 trade has profits on the turnover to equality; but there may be, and as 
 ternary or a m &tter of fact there is in each trade and in every branch of 
 fair rate of eac h trade, a more or less definite rate of profits on the 
 
 profit on 
 
 the turn- turnover which is regarded as a " fair " or normal rate. Of 
 
 course these rates are always changing in consequence of 
 
 changes in the methods of trade ; which are generally begun 
 
 by individuals who desire to do a larger trade at a lower rate 
 
 of profit on the turnover than has been customary, but at a 
 
 The practi- larger rate of profit per annum on their capital. If however 
 
 tages of there happens to be no great change of this kind going on, 
 
 tomary 8 tne traditions of the trade that a certain rate of profit on the 
 
 how'iUs turnover should be charged for a particular class of work are 
 
 uHunately of great practical service to those in the trade. Such tra- 
 
 mined. ditions are the outcome of much experience tending to show 
 
 that, if that rate is charged, a proper allowance will be made 
 
 for all the costs 2 incurred for that particular purpose, and in 
 
 1 The fishmongers and greengrocers in working-class quarters especially lay 
 themselves out to do a small business at a high rate of profits; because each 
 individual purchase is so small that the customer would rather buy from a dear 
 shop near at hand than go some way to a cheaper one. The retailer therefore 
 may not be getting a very good living though he charges a penny for what he 
 bought for less than a halfpenny. That same thing was however perhaps sold by 
 the fisherman or the farmer for a farthing or even less: and the direct cost of 
 carriage and insurance against loss will not account for any great part of this last 
 difference. Thus there seems to be some justification for the popular opinion that 
 the middlemen in these trades have special facilities for obtaining abnormally 
 high profits by combination among themselves. 
 
 2 That is for the Total cost, Supplementary as well as Prime. See Book v. Ch. iv. 
 
USE OF THE TERM A FAIR RATE OF PROFIT. 697 
 
 addition the normal rate of profits per annum in that class of BOOK vi. 
 business will be afforded. If they charge a price which gives c ^_^ n * 
 much less than this rate of profit on the turnover they can 
 hardly prosper ; and if they charge much more they are in 
 danger of losing their custom, since others can afford to 
 undersell them. This is the "fair" rate of profit on the turn- 
 over which an honest man is expected to charge for making 
 goods to order, when no price has been agreed on beforehand; 
 and it is the rate which a court of law will allow, in case a 
 dispute should arise between buyer and seller 1 . 
 
 5. DURING all this inquiry we have had in view chiefly Profits are 
 the ultimate, or long-period or true normal results of economic tuenT * 
 forces ; we have considered the way in which the supply of 
 business ability in command of capital tends in the long run 
 to adjust itself to the demand ; we have seen how under the 
 
 1 The expert evidence that is given in such cases is full of instruction to 
 the economist in many ways, and in particular because of the use of mediaeval 
 phrases as to the customs of the trade, with a more or less conscious recognition 
 of the causes which have produced those customs, and to which appeal must be 
 made in support of their continued maintenance. And it almost always comes 
 out finally that if the "customary" rate of profit on the turnover is higher for 
 one class of job than another, the reason is that the former does (or did a little 
 while ago) require a longer locking-up of capital; or a greater use of expensive 
 appliances (especially such as are liable to rapid depreciation, or cannot be kept 
 always employed, and therefore must pay their way on a comparatively small 
 number of jobs); or that it requires more difficult or disagreeable work, or a 
 greater amount of attention on the part of the undertaker ; or that it has some 
 special element of risk for which insurance has to be made. And the unreadi- 
 ness of experts to bring to light these justifications of custom, which are lying 
 almost hidden from themselves in the recesses of their own minds, gives ground 
 for the belief that if we could call to life and cross-examine mediaeval business 
 men, we should find much more half -conscious adjustment of the rate of profit 
 to the exigencies of particular cases than has been suggested by historians. 
 Many of them fail sometimes to make it clear whether the customary rate of 
 profits of which they are speaking is a certain rate on the turnover, or such 
 a rate on the turnover as will afford in the long run a certain rate of profits 
 per annum on the capital. Of course the greater uniformity of the methods of 
 business in mediaeval times, would enable a tolerably uniform rate of profits on 
 the capital per annum to exist without causing so great variations in the rate on 
 the turnover as are inevitable in modern business. But still it is clear that if 
 one kind of rate of profits were nearly uniform, the other would not be; and the 
 value of much that has been written on mediaeval economic history seems to be 
 somewhat impaired by the absence of a distinct recognition of the differences 
 between the two kinds, and between the ultimate sanctions on which customs 
 relating severally to them must depend. 
 
698 DEMAND AND SUPPLY IN RELATION TO CAPITAL, CONCLUDED- 
 
 BOOK vi. action of the law of substitution it seeks constantly every 
 CH ' vm ' business and every method of conducting every business in 
 which it can render services that are so highly valued by 
 persons who are able to pay good prices for the satisfaction 
 of their wants, that those services will in the long run earn a 
 high reward. The motive force is the competition of under- 
 takers: each one tries every opening, forecasting probable 
 future events, reducing them to their true relative propor- 
 tions, and considering what surplus is likely to be afforded 
 by the receipts of any undertaking over the outlay required 
 for it. All his prospective gains enter into the profits which 
 draw him towards the undertaking ; all the investments of 
 his capital and energies in making the appliances for future 
 production, and in building up the " immaterial " capital of 
 a business connection, have to show themselves to him as 
 likely to be profitable, before he will enter on them : the 
 whole of the profits which he expects from them enter into 
 the reward, which he expects in the long run for his venture. 
 And if he is a man of normal ability (normal that is for 
 that class of work), and is on the margin of doubt whether 
 to make the venture or not, they may be taken as true 
 representatives of the (marginal) normal expenses of pro- 
 duction of the services in question. Thus the whole of the 
 normal profits enter into true or long-period supply price. 
 But the But so soon as his skill, his material capital, and his 
 
 derived business connection are to any extent specialized to any one 
 capital branch of business ; then to that extent incomes earned by 
 i^ted is ^ ese ^ actors * production cease to exert a direct influence 
 generally on the value of the products due to them : and on the other 
 by the" 11 " hand the value of those products (in conjunction with the 
 product the otner circumstances of the case) determines the income 
 which can be derived from these factors ; (i.e. it determines 
 what we have called their quasi-rents). 
 
 The reader is referred to the application of this doctrine 
 to the earnings of industrial skill, which is given in the fifth 
 chapter of this Book; for the argument of that chapter is 
 valid generally with regard to the earnings of business power. 
 There are, however, some differences between the two cases, 
 which call for our study. 
 
FLUCTUATIONS OF PROFITS AND WAGES CONTRASTED. 699 
 
 ' ' 
 
 6. The motives which induce a man and his father to BOOK vi. 
 invest capital and labour in preparing him for his work as an 
 artisan, as a professional man, or as a business man, are similar 
 to those which lead to the investment of capital and labour in govern the 
 building up the material plant and the organization of a levels of 
 business. In each case the investment (so far as man's action 
 is governed by deliberate motive at all) is carried up to that 
 margin at which any further investment appears to offer no resemble 
 balance of gain, no excess or surplus of utility over "dis-utility ;" other 
 and the price, that is expected as a reward for all this invest- 
 ment, is therefore a part of the normal expenses of production 
 of the services rendered by it. 
 
 A long period of time is however needed in order to get 
 the full operation of all these causes, so that exceptional 
 success may be balanced against exceptional failure. On the 
 one hand are those who succeed abundantly because they 
 turn out to have rare ability or rare good fortune either in 
 the particular incidents of their speculative enterprises, or in 
 meeting with a favourable opportunity for the general de- 
 velopment of their business. And on the other are those 
 who are mentally or morally incapable of making good use of 
 their training and their favourable start in life, who have no 
 special aptitude for their calling, whose speculations are un- 
 fortunate, or whose businesses are cramped by the encroach- 
 ment of rivals, or left stranded by the tide of demand receding 
 from them and flowing in some other direction. 
 
 But though these disturbing causes may thus be neg- more 
 lected in problems relating to normal earnings and normal j^n those 
 value, they assume the first rank ; and exert a predominating 
 
 influence, with regard to the incomes earned by particular flnctua- 
 iiidividuals at particular times. And, since these disturbing their 
 causes affect profits and the earnings of management in very VJ 
 different ways from those in which they affect ordinary 
 earnings, there is a scientific necessity for treating differently 
 profits and ordinary earnings when we are discussing tem- 
 porary fluctuations and individual incidents. Questions 
 relating to market fluctuations cannot indeed be properly 
 handled till the theories of money, credit and foreign trade 
 have been discussed: but even at this stage we may note the 
 
700 DEMAND AND SUPPLY IN RELATION TO CAPITAL, CONCLUDED. 
 
 BOOK vi. following contrasts between the ways in which disturbing 
 cavm. cauges suc h as we nave j us t described affect profits and ordi- 
 nary earnings. 
 
 First dif- 7- I n tne nrs ^ pl ace tne undertaker's profits bear the 
 profits' fi rst brunt of any change in the price of those things which 
 fluctuate are the product of his capital (including his business organi- 
 and in even zation), of his labour and of the labour of his employees ; and 
 ratiof as a result fluctuations of his profits generally precede fluctu- 
 ations of their wages, and are much more extensive. For, 
 other things being equal, a comparatively small rise in the 
 price for which he can sell his product is not unlikely to 
 increase his profit manyfold, or perhaps to substitute a profit 
 for a loss. That rise will make him eager to reap the harvest 
 of good prices while he can ; and he will be in fear that his 
 employees will leave him or refuse to work. He will there- 
 fore be more able and more willing to pay the high wages ; 
 but the and wages will tend upwards. But experience shows that 
 employees (whether they are governed by sliding scales or not) they 
 and theft d> se ^ om r i se as mucn i n proportion as prices ; and therefore 
 fluctua- they do not rise nearly as much in proportion as profits, 
 less. Another aspect of the same fact is that when trade is 
 
 bad, the employee at worst is earning nothing towards the 
 support of himself and his family ; but the employer's out- 
 goings are likely to exceed his incomings, particularly if he 
 is using much borrowed capital. In that case even his gross 
 earnings of management are a negative quantity ; that is, he 
 is losing his capital 1 . In very bad times this happens to a 
 great number, perhaps the majority of undertakers ; and it 
 happens almost constantly to those who are less fortunate, or 
 less able, or less well fitted for their special trade than others. 
 Second dif- | 8. To pass to another point, the number of those who 
 The profits succeed in business is but a small per-centage of the whole ; 
 viiuais an( * * n tne ^ r nan ds are concentrated the fortunes of others 
 differ more several times as numerous as themselves, who have made 
 than savings of their own, or who have inherited the savings 
 earnings of others and lost them all, together with the fruits of their 
 their'aver- own efforts, in unsuccessful business. In order therefore to 
 ke avera g e profits of a trade we must not divide the 
 
 In this connection compare the Note at the end of the Chapter before last. 
 
FLUCTUATIONS OF PROFITS AND WAGES CONTRASTED. 701 
 
 aggregate profits made in it by the number of those who are BOOK vi. 
 
 reaping them, nor even by that number added to the number J _ 
 who have failed : but from the aggregate profits of the sue- 
 
 cessful we must subtract the aggregate losses of those who tnose wno 
 have failed, and perhaps disappeared from the trade ; and we their capi- 
 must then divide the remainder by the sum of the numbers pear from 
 of those who have succeeded and those who have failed. It Slght - 
 is probable that the true gross earnings of management, 
 that is, the excess of profits over interest, is not on the 
 average more than a half, and in some risky trades not more 
 than a tenth part, of what it appears to be to persons who 
 form their estimate of the profitableness of a trade by obser- 
 vation only of those who have secured its prizes. There are 
 however, as we shall presently see, reasons for thinking that 
 the risks of trade are on the whole diminishing rather than 
 increasing 1 . 
 
 1 A century ago many Englishmen returned from the Indies with large for- 
 tunes, and the belief spread that the average rate of profits to be made there was 
 enormous. But, as Sir W. Hunter points out (Annals of Enrol Bengal, Ch. vi.), 
 the failures were numerous, but only "those who drew prizes in the great lottery 
 returned to tell the tale." And at the very time when this was happening, it used 
 commonly to be said in England that the families of a rich man and his coach- 
 man would probably change places within three generations. It is true that this 
 was partly due to the wild extravagance common among young heirs at that 
 time, and partly to the difficulty of finding secure investments for their capital. 
 The stability of the wealthy classes of England has been promoted almost as much 
 by the spread of sobriety and education as by the growth of methods of invest- 
 ment, which enable the heirs of a rich man to draw a secure and lasting income 
 from his wealth though they do not inherit the business ability by which he 
 acquired it. There are however even now districts in England, in which the 
 majority of manufacturers are workmen or the sons of workmen. And in 
 America, though foolish prodigality is perhaps less common than in England, 
 yet the greater changefulness of conditions, and the greater difficulty of keeping 
 a business abreast of the age, have caused it commonly to be said that a 
 family passes "from shirt sleeves to shirt sleeves" in three generations. Mr 
 Wells says (Recent Economic Changes, p. 351), "There has long been a sub- 
 stantial agreement among those competent to form an opinion, that ninety per 
 cent, of all the men who try to do business on their own account fail of success." 
 And Mr J. H. Walker gives (Quarterly Journal of Economics, Vol. n. p. 448) 
 some detailed statistics with regard to the origin and careers of the manufacturers 
 in the leading industries of Worcester in Massachusetts between 1840 and 1888. 
 More than nine-tenths of them began life as journeymen ; and less than ten per 
 cent, of the sons of those who were on the list of manufacturers in 1840, 1850 
 and 1860, had any property in 1888, or had died leaving any. And as to France, 
 M. Leroy Beaulieu says (Repartition des Richesses, Ch. xi.) that out of every 
 hundred new businesses that are started twenty disappear almost at once, fifty or 
 sixty vegetate neither rising nor falling, and only ten or fifteen are successful. 
 
702 DEMAND AND SUPPLY IN RELATION TO CAPITAL, CONCLUDED. 
 
 BOOK vi. 9. We may pass to another difference between the 
 CH ' vm ' fluctuations of profits and ordinary earnings. We have seen 
 Third dif- that, when the artisan or professional man has once obtained 
 The true the skill required for his work, a part of his earnings are for 
 ofSfort 8 the future really a quasi-rent of the capital and labour in- 
 aiways & a ly vested in fitting him for his work, in obtaining his start in 
 abie^art ^ e ^ s ^ usmess connections, and generally his opportunity 
 of the in- f or turning his faculties to good account ; and only the re- 
 artisan mainder of his income is true earnings of effort. But this 
 fessionai remainder is generally a large part of the whole. And here 
 JJoTo'f but lies the contrast. For when a similar analysis is made of 
 thebusi- the profits of the undertaker of business, the proportions 
 taker. are found to be different : in his case nearly all is quasi- 
 rent. 
 
 For flue- The quasi-rent which the undertaker of business on a 
 
 the activity large scale gets from the capital, material and immaterial, 
 nes^do not invested in his business is so great, and liable to such 
 violent fluctuations from a considerable negative to a large 
 
 fluctua- positive quantity, that he often thinks very little of his own 
 ownexer- labour in the matter. If profitable business opens out to 
 him, he regards the harvest accruing from it as almost pure 
 gain ; there is so little difference between the trouble of 
 having his business on his hands only partially active, and 
 that of working it to its full capacity, that as a rule it scarcely 
 occurs to him to set off his own extra labour as a deduction 
 from those gains : they do not present themselves to his 
 mind as to any considerable extent earnings purchased by 
 extra fatigue, in the same way as the extra earnings got by 
 working overtime do to the artisan. This fact is the chief 
 cause, and to some extent the justification, of the imperfect 
 recognition by the general public, and even by some econo- 
 mists, of the fundamental unity underlying the causes that 
 determine normal profits and normal wages. 
 
 Fourth dif- | 10. Closely allied to the preceding difference is another. 
 Although When an artisan or a professional man has exceptional natural 
 tiegfin any abilities, which are not made by human effort, and are not the 
 result of sacrifices undergone for a future gain, they enable 
 him to obtain a surplus income over what ordinary persons 
 the nature could expect from similar exertions following on similar 
 
 
 
FLUCTUATIONS OF PROFITS AND WAGES CONTRASTED. 703 
 
 investments of capital and labour in their education and start BOOK vi. 
 
 in life ; a surplus which is of the nature of rent. CH-JOII. 
 
 But. to revert to a point mentioned at the end of last , of r nt ' at 
 
 least so 
 
 chapter, the class of business undertakers contains a dispro- long as we 
 
 p i -i i i consi der 
 
 portionately large number of persons with high natural the indi- 
 ability ; since, in addition to the able men born within its 
 ranks it includes also a large share of the best natural 
 abilities born in the lower ranks of industry. And thus specially 
 while profits on capital invested in education is a specially in profits. 
 important element in the incomes of professional men taken 
 as a class, the rent of rare natural abilities may be regarded 
 as a specially important element in the incomes of business 
 men, so long as we consider them as individuals. (In relation 
 to normal value the earnings even of rare abilities are, as we 
 have seen, to be regarded rather as a quasi-rent than as a 
 rent proper.) 
 
 But there are exceptions to this rule. The humdrum Exceptions 
 business man, who has inherited a good business and has just 
 sufficient force to keep it together, may reap an income of 
 many thousands a year, which contains very little rent of 
 rare natural qualities. And, on the other hand, the greater 
 part of incomes earned by exceptionally successful barristers, 
 and writers, and painters, and singers, and jockeys may be 
 classed as the rent of rare natural abilities so long at 
 least as we regard them as individuals, and are not con- 
 sidering the dependence of the normal supply of labour in 
 their several occupations on the prospects of brilliant success 
 which they hold out to aspiring youth. 
 
 The quasi-rent of a particular business is often very Changes 
 much affected by changes in its industrial environment and industrial 
 opportunity or conjuncture. But similar influences affect me V ntaffect 
 
 the quasi-rent of the skill of many classes of workers. The *^ 
 discovery of rich copper-mines in America and Australia vidual bu- 
 lowered the quasi-rent of the skill of Cornish miners, so long more than 
 as they stayed at home : and every new discovery of rich ordinary 
 mines in the new districts raised the quasi-rent of the skill earnin g s - 
 of those miners who had already gone there. And again, 
 the growth of a taste for theatrical amusements while raising 
 the normal earnings of actors, and inducing an increased 
 
704 DEMAND AND SUPPLY IN RELATION TO CAPITAL, CONCLUDED. 
 
 BOOK vi. supply of their skill, raises the quasi-rent of the skill of 
 CH ' vm - those already in the profession, a great part of which is, from 
 the point of view of the individual, a rent of rare natural 
 qualities. Not nearly all these changes in the industrial 
 environment are local in their action: but the chief of them 
 are. And this brings us to consider again situation rent in 
 connection with the general problem of demand and supply 
 in relation to land 1 . 
 
 1 General Walker's excellent services with regard to the causes that determine 
 wages on the one hand and earnings of management on the other, make it all 
 the more to be regretted that instead of developing the old tradition that all 
 earnings of rare natural abilities have in them, from the point of view of the 
 individual, something of the nature of rent, he has worked out only that side of 
 the tradition which relates to earnings of management. And his treatment of that 
 side does not appear altogether satisfactory. He maintains (Political Economy, 
 311) that profits do not form a part of the price of manufactured products ; and 
 he does not limit that doctrine to short periods, for which, as we have seen, the 
 income derived from all skill whether exceptional or not, whether that of an 
 employer or a workman, may be regarded as a quasi-rent. And he uses the 
 word "profits" in an artificial sense; for, having excluded interest altogether 
 from profits, he assumes that the "No-profits employer" earns "on the whole 
 or in the long run the amount which he could have expected to receive as wages 
 if employed by others" (First Lessons, 1889, 190): that is to say, the "No- 
 profits employer" obtains, in addition to interest on his capital, what we have 
 called the normal net earnings of management, not indeed of men of extraordinary 
 ability, but of men of such ability as his is. Thus profits in General Walker's 
 sense probably exclude at least four-fifths of what are ordinarily classed as profits 
 in England (the proportion would be rather less in America, and rather more on 
 the Continent than in England). So that his doctrine would appear to mean only 
 that that part of the employer's income, which is due to exceptional abilities or 
 good fortune, does not enter into price. But, as we have seen, the prizes as well 
 as the blanks of every occupation, whether it be that of an employer or not, take 
 their part in determining the number of persons who seek that occupation and 
 the energy with which they give themselves to their work : and therefore do 
 enter into normal supply price. General Walker appears to rest his argument 
 mainly on the important fact, which he has done much to make prominent, that 
 the ablest employers, who in the long run get the highest profits, are as a rule 
 those who pay the highest wages to the workman and sell at the lowest price to 
 the consumer. But it is an equally true and an even more important fact that 
 those workmen who get the highest wages are as a rule those who turn their 
 employers' plant and material to best account (see Book vi. Ch. in. 2), and thus 
 enable him both to get high profits for himself and to charge low prices to the 
 consumer. And therefore the argument, in so far as it is valid at all, applies to 
 the "rare ability" part of the earnings of all kinds of labour, as much as of 
 earnings of management. But for the reasons given in the last paragraph of the 
 fifth Chapter of this Book, the analogy between the rent of land and the earnings 
 of rare natural abilities cannot safely be pressed far. 
 
CHAPTER IX. 
 
 DEMAND AND SUPPLY IN RELATION TO LAND. 
 PRODUCER'S SURPLUS. 
 
 5 1. WE have seen that the rent of land is no unique BOOKVI. 
 
 CH. IX. 
 
 fact, but simply the chief species of a large genus of eco- 
 nomic phenomena ; and that the theory of the rent of land i an a j s a 
 is no isolated economic doctrine, but merely one of the chief ^f^gl f 
 applications of a particular corollary from the general theory genus. We 
 of demand and supply ; and that there is a continuous land to be 
 gradation from the true Rent of those free gifts which have by its 
 
 been appropriated by man, through the income derived from J^ 
 permanent improvements of the soil, to those yielded by farm questions 
 and factory buildings, steam-engines and less durable goods 1 , its tenure. 
 In the present Chapter we have to study those incidents of 
 the rent of land which differentiate it from other species 
 belonging to the same genus : but many of them are con- 
 nected with special forms of land tenure ; and in order that 
 our reasoning at this stage may apply to all forms of tenure, 
 we will suppose that the cultivation of the land is under- 
 taken by its owner. 
 
 We may call to mind that the land has an " inherent " The in- 
 income of heat and light and air and rain, which man cannot tributed 
 appreciably affect ; and advantages of situation, many of Inherent 
 which are beyond man's control, while but few of the re- properties 
 
 .of land. 
 
 mainder are the direct result of the investment of capital 
 and effort in the land by its individual owners. These are 
 the chief of its properties, the supply of which is not 
 dependent on human effort, and which would therefore not 
 
 i See Book v. especially Ch. vin. x. 
 
706 DEMAND AND SUPPLY IN RELATION TO LAND. 
 
 BOOK vi. be increased by extra rewards to that effort : and a tax on 
 CHJX. ^j^k wou id always fall exclusively on the owners 1 . 
 The in- On the other hand those chemical or mechanical properties 
 
 of the soil, on which its fertility largely depends, can be 
 modified, and in extreme cases entirely changed by man's 
 merits. action. But a tax on the income derived from improvements 
 which, though capable of general application are yet slowly 
 made and slowly exhausted, would not appreciably affect the 
 supply of them during a short period, nor therefore the 
 supply of produce due to them. It would consequently fall 
 in the main on the owner ; a leaseholder being regarded for 
 the time as owner, subject to a mortgage. In a long period, 
 however, it would diminish the supply of them, would raise 
 the normal supply price of produce and fall on the consumer 2 . 
 R<>sum<$ 2. Now let us revert to our study of the Law of 
 
 catlo^fof 1 Diminishing Return in agriculture in the fourth Book ; still 
 the( ^nin supposing that the owner of the land undertakes its culti- 
 Book iv. vation, so that our reasoning may be general, and independent 
 action of of the incidents of particular forms of land tenure,. 
 Diminish- We saw how the return to successive doses of capital and 
 turn Re labour, though it may increase for the first few doses, will 
 begin to diminish, when the land is already well cultivated. 
 The cultivator continues to apply additional capital and 
 labour, till he reaches a point at which the return is only 
 just sufficient to repay his outlay and reward him for his 
 own work. That will be the dose on the margin of cultiva- 
 tion, whether it happens to be applied to rich or to poor 
 land ; an amount equal to the return to it will be required, 
 and will be sufficient to repay him for each of his previous 
 doses. The excess of the gross produce over this amount is 
 his producer's surplus 3 . 
 
 1 This is a special case of the general principles discussed in Book v. Ch. vin. 
 2. But compare Book v. Ch. x., especially 3, for exceptions to the rule as to 
 Situation Rent. 
 
 2 This argument is equally applicable to urban land; buildings being of the 
 character of improvements which are slowly made and slowly exhausted. 
 
 8 As Mr Hollander says (Quarterly Journal of Economics, Jan. 1895), "marginal 
 expenditure occurs both in extensive and intensive cultivation, and the marginal 
 product is derived in part from no-rent land and in part from no-rent uses of 
 land." 
 
PRODUCER'S SURPLUS OR RENT. 707 
 
 He looks forward as far as he can : but it is seldom BOOK vi. 
 possible to look forward very far. And at any given time c ^_^' 
 he takes for granted all that richness of the soil which results 
 from permanent improvements ; and the income (or quasi- 
 rent) derived from those improvements, together with that 
 due to the original qualities of the soil, constitutes his pro- 
 ducer's surplus or rent. Henceforth it is only the income 
 derived from new investments that appears as earnings and 
 profits: he carries these new investments up to the margin 
 of profitableness ; and his producer's surplus or rent is the 
 excess of the gross income from the improved land over what 
 is required to remunerate him for the fresh doses of capital 
 and labour he annually applies. 
 
 This surplus depends on, firstly, the richness of the land* 
 and secondly, the relative values of those things which he 
 has to sell and of those things which he needs to buy. The 
 richness or fertility of the land, we have seen, cannot be 
 measured absolutely, for it varies with the nature of the 
 crops raised, and with the methods and intensity of culti- 
 vation. Two pieces of land cultivated always by the same 
 man with equal expenditures of capital and labour, are 
 likely, if they yield equal crops of barley, to give unequal 
 crops of wheat ; if they return equal crops of wheat when 
 cultivated slightly or in a primitive fashion, they are likely to 
 yield unequal crops when cultivated intensively, or on modern 
 methods. Further, the prices at which the various requisites 
 of the farm can be bought, and its various products sold, depend 
 on the industrial environment ; and changes in that are con- 
 tinually changing the relative values of different crops and 
 therefore the relative values of land in different situations. 
 
 Lastly, we suppose the cultivator to be of normal ability The culti- 
 relatively to the task he has undertaken, and the circum- mus t be 
 
 stances of time and place. If he is of less ability his actual to 
 gross produce will be less than that which normally should n ? ial 
 come from the land : it will be yielding to him less than its enterprise. 
 true producer's surplus. If, on the contrary, he is of more 
 than normal ability, he will be getting in addition to the 
 producer's surplus due to the land, some producer's surplus 
 due to rare ability. 
 
 452 
 
708 DEMAND AND SUPPLY IN RELATION TO LAND. 
 
 BOOK vi. 3. We have already traced in some detail the way in 
 CH * IX> which a rise in the value of agricultural produce increases 
 A rise in ^he producer's surplus measured in terms of produce from 
 value of all lands, but especially from those where the law of 
 generally diminishing return acts but feebly 1 ; and we saw that 
 produce 16 generally speaking it raises the value of poor lands relatively 
 thesur* ^ r *k : or * n ^ ner wor ds, that if a person anticipates a rise 
 plus, i n the value of produce, he may expect a larger future income 
 
 from investing a given sum of money in poor land at present 
 
 prices than from investing it in rich land 2 . 
 
 and its real Next, the producer's surplus, that is, measured in terms 
 more. ev of general purchasing power, will rise relatively to its produce 
 
 value, in the same ratio as the value of produce measured in 
 
 .the same way has risen : that is to say, a rise in the value of 
 
 produce causes a double rise in the value of producer's 
 
 surplus. 
 
 Necessity The term the " real value " of produce is indeed ambigu- 
 guishing ous. Historically it has most often been used to mean the 
 changes in rea l value from the point of view of the consumer. This use 
 
 * s ra ^ ner dangerous : for there are some purposes for which 
 
 produce, to consider real value from the point of view of the producer. 
 
 and in its 
 
 general But with this caution we may use the term " labour- value " 
 to express the amount of labour of a given kind that the 
 produce will purchase ; and "real value" to mean the amount 
 of necessaries, comforts, and luxuries of life that a given 
 amount of produce will purchase. A rise in the labour- 
 value of raw produce may imply an increasing pressure of 
 population on the means of subsistence; and a rise of the 
 producer's surplus from land due to that cause goes together 
 
 1 Book rv. Ch. in. 3. Thus we see that if the value of produce rises from 
 OH' to OH (figs. 12, 13, 14), so that while an amount of produce OH was required 
 to remunerate a dose of capital and labour before the rise, an amount OH' would 
 suffice after the rise, then the producer's surplus will be increased a little in the 
 case of lands of the class represented in fig. 12, with, regard to which the law of 
 diminishing return acts quickly; much more with regard to the second class of 
 lands (fig. 13), and most of all with regard to the third class (fig. 14). 
 
 2 Ib. 4. Comparing two pieces of land (figs. 16 and 17) with regard to which 
 the law of diminishing return acts in a similar way, but of which the first is rich 
 and the second poor, we found that the rise of producer's surplus from AHC to 
 AH'C', caused by a rise in the price of produce in the ratio OH to OH', was much 
 larger in proportion in the second case. 
 
EFFECTS OF IMPROVEMENTS. 709 
 
 with, and is a sort of measure of, the degradation of the BOOKVI. 
 people. But if, on the other hand, the rise in the real value ' 
 of raw produce has been caused by an improvement of the 
 arts of production, other than agricultural, it will probably 
 be accompanied by a rise in the purchasing power of 
 wages. 
 
 4. In all this it has been clear that the producer's Jicardo's 
 
 doctrine 
 
 surplus from land is an evidence not of the greatness of the with re- 
 
 bounty of nature, as was held by the Physiocrats and in a ?ffectsof e 
 
 more modified form by Adam Smith, but of the inequality 
 
 of that bounty. But it must be remembered that inequalities 
 
 of situation relatively to the best markets are just as powerful though 
 
 causes of (Real) producer's surplus, as are inequalities of stated 
 
 absolute productiveness 1 . 
 
 This truth and its chief consequences, many of which thought 
 
 '. J . out care- 
 
 seem now so obvious, were first made manifest by Kicardo. fully. 
 
 He delighted to argue that no surplus can be reaped from 
 the ownership of those of nature's gifts the supply of which 
 is everywhere practically unlimited: and in particular that 
 there would be no surplus from land if there were an un- 
 limited supply of it all equally fertile and all equally accessible. 
 He carried this argument further, and showed that an im- 
 provement in the arts of cultivation, equally applicable to 
 
 1 England is so small and so thickly peopled, that even milk and vegetables 
 which require to be marketed quickly, and even hay in spite of its bulk, can be 
 sent across the country at no inordinate expense : while for the staple products, 
 corn and live stock, the cultivator can get nearly the same net price in whatever 
 part of England he is. For this reason English economists have ascribed to 
 fertility the first rank among the causes which determine the value of agri- 
 cultural land ; and have treated situation as of secondary importance. They have 
 often regarded the producer's surplus of land as the excess of the produce which 
 it yields, over what is returned to equal capital and labour (applied with equal 
 skill) to land that is so barren as to be on the margin of cultivation ; without 
 taking the trouble to state explicitly either that the two pieces of land must be in 
 the same neighbourhood, or that separate allowance must be made for differences 
 in the expense of marketing. But this method of speaking does not come 
 naturally to economists in new countries, where the richest land may lie un- 
 cultivated, because it has not good access to markets. To them situation appears 
 at least coordinate with fertility as a cause determining the value of land. They 
 think of land on the margin of cultivation, as land far from markets; and the 
 producer's surplus presents itself as the excess value of the produce from well- 
 situated land over that which equal labour, capital (and skill), would get on 
 the worst situated land; allowance being made for differences of fertility, if 
 necessary. 
 
710 DEMAND AND SUPPLY IN RELATION TO LAND. 
 
 BOOK vi. all soils (which is equivalent to a general increase in the 
 CH^IX. natura j f er tility of land), will be nearly sure to lower the 
 aggregate corn-surplus and quite sure to lower the aggregate 
 real surplus derived from the land that supplies a given 
 population with raw produce. He also pointed out that, 
 if the improvements affected chiefly those lands that were 
 already the richest, it might raise the aggregate surplus ; but 
 that, if it affected chiefly the poorer class of lands, it would 
 lower that aggregate very much. 
 
 It is quite consistent with this proposition to admit that 
 an improvement in the arts of cultivation of the land of 
 England now would raise the aggregate surplus from her 
 land, unless it were accompanied by an equal improvement 
 in the arts of production in those countries from which she 
 imports raw produce ; or, which comes to the same thing for 
 this purpose, by an improvement in the means of communi- 
 cation with them. And as Ricardo himself says, improve- 
 ments that apply equally to all the land supplying the same 
 market, " as they give a great stimulus to population, and at 
 the same time enable us to cultivate poorer lands with less 
 labour, are ultimately of immense advantage to the land- 
 lords 1 ." 
 The argu- 5. The argument of this chapter so far is applicable 
 
 ment so far , -,-, PIT, i -t 
 
 applicable to all systems of land tenure, which recognize private owner- 
 
 sn ^P ^ ^ an( ^ * n anv ^ orm 5 ^ or ^ ^ s concerned with that 
 tenure 1 producer's surplus, which accrues to the owner if he culti- 
 vates his land himself; or, if he does not, then accrues to him 
 and his tenants, regarded as a firm engaged in the business 
 of cultivation. Thus it holds true, whatever be the division 
 which custom or law or contract may have arranged between 
 them with regard to their several shares of the cost of culti- 
 vation on the one hand, and the fruits of the cultivation on 
 the other. The greater part of it is also independent of the 
 stage of economic development which has been reached ; and 
 it is valid if little or no produce is sent to market, if dues are 
 levied in kind and so on 2 . 
 
 1 Foot-note to his third Chapter. 
 
 2 Petty's memorable statement of the law of rent (Taxes and Contributions, 
 iv. 13) is so worded as to apply to all forms of tenure and to all stages of 
 
RENT IN RELATION TO LAND TENURE. 711 
 
 At the present day, in those parts of England where BOOKVI. 
 
 custom and sentiment count for least, and free competition _! _ ' 
 and enterprise for most in the bargaining for the use of land, 
 
 it is commonly understood that the landlord supplies, and in of division 
 
 J . , . . , . , , , between 
 
 some measure maintains, those improvements which are slowly the land- 
 made and slowly worn out. That being done, he requires 
 his tenant the whole producer's surplus which the land thus 
 
 equipped is estimated to afford in a year of normal harvests ^ e modern 
 and normal prices, after deducting enough to replace the system is 
 farmer's capital with normal profits, the farmer standing to wn i c h i & s 
 
 lose in bad years and gain in good years. In this estimate it 
 is implicitly assumed that the farmer is a man of normal science. 
 ability and enterprise for that class of holding ; and therefore, 
 if he rises above that standard, he will himself reap the 
 benefit ; and, if he falls below it, will himself bear the loss, 
 and perhaps ultimately leave the farm. In other words, the 
 landlord obtains that part of the income derived from the 
 land which has to be regarded as a rent or a quasi-rent; that is, 
 as governed, for all periods of moderate length, mainly by the 
 market for the produce, and with little reference to the cost 
 of providing the various agents employed in raising it; while 
 the tenant retains that part which is to be regarded, even for 
 short periods, as profits entering directly into the normal 
 price of the produce, because the produce would not be pro- 
 duced unless it were expected to yield those profits. 
 
 The more fully therefore the distinctively English features 
 of land tenure are developed, the more nearly is it true that 
 the line of division between the tenant's and the landlord's 
 share coincides with the deepest and most important line of 
 cleavage in economic theory ; viz., that between the quasi- 
 rents which do not, and the profits which do, directly enter 
 
 civilization: " Suppose a man could with his own hands plant a certain scope of 
 Land with Corn, that is, could Digg, or Plough; Harrow, Weed, Reap, Carry 
 home, Thresh, and Winnow so much as the Husbandry of this Land requires ; and 
 had withal Seed wherewith to sow the same. I say, that when this man hath 
 subducted his seed out of the proceed of his Harvest, and also what himself hath 
 both eaten and given to others in exchange for Clothes, and other Natural 
 necessaries; that the Remainder of Corn, is the natural and true Rent of the 
 Land for that year ; and the medium of seven years, or rather of so many years 
 as make up the Cycle, within which Dearths and Plenties make their revolution, 
 doth give the ordinary Rent of the Land in Corn." 
 

 712 DEMAND AND SUPPLY IN RELATION TO LAND. 
 
 BOOK vi. into the normal supply prices of produce for periods of moder- 
 CH - IX - ate length. This fact perhaps more than any other was the 
 cause of the ascendancy of English economic theory early 
 in this century; it helped English economists to pioneer the 
 way so far ahead, that even in our own generation, when as 
 much intellectual activity has been devoted to economic 
 studies in other countries as in England, nearly all the new 
 constructive ideas are found to be but developments of others 
 which were latent in the older English work. 
 
 The fact itself appears accidental: but perhaps it was 
 not. For this particular line of cleavage involves less friction, 
 less waste of time and trouble in checks and counter-checks 
 than any other. It may be doubted whether the so-called 
 English system will endure. It has great disadvantages, and 
 it may not be found the best in a future stage of civilization. 
 But when we come to compare it with other systems, we 
 shall see that it afforded great advantages to a country, which 
 pioneered the way for the world in the development of free 
 enterprise ; and which therefore was impelled early to adopt 
 all such chailges as give freedom and vigour, elasticity and 
 strength. 
 
 6. It may be well to refer once again to the relations 
 between land, whether agricultural or urban, and other forms 
 of wealth regarded from the point of view of the individual 
 investor. 
 
 The Even from the point of view of normal value, the distinc- 
 
 between n tion, though a real one, is slighter than is often supposed; and, 
 other and even m an ^ coun try, the distinction between land and other 
 forms of forms of wealth has very little bearing on the detailed trans- 
 slight, even actions of ordinary life. Suppose a cultivator with spare 
 country, capital to be in doubt whether to buy more land, or to get 
 ^TnoT 6 better buildings and plant for what he already has : he may 
 looking expect that in either case he would obtain the same increase 
 
 far ahead. 
 
 of net produce (after allowing for depreciation of his perish- 
 able plant) by the same total outlay; and, for him as an 
 individual, the question whether to cultivate a large piece of 
 land lightly or a smaller piece intensively, is to be decided by 
 business calculations of just the same character as those that 
 govern other applications of his capital and energy. 
 
LAND IN RELATION TO OTHER FORMS OF WEALTH. 713 
 
 On the other hand even in a new country a far-seeing BOOKVI. 
 statesman will feel a greater responsibility to future genera- .' 
 tions when legislating as to land than as to other forms of 
 wealth. Thus from the economic and from the ethical point 
 of view, land must everywhere and always be classed as a 
 thing by itself. And in an old country this distinction is 
 vital for a broad survey of the causes that govern normal 
 value. For the net income derived from the inherent pro- 
 perties of land is a true surplus; which does not directly 
 enter even in the long run into the normal expenses of 
 production, and which are required as rewards for the work 
 and inventive energy of labourers and undertakers. It thus 
 differs from the incomes derived from buildings, machinery, 
 &c., which are in the long run needed (in the present state 
 of human character and social institutions), to sustain the 
 full force of production, invention, and accumulation. The 
 sudden appropriation by the State either of rents, or of these 
 incomes which we have called quasi-rents would indeed 
 destroy security and shake the foundations of society: but 
 if from the first the State had retained true rents in its 
 own hands, the vigour of industry and accumulation need 
 not have been impaired; and nothing at all like this can 
 be said of quasi-rents. The same is true of urban ground 
 rent, which, as we have seen, is governed on the same 
 principle as that of agricultural rent 1 . 
 
 1 This matter has been argued very fully in Book v. Ch. vin. x., and again 
 in Book vi. Ch. n. 4, 5. But a numerical illustration may be added here, 
 which without going over exactly the same ground as those arguments will help 
 to bring some of them clearly to mind. Suppose a person planning a hotel or a 
 factory; and considering how much land to take for the purpose. If land is 
 cheap he will take much of it; if it is dear he will take less and build high. 
 Suppose him to calculate the expenses of building and working his establishment 
 with frontages of 100 and 110 feet respectively, in ways equally convenient on the 
 I whole to himself, his customers and employes, and therefore equally profitable to 
 himself. Let him find that the difference between the two plans, after capitalizing 
 future expenditure, shows an advantage of 500 in favour of the larger area ; he 
 will then be inclined to take the larger if the land is to be got at less than 50 per 
 foot of frontage, but not otherwise ; and 50 will be the marginal value of land to 
 him. He might have reached this result by calculating the increased value of the 
 business that could be done with the same outlay in other respects on the larger 
 site as compared with the smaller, or again by building on less expensive ground 
 instead of in a less favourable situation. But, by whatever route he makes his 
 
714 DEMAND AND SUPPLY IN RELATION TO LAND, 
 
 BOOK vi. 7. The demand for exceptionally valuable urban land 
 
 CH>IX ' comes from traders of various kinds, wholesale and retail, 
 
 J 1 . 11 ^ t more than from manufacturers : and it may be worth while 
 
 ground- to say something here as to the features of demand that are 
 
 rents are . . 
 
 generally special to their case. 
 
 If two factories in the same branch of trade have 
 
 ments ish ec l ua l outputs they are sure to have nearly equal floor 
 Their space. But there is no close relation between the size of 
 trading establishments and their turn-overs. Plenty of space 
 
 is elastic, - g or ^jjgjQ a matter of convenience and a source of extra 
 
 and does 
 
 not bear a profit, but it is not physically indispensable. The larger 
 
 tiontothe their space, the greater the stock which they can keep on 
 
 of their hand, and the greater the advantage to which they can dis- 
 
 busmess. S p ec i mens o f j^ ; and especially is this the case in 
 
 trades that are subject to changes of taste and fashion. In 
 such trades the dealers exert themselves to collect within 
 a comparatively small space representatives of all the best 
 ideas that are in vogue, and still more of those that are 
 likely soon to be so; and the higher their ground-rent the 
 more prompt they must be in getting rid, even at a loss, of 
 such things as are a little behind the time and do not im- 
 prove the general character of their stocks. If the locality 
 is one in which customers are more likely to be tempted by 
 a well-chosen stock than by low prices, the traders will 
 charge prices that give a high rate of profit on a compara- 
 tively small turn-over ; but if not, they will choose low 
 prices and try to force a large business in proportion to their 
 capital and the size of their premises, just as in some neigh- 
 bourhoods the market-gardener finds it best to gather his 
 peas young when they are full of flavour, and in others to 
 let them grow till they weigh heavily in the scales. Which- 
 ever plan the traders follow, there will be some conveniences 
 which they are in doubt whether it is worth while to offer to 
 
 calculation, its character is similar to that by which he decides whether it is worth 
 his while to buy business plant of any other kind : and he regards the net income 
 (allowance being made for depreciation) which he expects to get from either 
 investment as standing in the same general relation to his business ; and if the 
 advantages of the situation are such, that all the land available can find employ- 
 ments for which its marginal use is represented by a capital value of 50 per foot 
 of frontage, then that will be the current value of the land. 
 
BENT IN RELATION TO RETAIL PRICES. 715 
 
 the public ; since they calculate that the extra sales gained BOOK vi. 
 by such conveniences are only just remunerative, and do not c 
 contribute any surplus towards rent. The goods which they Rent does 
 sell in consequence of these conveniences are marginal goods 
 into whose expenses of marketing rent does not enter any 
 more than it does into those of the peas which the market- 
 
 * e services. 
 
 gardener only just finds it worth his while to produce. 
 
 Prices are low in some very highly-rented shops, because 
 their doors are passed by great numbers of people who can- 
 not afford to pay high prices for the gratification of their 
 fancy ; and the shopkeeper knows that he must sell cheaply, 
 or not sell at all. He has to be content with a low rate of 
 profit each time he turns over his capital; but, as he can turn 
 over his capital many times a year, his annual net profits 
 are very great, and he is willing to pay a very high rent for 
 the situation in which they can be earned. On the other hand, 
 prices are very high in some of the quiet streets in the 
 fashionable parts of London and in many villages; because 
 in the one case customers must be attracted by a very choice 
 stock, which can only be sold slowly ; and in the other the 
 aggregate turn-over is very small indeed. In neither place 
 can the trader make profits that will enable him to pay as 
 high a rent as those of some cheap but bustling shops in the 
 East end of London. It appears then that rent does not 
 enter into retail price any more than it enters into the price 
 charged by the trader or the manufacturer; intensive de- 
 mands for land may come from the opportunities it offers 
 either for moderate sales at high prices or for very large sales 
 at lower prices. 
 
 It is however true that, if without any increase in traffic But a rise 
 such as brings extra custom, a situation becomes more valu- ren?smay 
 able for purposes other than shopkeeping ; then only those catfon^a 
 shopkeepers will be able to pay their way who can manage scarcity of 
 to secure a large custom relatively to the prices which they will tend 
 charge and the class of business which they do. There will traders' 
 therefore be a smaller supply of shopkeepers in all trades for P rices - 
 which the demand has not increased : and those who remain, 
 will be able to charge a higher price than before, while offer- 
 ing equal conveniences and attractions to their customers. The 
 
716 DEMAND AND SUPPLY IN RELATION TO LAND. 
 
 BOOK vi. rise of ground-rents in the district will thus be an indication 
 CH^IX. ^^ a gcarc ity O f S p ace which, other things being equal, will 
 raise the prices of retail goods ; just in the same way as the 
 rise of agricultural rents in any district will indicate a 
 scarcity of land which will raise the marginal expenses of 
 production, and therefore the price of any particular crop. 
 The capital 8. In conclusion it may be noticed that the capital- 
 land 6 f i 26 ^ value of land is the actuarial " discounted " value of all 
 the net incomes which it is likely to afford, allowance being 
 made on the one hand for all incidental expenses, including 
 those of collecting the rents, and on the other for its mineral 
 wealth, its capabilities of development for any kind of busi- 
 ness, and its advantages, material, social and aesthetic, for the 
 purposes of residence. The money equivalent of those direct 
 gratifications which the ownership of land affords, does not 
 appear in the returns of the money income derived from it, 
 but does enter into its capital money value 1 . 
 
 NOTE ON BJCARDO'S DOCTRINE AS TO THE INCIDENCE OP TAXES 
 AND THE INFLUENCE OF IMPROVEMENTS IN AGRICULTURE. 
 
 Malthus MUCH has already been said about the excellence of Bicardo's 
 
 justly com- thought and the imperfections of his expression of it, and in particular 
 Ricardo's notice has been taken of the causes which led him to lay down the 
 incon- Law of Diminishing Eeturn without proper qualifications. Similar 
 k? paying remarks apply to his treatment of the influence of improvements and 
 
 1 The value of land is commonly expressed as a certain number of times the 
 current money rental, or in other words a certain "number of years' purchase" 
 of that rental: and other things being equal it will be the higher, the more 
 important these direct gratifications are, as well as the greater the chance 
 that they and the money income afforded by the land will rise. The number 
 of years' purchase would be increased also by an expected fall either in the 
 future normal rate of interest or in the purchasing power of money. 
 
 It may be mentioned that the discounted value of a very distant rise 
 in the value of land is much less than is commonly supposed. For instance, 
 if we take interest only at five per cent, (and of course a much higher rate 
 prevailed during the Middle Ages), 1 invested at compound interest would 
 amount to about 130 in 100 years, 17,000 in 200 years, and 40,000,000,000 
 in 500 years: and therefore an expenditure by the State of 1 in securing 
 to itself the reversion of a rise in the value of land which came into opera- 
 tion now for the first time would have been a bad investment, unless the 
 value of that rise now exceeded 130, if the payment was made 100 years 
 ago; if 200 years ago the gain ought now to amount to 17,000; if 500 years 
 ago to 40,000,000,000. 
 
NOTE ON RICARDO'S DOCTRINE. 717 
 
 the incidence of taxes in agriculture. He was especially careless in BOOK vi. 
 his criticisms of Adam Smith ; and as Malthus justly said (Sum- CH - IX - 
 mary of Section x. of his Political Economy\ " Mr Ricardo, who gener- more at _ 
 ally looks to permanent and final results, has always pursued an tentipn to 
 opposite policy in reference to the rents of land. It is only by looking 
 
 to temporary results, that he could object to Adam Smith's statement, ultimate 
 that the cultivation of rice or of potatoes would yield higher rent regards 
 than corn." And Malthus was perhaps not far wrong when he added : rent and 
 " Practically, there is reason to believe that, as a change from corn ^^3^ 
 
 to rice must be gradual, not even a temporary fall of rent would take agri- 
 
 , culture, 
 
 place. 
 
 Nevertheless, in Ricardo's time it was of great practical importance 
 to insist, and it is of much scientific interest even now to know, that in 
 a country which cannot import much corn, it is very easy so to adjust 
 taxes on cultivation and so to hinder improvements as to enrich the 
 landlords for a time and to impoverish the rest of the people. No 
 doubt when the people had been thinned by want, the landlords would 
 suffer in pocket : but that fact took little of the force from Ricardo's 
 contention that the enormous rise of agricultural prices and rents 
 which occurred during his life was an indication of an injury to the 
 nation beyond all comparison greater than the benefits received by the 
 landlords. But let us now pass in review some of those arguments in 
 which Ricardo delighted to start from sharply defined assumptions, so 
 as to get clear net results, which would strike the attention ; and which 
 the reader might combine for himself so as to make them applicable 
 to the actual facts of life. 
 
 Let us first suppose that the "corn" raised in a country is abso- But let us 
 lutely necessary ; i.e. that the demand for it has no elasticity, and K 110 ^ 
 that any change in its marginal cost of production would affect only and assume 
 the price that people paid for it, and not the amount of it consumed. ^ e de- 
 And let us suppose that no Corn is imported. Then the effect of a Corn to be 
 tax of one-tenth on Corn would be to cause its real value to rise till fixed '> 
 nine-tenths as much as before would suffice to remunerate the marginal tax on it 
 dose, and therefore every dose. The gross Corn surplus on every would not 
 piece of land would therefore remain the same as before ; but one- re nts. 
 tenth being taken away as a tax, the remainder would be nine-tenths 
 of the old Corn surplus. Since, however, each part of it would have 
 risen in real value in the ratio of ten to nine, the Real Surplus would 
 remain unchanged. 
 
 But the assumption that the demand for produce is absolutely But this 
 inelastic is a very violent one. The rise in price would in fact be 
 sure to cause an immediate falling-off in the demand for some kinds of 
 produce, if not for the staple cereals : and therefore the value of Corn, 
 i.e. produce in general, would never rise in full proportion to the tax, and 
 less capital and labour would be applied in the cultivation of all lands. 
 There would thus be a diminution in the Corn surplus from all lands, 
 
718 
 
 NOTE ON RICARDO'S DOCTRINE AS TO 
 
 BOOK VI. 
 CH. IX. 
 
 On the 
 
 sumption 
 improve- 
 ments 
 which in- 
 crease the 
 return to 
 each dose 
 of capital 
 by equal 
 amounts 
 will cause 
 a double 
 fall of real 
 rents. 
 
 but not in the same proportion from all ; and since a tenth of the Corn 
 surplus would be taken by the tax, while the value of each part of it 
 would have risen in less than the ratio of ten to nine, there would be a 
 double fall in the Real surplus. (The diagrams in Book iv. to which we 
 have just referred suggest at once translations of those reasonings into 
 the language of geometry.) 
 
 The immediate fall would be very great under modern conditions 
 in which free importation of Corn prevents its real value from being 
 much raised by the tax ; and the same result would follow gradually, 
 even in the absence of importation, if the rise in its real value 
 diminished the numbers of the people; or, what is at least as pro- 
 bable, if it had the effect of. lowering the standard of living, and 
 the efficiency of the working population. These two effects would 
 operate very much in the same way on the producer's surplus ; both 
 would make labour dear to the employer, while the latter would also 
 make real time wages low to the worker. 
 
 Ricardo's reasonings on all these questions are rather difficult to 
 follow because he often gives no hint when he passes from results 
 which are "immediate" and relate to a "short period" relatively to 
 the growth of population, and those which are "ultimate," and relate 
 to a "long period" in which the labour value of raw produce would have 
 time materially to affect the numbers of the people and therefore the 
 demand for raw produce. When such interpreting clauses are supplied, 
 very few of his reasonings will be found invalid. 
 
 We may now pass to his argument with regard to the influence of 
 improvements in the arts of agriculture, which he divides into two 
 classes. A special scientific interest attaches to his treatment of the 
 first, which consists of those improvements that "I can obtain the 
 same produce with less capital, and without disturbing the difference 
 between the productive powers of the successive portions of capital 1 ;" 
 of course neglecting for the purpose of his general argument the fact 
 that any given improvement may be of greater service to one particular 
 piece of land than another. (See above, Book iv. Ch. in. 4.) As- 
 suming as before that the demand for Corn has no elasticity, he proved 
 that capital would be withdrawn from the poorer lands (and from the 
 more intensive cultivation of the richer lands), and therefore the surplus 
 measured in Corn, the Corn surplus as we may say obtained by 
 applications of capital under the most favourable circumstances, will be 
 a surplus relatively to lands not so poor as those which were on the 
 margin of cultivation before ; and the differential productiveness of any 
 two applications of capital remaining, by hypothesis, unchanged, the 
 
 1 Ch. n. Collected Works, p. 42. Comp. Cannan's Production and Distribution 
 1776 1848, pp. 325-6. Ricardo's distinction between his two classes of improve- 
 ments is not altogether happy, and need not be considered here. 
 
TAXES AND IMPROVEMENTS IN AGRICULTURE. 
 
 719 
 
 Corn surplus must necessarily fall, and of course the real value and the 
 labour value of the surplus will fall much more than in proportion. 
 
 This may be made clear by the adjoining figure ; in which curve AC 
 represents the return which the land of the whole 
 country, regarded as one farm, makes to doses of 
 capital and labour applied to it, these doses being 
 arranged not in the order of their application, but 
 in that of their productiveness. In equilibrium 
 OD doses are applied, the price of the Corn being 
 such that a return Z>(7isjust sufficient to remune- 
 rate a dose ; the whole amount of Corn raised 
 being represented by the area AODC, of which 
 A EC represents the aggregate Corn surplus. [We may pause to notice 
 that the only change in the interpretation of this diagram which is 
 required by our making it refer to the whole country instead of a 
 single farm, arises from our not being able now, as we could then, to 
 suppose that all the several doses of capital are applied in the same 
 neighbourhood, and that therefore the values of equal portions (of the 
 same kind) of produce are equal. We may however get over this 
 difficulty by reckoning the expenses of transporting the produce to a 
 common market as part of its expenses of production ; a certain part 
 of every dose of capital and labour being assigned to the expenses of 
 transport.] 
 
 Now an improvement of Ricardo's first class will increase the 
 return to the dose applied under the most favourable conditions from 
 OA to OA', and the returns to other doses, not in like proportion, 
 but by equal amounts. The result is that the new produce curve A'C' 
 will be a repetition of the old produce curve AC, but raised higher 
 than it by the distance AA'. If, therefore, there were an unlimited 
 demand for corn, so that the old number of doses, OZ>, could be 
 profitably applied, the aggregate Corn surplus would remain the same 
 as before the change. But in fact such an immediate increase of pro- 
 duction could not be profitable ; and therefore an improvement of this 
 kind must necessarily lessen the aggregate Corn surplus. And on the 
 assumption made here by Ricardo that the aggregate produce is not in- 
 creased at all, only OD' doses will be applied, OD' being determined by 
 the condition that A'OD'C' is equal to AODC ; and the aggregate Corn 
 surplus will shrink down to A'H'C'. This result is independent of 
 the shape of AC; and, which is the same thing, of the particular 
 figures selected for the numerical illustration which Ricardo used in 
 proof of his argument. 
 
 And here we may take the occasion to remark that numerical 
 
 i instances can as a rule be safely used only as illustrations and not as 
 
 proofs : for it is generally more difficult to know whether the result 
 
 has been implicitly assumed in the numbers shown for the special case 
 
 than it is to determine independently whether the result is true or 
 
 BOOK VI. 
 CH. IX. 
 
 Mill sub- 
 stituted 
 equal pro- 
 portions 
 for equal 
 amounts, 
 and then 
 
720 
 
 NOTE ON RICARDO'S DOCTRINE AS TO 
 
 BOOK VI. 
 CH. IX. 
 
 tried to 
 establish 
 the same 
 result, 
 but in- 
 correctly. 
 
 not. Kicardo himself had no mathematical training. But his instincts 
 were unique ; and very few trained mathematicians could tread as 
 safely as he over the most perilous courses of reasoning. Even the 
 acute logical rnind of Mill was unequal to the task. 
 
 Mill characteristically observed that it is much more probable that 
 an improvement would increase the returns to capital applied to 
 different classes of land in equal proportions than by equal amounts. 
 (See his second case, Political Economy, Book iv. Ch. in. 4.) He did 
 not notice that by so doing he cut away the basis of Bicardo's sharply 
 denned argument, which was that the change did not alter the differen- 
 tial advantages of different applications of capital. And though he 
 arrived at the same result as Kicardo, it was only because his result was 
 implicitly contained in the figures he chose for his numerical illus- 
 tration. 
 
 The adjoining figure tends to show that there is a class of economic 
 problems which cannot be safely treated by any one of less genius 
 than Bicardo without the aid of some apparatus, either of mathe- 
 matics or of diagrams, that present as a continuous whole the schedules 
 of economic forces, whether with regard to the Law of Diminishing 
 Beturn or to those of Demand and Supply. The curve AC has the 
 same interpretation in this figure as in the last ; but the improvement 
 has the effect of increasing the return to each dose of capital 
 and labour by one-third, i.e. in an equal proportion and not by 
 an equal amount: and the new produce curve A'C' stands much higher 
 above AC at its left end than at its right. Cultivation is restricted to 
 
 OJy doses, where the area A'OD'C', 
 representing the new aggregate pro- 
 duct, is as before equal to AODC; 
 and A'H'C' is as before the new 
 aggregate Corn surplus. Now it 
 can be easily proved that A'H'C' is 
 four-thirds of ARE, and whether 
 this is greater or less than AHC 
 depends upon the particular shape 
 assigned to A C. If A C be a straight 
 line or nearly a straight line (both 
 Mill's and Bicardo's numbers repre- 
 sented points on a straight Produce 
 line) A'H'C' would be less than 
 AHC-, but with the shape assigned to AC in our figure A'H'C' is 
 greater than AHC. And thus Mill's argument is, while Bicardo's is 
 not, dependent for its conclusion on the particular shape assumed by 
 them for the gross produce curve. 
 
 (Mill assumes that the cultivated part of a country consists of 
 three quantities of land, yielding at an equal expense 60, 80, and 100 
 bushels ; and he then shows that an improvement which increased 
 
 Fig. (41) 
 
TAXES AND IMPROVEMENTS IN AGRICULTURE. 721 
 
 the return to each dose of capital by one- third, would lower corn rents BOOK vi. 
 in the ratio of 60 to 26. But if he had taken the distribution of CH - Ix - 
 fertility in a country to be such that the land consisted of three 
 qualities yielding at an equal expense 60, 65, and 115 bushels, as is 
 done roughly in our figure, he would have found in that case the 
 improvement would raise corn rents in the ratio 60 to 66.) 
 
 Finally it may be noticed that Bieardo's paradox as to the possible Ricardo's 
 effects of improvements on the rent of land is applicable to urban as appU^to 
 well as agricultural land. For instance, the American plan of building urban land 
 stores sixteen stories high with steel frames, and served with elevators, 
 may be supposed suddenly to become very efficient, economical and 
 convenient in consequence of improvements in the arts of building, 
 lighting, ventilation and the making of elevators. In that case the 
 trading part of each town would occupy a less area than now ; a good 
 deal of land would have to revert to less remunerative uses ; and the 
 net result might possibly be a fall in the aggregate ground-rent of the 
 town. 
 
 M. 46 
 
CHAPTER X. 
 
 DEMAND AND SUPPLY IN RELATION TO LAND, CONTINUED. 
 LAND TENURE. 
 
 BOOK vi. 
 CH - X ' 
 Early 
 
 Land- 
 havTgene- 
 
 partner- 
 
 controlled 
 
 tionTather 
 
 conscious 
 contract. 
 
 so-called 
 
 . 
 partner, 
 
 1. IN early times, and in some backward countries 
 even in our own age, all rights to property depend on general 
 understandings rather than on precise laws and documents. 
 In so far as these understandings can be reduced to definite 
 terms and expressed in the language of modern business, 
 ^hey are generally to the following effect: The ownership of 
 } an( j j s vested, not in an individual, but in a firm of which 
 one member or group of members is the sleeping partner, 
 while another member or group of members (it may be a 
 wn l e family) is the working partner 1 . 
 
 The sleeping partner is sometimes the ruler of the State, 
 sometimes he is an individual who inherits what was once 
 *k e duty ^ collecting the payments due to this ruler from 
 the cultivators of a certain part of the soil ; but what, in 
 the course of silent time, has become a right of ownership, 
 more or less definite, more or less absolute. If, as is gene- 
 rally the case, he retains the duty to make certain payments 
 to the ruler of the State, the partnership may be regarded 
 
 1 The sleeping partner may be a village community ; but recent investigations, 
 especially those of Mr Seebohm, have given cause for believing that the com- 
 munities were not often "free" and ultimate owners of the land. For a good 
 summary of the controversy as to the part which the village community has 
 played in the history of England the reader is referred to the first chapter of 
 Prof. Ashley's Economic History. Mention has already been made of the ways 
 in which primitive forms of divided ownership of the land hindered progress 
 (Book i. Ch. IT. 2). 
 
INFLUENCE OF CUSTOM. 723 
 
 as containing three members, of whom two are sleeping BOOKVI. 
 
 CH. X. 
 
 partners 1 . 
 
 The sleeping partner, or one of them, is generally called and his 
 
 i 11 i i i ii i ,11 i share of 
 
 the proprietor, or landholder or landlord, or even the land- the pro- 
 owner. But this is an incorrect way of speaking, when he is 
 restrained by law, or by custom which has the force of law, 
 from turning the cultivator out of his holding either by an 
 arbitrary increase of the payments exacted from him or by 
 any other means. In that case the property in the land vests 
 not in him alone, but in the whole of the firm of which he is 
 only the sleeping partner; the payment made by the working 
 partner is not a rent at all, but is that fixed sum, or that 
 part of the gross proceeds, as the case may be, which the 
 constitution of the firm binds him to pay ; and, in so far as 
 the custom or law which regulates these payments is fixed 
 and unalterable, the theory of rent has but little direct 
 application. 
 
 S 2. But in fact the payments and dues, which custom But custom 
 3 , . , is much 
 
 is supposed to stereotype, nearly always contain elements 
 
 which are incapable of precise definition ; while the accounts 
 of them handed down by tradition are embodied in loose first 
 and vague impressions, or at best are expressed in words 
 that make no attempt at scientific exactness 2 . 
 
 We can watch the influence of this vagueness in the as is shown 
 agreements between landlord and tenant even in modern recent 7 
 England ; for they have always been interpreted by the aid 
 
 1 The firm may be further enlarged by the introduction of an intermediary 
 who collects payments from a number of cultivators, and after deducting a certain 
 share, hands them over to the head of the firm. He is not a middleman in the 
 sense in which the word is used ordinarily in England; that is, he is not a sub- 
 contractor, liable to be dismissed at the end of a definite period for which he has 
 contracted to collect the payments. He is a partner in the firm, having rights in 
 the land as real as those of the head partner, though, it may be, of inferior value. 
 The case may be even more complex than this. There may be many intermediate 
 holders between the actual cultivators and the person who holds direct from the 
 State. The actual cultivators also vary greatly in the character of their interests ; 
 some having a right to sit at fixed rents and to be altogether exempt from 
 enhancement, some to sit at rents which are enhanceable only under certain 
 prescribed conditions, some being mere tenants from year to year. 
 
 2 Prof. Maitland in the article on Court Rolls in the Dictionary of Political 
 Economy observes that "we shall never know how far the tenure of the mediaeval 
 tenant was precarious until these documents have been examined." 
 
 462 
 
724 DEMAND AND SUPPLY IN RELATION TO LAND, CONTINUED, 
 
 BOOK vi. of customs, which have ever been imperceptibly growing 
 CH ' X ' and dwindling again, to meet the changing exigencies of 
 successive generations. We change our customs more quickly 
 than our forefathers did, and we are more conscious of our 
 changes and more willing to convert our customs into legal 
 enactments, and to make them uniform 1 . 
 
 Even now At the present day, in spite of minute legislation and 
 ment of carefully drawn agreements, there remains a wide margin of 
 uncertainty as to the amount of capital which the landlord 
 f rom ^ me ^ ^ me i nves t i n maintaining and extending 
 
 the land the farm buildings and other improvements. It is in these 
 
 is partly . ..... 
 
 tacit and matters, quite as much as in his direct money relations with 
 conscious." the tenant, that the generous and liberal landlord shows 
 himself; and, what is specially important for the general 
 argument of this chapter, alterations in the real net rent 
 required of the tenant are as often made by a quiet readjust- 
 ment of the shares of the expenses of working the farm 
 that are borne by the landlord and the tenant as by a change 
 in the money rent. Thus corporate bodies and many large 
 private landowners often let their tenants go on from year 
 to year, without any attempt to make the money rents 
 follow the changes in the real letting value of the land ; and 
 there are many farms which are not let on lease and yet the 
 rent of which has nominally remained unchanged during the 
 agricultural inflation which culminated in 1874, and during 
 the depression which followed. But in the earlier period 
 the farmer, who knew he was under-rented, could not put 
 pressure on his landlord to lay out capital in drainage or 
 new buildings or even in repairs, and had to humour him as 
 
 1 Thus Mr Pusey's Committee of the House of Commons in 1848 reported, 
 " That different usages have long prevailed in different counties and districts of 
 the country, conferring a claim on an outgoing tenant for various operations of 
 husbandry.... That these local usages are imported into leases or agreements,... un- 
 less the terms of the agreement expressly, or by implication, negative such a pre- 
 sumptipn. That in certain parts of the country a modern usage has sprung up, 
 which confers a right on the outgoing tenant to be reimbursed certain expenses... 
 other than those above referred to.... That this usage appears to have grown out of 
 improved and spirited systems of farming, involving a large outlay of capital.... 
 That these [new] usages have gradually grown into general acceptance in certain 
 districts, until they have ultimately become recognized there as the custom of 
 the country." Many of them are now enforced by law. See below, 10. 
 
CUSTOM NOW AND IN EARLY TIMES. 725 
 
 regards the game and in other matters ; while just now the BOOK vi. 
 landlord, who has a steady tenant, will do many things, that _ _' 
 are not stipulated for in the agreement, in order to retain 
 him. Thus, while the money rent has remained stationary, 
 the real rent has changed. 
 
 This fact is an important illustration of the general pro- Thus 
 position, that the economic theory of rent, the Ricardian needed 1S 
 
 theory as it is sometimes called, does not apply to modern 
 English land tenure without many corrections and limitations JJ 1 . 6 
 
 * Kicardian 
 
 both as regards substance and form ; and that a further analysis to 
 extension of these corrections and limitations will make the English 
 theory applicable to all forms of Mediaeval and Oriental land Mems 
 tenure, in which any sort of private ownership is recognized. 
 The difference is only one of degree. 
 
 5 3. But the difference of degree is very great. This as well as 
 
 ,, , . . ... 1-iTi , to earlier 
 
 is partly because in primitive times and backward countries systems. 
 the sway of custom is more undisputed ; partly because, in 
 the absence of scientific history, shortlived man has little 
 better means of ascertaining whether custom is quietly 
 changing, than the fly, born to-day and dead to-morrow, has 
 of watching the growth of the plant on which it rests. But 
 the chief reason is that the conditions of partnership were 
 expressed in terms which were seldom capable of exact defi- 
 nition and measurement. 
 
 For the share of the senior partner in the firm, or the For the 
 landlord as we may for shortness call him, generally included partner- 
 
 Cither with or without a right to a certain share of the 
 produce) the right to claim certain labour services and vague, 
 
 elastic, and 
 
 dues, tolls and presents ; and the amount which he obtained capable of 
 under each of those heads varied from time to time, from O us modifi- 
 place to place, and from one landlord to another. When- 
 ever payments of all kinds made by the cultivator left 
 him a margin beyond the necessaries of life for him and 
 his family, together with those comforts and luxuries which 
 were established by custom, the landlord was likely to use 
 his superior strength to raise the payments in some form or 
 other. If the chief payments were a certain share of the 
 produce, he might increase that share : but, as that could 
 seldom be done without an appearance of violence, he would 
 
726 DEMAND AND SUPPLY IN RELATION TO LAND, CONTINUED. 
 
 BOOK vi. be more likely to increase the number and weight of his 
 CH>X - minor imposts, or to insist that the land be more inten- 
 sively cultivated, and a larger part of it be given to crops 
 that cost much labour and are of great value. Thus changes 
 went on, smoothly for the most part, silently and almost 
 imperceptibly, like the hour-hand of a clock ; but in the long 
 run they were very thorough 1 . 
 
 The pro- The protection which custom afforded to the tenant was 
 
 forced not indeed unimportant even as regards these dues. For he 
 
 custom. a i wa y s knew pretty well what demands he would have to 
 
 meet at any particular time. The moral sense of all around 
 
 him. high and low, protested against any attempt on the 
 
 part of his landlord to make a sudden and violent increase 
 
 in the payments and dues, the tolls and fines which were 
 
 recognized as usual ; and thus custom rounded off the edges 
 
 of change. 
 
 It is moreover true that these vague and variable elements 
 of rent were generally but a small part of the whole ; and 
 that in those not very rare cases in which the money rent 
 remained fixed for very long periods together, the tenant 
 had a kind of partnership in the soil, which he owed partly 
 to the forbearance of his landlord if it happened that the 
 true net value of the land had risen, but partly also to the 
 constraining force of custom and public opinion. This force 
 in some measure resembled the force which holds rain- 
 
 1 Thus the value of a service of a certain number of days' work would depend 
 partly on the promptness with which the labourer left his own hayfield when 
 called to that of his landlord, and on the energy he put into his work. His own 
 rights, such as that of cutting wood or turf, were elastic ; and so were those of his 
 landlord which bound him to allow flocks of pigeons to devour his crops unmolested, 
 to grind his corn in the lord's mill, and to pay tolls levied on the lord's bridges and 
 in his markets. Next, the fines or presents, or " abwabs " as they are called in 
 India, which the tenant might be called on to pay, were more or less elastic, not 
 only in their amounts but in the occasions on which they were levied. Under 
 the Moguls the tenants in chief had often to pay a vast number of such imposts 
 in addition to their nominally fixed share of the produce: and they passed* these 
 on, increased in weight and with additions of their own, to the inferior tenants. 
 The British Government has not levied them itself; but it has not been able, in 
 spite of many efforts, to protect the inferior tenants from them. For instance, in 
 some parts of Orissa, Sir W. W. Hunter found that the tenants had to pay, besides 
 their customary rent, 33 different cesses. They paid whenever one of their children 
 married, they paid for leave to erect embankments, to grow sugar-cane, to attend 
 the festival of Juggernaut, &c. (Orissa, i. 559.) 
 
PLASTICITY OF EARLY FORMS OF LAND TENURE. 727 
 
 drops on the lower edge of a window frame : the repose is BOOK vi. 
 complete till the window is violently shaken, and then they ' 
 fall altogether; and in like way the legal rights of the landlord 
 which had long lain latent were sometimes brought suddenly 
 into action in a period of great economic change 1 . 
 
 1 In India at the present time we see very various forms of tenure existing 
 side by side, sometimes under the same name and sometimes under different 
 names. There are places in which the raiyats and the superior holders own 
 between them the property in the land subject to definite dues to Government, 
 and where the raiyat is safe not only from being ejected, but also from being 
 compelled by fear of violence to pay over to his superior holder more than that 
 share of the Producer's Surplus which custom strictly prescribes. In that case 
 the payment which he makes is, as has already been said, simply the handing over 
 to the other partner in the firm of that share of the receipts of the firm which 
 under the unwritten deed of partnership belongs to him. It is not a rent at all. 
 This form of tenure, however, exists only in those parts of Bengal in which there 
 have been no great recent dislocations of the people, and in which the police are 
 sufficiently active and upright to prevent the superior holders from tyrannizing 
 over the inferior. 
 
 In the greater part of India the cultivator holds directly from the Government 
 under a lease the terms of which can be revised at intervals. And the principle 
 on which those leases are arranged, especially in the North- West and North-East, 
 where new land is being settled, is to adjust the annual payments due for it to the 
 probable Surplus Produce of the land, after deducting the cultivator's necessaries 
 and his little luxuries, according to the customary standard of the place, and on 
 the supposition that he cultivates with the energy and skill that are normal in that 
 place. Thus as between man and man in the same place the charge is of the nature 
 of economic rent. But, since unequal charges will be levied in two districts of 
 equal fertility, of which one is cultivated by a vigorous and the other by a feeble 
 population, its method of adjustment as between different districts is rather that 
 of a tax, than a rent. For taxes are supposed to be apportioned to the net 
 income which actually is earned, and rents to that which would be earned by an 
 individual of normal ability: a successful trader will pay on ten times as large 
 an actual income ten times as large a tax as his neighbour who lives in equally 
 advantageous premises and pays equal rents. 
 
 The whole history of India records little of that quiet stability which has come 
 over the rural parts of England since war, famine, and plague have ceased to visit 
 us. Extensive movements seem to have been nearly always in progress, partly 
 in consequence of the recurrence of famines (for, as the Statistical Atlas of India 
 shows, there are very few districts which have not been visited at least once by a 
 severe famine during this century) ; partly of the devastating wars which one set 
 of conquerors after another has inflicted on the patient people ; and partly of the 
 rapidity with which the richest land reverts to a thick jungle. The land which 
 has supported the largest population is that which, when deprived of its human 
 inhabitants, most quickly provides shady harbours for wild beasts, for venomous 
 snakes, and for malaria; these prevent the return of the refugees to their old 
 homes, and cause them often to wander far before they settle. When land has 
 been depopulated, those who have the control over it, whether the Government 
 or private persons, offer very favourable terms in order to attract cultivators 
 from elsewhere ; this competition for tenants very much influences the relations of 
 
728 DEMAND AND SUPPLY IN RELATION TO LAND, CONTINUED. 
 
 BOOK vi. 4- The question whether the payments made by the 
 
 CH - X - cultivator for the use of his land should be reckoned in 
 
 Metayage mo ney or in produce is of growing interest with reference 
 
 or rental *, 1 ^ , , ^ . ., , f 
 
 by shares to both India and England. But we may pass it by for 
 the present and consider the more fundamental distinction 
 between the " English " system of rental and that of hold- 
 ing land on "shares," as it is called in the New World, or 
 the "Metayer 1 " system as it is called in the Old. 
 has many In a great part of Latin Europe the land is divided into 
 Europeand holdings, which the tenant cultivates by the labour of him- 
 America. SQ [f an( j j^g f am ily, and sometimes, though rarely, that of a 
 few hired labourers, and for which the landlord supplies 
 buildings, cattle and, sometimes even, farm implements. In 
 America there are few agricultural tenancies of any kind, but 
 
 cultivators and superior holders for a long distance around them ; and therefore, 
 in addition to the changes of customary tenure, which, though impalpable at any 
 time, have been always going on, there have been in almost every place many 
 epochs hi which the continuity even of the former custom has been broken and 
 keen competition has reigned supreme. 
 
 These disturbing forces of war, famine, and plague were frequent in mediaeval 
 England, but their violence was less. And further, the rate of movement of 
 nearly all changes in India has been greater than it would have been if the 
 average period of a generation were as long as in the colder climate of England. 
 Peace and prosperity therefore enable Indian populations to recover from their 
 calamities more quickly; and the traditions which each generation holds of 
 the doings of its fathers and grandfathers run back for a shorter time, so that 
 usages of comparatively recent growth are more easily believed to have the 
 sanction of antiquity. Change can move faster without being recognized as 
 change. 
 
 Modern analysis may be applied to the contemporary conditions of land tenure 
 in India and other Oriental countries, the evidence as to which we can examine and 
 cross-examine, in such a way as to throw light on the obscure and fragmentary 
 records of mediaeval land tenures, which may indeed be examined, but cannot be 
 cross-examined. There is of course great danger in applying modern methods to 
 primitive conditions : it is easier to misapply them than to apply them rightly. 
 But the assertion, which has been sometimes made, that they cannot be usefully 
 applied at all appears to be based on a conception of the aims, methods and results 
 of analysis, which has little in common with that presented in this, and other 
 modern treatises. See A Reply in the Economic Journal, Sep. 1892. 
 
 1 The term Metayer applies properly only to cases in which the landlord's 
 share of the produce is one-half; but it is usually applied to all arrangements 
 of this kind whatever the landlord's share be. It must be distinguished from 
 the Stock lease system in which the landlord provided part at least of the 
 stock, but the tenant managed the farm entirely at his own risk subject to 
 a fixed annual payment to the landlord for land and stock. In mediaeval England 
 this system was much used, and the Metayer system appears not to have been 
 unknown. (See Professor Rogers, Six Centuries of Work and Wages, Ch. x.) 
 
PLASTICITY OF METAYAGE. 729 
 
 two-thirds of those few are small holdings let out to white BOOK vi. 
 men of the poorer class, or to freed negroes, on some plan by CH ' X ' 
 which labour and capital share in the produce 1 . 
 
 This plan enables a man who has next to no capital of it offers ta 
 his own to obtain the use of it at a lower charge than he without 
 
 could in any other way, and to have more freedom and 
 responsibility than he would as a hired labourer; and thus the advant- 
 the plan has many of the advantages of the three modern operative 
 
 r. , ~. i -, , i production. 
 
 systems 01 co-operation, profit snaring, and payment by But it 
 piece-work 2 . But though the metayer has more freedom much 8 
 than the hired labourer he has less than the English farmer. fnctlon - 
 His landlord has to spend much time and trouble, either 
 of his own or of a paid agent, in keeping the tenant to his 
 work ; and he must charge for these a large sum, which, though 
 going by another name, is really earnings of management. 
 For, when the cultivator has to give to his landlord half of the if the con- 
 returns to each dose of capital and labour that he applies to landlord is 
 
 the land, it will not- be to his interest to apply any doses 
 the total return to which is less than twice enough to reward is poor; 
 him. If, then, he is free to cultivate as he chooses, he will 
 cultivate far less intensively than on the English plan ; he 
 will apply only so much capital and labour as will give him 
 returns more than twice enough to repay himself: so that 
 his landlord will get a smaller share even of those returns 
 than he would have on the plan of a fixed payment 3 . 
 
 1 In 1880 74 per cent, of the farms of the United States were cultivated 
 by their owners, 18 per cent., or more than two-thirds of the remainder, were 
 rented for a share of the produce, and only 8 per cent, were held on the 
 English system. The largest proportion of farms that were cultivated by per- 
 sons other than their owners were in the Southern States. In some cases the 
 landowner the farmer as he is called there supplies not only horses and 
 mules, but their feed; and in that case the cultivator who in France would 
 be called not a Metayer but a Maitre Valet is almost in the position of a hired 
 labourer paid by a share of what he gets, as is for instance a hired fisher- 
 man whose pay is the value of a part of the catch. The tenant's share varies 
 from one-third, where the land is rich and the crops such as to require little 
 labour, to four-fifths, where there is much labour and the landlord supplies 
 little capital. There is much to be gained from a study of the many various 
 plans on which the share contract is based. 
 
 2 The relations between publisher and author on the " half -profits " system 
 resemble in many ways those between landlord and metayer. 
 
 3 This can be most clearly seen by aid of diagrams of the same kind as 
 those used in Book iv. Ch. in. A tenant' s-share curve would be drawn standing 
 
730 DEMAND AND SUPPLY IN RELATION TO LAND, CONTINUED. 
 
 BOOKVI. This is the case in many parts of Europe, in which the 
 CH ' x ' tenant has practical fixity of tenure ; and then it is only by 
 constant interference that the landlord can keep up the 
 amount of labour he puts on his farm, and keep down the 
 use he makes of the farm cattle for outside work, the fruits 
 of which he does not share with his landlord. 
 
 but if it is But even in the most stationary districts the amount 
 the results and quality of the stock which custom requires the landlord 
 vSy dif- be to provide are being constantly, though imperceptibly, modi- 
 thoseVn 0111 ^ to suit t ^ ie cnan gi n g relations of demand and supply, 
 the English And if the tenant has no 'fixity of tenure, the landlord can 
 deliberately and freely arrange the amount of capital and 
 labour supplied by the tenant and the amount of capital sup- 
 plied by himself to suit the exigencies of each special case 1 . 
 
 one-half (or one-third or two-thirds) as high above OD as AC does; the area 
 below that curve would represent the tenant's share, that above the land- 
 lord's. OH being, as before, the return required to remunerate the tenant 
 for one dose; he will, if left to his own devices, not carry cultivation beyond 
 the point at which the tenant's- share curve cuts HC: and the landlord's will 
 therefore be a less proportion of the returns to a slighter cultivation than under 
 the English plan. Diagrams of this kind may be used to illustrate the 
 way in which Eicardo's analysis of the causes that govern the Producer's 
 Surplus from land, apply to systems of tenure other than the English. A 
 little further change will adapt them to such customs as those found in Persia, 
 where land itself is of small value ; and " the harvest is divided into five 
 parts, which are apportioned as follows, one part to each : 1, land ; 2, water 
 for irrigation, &c. ; 3, seed ; 4, labour ; 5, bullocks. The landlord generally 
 owns two, so he gets two-fifths of the harvest." 
 
 1 This is already done in America, and in many parts of France ; and some 
 good judges think that the practice may be extended largely, and infuse new life 
 into what a little while ago was regarded as the decaying system of Metayage. 
 If worked out thoroughly, it will result in the cultivation being carried just about 
 as far and affording the landlord the same income as he would have on the 
 English plan for equally fertile and well- situated land equipped with the same 
 capital, and in a place in which the normal ability and enterprise of candidates 
 for farms is the same. 
 
 On the elasticity of Metayage in France see an interesting article by Mr Higgs 
 in the Economic Journal, Jan. 1894. See also an article on Rural France in 
 the Edinburgh Review for Oct. 1887 ; and M. Leroy-Beaulieu, Repartition des 
 Richesses, Ch. iv., especially p. 151. 
 
 Starting as in the last note, let the Circulating capital supplied by the 
 landlord be represented by a distance OK marked off along OD. Then, if 
 the landlord controls the amount OK freely and in his own interest, and can 
 bargain with his tenant as to the amount of labour he applies, it can be 
 proved geometrically that he will so adjust it as to force the tenant to cul- 
 tivate the land just as intensively as he would under the English tenure; 
 and his share will then be the same as under it. If he cannot modify the 
 
PEASANT PROPRIETORS. 731 
 
 It is obvious then that the advantages of the metayer BOOKVI. 
 system are considerable when the holdings are very small, __' 
 the tenants poor, and the landlords not averse to taking 
 much trouble about small things : but that it is not suit- 
 able for holdings large enough to give scope to the enter- 
 prise of an able and responsible tenant. It is commonly 
 associated with the system of peasant proprietorship ; and 
 we may consider that next. 
 
 5. The position of a peasant proprietor has great The pea- 
 attractions. He is free to do what he likes, he is not prietor 
 
 worried by the interference of a landlord, and the anxiety 
 
 lest another should reap the fruits of his work and self- 
 
 denial. His feeling of ownership gives him self-respect, and happiness; 
 
 stability of character, and makes him provident and tem- 
 
 perate in his habits. He is scarcely ever idle, and seldom 
 
 regards his work as mere drudgery; it is all for the land 
 
 that he loves so well. 
 
 " The magic of property turns sand into gold," said but he is 
 Arthur Young. It undoubtedly has done so in many cases penurious 7 , 
 
 in which the proprietors have been men of exceptional 
 energy. But such men might perhaps have done as well or 
 better if their horizon had not been limited to the narrow worker. 
 hopes of a peasant proprietor. For indeed there is another 
 side to the picture. " Land," we are told, "is the best savings- 
 bank for the working man." Sometimes it is the second 
 best. But the very best is the energy of himself and his 
 children ; and the peasant proprietors' thoughts are so full 
 of the one that they often starve the other. Many even of 
 the richest of them stint the food of themselves and their 
 families : they pride themselves on the respectability of their 
 houses and furniture; but they live in their kitchens for 
 economy, and are practically worse housed and far worse fed 
 than the better class of English cottagers. And the poorest 
 of them work hard during very long hours, but do not really 
 get through much work, because they feed themselves worse 
 
 amount OK, but can still control the amount of the tenant's labour, then with 
 certain shapes of the produce curve, the cultivation will be more intensive than 
 it would be on the English plan ; but the landlord's share will be somewhat less. 
 This paradoxical result has some scientific interest, but little practical importance. 
 
732 
 
 DEMAND AND SUPPLY IN RELATION TO LAND, CONTINUED. 
 
 BOOK vi. 
 CH ' X ' 
 
 There are 
 weTto-do 
 
 peasants, 
 but against 
 them must 
 be set the 
 many rich 
 men in the 
 Old World 
 and the 
 New who 
 are de- 
 scended 
 from 
 English 
 labourers. 
 
 The 
 
 American 
 
 farmer. 
 
 than the poorest English labourers. They do not understand 
 that wealth is useful only as the means towards a real 
 income of happiness; they sacrifice the end to the means 1 . 
 
 And it must be recollected that the English labourers 
 represent the failure rather than the success of the English 
 system. They are the descendants of those who for many 
 successive generations have not availed themselves of the 
 opportunities by which their abler and more adventurous 
 neighbours were rising to leading posts at home, and, what 
 is far more important, were acquiring the fee simple of a 
 great part of the surface of the globe. Of the causes which 
 have contributed to make the English race the chief owners 
 of the New World, the most important is that bold enter- 
 prise which has made a man, who is rich enough to be a 
 peasant proprietor, generally refuse to be content with the 
 humdrum life and the narrow income of a peasant. And 
 among the causes which have fostered this enterprise, none 
 is more important than the absence of the temptations to 
 wait about for a petty inheritance, and to marry for the sake 
 of property rather than in the free exercise of individual 
 choice temptations which have often dulled the energy of 
 youth in places in which peasant properties have predomi- 
 nated. 
 
 It is partly in consequence of the absence of these temp- 
 tations that the " farmers " of America, though they are men 
 of the working class cultivating their own land with their 
 own hands, do not resemble "peasant proprietors." They 
 invest their income freely and wisely in developing the ener- 
 gies of themselves and their children; and these energies 
 constitute the chief part of their capital, for their land gener- 
 ally is as yet of but little value. Their minds are always 
 active, and though many of them have little technical know- 
 
 1 The term "peasant proprietor" is a very vague one: it includes many who 
 by thrifty marriages have collected into one hand the results of several genera- 
 tions of hard work and patient saving ; and in France some of these were able to 
 lend freely to the Government after the great war with Germany. But the savings 
 of the ordinary peasant are on a very small scale ; and in three cases out of four 
 his land is starved for want of capital : he may have a little money hoarded or in- 
 vested, but no good grounds have been shown for believing that he often has much. 
 
 On the wastefulness of consuming less than the necessaries for efficiency 
 compare Book n. Ch. m. 5, and Book vi. Ch. iv. 2. 
 
PEASANT PROPRIETORS. ENGLISH FARMERS. 733 
 
 ledge of Agriculture, their acuteness and versatility enable BOOKVI. 
 them to find out almost unerringly the best solution of the ' 
 problem immediately before them. 
 
 That problem is generally to obtain a produce large in American 
 proportion to the labour spent on it, though small in pro- cuitiva- 
 portion to the abundant land at their disposal. In some tlon ' 
 parts of America however, in which land is beginning to get 
 a scarcity value, and in which the immediate neighbourhood 
 of good markets is making an intensive cultivation profitable, 
 the methods of farming and of tenure are rearranging them- 
 selves on the English model. And within the last few years 
 there have been signs of a tendency on the part of native 
 Americans to hand over to persons of recent European origin 
 the farms of the West, as they have already done the farms 
 of the East, and as they did long ago the textile industries. 
 
 6. Let us then turn to that English system of tenure. The 
 It is faulty and harsh in many respects ; but it stimulated 
 and economized the enterprise and energy, which, aided by JJ 
 
 England's geographical advantages and freedom from de- harsh e ives 
 vastating wars, gave her the leadership of the world in the power. 
 arts of manufacture and colonization and, though in a less 
 marked degree, in agriculture. England has learnt lessons 
 in agriculture from many countries and especially the 
 Netherlands ; but on the whole she has taught far more 
 than she has learnt. And there is now no country except 
 the Netherlands, which can compare with her in the amount 
 of produce per acre of fertile land ; and no country in Europe 
 which obtains nearly so high returns in proportion to the 
 labour expended in getting them 1 . 
 
 1 It would seem that England gets more produce per acre of fertile land 
 than even the Netherlands, though there is some doubt about it. The Netherlands 
 have led the way for England in more paths of industrial enterprise than any 
 other country has ; and this enterprise has diffused itself from their thickly 
 scattered towns over the whole land. But there is error in the common opinion 
 that they support as dense a population as England does, and yet export on the 
 balance a great deal of agricultural produce. For Belgium imports a great part of 
 her food ; and even Holland imports as much food as she exports, though her non- 
 agricultural population is small. In France, farm crops and even potatoes are 
 on the average only about half as heavy as in England proper; and France 
 has only about half the weight of cattle and sheep in proportion to her area. 
 On the other hand, the small cultivators of France excel in poultry and 
 
734 DEMAND AND SUPPLY IN RELATION TO LAND, CONTINUED. 
 
 BOOK vi. The chief merit of the system is that it enable^ the land- 
 CH - X - lord to keep in his own hands the responsibility for that part 
 For ifc and only that part of the property which he can look after 
 landlord to w ith but little trouble to himself, and little vexation to his 
 pa?t P o y f th? tenant ; and the investment of which, though requiring both 
 enterprise and judgment, does not demand constant super- 
 
 can be vision of minor details. His part consists of land, buildings 
 
 easily and 
 
 effectively an d permanent improvements, and averages in England five 
 
 times that which the farmer has to supply himself; and he 
 is willing to supply his part in the enterprise with this 
 great capital at a net rent which seldom gives interest at 
 as much as three per cent, on its cost. There is no other 
 business in which a man can borrow what capital he wants 
 at so low a rate, or can often borrow so large a part of his 
 capital at any rate at all. The metayer indeed may be said 
 to borrow an even larger share, but at a much higher rate 1 . 
 and it gives The second merit of the English system, which partly 
 
 consider- . . 
 
 able free- follows from the first, is that it gives the landlord consider- 
 forcesof able freedom in the selection of an able and responsible 
 lon ' tenant. So far as the management of land, as opposed to 
 its ownership, goes, the accident of birth counts for less in 
 England than in any other country of Europe. But we have 
 already seen that even in modern England the accident oi 
 birth counts for a good deal in the access to posts of com- 
 mand in all kinds of business, to the learned professions and 
 even to skilled manual trades. And it counts for somewhat 
 more in English agriculture. For the good and bad qualities 
 of landlords combine to prevent their selecting tenants on 
 . strictly commercial principles. They seldom go far afield 
 for a new tenant : and until quite recently, they have seldom 
 given facilities for an able working man, similar in character 
 to the American farmer, to make a start on a small farm 
 which he can cultivate with his own hands and those of his 
 family and a few hired men. 
 
 fruit and other light branches of production for which her superb climate is 
 well suited. 
 
 1 For long periods the landlord may be regarded as an active partner and the 
 predominant partner in the business : for short periods his place is rather that of 
 the sleeping partner. On the part played by his enterprise compare the Duke of 
 Argyle's Unseen Foundations of Society, especially p. 374. 
 
AGRICULTURE MOVES SLOWLY EVEN IN ENGLAND. 735 
 
 7. The number of people who have the opportunity BOOKVI. 
 of making a step forward in the arts of agriculture is very ' 
 great. And since the different branches of agriculture differ J^J]: jjj" 
 from one another in general character less than do those of agriculture 
 manufacture, it might have been expected that new ideas in slowly. 
 it would have followed one another quickly and have been 
 speedily diffused. But on the contrary progress has been slow. 
 For the most enterprising agriculturists drift towards the 
 town ; those who stay behind live more or less isolated lives ; 
 and, as a result of natural selection and education, their 
 minds have always been more staid than those of townsmen, 
 and less ready to suggest or even to follow new paths. And 
 further, though a manufacturer is nearly always safe in copying 
 a plan that has worked well with his neighbour in the same 
 trade, a farmer is not : for every farm has slight peculiarities 
 of its own, so that the blind adoption of a plan, that has 
 worked well close by, is likely to fail ; and its failure encour- 
 ages others in the belief that old and tried ways are the best. 
 
 Again, the variety in agricultural detail makes the proper The diffi- 
 keeping of farming accounts very difficult. There are so many J^ing 
 joint products and so many bye products, so many complex I^JjJ 
 and shifting relations of debtor and creditor between the accounts, 
 several crops and methods of feeding, that an ordinary farmer, 
 even if he were as fond of accounts as he is in fact averse to 
 them, would have great difficulty in ascertaining, otherwise 
 than by a semi-instinctive guess, what is the price that will 
 just pay him to raise a certain amount of extra produce. He 
 may know its prime cost with fair certainty, but he seldom 
 knows its true total cost ; and this increases the difficulty of 
 reading quickly the teachings of experience and making pro- 
 gress by their aid 1 . 
 
 1 The difficulty is even greater in small holdings. For the capitalist fanner 
 does at all events measure the prime cost in terms of money. But the culti- 
 vator working with his own hands often puts into his land as much work as 
 he feels able to do, without estimating carefully its money value in relation 
 to its product. 
 
 Although peasant proprietors resemble the heads of other small businesses in 
 their willingness to work harder than those whom they hire and for less reward ; 
 yet they differ from the small masters in manufacture in this, that they often do 
 not hire extra labour even when it would pay them well to do so. If all that they 
 and their family can do for their land is less than enough for it, it is generally 
 
736 DEMAND AND SUPPLY IN KELATION TO LAND, CONTINUED. 
 
 BOOK vi. And there is another difference between the mode of 
 
 CH ' X ' action of competition in agriculture and in manufacture. If 
 
 Tffit'on one manu f ac turer i g unenterprising, Bothers may be able to 
 
 the part of step into the opening which he leaves vacant : but when one 
 
 one under- , , , , , . . ,, , . , , . , , 
 
 taker is not landowner does not develop the resources of his land in the 
 satedlby best way, others cannot make up for the deficiency without 
 g bmt calling into play the law of diminishing return ; so that his 
 the part of want of wisdom and enterprise makes the marginal supply 
 it is in' price a little higher than it otherwise would be. It is how- 
 factures. ever true that the difference between the two cases is only 
 one of degree ; since the growth of any branch of manufac- 
 tures may be retarded perceptibly by any falling-off in the 
 ability and enterprise of the leading firms engaged in it. 
 The chief agricultural improvements have been made by 
 landlords who have themselves been townsmen or at least 
 have associated a good deal with townsmen, and by manu- 
 facturers in trades subsidiary to agriculture 1 . 
 
 Man's part 8. Though nature yields generally a less than propor- 
 
 cuiture tionate return to an increased amount of labour of a given 
 
 to'the" 118 e ffi c i enc yj nian's part conforms generally to the law of in- 
 
 law of creasing return, (i.e., it increases in aggregate efficiency more 
 
 return. than in proportion to the number of workers), in agriculture 
 
 as well as in manufacture 2 . But yet the economies of 
 
 production on a large scale are not quite similar in the 
 
 two cases. 
 
 cS^otbe e Firstly, agriculture must be spread over the broad land : 
 a localized raw material can be brought to the manufacturer for him 
 highly to work on ; but the agriculturist must seek his work. 
 i S ndustryt Again, the workers on the land must adapt their work to 
 
 under-cultivated: if more, it is often cultivated beyond the remunerative limit. 
 It is a common rule that those who give the time which is free from their 
 main occupation to some other industry, often regard their earnings in this last, 
 however low, as an extra gain ; and they sometimes even work below what would 
 be a starvation wage to those who depend on that industry for support. This is 
 especially true when the side-industry is that of cultivating, partly for the pleasure 
 of doing it, a small plot of land with imperfect appliances. 
 
 1 Mr R. Prothero (English Farming, Ch. vi.) gives some instances of pro- 
 longed resistance to changes, and adds that an Act had to be passed in England 
 as late as 1634 " agaynst plowynge by the taile." 
 
 2 See Book iv. Ch. xin. especially p. 397 ; also Book iv. Ch. in. 5,6; also 
 the last paragraph of the note on p. 604. 
 
LARGE AND SMALL FARMS. 737 
 
 the seasons, and can seldom confine themselves entirely to BOOKVI. 
 one class of work; and in consequence agriculture, even H ' X ' 
 under the English system, cannot move fast in the direction 
 of the methods of manufacture. 
 
 But yet there are considerable forces tending to push it but there 
 in that direction. The progress of invention is constantly tencUngto 
 increasing the number of serviceable, but expensive machines, mov ? Sl 
 for most of which a small farmer can find employment during methods 
 only a very short time. He may hire some of them; but there facture. 
 are many the use of which he can get only by co-operation 
 with his neighbours; and the uncertainties of the weather 
 prevent this plan from working very smoothly in practice l . 
 
 Again, the farmer must go beyond the results of his own it requires 
 and his father's experience in order to keep abreast of the 
 changes of the day. He should be able to follow the move- 
 ments of agricultural science and practice closely enough to ? nd tllis 
 see their chief practical applications to his own farm. To do the econo- 
 all this properly requires a trained and versatile mind; and a 
 
 farmer who has these qualities could find time to direct the 
 general course of the management of several hundred, or methods of 
 even of several thousand acres; and the mere superintendence ment. 
 of his men's work in matters of detail is not a task fitting for 
 him. The work which he ought to do is as difficult as that of 
 a large manufacturer; and he would never dream of spending 
 his own strength on minute supervision which he can easily 
 hire subordinates to do. A farmer who can do this higher 
 work, must be wasting his strength on work that is beneath 
 him, unless he employs many gangs of workmen each of them 
 under a responsible foreman. But there are not many farms 
 which give scope for this, and there is therefore very little 
 inducement for really able men to enter the business of 
 farming ; the best enterprise and ability of the country gene- 
 rally avoid agriculture and go to trades in which there is 
 
 1 Horse-power is dearer relatively to both steam-power and hand-power 
 in England than in most other countries. England has taken the lead hi the 
 improvement of field steam machinery, and America in that of horse machinery 
 and hand implements. The cheapness of horse-power tells generally on the side 
 of moderate sized farms versus very small ones ; but the cheapness of steam-power 
 tells on the side of very large farms, except in so far as the use of field steam 
 machinery can be hired economically and at convenient tunes. 
 
 M. 47 
 
BOOK VI. 
 CH. X. 
 
 738 DEMAND AND SUPPLY IN RELATION TO LAND, CONTINUED. 
 
 room for a man of first-rate ability to do nothing but high 
 class work, to do a great deal of it, and therefore to get high 
 earnings of management 1 . 
 
 Another If it be assumed, as is the modern fashion, that the 
 
 pianis 1C farmer is not to work habitually with his men and to 
 that of encourage them by his presence, it seems best for the 
 small economy of production that farms should be as large as 
 theTork of is practicable under the existing condition of land tenure ; 
 so as to give room for the use of highly specialized ma- 
 chines and for the exercise of great ability on the part 
 share. o f ^e farmer. But if a farm is not very large, and if, as 
 is often the case, the farmer has no greater ability and 
 activity of mind than is commonly to be found among the 
 better class of working foremen in manufactures, then it 
 would be best for others, and in the long run for himself, that 
 he should return to the old plan of working among his men. 
 Perhaps also his wife might return to some of those lighter 
 tasks in and near the farmhouse which tradition ascribes to 
 her. They require discretion and judgment, they are not 
 inconsistent with education and culture ; and combined with 
 it they would raise and not lower the tone of her life, and 
 her real claims to a good social position. There is some 
 reason for thinking that the stern action of the principle 
 of natural selection is now displacing those farmers, who have 
 not the faculty to do difficult head-work, and yet decline to 
 do hand-work. Their places are being taken by men of more 
 
 1 The experiment of working farms on a very large scale is difficult and 
 expensive, because it requires farm buildings and means of communication 
 specially adapted to it ; and it may have to overcome a good deal of resistance 
 from custom and sentiment not altogether of an unhealthy kind. The risk 
 also would be great ; for in such cases those who pioneer often fail, though their 
 route when well trodden may be found to be the easiest and best. 
 
 Our knowledge on many disputed points would be much increased and valuable 
 guidance gained for the future if some private persons, or joint-stock companies, 
 or co-operative associations, would make a few careful experiments of what have 
 been called "Factory farms." On this plan there would be a central set of 
 buildings (there might be more than one) from which roads and even light 
 tramways extended in all directions. In these buildings the recognized principles 
 of factory management would be applied, machinery would be specialized and 
 economized, waste of material would be avoided, bye products would be utilized, 
 and above all the best skill and managing power would be employed, but only for 
 its proper work. 
 
LARGE AND SMALL FARMS. 739 
 
 than average natural ability who, with the help of modern BOOKVI. 
 education, are rising from the ranks of labourers; who J!l^" 
 are quite able to manage the ordinary routine work of a 
 model farm ; and who are giving to it a new life and spirit 
 by calling their men to come and work, instead of telling 
 them to go and work. Very large farms being left out of 
 view, it is with rather small farms worked on these principles 
 that the immediate future of English agriculture seems to 
 lie. Very small holdings however have great advantages Very small 
 wherever so much care has to be given to individual plants, 
 that machinery is out of place; and there is reason for hoping 
 that they will continue to hold their own in raising vegeta- 
 bles, flowers and fruit. 
 
 9. We may next consider how far landlords will in The gross 
 their own interest adjust the size of holdings to the real sma ii 
 needs of the people. Small holdings often require more ex- 
 pensive buildings, roads and fences, and involve greater Wj rela - 
 trouble and incidental expenses of management to the land- their acre- 
 lord in proportion to their acreage than do large holdings ; ai 
 and while a large farmer who has some rich land can 
 turn poor soils to good account, small holdings will not 
 flourish generally except on good soil 1 . Their gross rental 
 per acre must therefore always be at a higher rate than that 
 of large farms. But it is contended that, especially when 
 land is heavily burdened by settlements, landlords are un- 
 willing to incur the expense of subdividing farms, unless 
 they see their way to rents for small holdings that will give 
 them, in addition to high profits on their outlay, a heavy But it is 
 insurance fund against the chance of having to throw the me ' 
 holdings together again ; and that the rental for small hold- 
 ings, and especially for those of only a few acres, is extrava- 
 gantly high in many parts of the country. Sometimes the 
 prejudices of the landlord and his desire for undisputed 
 
 1 The interpretation of this term varies with local conditions and individual 
 wants. On permanent pasture land near a town or an industrial district the 
 advantages of small holdings are perhaps at then- maximum, and the disad- 
 vantages at their minimum. If the land is arable, it must not be light, but 
 strong, and the richer the better; and this is especially the case with holdings 
 so small as to make much use of the spade. If the land is hilly and broken 
 the small cultivator loses but little from his want of command of machinery. 
 
 472 
 
740 DEMAND AND SUPPLY IN RELATION TO LAND, CONTINUED. 
 
 BOOK vi. authority make him positively refuse to sell or let land to 
 CH - X ~ persons who are not in harmony with him on social, political 
 
 or religious questions ; but it seems certain that evils of this 
 
 kind have always been confined to a few districts, and that 
 
 they are rapidly diminishing. 
 
 and that is But they rightly attract much attention. For there is a 
 the^Xc Public need in every district for small holdings, as well as 
 interest, large; for allotments and large gardens; and generally for 
 
 holdings so small that they can be worked by people who 
 
 have some other occupation 1 . 
 There And lastly though peasant proprietorship, as a system, is 
 
 unsuited to the economic conditions of England, to her soil, 
 
 hindrances ner climate, and the temper of her people, yet there are a 
 
 ants' pro- few peasant proprietors in England who are perfectly happy 
 
 in this condition ; and there are a few others who would buy 
 
 small plots of land and would live happily on them, if they 
 
 could get just what they wanted where they wanted it. 
 
 . Their temper is such that they do not mind working hard 
 
 and living sparely, provided they need call no one master ; 
 
 they love quiet and dislike excitement ; and they have a 
 
 great capacity for growing fond of land. Reasonable oppor- 
 
 tunity should be given to such people to invest their savings 
 
 in small plots of land, on which they may raise suitable 
 
 crops with their own hands ; and at the very least the 
 
 present grievous legal charges on the transfer of small plots 
 
 should be diminished 2 . 
 
 Co-opera- Co-operation might seem likely to flourish in agriculture 
 
 1 They increase the number of people who are working in the open air with 
 their heads and their hands : they give to the agricultural labourer a stepping-stone 
 upwards, prevent him from being compelled to leave agriculture to find some 
 scope for his ambition, and thus check the great evil of the continued flow of the 
 ablest and bravest farm lads to the towns. They break the monotony of existence, 
 they give a healthy change from indoor life, they offer scope for variety of 
 character and for the play of fancy and imagination in the arrangement of 
 individual life; they afford a counter attraction to the grosser and baser 
 pleasures ; they often enable a family to hold together that would otherwise have 
 to separate ; under favourable conditions they improve considerably the material 
 condition of the worker ; and they diminish the fretting as well as the positive 
 loss caused by the inevitable interruptions of their ordinary work. 
 
 2 In 1885 the number of the holdings between one and five acres in England 
 was a quarter of the whole number of holdings : and since then they have rapidly 
 increased. 
 
LARGE AND SMALL HOLDINGS. 741 
 
 and to combine the economies of production on a large scale BOOK vi. 
 with many of the joys and the social gains of small pro- CH ' x> 
 perties. But it requires habits of mutual trust and con- great P: 
 fidence ; and unfortunately the bravest and the boldest, and but also 
 therefore the most trustful, of the countrymen have always cuities in 
 moved to the towns, and agriculturists are a suspicious race. 
 Co-operative movements in agriculture therefore must needs 
 be very cautious, until the way has been well prepared for 
 them by the less ambitious but safer system of profit-sharing. 
 
 As co-operation might combine more of the advantages 
 of all systems of tenure, so the cottier system of Ireland often 
 combined the disadvantages of all ; but its worst evils and 
 their causes are rapidly disappearing, and the economic 
 elements of the problem are just now overshadowed by the 
 political. We must therefore pass it by 1 . 
 
 10. The failures of the English system of land tenure The 
 in Ireland have brought into clear relief difficulties which 
 are inherent in it, but which have been kept in the back- tenure I s 
 
 competi- 
 
 ground in England by the conformity of the system to the tive, but 
 business habits and the character of the people. The chief tion P does 
 of these difficulties arise from the fact that while the system easily 
 is competitive in its essence, the conditions of agriculture 
 even in England offer a strong resistance to the full action 
 of free competition. To begin with, there are special dif- 
 ficulties in ascertaining the facts on which that action must 
 be based. We have just noticed the difficulty of keeping Difficulty 
 exact farming accounts : to this must be added that a 
 
 1 The Ricardian theory of rent ought not to bear the greater part of the 
 blame that has been commonly thrown on it, for those mistakes which English 
 legislators made during the first half of this century in trying to force the 
 English system of land tenure on India and Ireland. The theory concerns 
 itself with the causes that determine the amount of the Producer's surplus 
 from land at any time ; and no great harm was done when this surplus was 
 regarded as the landlord's share, in a treatise written for the use of English- 
 men in England. It was an error in jurisprudence and not in economics that 
 caused our legislators to offer to the Bengal tax-collector and Irish landlord 
 facilities for taking to themselves the whole property of a cultivating firm, 
 which consisted of tenant and landlord in the case of Ireland, and in the case 
 of Bengal, of the Government and tenants of various grades ; for the tax-collector 
 was in most cases not a true member of the firm, but only one of its servants. 
 But wiser and juster notions are prevailing now in the Government of India as 
 well as of Ireland. 
 

 742 DEMAND AND SUPPLY IN RELATION TO LAND, CONTINUED. 
 
 BOOK vi. farmer's calculations as to the rent which it is worth his 
 CH ' X ' while to undertake to pay, are further hampered by the diffi- 
 "ricesand cu ^> r * deciding wnat is a normal harvest and a normal level 
 harvests. o f prices. For good and bad seasons come so much in cycles 
 that many years are required to afford a trustworthy average 
 of them 1 : and in those many years the industrial environ- 
 ment is likely to have changed much ; the local demand, the 
 facilities for selling his own produce in distant markets and 
 those which assist competitors from a distance to sell their 
 produce in his local markets may all have changed. 
 Difficulty The landlord in determining what rent to accept is met 
 from k>cai by this difficulty and also by another, arising out of variations 
 i n * ne standards of ability among farmers in different parts 
 o f ^ e country. The Producer's Surplus, or English rent, of 
 
 farming a farm is that excess which its produce yields over its ex- 
 enterprise. penses of cultivation, including normal profits to the farmer ; 
 it being assumed that that farmer's ability and enterprise 
 are such as are normal for farms of that class in that place. 
 The difficulty in view is to decide whether these last words 
 are to be interpreted broadly or narrowly. 
 
 Ethicaiand It is clear that if a farmer falls below the standard 
 
 elements of ability of his own district, if his only forte is in driving 
 
 closely 6 nap d bargains, if his gross produce is small and his net 
 
 mingled produce even smaller in proportion; in such a case the 
 
 landlord acts in the interest of all when he hands over 
 
 the farm to a more competent tenant, who will pay better 
 
 wages, obtain a much higher net produce and pay a some- 
 
 what higher rent. On the other hand, when the local 
 
 standard of normal ability and enterprise is low, it is not 
 
 clearly right from an ethical point of view, nor is it clearly 
 
 in the business interests of the landlord in the long run, that 
 
 he should endeavour to take to himself a greater rent than 
 
 can be paid by a farmer who reaches that standard; even 
 
 though it could be obtained by importing a farmer from 
 
 another district in which the standard is higher 2 . 
 
 1 Compare Tooke and Newmarch, History of Prices, Vol. vi. App. m. 
 
 2 Difficulties of this kind are practically solved by compromises which experience 
 has justified, and which are in accordance with the scientific interpretation 
 of the term "normal." If a local tenant showed extraordinary ability, the 
 
DIFFICULTY OF DECIDING WHAT IS A NORMAL RENT. 743 
 
 Closely related to this question is one as to the freedom BOOK vi. 
 
 the tenant should have to develop the natural capabilities of CH ' X ' 
 his land at his own risk, with the understanding that if he is 
 
 successful he is to retain something more than mere normal freedom to 
 
 , , . 01 p m ake and 
 
 profits on his enterprise. So far as minor improvements go, reap the 
 this difficulty is in a great measure met by long leases. 
 
 These have done much for Scotland : but they have dis- ments - 
 advantages of their own 1 . 
 
 Custom, and, within recent years, legislation, have given 
 the English tenant claims for compensation for improve- 
 ments made by him which do not alter the character of his 
 holding, and the fruits of which come in quickly. But he 
 cannot claim the compensation till he quits his tenancy : 
 and it is theoretically possible for a hard landlord to exact 
 more than a fair rent from an improving farmer who has an 
 affection for his ancestral home. Such cases are however rare 2 . 
 
 landlord would be thought grasping who, by threatening to import a stranger, 
 tried to extort a higher rent than the normal local farmer could make the 
 land pay. On the other hand, a farm being once vacant, the landlord would 
 be thought to act reasonably if he imported a stranger who would set a good 
 model to the district, and who shared about equally with the landlord the extra 
 net surplus due to his ability and skill, which, though not strictly speaking 
 exceptional, were yet above the local standard. Compare the action of Settlement 
 Officers in India with regard to equally good land cultivated by energetic and 
 unenergetic races, noticed in the foot-note on p. 727. 
 
 1 The chief of these is that a great change in the Industrial Environment in its 
 broader sense, if favourable to the land, may enrich the leaseholder without any 
 merit of his own; and if unfavourable, may break him in spite of his best efforts. 
 The opening up of the wheat fields of the North- West of America struck some 
 Scotch farmers with long leases almost as heavily as it did many peasant 
 proprietors in the West of Europe. As Sir James Caird points out (Landed 
 Interest, Ch. xi.) the Earl of Leicester's plan of allowing the tenant proper 
 freedom of cropping, till the last four years of his lease, would remove many other 
 evils that have attached to, but are not inherent in the system. 
 
 2 The Agricultural Holdings Act of 1881 enforces customs which Mr Pusey's 
 committee eulogized, but did not propose to enforce. Many improvements are 
 made partly at the expense of the landlord and partly at that of the tenant, 
 the former supplying the materials, and the latter the labour. In other cases 
 it is best that the landlord should be the real undertaker of the improvements, 
 bearing the whole expense and risk, and realizing the whole gain. Partly for the 
 sake of simplicity in working, the law provides that compensation for permanent 
 improvements can be claimed only if they have been made with the consent of the 
 landlord. But Prof. Nicholson argues with great force ( Tenant's Gain not Landlord's 
 Loss, Ch. x.) that the tenant should be allowed to claim for all improvements 
 necessary for good husbandry, after giving the landlord notice and time to make 
 them himself, provided only they do not alter the character of the holding. New 
 light on all these questions is to be expected from the Report of the Royal 
 Commission on Agriculture. 
 
744 DEMAND AND SUPPLY IN RELATION TO LAND, CONTINUED. 
 
 BOOK vi. 11. Finally a word may be said as to private and 
 CH ' X ' public interests with regard to open spaces in towns. Wake- 
 Conflict e kj an( j the American economists have taught us how a 
 public and sparsely inhabited new district is enriched by the advent 
 terests in of every new settler. The converse truth is that a closely 
 SbSfding peopled district is impoverished by every one who adds a 
 new building or raises an old one higher. The want of air 
 and light, of peaceful repose out-of-doors for all ages and of 
 healthy play for children, exhausts the energies of the best 
 blood of England which is constantly flowing towards our 
 large towns. By allowing vacant spaces to be built on 
 recklessly we are committing a great blunder from a busi- 
 ness point of view, since for the sake of a little material 
 wealth we are wasting those energies which are the factors 
 of production of all wealth ; and we are sacrificing those 
 ends towards which material wealth is only a means. It is 
 a difficult question to decide how far the expense of clearing 
 open spaces in land already built on should fall on the 
 neighbouring owners ; but it seems right that for the future 
 every new building erected, save in the open country, should 
 be required to contribute in money or in kind towards the 
 expenses of open places in its neighbourhood 1 . 
 
 and in \\r e are however trenching on those general relations 
 
 matters, between collective and private interests, which we shall 
 have to study carefully at a later stage. We shall then 
 have to face several ethico-economic problems^as to the 
 limits of perpetual private rights in land " from the centre 
 of the earth to the sky above it ; " we shall have to enter on 
 such questions as whether the interests of the mine-owner 
 make him sufficiently careful of Nature's stored-up treasures, 
 especially when they occur in poor seams ; and again 
 whether there is a balance of public advantage in allowing 
 the shopkeeper in a town who has given a special value to 
 his premises by the ability with which he has done business 
 in them, a similar claim to compensation for disturbance 
 to that which has been recognized in the case of the im- 
 proving agricultural tenant. 
 
 1 It must be borne in mind that a special tax on new building land would 
 however tend to give something of a monopoly value to the land already built on, 
 and thus raise ground-rents of existing buildings. 
 
CHAPTER XL 
 
 GENERAL VIEW OF DISTRIBUTION. 
 
 1. IN the Summary at the end of Book v. we traced a BOOK vi. 
 continuous thread running through and connecting the appli- CHtXI ' 
 cations of the general theory of equilibrium of demand and ^ he 
 supply to different periods of time ; from those so short that given in 
 
 Book v 
 
 cost of production could exercise no direct influence on value, ch. xiv 
 to those so long that the supply of the appliances of produc- 
 tion could be fairly well adjusted to the indirect demand for 
 them, which is " derived " from the direct demand for the 
 commodities which they produce. 
 
 In the present Book we have been concerned with is con- 
 another thread of continuity ; which lies transversely to the the present 
 thread connecting different periods of time, and connects the on^hTcn 7 
 various agents and appliances for production, material and {F ace ^, a f 
 human. It thus establishes a fundamental unity between continuity 
 them, in spite of their important differences of outward to the 
 
 feature. earlierone. 
 
 There is a general correspondence between the causes 
 that govern the supply prices of material and of personal 
 capital: the motives which induce a man to accumulate 
 personal capital in his son's education, are similar to those 
 which control his accumulation of material capital for his 
 son. There is a continuous transition from the father who The causes 
 works and waits in order that he may bequeath to his son a mu ie the 
 rich and firmly-established manufacturing or trading business, supply 1 
 to one who works and waits in order to support his son while prices of 
 
 . " . material 
 
 he is slowly acquiring a thorough medical education, and and per- 
 
746 GENERAL VIEW OF DISTRIBUTION. 
 
 
 BOOK vi. ultimately to buy for him a lucrative practice. Again there 
 
 CHJCI. j g ^ e same continuous transition from him to one who works 
 
 ctTitli are an ^ wa ^ s ^ n order that his son may stay long at school ; and 
 
 very may afterwards work for some time almost without pay while 
 
 general learning a skilled trade, instead of being forced to support 
 
 ter> himself early in an unskilled occupation, such as that of an 
 
 errand-boy. For such occupations, because they lead the 
 
 way to no future advance, sometimes offer comparatively 
 
 high wages to young lads. 
 
 in spite of It is indeed true that the only persons, who, as society is 
 differences, now constituted, are very likely to invest much in developing 
 the personal capital of a youth's abilities are his parents : and 
 that many first-rate abilities go for ever uncultivated because 
 no one, who can develop them, has had any special interest 
 in doing so. This fact is very important practically, for its 
 effects are cumulative. But it does not give rise to a funda- 
 mental difference between material and human agents of 
 production : for it is analogous to the fact that much good 
 land is poorly cultivated because those who would cultivate 
 it well have not access to it. 
 
 Again, since human beings grow up slowly and are slowly 
 worn out, and parents in choosing an occupation for their 
 children must as a rule look forward a whole generation, 
 changes in demand take a longer time to work out their full 
 effects on supply in the case of human agents than of most 
 kinds of material appliances for production ; and a specially 
 " long " period is required in the case of labour to give full 
 play to the economic forces which tend to bring about a 
 normal adjustment between demand and supply 1 . 
 
 2. That part of a man's income which he owes to the 
 
 income 
 
 1 Comp. Book iv. Ch. v. vi. vn. and xn. ; and Book vi. Ch. iv. v. and vn. 
 To repeat another statement of nearly the same thing : when we are considering 
 periods of moderate length say of a few years the average earnings of skill or 
 ability of any kind, have to be regarded more as a quasi-rent determined by the 
 demand for their services, and less as normal profits on the labour and waiting 
 needed for the acquirement of that skill or ability, than is the case with regard to 
 such material appliances for production as are quickly made and quickly worn 
 out. But, on the other hand, a great part of the earnings of a worker are the 
 payment required to induce him to undergo a certain strain or fatigue. And this 
 may be regarded as the prime cost of his labour, while the remainder is the 
 supplementary cost required to make up in the long run its total supply price. 
 
A SUMMARY. 747 
 
 possession of extraordinary natural abilities may be regarded BOOK vi. 
 by him as analogous to the rent of other free gifts of nature, 
 such as the " inherent " properties of land. But in reference 
 to normal prices, it is to be classed rather with the profits 
 derived by free settlers from the cultivation of new land, is a rent 
 or again with the find of the pearl-fisher. The plot of one $oSt of 6 
 settler turns out better and that of another worse than was ^h-iduaT 
 expected ; the good find of one dive of the pearl-fisher com- n for 
 
 pensates for many others that are fruitless: and the high poses of the 
 
 ... J , . theory of 
 
 income which one barrister, or engineer, or trader earns by normal 
 his natural genius has to be counted with the comparative V 
 failures of many others ; they perhaps appeared of no less 
 promise when young, and they received as costly an educa- 
 tion and start in life, but their services to production were 
 less than his in proportion to their cost. 
 
 The ablest business men are generally those who get the 
 highest profits, and at the same time do their work most 
 cheaply ; and it would be as wasteful if society were to give 
 their work to inferior people who would undertake to do it 
 more cheaply, as it would be to give a valuable diamond to 
 be cut by a low waged but unskilled cutter. And, just as 
 the wages of skilled cutters enter into the normal supply 
 price of cut diamonds, so the earnings of management of 
 able business men enter into the normal supply price of the 
 goods which they provide 1 . 
 
 3. The marginal efficiency of human agents of produc- Business 
 tion on the one hand, and that of material agents on the 
 
 other, are weighed against one another and compared with * lie a p nts 
 their marginal costs ; and each tends to be applied as far as means the 
 it is more efficient than the other in proportion to its cost. stitution U 
 A chief function of business undertakers is to facilitate the 
 free action of this great law of substitution. Generally to 
 the public benefit, but sometimes in opposition to it, they the dif- 
 are constantly comparing the services of machinery, and of industrial 
 labour, and again of unskilled and skilled labour, and of cl 
 extra foremen and managers ; they are constantly devising 
 and experimenting with new arrangements which involve 
 
 Compare Book v. Ch. ix. 2, 3; Book vi. Ch. v. 7, and Ch. vm. 
 
748 GENERAL VIEW OF DISTRIBUTION. 
 
 BOOK vi. the use of different factors of production, and selecting th< 
 CH ' XI ' most profitable to themselves 1 . 
 
 The efficiency as compared with the cost of almost every 
 class of labour, is thus continually being weighed in the 
 balance in one or more branches of production against 
 some other classes of labour : and each of these in its turn 
 against others. This competition is primarily " vertical : " 
 it is a struggle for the field of employment between groups 
 of labour belonging to different grades, but engaged in the 
 same branch of production, and inclosed, as it were, between 
 the same vertical walls. But meanwhile " horizontal " com- 
 petition is always at work, and by simpler methods : for, 
 firstly, there is great freedom of movement of adults from 
 one business to another within each trade ; and secondly, 
 parents can generally introduce their children into almost 
 any other trade of the same grade with their own in their 
 neighbourhood. By means of this combined vertical and 
 horizontal competition there is an effective and closely ad- 
 justed balance of payments to services as between labour in 
 different grades ; in spite of the fact that the labour in any 
 one grade is mostly recruited even now from the children of 
 those in the same grade 2 . 
 
 Th ^ action The working of the law of substitution is thus chiefly 
 though indirect. When two tanks containing fluid are joined by a 
 round 7 - pipe, the fluid, which is near the pipe in the tank with the 
 higher level, will flow into the other, even though it be rather 
 *i viscous ; and thus the general levels of the tanks will tend 
 
 in the long 
 
 run. to be brought together, though no fluid may flow from the 
 
 further end of the one to the further end of the other ; 
 and if several tanks are connected by pipes, the fluid in all 
 will tend to the same level, though some tanks have no 
 direct connection with others. And similarly the law of 
 substitution is constantly tending by indirect routes to 
 apportion earnings to efficiency between trades, and even 
 between grades, which are not directly in contact with one 
 another, and which appear at first sight to have no way 
 of competing with one another. 
 
 1 Compare Book v. Ch. in. 3 ; and Book vi. Ch. i. 2, and Ch. vn. 2. 
 
 2 Compare Book iv. Ch. vi. 7 ; Book vi. Ch. v. 2. 
 
A SUMMARY. 749 
 
 4. There is no breach of continuity as we ascend from BOOK vi. 
 
 PTT XT 
 
 the unskilled labourer to the skilled, thence to the foreman, ' ' 
 
 to the head of a department, to the general manager of a large 
 business paid partly by a share of the profits, to the junior business 
 partner, and lastly to the head partner of a large private takers 
 business : and in a joint-stock company there is even some- 
 what of an anti-climax when we pass from the directors to 
 the ordinary shareholders, who undertake the chief ultimate 
 risks of the business. Nevertheless business undertakers are 
 to a certain extent a class apart. 
 
 For while it is through their conscious agency that the makes the 
 law of substitution chiefly works in balancing one factor of the law of 
 production against another ; with regard to them it has no Son with 
 other agency than the indirect influence of their own com- 
 petition. So it works blindly, or rather wastefully ; it forces 
 many to succumb who might have done excellent work if wasteful; 
 they had been favoured at first : and, in conjunction with the 
 law of increasing return, it strengthens those who are strong, 
 and hands over the businesses of the weak to those who have 
 already obtained a partial monopoly. 
 
 But on the other hand there is also a constant increase 
 in the forces which tend to break up old monopolies, am 
 to offer to men, who have but little capital of their own, 
 openings both for starting new businesses and for rising into 
 posts of command in large public and private concerns ; and 
 these forces tend to put business ability in command of the 
 capital required to give it scope. 
 
 On the whole the work of business management is done their work 
 cheaply not indeed as cheaply as it may be in the future done more 
 when men's collective instincts, their sense of duty and their hereafter, 
 public spirit are more fully developed; when society exerts ^^ 
 itself more to develop the latent faculties of those who are society 
 born in a humble station of life, to diminish the secrecy of more than 
 business ; and when the more wasteful forms of speculation l 
 and of competition are held in check. But yet it is done so 
 cheaply as to contribute to production more than the equi- 
 valent of its pay. For the business undertaker, like the 
 skilled artisan, renders services which society needs, and 
 
750 GENERAL VIEW OF DISTRIBUTION. 
 
 BOOK vi. which it would probably have to get done at a higher cost 
 CH " "' if he were not there to do them 1 . 
 
 Contrasts The similarity between the causes that determine the 
 fludua" normal rewards of ordinary ability on the one hand, and 
 current f business power in command of capital on the other, does 
 profits and not ex t e nd to the fluctuations of their current earnings. 
 For the undertaker stands as a buffer between the buyer 
 of goods and all the various classes of labour by which they 
 are made. He receives the whole price of the one and pays 
 the whole price of the others. The fluctuations of his profits 
 go with fluctuations of the prices of the things he sells, and 
 are more extensive : while those of the wages of his em- 
 ployees come later and are less extensive. The earnings at 
 any particular time (or the quasi-rent) of his capital and 
 ability are sometimes large, but sometimes also a negative 
 quantity : whereas those of the ability of his employees are 
 never very large, and are never a negative quantity. The 
 wage-receiver is likely to suffer much when out of work ; but 
 that is because he has no reserve, not because he is a 
 wage-receiver 2 . 
 
 The 5. Returning to the point of view of the second chapter 
 
 a^entiTof ^ ^*is Book, we may call to mind the double relation in 
 production which the various agents of production stand to one another, 
 sole source On the one hand they are often rivals for employment ; any 
 meiiTfor 7 on e that is more efficient than another in proportion to its 
 another cos * tending to be substituted for it, and thus limiting the 
 demand price for the other. And on the other hand they all 
 constitute the field of employment for each other : there is no 
 field of employment for any one, except in so far as it is pro- 
 vided by the others : the national dividend which is the joint 
 product of all, and which increases with the supply of each 
 of them, is also the sole source of demand for each of them. 
 
 1 We postpone a criticism of the contention of the socialists that it would be 
 better for the State to take the work into its own hands and hire business managers 
 to conduct it : and we postpone a study of those forms of speculation and commercial 
 competition which are not beneficial to society, and perhaps are even harmful. 
 
 2 Compare Book v. Ch. n. 3 and Book vi. Ch. iv. 6 and Ch. vm. 79. 
 
 
A SUMMARY. 751 
 
 Thus an increase of material capital causes it to push its BOOK vi. 
 way into new uses ; and though in so doing it may occasion- ' x 
 ally diminish the field of employment for manual labour in a 
 
 few trades, yet on the whole it will very much increase the capital 
 
 J J enriches 
 
 demand for manual labour and all other agents of production, the field 
 
 for the 
 
 eld 
 
 For it will much increase the national dividend, which is the employ,- 
 common source of the demand for all ; and since by its in-J2jjjJ r * V 
 creased competition for employment it will have forced doro. 
 the rate of interest, therefore the joint product of a dose of 
 capital and labour will now be divided more in favour of 
 labour than before. 
 
 This new demand for labour will partly take the form of 
 the opening-out of new undertakings which hitherto could 
 not have paid their way. It will, for instance, lead to the 
 making of railways and waterworks in districts which are not 
 very rich, and which would have continued to drag their goods 
 along rough roads, and draw up their water from wells, if 
 people had not been able and willing to support labour while 
 making railway embankments and water conduits, and to 
 wait for the fruits of their investment long and for a rela- 
 tively low reward. 
 
 Another part of this new demand for labour will come 
 from the makers of new and more expensive machinery in all 
 branches of production. For when it is said that machinery 
 is substituted for labour, this means that one class of labour 
 combined with much waiting is substituted for another com- 
 bined with less waiting : and for this reason alone, it would 
 be impossible to substitute capital for labour in general, 
 except indeed locally by the importation of capital from other 
 places. 
 
 It remains true however that the chief benefit which 
 capital confers upon labour is not by opening out to it new 
 employments, but by increasing the joint product of land, 
 labour and capital (or of land, labour and waiting), and by 
 reducing the share of that product which any given amount 
 of capital (or of waiting) can claim as its reward. 
 
 6. In discussing the influence which a change in the An in- 
 i supply of work of any one industrial group exerts on the 
 field of employment for other kinds of labour, there was no QJ 
 
752 
 
 GENERAL VIEW OF DISTRIBUTION. 
 
 BOOK VI. 
 CH. XI. 
 
 group of 
 workers 
 has similar 
 results on 
 other 
 workers, 
 
 but very 
 different 
 results on 
 them- 
 selves. 
 
 Relations 
 between 
 the in- 
 terests of 
 different 
 classes of 
 workers 
 in the 
 
 trade. 
 
 need to raise the question whether the increase of work came 
 from an increase in the numbers or in the efficiency of those 
 in the group : for that question is of no direct concern to the 
 others. In either case there is the same addition to the 
 national dividend : in either case competition will compel 
 them to force themselves to the same extent into uses in 
 which their marginal utility is lower ; and will thus lessen to 
 the same extent the share of the joint product which they 
 are able to claim in return for a given amount of work of a 
 given kind. 
 
 But the question is of vital importance to the members 
 of that group. For, if the change is an increase of one-tenth 
 in their average efficiency, then each ten of them will have 
 as high an aggregate income as each eleven of them would 
 have if their numbers had increased by one-tenth, their 
 efficiency remaining unchanged 1 . 
 
 We shall have to look at some other aspects of this ques- 
 tion in the next chapter while discussing the relative merits 
 of increased leisure and increased material production as 
 aims of progress. 
 
 7. But meanwhile we must stay to consider in relation 
 to one another the interests of different industrial classes 
 engaged in the same trade. 
 
 This solidarity is a special case of the general fact that 
 the demand for the several factors of production of any com- 
 modity is a joint demand, and we may refer back to the 
 illustration of this general fact which is given in Book v. Ch. 
 VI. We there saw how a change in the supply of (say) 
 plasterers' labour would affect the interests of all other 
 branches of the building trades in the same way, but much 
 more intensely than it would the general public. The fact 
 is that the incomes derived from the specialized capital and 
 the specialized skill belonging to all the various industrial 
 
 1 Suppose, for instance, that an increase in the supply of work of the group by 
 one-tenth forced them into work in which their marginal uses were lower, and 
 thus lowered by a thirtieth their wages for any given amount of work ; then, if the 
 change came from an increase in their numbers, their average wages would fall by 
 a thirtieth. But if it came from an increase in their efficiency, their wages would 
 rise by about a fifteenth. (More exactly they would be j^x$4 = l-^fr of what 
 they were before.) 
 
SHARES IN THE GAINS OF A BUSINESS. 753 
 
 classes engaged in producing houses, or calico, or anything BOOK vi. 
 else, depend very much on the general prosperity of the '. _ 
 trade. And in so far as this is the case they may be regarded 
 for short periods as shares of a composite or joint income 
 of the whole trade. The share of each class tends to rise 
 when this aggregate income is increased by an increase in 
 their own efficiency or by any external cause. But when 
 the aggregate income is stationary, and any one class gets a 
 better share than before, it must be at the expense of the 
 others. This is true of the whole body of those engaged in 
 any trade ; and will be found to be true in a special sense of 
 those who have spent a great part of their lives in working 
 together in the same business establishment. 
 
 8 8. The earnings of a successful business, looked at from The gains 
 
 of L 
 
 the point of view of the undertaker himself, are the aggre- business 
 gate of the earnings, firstly, of his own ability, secondly, of 
 
 his plant and other material capital, and thirdly, of his busi- ^ e e m ' 
 ness organization and connection. But really it is more than arise from 
 the sum of these. For his efficiency depends partly on his different 
 being in that particular business ; and if he were to sell it at 8C 
 a fair price, and then engage himself in another business, his 
 income would probably be much diminished. 
 
 The point of view of the undertaker however does not But there 
 include the whole gains (or quasi-rents) of the business : for part of it 
 there is another part which attaches to his employees. Attaches 
 
 Indeed, in some cases and for some purposes, nearly the whole ees 
 
 income of a business may be regarded as a quasi-rent, that is **& would 
 an income determined. for the time by the state of the market if they 
 for its wares, with but little reference to the cost of prepar- other em- 
 ing for their work the various things and persons engaged P 1 y ment - 
 in it. In other words it is a composite quasi-rent 1 divisible 
 among the different persons in the business by bargaining, 
 supplemented by custom and by notions of fairness results 
 which are brought about by causes, that bear some analogy 
 to those that, in early forms of civilization, have put the pro- 
 ducer's surplus from the land almost permanently into the 
 hands not of single individuals, but of cultivating firms. 
 
 i Compare Book v. Ch. x. 4. 
 M. 48 
 
754 GENERAL VIEW OF DISTRIBUTION. 
 
 BOOK vi. Thus the head clerk in a business often has an acquaint- 
 CH " "' ance with men and things, the use of which he could sell at 
 a high price to rival firms : but on the other hand it may be 
 of a kind to be of no value save to the business in which 
 he already is ; and then his departure would perhaps injure 
 it by several times the value of his salary, while probably 
 he could not get half that salary elsewhere. And when a 
 firm has a speciality of its own, many of its ordinary workmen 
 would lose a great part of their wages by going away, and at 
 the same time injure the firm seriously. The chief clerk 
 may be taken into partnership, and the whole of the em- 
 ployees may be paid partly by a share in the profits of the 
 concern ; but whether this is done or not, their earnings are 
 determined, not so much by competition and the direct action 
 of the law of substitution, as by a bargain between them and 
 their employers, the terms of which are theoretically arbitrary. 
 In practice however they will probably be governed by a 
 desire to " do what is right," that is, to agree on payments 
 that represent the normal earnings of such ability, industry 
 and special training as the employees severally possess, with 
 something added if the fortunes of the firm are good, and 
 something subtracted if they are bad. 
 
 -When It is important to see how the position of such employees 
 
 would be differs fr m that of others, whose services would be of almost 
 no such equal value to any business in a large trade. The income of 
 
 loss, the J 
 
 quasi-rent one of these in any week consists, as we have seen, partly of 
 
 employees' a recompense for the fatigue incurred by the work of that 
 
 depends week, and partly of a quasi-rent of his specialized skill and 
 
 ros h erit a ^^y : an( ^' assuming competition to be perfectly efficient, 
 
 of the this quasi-rent is determined by the price which either his 
 
 general, present employers, or any other, would be willing to pay for 
 
 his services in the state in which the market for their wares 
 
 is during that week. The prices that have to be paid for 
 
 given work of a given kind being thus determined by the 
 
 general conditions of the trade, these prices enter into the 
 
 direct outgoings which have to be deducted from its gross 
 
 earnings in order to ascertain the quasi-rent of this particular 
 
 firm at the time. But in the rise or fall of that quasi-rent 
 
 the employees would have no share. 
 
SHARES IN THE GAINS OF A BUSINESS. 755 
 
 But in fact competition is not thus perfectly efficient. BOOKVI. 
 Even where the same price is paid all over the market for the '. 
 same work with the same machinery, the prosperity of a firm 
 increases the chance of advancement for each of its employees, 
 and also his chance of continuous employment when trade is 
 slack, and much-coveted overtime when trade is good. 
 
 Thus there is de facto some sort of profit-and-loss Profit- 
 sharing between almost every business and its employees ; s 
 and perhaps this is in its very highest form when, without 
 being embodied in a definite contract, the solidarity of 
 interests between those who work together in the same busi- 
 ness is recognized with cordial generosity as the result of 
 true brotherly feeling. But such cases are not very common ; 
 and as a rule the relations between employers and employed 
 are raised to a higher plane both economically and morally 
 by the adoption of the system of profit-sharing; especially 
 when it is regarded as but a step towards the still higher but 
 much more difficult level of true co-operation. 
 
 9. If the employers in any trade act together and so when em- 
 do the employed, the solution of the problem of wages 
 becomes indeterminate. The trade as a whole may be 
 
 regarded as receiving a quasi-rent consisting of the excess of the divi- 
 
 .... . sion of the 
 
 the aggregate price which it can get for such wares as it pro- whole 
 duces over what it has to pay to other trades for the raw thetrade f 
 
 materials &c. it buys l ; and there is nothing but bargaining 
 to decide the exact shares in which this should go to employers arbitrary 
 and employed. No lowering of wages will be permanently 
 in the interest of employers, which is unnecessary and drives 
 many skilled workers to other markets, or even to other 
 industries in which they abandon the quasi-rent of their 
 special skill ; and wages must be high enough in an average 
 year to attract young people to the trade. This sets lower 
 limits to wages, and upper limits are set by corresponding 
 necessities as to the supply of capital and business power. 
 But what point between these limits should be taken at any 
 time can be decided only by higgling and bargaining ; which 
 
 1 Regarding the whole trade as a "nation," this becomes the national dividend : 
 and this analogy is of service when the pure theory of international commerce is 
 applied to the relations between different trades in the same country. 
 
 482 
 
756 GENERAL VIEW OF DISTRIBUTION. 
 
 BOOK vi. are however likely to be tempered somewhat by ethico-pru- 
 CH ' "' dential considerations, especially if there be a good Court of 
 conciliation in the trade. 
 
 The case is in practice even more complex, because each 
 group of employees is likely to have its own union, and to 
 fight for its own hand. The employers act as buffers : but a 
 strike for higher wages on the part of one group may, in 
 effect, strike the wages of some other group almost as hard 
 as the employers' profits. 
 
 We must postpone the consideration of the causes and 
 effects of trade combinations and of alliances and counter- 
 alliances among employers and employed, as well as among 
 traders and manufacturers. They present a succession of 
 picturesque incidents and romantic transformations, which 
 arrest public attention and seem to indicate a coming change 
 of our social arrangements now in one direction and now in 
 another ; and their importance is certainly great and grows 
 rapidly. But it is apt to be exaggerated ; for indeed many 
 of them are little more than eddies, such as have always 
 fluttered over the surface of progress. And though they are 
 on a larger and more imposing scale in this modern age 
 than before ; yet now, as ever, the main body of movement 
 depends on the deep silent strong stream of the tendencies 
 of normal distribution and exchange ; which " are not seen," 
 but which control the course of those episodes which " are 
 seen." For even in conciliation and arbitration, the central 
 scientific difficulty is to discover what is that normal level 
 from which the decisions of the Court must not depart far 
 under penalty of destroying their own authority 1 . 
 
 1 See Mr L. L. Price's Industrial Peace and a Preface to it by the present 
 writer. 
 
CHAPTER XII. 
 
 THE INFLUENCE OF PROGRESS ON VALUE. 
 
 1. THE field of employment which any place offers BOOKVI. 
 for labour and capital depends, firstly, on its natural re- c ^_^ 1 ' 
 sources ; secondly, on the power of turning them to good Jf^ 6 ^ . 
 
 account, derived from its progress of knowledge and of m ent for 
 
 . . . . , . , x- j XT.- ji capital and 
 
 social and industrial organization ; and thirdly, on the access labour 
 that it has to markets in which it can sell those things of 
 which it has a superfluity. The importance of this last con- 
 dition is often underrated; but it stands out prominently 
 when we look at the history of new countries. 
 
 It is commonly said that wherever there is abundance of is not 
 good land to be had free of rent, and the climate is not un- 
 healthy, the real earnings of labour and the interest on 
 capital must both be high. But this is only partially true. no g od 
 The early colonists of America lived very hardly. Nature gave the mar- 
 them wood and meat almost free : but they had very few of tkVoid 
 the comforts and luxuries of life. And even now there are, World - 
 especially in South America and Africa, many places to which 
 Nature has been abundantly generous, which are nevertheless 
 shunned by labour and capital, because they have no ready 
 communications with the rest of the world. On the other 
 hand high rewards may be offered to capital and labour by a 
 mining district in the midst of an alkaline desert, when once 
 communications have been opened up with the outer world, 
 or again by a trading centre on a barren sea-coast ; though, 
 if limited to their own resources, they could support but a 
 scanty population, and that in abject poverty. And the 
 splendid markets which the Old World has offered to the 
 
758 THE INFLUENCE OF PROGRESS ON VALUE. 
 
 BOOK vi. products of the New, since the growth of steam conimuni- 
 CH^XII. cat - onj nave rendered North America and Australia the 
 richest large fields for the employment of capital and labour 
 that there have ever been. 
 
 Old conn- But after all the chief cause of the modern prosperity of 
 amarkeT new countries lies in the markets that the old world offers, 
 gagesof not f r gd s delivered on the spot, but for promises to 
 the future deliver goods at a distant date. A handful of colonists 
 
 incomes 
 
 of a new having assumed rights of perpetual property in vast tracts of 
 Q ry> rich land, are anxious to reap in their own generation its 
 future fruits ; and as they cannot do this directly, they do it 
 indirectly, by selling in return for the ready goods of the old 
 world promises to pay much larger quantities of the goods 
 and the that their own soil will produce in a future generation. In 
 influx^ one f orm or another they mortgage their new property to the 
 Sto'the ^ WOI> ld at a very high rate of interest. Englishmen and 
 latter others, who have accumulated the means of present enjoy- 
 ment, hasten to barter them for larger promises in the future 
 than they can get at home : a vast stream of capital flows 
 to the" new country, and its arrival there raises the rate of 
 wages very high. The new capital filters but slowly towards 
 the outlying districts : it is so scarce there, and there are so 
 many persons eager to have it, that it often commands for a 
 long time two per cent, a month, from which it falls by 
 gradual stages down to six, or perhaps even five per cent., a 
 raises daily year. For the settlers being full of enterprise, and seeing 
 tne i r wav to acquiring private title-deeds to property that 
 will shortly be of great value, are eager to become independent 
 undertakers, and if possible employers of others ; so wage- 
 earners have to be attracted by high wages, which are paid 
 in a great measure out of the commodities borrowed from 
 the old world on mortgages, or in other ways. 
 but labour It is, however, difficult to estimate exactly the real rate of 
 wages in outlying parts of new countries. The workers are 
 
 ficient. picked men w ^h a natural bias towards adventure; hardy, 
 resolute, and enterprising ; men in the prime of life, who do 
 not know what illness is; and the strain of one kind and 
 another which they go through, is more than the average 
 English, and much more than the average European labourer 
 
CAUSES OF HIGH WAGES IN NEW COUNTEIES. 759 
 
 could sustain. There are no poor among them, because there BOOK vi. 
 
 are none who are weak : if anyone becomes ailing, he is forced J ' 
 
 to retire to some more thickly-peopled place where there is 
 less to be earned, but where also a quieter and less straining 
 life is possible. Their earnings are very high if reckoned in 
 money; but they have to buy at very high prices, or 
 altogether dispense with, many of the comforts and luxuries 
 which they would have obtained freely, or at low prices, if 
 they had lived in more settled places. But it is true that 
 many of these things are of but little real utility, and can be 
 easily foregone, where no one has them and no one expects 
 them. 
 
 As population increases, the best situations being already As time 
 occupied, nature gives generally less return of raw produce though the 
 to the marginal effort of the cultivators ; and this tends a j mi f ish _ 
 
 little to lower wages. But even in agriculture the law of in s return 
 
 may not be 
 increasing return is constantly contending with that of acting very 
 
 diminishing return, and many of the lands which were neg- s 
 lected at first, give a generous response to careful cultivation 1 ; 
 and meanwhile the development of roads and railroads, and 
 the growth of varied markets and varied industries, render 
 possible innumerable economies in production. Thus the 
 actions of the laws of increasing and diminishing return 
 appear pretty well balanced, sometimes the one, sometimes 
 the other being the stronger. 
 
 There is no reason so far why there should be any fall in 
 the rate of real wages for labour of a given efficiency. For if, 
 taking one thing with another, the law of production is that 
 of constant return, there will be no change in the reward to 
 be divided between a dose of capital and labour ; that is, be- 
 tween capital and labour working together in the same pro- 
 portions as before. And, since the rate of interest has fallen, 
 the share which capital takes of this stationary joint reward 
 is less than before ; and therefore the amount of it remaining 
 for labour is greater. 
 
 Of course the aggregate share of capital may have in- 
 creased. For instance, while labour has doubled capital may 
 have quadrupled, and the rate of interest may be two-thirds 
 
 1 Comp. Book iv. Ch. HI. 5, 6. 
 
760 
 
 THE INFLUENCE OF PROGRESS ON VALUE. 
 
 BOOK VI. 
 CH. XII. 
 
 the influx 
 of capital 
 becomes 
 relatively 
 slower and 
 wages tend 
 to fall. 
 
 And time 
 
 measured 
 in money 
 f all faster 
 than real 
 efficiency 
 wages. 
 
 England's 
 present 
 industrial 
 problems 
 are a de- 
 velopment 
 of those of 
 the last 
 century. 
 
 of what it was ; and then, though each dose of capital gets a 
 lower reward by one-third, and leaves for labour a larger share 
 of the joint product of a dose of capital and labour, the aggre- 
 gate share of capital will have risen in the ratio of eight to 
 three 1 . 
 
 But whether the law of production of commodities be one 
 of constant return or not, that of the production of new title- 
 deeds to land is one of rapidly diminishing return. The 
 influx of foreign capital, though perhaps as great as ever, 
 becomes less in proportion to the population ; wages are no 
 longer paid largely with commodities borrowed from the old 
 world : and this is the chief reason of the subsequent fall in 
 the necessaries, comforts and luxuries of life which can be 
 earned by work of a given efficiency. But there are two 
 other causes tending to lower average daily wages measured 
 in money. The first is, that as the comforts and luxuries of 
 civilization increase, the average efficiency of labour is lowered 
 by the influx of immigrants of a less sturdy character than 
 the earlier settlers. And the second is, that many of these 
 new comforts and luxuries do not enter directly into money 
 wage, but are an addition to it. We took account of them 
 when arriving at the conclusion that the action of the law of 
 increasing return would on the whole countervail that of 
 diminishing return : and we ought to count them in at their 
 full value when tracing the changes in real wages. Many 
 historians have compared wages at different epochs with ex- 
 clusive reference to those things which have always been in 
 common consumption. But from the nature of the case, it 
 is just these things to which the law of diminishing return 
 applies; and which tend to become scarce as population 
 increases. The view thus got is one-sided and misleading in 
 its general effect. 
 
 2. The influence which access to distant markets exerts 
 on the growth of the national dividend has been conspicuous 
 in the history of England also. Her present economic con- 
 dition is the direct result of those tendencies to production 
 on a large scale, and to wholesale dealings in labour as well 
 
 1 Much of the argument of Mr Henry George's Progress and Poverty is vitiated 
 by his having overlooked this distinction. 
 
ENGLAND'S GAINS FROM CHEAP TRANSPORT. 761 
 
 as in goods which had long been slowly growing ; but which BOOK vi. 
 in the eighteenth century received a twofold impetus from CH ' x 
 mechanical inventions, and the growth of consumers beyond 
 t^e seas, who imported large quantities of goods of the same 
 pattern 1 . Then were the first beginnings of that system of 
 interchangeable parts, and the application of special machinery 
 to make the special machinery by which nearly everything 
 in common use is made. Then first was seen the full force 
 which the law of increasing return gives in a manufacturing 
 country with localized industries and large capitals ; particu- 
 larly when many of the large stocks of capital are combined 
 together either into Joint-stock or Regulated companies, or 
 into modern Trusts. And then began that careful " grading " 
 of goods for sale in distant markets, which has already led to 
 national and even international speculative combinations in 
 produce markets and stock-exchanges; and the future of 
 which no less than that of more lasting combinations among 
 producers, whether undertakers of industry or working men, 
 is the source of some of the gravest practical problems with 
 which the coming generation will have to deal. 
 
 The key-notes of the modern movement are the reduction The key- 
 of a great number of tasks to one pattern ; the diminution of the modern 
 friction of every kind which might hinder powerful agencies m 
 from combining their action and spreading their influence 
 over vast areas; and the development of transport by new 
 methods and new forces. The macadamized roads and the 
 improved shipping of the eighteenth century broke up local 
 combinations and monopolies, and offered facilities for the 
 growth of others extending over a wider area : and in our 
 own age the same double tendency is resulting from every 
 new extension and cheapening of communication by land 
 and sea, by printing-press and telegraph. 
 
 3. But though in the eighteenth century, as now, the in the 
 real national dividend of England depended much on the century 
 action of the law of increasing return with regard to her trade gn 
 exports, the mode of dependence has very much changed, 
 
 Then England had something approaching to a monopoly of part of the 
 the new methods of manufacture ; and each bale of her goods dividend 
 
 i Comp. Book i. Ch. in. 4. 
 
762 THE INFLUENCE OF PROGRESS ON VALUE. 
 
 BOOK vi. would be sold at all events when their supply was arti- 
 ii m ited in return for a vast amount of the produce 
 countries. But, partly because the time was not 
 
 comforts y e t ripe for carrying bulky goods great distances, her imports 
 ries. from the far-east and the far-west consisted chiefly of com- 
 
 forts and luxuries for the well-to-do; they had but little 
 direct effect in lowering the labour-cost of necessaries to 
 the English workman. Indirectly indeed her new trade 
 lowered the cost of hardware, clothing and such other English 
 manufactures as he consumed ; because the production on 
 a large scale of these things for consumers beyond the sea 
 cheapened them for him. But it had very little effect on 
 the cost of his food ; and that was left to rise under the law 
 of diminishing return, which was called into action by the 
 rapid increase of population, caused by the growth of new 
 manufacturing centres where there were not the customary 
 restraints of a narrow village life. And a little later the 
 great French war, and a series of bad harvests, raised that 
 cost to much the highest point it has ever reached in 
 Europe. 
 
 But now . But gradually the influence of foreign trade began to tell 
 England an on the cos t f production of our staple food. As the popula- 
 command ^ on ^ America spread westward from the Atlantic, richer 
 over neces- and still richer wheat soils have come under cultivation ; and 
 the economies of transport have increased so much, especially 
 in recent years, that the total cost of importing a quarter of 
 wheat from the farms on the outskirts of cultivation has 
 diminished rapidly, though the distance of that margin has 
 been increasing. And thus England has been saved from 
 the need of more and more intensive cultivation. The bleak 
 hill-sides, up which the wheat fields were laboriously climb- 
 ing in Ricardo's time, have returned to pasture ; and the 
 ploughman works now only where land will yield plentiful 
 returns to his labour : whereas if England had been limited 
 to her own resources, he must have plodded over ever poorer 
 and poorer soils, and must have gone on continually re- 
 ploughing land that had already been well ploughed, in the 
 hope of adding by this heavy toil an extra bushel or two to 
 the produce of each acre. Perhaps in an average year now, 
 
ENGLAND'S GAINS FROM CHEAP TRANSPORT. 763 
 
 the ploughing which only just pays its expenses, the plough- BOOKVI. 
 
 ing " on the margin of cultivation " gives twice as much _J 
 
 produce as it gave in Ricardo's time, and five times as much 
 or more, as it would have given now if with her present 
 population England had been compelled to raise all her own 
 food. 
 
 4. Every improvement in the manufacturing arts in- England 
 creases England's power of meeting the various wants of i e *gf ban 
 backward countries ; so that it answers their purpose to at **" 
 divert their energies from making things by hand for their from tne 
 own use, to growing raw material with which to buy manu- improve- 
 factures from her. In this way the progress of invention nianufac- 
 opens a wider field for the sale of her special products, and tures> 
 enables her more and more to confine her own production of 
 food to conditions under which the law of diminishing return 
 does not make itself much felt. But the same is not true of 
 OUT trade -with America, who quickly follows if she does not 
 anticipate, England's improvements. The Bessemer, and 
 other new processes, have enabled England to make steel 
 that will push its way further than it could before in India 
 and China, but not in America. The amount of food and other 
 raw material which can be bought in Illinois with a ton of 
 steel cannot be more than the produce of as much capital 
 and labour as would make a ton of steel in Illinois by the 
 new processes ; and therefore it has fallen as the efficiency 
 of English and American labour in making steel has increased. 
 It is for this reason, as well as because of the heavy tariffs 
 levied on her goods by many countries, that in spite of 
 England's large trade, the progress of invention in the manu- 
 facturing arts has added less than might have been otherwise 
 expected to her real national dividend. 
 
 It is no slight gain that she can make cheaply clothes 
 and furniture and other commodities for her own use: but 
 those improvements in the arts of manufacture which she 
 has shared with other nations, have not directly increased 
 the amount of raw produce which she can obtain from other 
 countries with the product of a given quantity of her own 
 capital and labour. Probably more than three-fourths of the 
 whole benefit she has derived from the progress of manu- 
 
764 THE INFLUENCE OF PROGRESS ON VALUE. 
 
 BOOK vi. factures during the present century has been through its 
 
 CH^XII. j n( j- rec influences in lowering the cost of transport of men 
 
 2t r ains anc ^ gds, of water and light, of electricity and news; for the 
 
 have come dominant economic fact of our own age is the development 
 
 from the . 
 
 cheapening not of the manufacturing, but of the transport industries. 
 port of 8 It is these that are growing most rapidly in aggregate 
 
 volume and in individual power, and which are giving rise 
 to the most anxious questions as to the tendencies of large 
 capitals to turn the forces of economic freedom to the de- 
 struction of that freedom : but, on the other hand, it is they 
 also which have done by far the most towards increasing 
 England's wealth. 
 Some of the 8 5. Thus the new economic asre has brought with it 
 
 influences 
 
 of progress great changes in the relative values of labour and the chief 
 normal requisites of life ; and many of these changes are of a charac- 
 vahies: * er which could not have been anticipated at the beginning 
 century. The America then known was ill-suited for 
 
 requisites growing wheat ; and the cost of carrying it great distances 
 civilized by land was prohibitive. The labour value of wheat that is 
 
 the amount of labour which will purchase a peck of wheat 
 was then at its highest point, and now is at its lowest. It 
 would appear that agricultural wages have been generally 
 below a peck of wheat a day ; but that in the first half of the 
 eighteenth century they were about a peck, in the fifteenth a 
 peck and a-half or perhaps a little more, while now they are 
 two or three pecks. Prof. Rogers's estimates for the middle 
 ages are higher: but he seems to have taken the wages of 
 the more favoured part of the population as representative of 
 the whole. In the middle ages, even after a fairly good har- 
 vest, the wheat was of a lower quality than the ordinary wheat 
 of to-day ; while after a bad harvest much of it was so musty 
 that now-a-days it would not be eaten at all ; and the wheat 
 seldom became bread without paying a high monopoly charge 
 to the mill belonging to the lord of the manor. 
 
 meat, It is true that, where population is very sparse, nature 
 
 supplies grass and therefore animal food almost gratis ; and 
 in South America beggars pursue their calling on horseback. 
 During the middle ages however the population of England 
 was always dense enough to give a considerable labour value 
 
LABOUR VALUES OF SOME LEADING COMMODITIES. 765 
 
 to meat, though it was of poor quality. For cattle, though BOOK vi. 
 
 only aboijt a fifth as heavy as now, had 'very large frames : - ' 
 
 their flesh was chiefly in those parts from which the coarsest 
 joints come ; and since they were nearly starved in the winter 
 and fed up quickly on the summer grass, the meat contained 
 a large percentage of water, and lost a great part of its weight 
 in cooking. At the end of the summer they were slaugh- 
 tered and salted : and salt was dear. Even the well-to-do 
 scarcely tasted fresh meat during the winter 1 . A century 
 ago very little meat was eaten by the working classes ; while 
 now, though its price is a little higher than it was then, they 
 probably consume more of it, on the average, than at any 
 other time in English history. 
 
 Turning next to the rent of house room, we find that house 
 ground-rents in towns have risen, both extensively and in- " 
 tensively. For an increasing part of the population is living 
 in houses on which ground-rents at an urban scale have to be 
 paid, and that scale is rising. But house rent proper, that is 
 what remains of the total rent after deducting the full rental 
 value of the ground, is probably little, if at all, higher than 
 at any previous time for similar accommodation ; for the 
 rate of profits on the turnover which is earned by capital 
 engaged in building is now low, and the labour cost of build- 
 ing materials has not much altered. And it must be re- 
 membered that those who pay the high town rents get in 
 return the amusements and other advantages of modern town 
 life, which many of them would not be willing to forego for 
 the sake of a much greater gain than their total rent. 
 
 The labour value of wood, though lower than at the 
 beginning of the century, is higher than in the middle ages : 
 but that of mud, brick or stone walls has not much changed ; 
 while that of iron to say nothing of glass has fallen much. 
 
 And indeed the popular belief that house rent proper has 
 risen, appears to be due to an imperfect acquaintance with 
 the way in which our forefathers were really housed. The 
 
 1 It is a significant fact that rabbits, which were probably neither better nor 
 worse than in our own time, were then ten times as dear relatively to an ox as 
 now. Their furs were highly prized, but only counted for a quarter of their whole 
 value. (Rogers's History, Vol. i. p. 583.) 
 
766 THE INFLUENCE OF PROGRESS ON VALUE. 
 
 BOOK vi. modern suburban artisan's cottage contains sleeping accom- 
 c ^l^ 1 ' modation far superior to that of the gentry in tj^e middle 
 ages ; and the working classes had then no other beds than 
 loose straw, reeking with vermin, and resting on damp mud 
 floors. But even these were probably less unwholesome, 
 when bare and shared between human beings and live stock, 
 than when an attempt at respectability covered them with 
 rushes, which were nearly always vile with long accumulated 
 refuse. It is undeniable that the housing of the very poorest 
 classes in our towns now is destructive both of body and 
 soul : and that with our present knowledge and resources we 
 have neither cause nor excuse for allowing it to continue. 
 And it is true that in earlier times bad housing was in so far 
 a less evil than now, as those who were badly housed by night 
 had abundant fresh air by day. But a long series of records, 
 ending with the evidence of Lord Shaftesbury and others 
 before the recent Commission on the housing of the poor, 
 establishes the fact that all the horrors of the worst dens of 
 modern London had their counterpart in worse horrors of the 
 lairs of the lowest stratum of society in every previous age. 
 
 fuel, Fuel, like grass, is often a free gift of nature to a sparse 
 
 population ; and during the middle ages the cottagers could 
 generally, though not always, get the little brushwood fire 
 needed to keep them warm as they huddled together round 
 it in huts which had no chimney through which the heat 
 could go to waste. But as population increased the scarcity 
 of fuel pressed heavily on the working classes, and would 
 have arrested England's progress altogether, had not coal 
 been ready to take the place of wood as fuel for domestic 
 purposes, as well as for smelting iron. It is now so cheap 
 that even the comparatively poor can keep themselves warm 
 indoors without living in an unwholesome and stupefying 
 atmosphere. 
 
 clothing, This is one of the great services that coal has wrought 
 
 for modern civilization. Another is to provide cheap under- 
 clothing, without which cleanliness is impossible for the 
 masses of the people in a cold climate : and that is perhaps 
 the chief of the benefits that England has gained from the 
 direct application of machinery to making commodities for 
 
LABOUR VALUES OF SOME LEADING COMMODITIES. 767 
 
 her own use. Another, and not less important service, is to BOOK vi. 
 provide abundant water, even in large towns 1 ; and another to _ ' 
 supply, with the aid of mineral oil, that cheap and artificial water > 
 light which is needed not only for some of man's work, but, light, 
 what is of higher moment, for the good use of his evening 
 leisure. To this group of requisites for a civilized life, 
 derived from coal on the one hand, and modern means of 
 transport on the other, we must add, as has just been 
 noticed, the cheap and thorough means of communication of 
 news and thought by steam-presses, by steam-carried letters news and 
 and steam-made facilities for travel. We have already re- 
 ferred to these agencies, aided by electricity, as rendering 
 possible the civilization of the masses in countries the climate 
 of which is not so warm as to be enervating; and as pre- 
 paring the way for true self-government and united action by 
 the whole people, not merely of a town such as Athens, 
 Florence or Bruges, but of a broad country, and even in some 
 respects of the whole civilized world 2 . 
 
 6. We have seen that the national dividend is at The influ- 
 ence the aggregate net product of, and the sole source of 
 payment for, all the agents of production within the country ; 
 
 that the larger it is, the larger, other things being equal, the chief 
 will be the share of each agent of production, and that an produc- 
 increase in the supply of any agent will generally lower its 
 i price, to the benefit of other agents. 
 
 This general principle is specially applicable to the case it has 
 of land. An increase in the amount of productiveness of lowered the 
 ; the land that supplies any market redounds in the first English 
 i instance to the benefit of those capitalists and workers who agricul- 
 
 r . tural land, 
 
 I are in possession of other agents of production for the same 
 ! market. And the influence on values which has been ex- 
 i erted in the modern age by the new means of transport is 
 nowhere so conspicuous as in the history of land ; its value 
 | rises with every improvement in its communications with 
 
 1 Primitive appliances will bring water from high ground to a few public 
 fountains: but the omnipresent water supply which both in its coming and its 
 going performs essential services for cleanliness and sanitation, would be im- 
 possible without coal-driven steam-pumps and coal-made iron pipes. 
 
 2 Book i. Ch. n. 6, 7. 
 
768 THE INFLUENCE OF PROGRESS ON VALUE. 
 
 BOOK vi. markets in which its produce can be sold, and its value falls 
 CH ' xn ' with every new access to its own markets of produce from 
 more distant places. It is not very long ago that the home 
 counties were full of fears that the making of good roads 
 would enable the more distant parts of England to compete 
 with them in supplying London with food ; and now the 
 differential advantages of English farms are in some respects 
 being lowered by the importation of food that has travelled 
 on Indian and American railroads, and being carried in ships 
 made of Bessemer steel and driven by triple expansion 
 engines \ 
 
 but not of But as Malthus contended, and Ricardo admitted, any- 
 turai and thing that promotes the prosperity of the people promotes 
 taken toge- a l so i n ^ ne l n g run that f tne landlords of the soil. It is 
 ther. j. rue ^at English rents rose very fast when, at the beginning 
 of this century, a series of bad harvests struck down a people 
 that could not import their food ; but a rise so caused could 
 not from the nature of the case have gone very much further. 
 And the adoption of free trade in corn in the middle of the 
 century, followed by the expansion of American wheat-fields, 
 is rapidly raising the real value of the land urban and rural 
 taken together ; that is, it is raising the amount of the neces- 
 saries, comforts and luxuries of life which can be purchased 
 by the aggregate rental of all the landowners urban and rural 
 taken together 2 . 
 
 1 A somewhat similar case is that of many quiet summer resorts. Their humble 
 attractions absorbed the attention of neighbouring residents fifty years ago ; but 
 now they are impoverished by those modern facilities of travel which induce people 
 to take longer journeys in search of change of scene, and enrich more fashionable 
 and more distant resorts. As steam carriage favours those soils which are excep- 
 tionally fertile but distant from good markets, so it favours those pleasure resorts 
 which have exceptionally beautiful scenery, even though they are far away. 
 
 2 Mr W. Sturge (in an instructive paper read before the Institute of Sur- 
 veyors, Dec. 1872) estimates that the agricultural (money) rent of England 
 doubled between 1795 and 1815, and then feU by a third till 1822; after that time 
 it has been alternately rising and falling ; and it is now about 45 or 50 millions as 
 against 50 or 55 millions about the year 1873, when it was at its highest. It was 
 about 30 millions in 1810, 16 millions in 1770, and 6 millions in 1600. (Compare 
 Mr Giffen's Growth of Capital, Ch. v., and Porter's Progress of the Nation, 
 Sect. ii. Ch. i.) But the rental of urban land in England is now rather greater 
 than the rent of agricultural land : and in order to estimate the full gain of the 
 landlords from the expansion of population and general progress, we must reckon 
 in the values of the land on which there are now railroads, mines, docks, &c. Taken 
 
CHANGES IN RENT AND INTEREST. 769 
 
 7. But though the development of the industrial en- BOOK vi. 
 vironment tends on the whole to raise the value of land, it CH ' xn> 
 
 more often than not lessens the value of machinery and Progress 
 other kinds of fixed capital, in so far as their value can be the value 
 separated from that of the sites on which they rest. A sud- appliances 
 den burst of prosperity may indeed enable the existing stock 
 of appliances in any trade to earn for a time a very high 
 income. But things which can be multiplied without limit from 
 cannot retain for long a scarcity value ; and if they are fairly sites ; 
 durable, as for instance ships and blast furnaces and textile 
 machinery, they are likely to suffer great depreciation from 
 the rapid progress of improvement. 
 
 The value of such things as railways and docks however but not if 
 depends in the long run chiefly on their situation. If that 
 is good, the progress of their industrial environment will 
 raise their net value even after allowance has been made for in - 
 the charges to which they may be put in keeping their 
 appliances abreast of the age 1 . 
 
 8. Political Arithmetic may be said to have begun it has 
 in England in the seventeenth century ; and from that time creased to 
 onwards we find a constant and nearly steady increase in the ^ P ftd f 
 amount of accumulated wealth per head of the population 2 . 
 
 Man, though still somewhat impatient of delay, has The 
 gradually become more willing to sacrifice ease or other wealth is 
 enjoyment in order to obtain them in the future. He jj 10 ^* 
 has acquired a greater " telescopic " faculty ; that is, he has increased 
 
 * r ^ f + A wi^g 8 
 
 acquired an increased power of realizing the future and to sacrifice 
 
 bringing it clearly before his mind's eye : he is more prudent, f r the 
 and has more self-control, and is therefore more inclined to future 
 estimate at a high rate future ills and benefits these 
 terms being used broadly to include the highest and lowest 
 affections of the human mind. He is more unselfish, and 
 
 all together, the money rental of England's soil is probably twice as high, and its 
 Real rental three or four times as high, as it was when the corn laws were repealed. 
 
 1 Of course there are exceptions. Economic progress may take the form of 
 building new railways that will draw off much of the traffic of some of those 
 already existing, or of increasing the size of ships till they can no longer enter 
 docks the entrance to which is through shallow waters. 
 
 2 See Book iv. Ch. vn. and especially the Note on the Statistics of the Growth 
 of Wealth. 
 
 M. 49 
 
770 THE INFLUENCE OF PROGRESS ON VALUE. 
 
 BOOK VI. 
 CH. XII. 
 
 therefore more inclined to work and save in order to secure 
 a future provision for his family ; and there are already faint 
 signs of a brighter time to come, in which there will be a 
 general willingness to work and save in order to increase the 
 stores of public wealth and of public opportunities for leading 
 a higher life. 
 
 in spite of But though he is more willing than in earlier ages to 
 fnglnSs incur present ills for the sake of future benefits, it is 
 doubtful whether we can now trace a continued increase in 
 ^he amount of exertion which he is willing to undergo for 
 the sake of obtaining positive pleasures, whether present or 
 future. During many generations the industry of the 
 Western World has steadily become more sedulous: holi- 
 days have diminished, the hours of work have increased, and 
 people have from choice or necessity contented themselves 
 with less and less search for pleasure outside their work. 
 But it would seem that this movement has reached its maxi- 
 mum, and is now declining. In all grades of work except the 
 very highest, people are getting to prize relaxation more 
 highly than before, and are becoming more impatient of the 
 fatigue that results from excessive strain; and they are 
 perhaps on the whole less willing than they used to be to 
 undergo the constantly increasing "discommodity" of very 
 long hours of work, for the sake of obtaining present luxuries. 
 These causes would make them less willing than before to 
 work hard in order to provide against distant needs, were it 
 not that there is an even more rapid increase in their power 
 of realizing the future, and perhaps though this is more 
 doubtful in their desire for that social distinction which 
 comes from the possession of some small store of accumu- 
 lated wealth 1 . 
 
 The in- This increase of capital per head tended to diminish its 
 
 capital has marginal utility, and therefore the rate of interest on new 
 its V pro- d investments ; but not uniformly, because there were mean- 
 portionate while great variations in the demand for capital, both for 
 
 though not .... 
 
 its total political and military and for industrial purposes. Thus the 
 rate of interest which was vaguely reported to be 10 per cent. 
 
 1 Compare two suggestive articles by Prof. Giddings in the Harvard Journal 
 of Economics for Jan. 1890 and Jan. 1891. 
 
EARNINGS OF SKILL AND TRAINED ABILITY. 771 
 
 during a great part of the middle ages, had sunk to 3 per BOOK vi. 
 cent, in the earlier half of the eighteenth century ; but the CE ^ 1 " 
 immense industrial and political demand for capital raised it 
 again, and it was relatively high during the great war. It 
 fell as soon as the political drain had ceased ; but it rose again 
 in the middle of this century, when railways and the de- 
 velopment of new countries made a great new demand for 
 capital. These new demands have not slackened; but the 
 rate of interest is again falling fast, in consequence of the 
 great recent accumulations of wealth in England, on the 
 Continent, and above all in America. 
 
 9. The growth of general enlightenment and of a sense There is a 
 of responsibility towards the young has turned a great deal faiHuThe 
 of the increasing wealth of the nation from investment as tSSSf * f 
 material capital to investment as personal capital. There abilitv - 
 has resulted a largely increased supply of trained abili- 
 ties, which has much increased the national dividend, and 
 raised the average income of the whole people : but it has 
 taken away from these trained abilities much of that scarcity 
 value which they used to possess, and has lowered their 
 earnings not indeed absolutely, but relatively to the general 
 advance ; and it has caused many occupations, which not long 
 ago were accounted skilled, and which are still spoken of as 
 skilled, to rank with unskilled labour as regards wages. 
 
 A striking instance is that of writing. It is true that 
 many kinds of office work require a rare combination of high 
 mental and moral qualities ; but almost any one can be easily 
 taught to do the work of a copying clerk, and probably there 
 will soon be few men or women in England who cannot write 
 fairly well. When all can write, the work of copying, which 
 used to earn higher wages than almost any kind of manual 
 labour, will rank among unskilled trades 1 . 
 
 1 In fact the better kinds of artisan work educate a man more, and will be 
 better paid than those kinds of clerk's work which call for neither judgment nor 
 responsibility. And, as a rule, the best thing that an artisan can do for his son is 
 to bring him up to do thoroughly the work that lies at his hand, so that he may 
 understand the mechanical, chemical or other scientific principles that bear upon 
 it ; and may enter into the spirit of any new improvement that may be made in it. 
 If his son should prove to have good natural abilities, he is far more likely to rise 
 to a high position in the world from the bench of an artisan than from the desk 
 of a clerk. 
 
 492 
 
772 
 
 THE INFLUENCE OF PROGRESS ON VALUE. 
 
 BOOK vi. 
 
 Earnings 
 
 in old and 
 
 familiar 
 occupa- 
 tofaii tend 
 
 
 Again a new branch of industry is often difficult simply 
 k ecause j t j s un familiar ; and men of great force and skill are 
 reau i re d to do work, which can be done by men of ordinary 
 
 ...,', , 
 
 capacity or even by women and children, when the track has 
 once been well beaten : its wages are high at first, but they 
 fall as it becomes familiar. And this has caused the rise of 
 average wages to be underrated, because it so happens that 
 many of the statistics, which seem typical of general move- 
 ments of wages, are taken from trades which were compara- 
 tively new a generation or two ago, and are now within 
 the grasp of men of much less real ability than those who 
 pioneered the way for them 1 . 
 
 The consequence of such changes as these is to increase 
 the number of those employed in occupations which are 
 called skilled, whether the term is now properly applied or 
 not : and this constant increase in the numbers of workers in 
 the higher classes of trades has caused the average of all 
 labour to rise much faster than the average of representative 
 wages in each trade 2 . 
 
 In the middle ages, though some men of great ability 
 remained artisans all their lives, and became artists ; yet as 
 a class the artisans ranked more nearly with the unskilled 
 
 1 Comp. Book iv. Ch. vi. 1, 2; and Ch. ix., especially 6. As the trade 
 progresses, improvements in machinery are sure to lighten the strain of ac- 
 complishing any given task; and therefore to lower task wages rapidly. But 
 meanwhile the pace of the machinery, and the quantity of it put under the charge 
 of each worker, may be increased so much that the total strain involved in the 
 day's work is greater than before. On this subject employers and employed 
 frequently differ. It is for instance certain that time wages have risen in the 
 textile trades ; but the employees aver, in contradiction to the employers, that the 
 strain imposed on them has increased more than in proportion. In this contro- 
 versy wages have been estimated in money; but when account is taken of the 
 increase in the purchasing power of money, there is no doubt that real efficiency 
 wages have risen ; that is, the exertion of a given amount of strength, skill and 
 energy is rewarded by a greater command over commodities than formerly. 
 
 2 This may be made clearer by an example. If there are 500 men in grade A 
 earning 12s. a week, 400 in grade B earning 25s. and 100 in grade C earning 40s. r 
 the average wages of the 1000 men are 20s. If after a time 300 from grade A have 
 passed on to grade B, and 300 from grade B to grade C, the wages in each grade 
 remaining stationary, then the average wages of the whole thousand men will be 
 about 28s. &d. And even if the rate of wages in each grade had meanwhile fallen 
 10 per cent., the average wages of all would still be about 25s. 6d., that is, would 
 have risen more than 25 per cent. Neglect of such facts as these, as Mr Giffen 
 has pointed out, is apt to cause great errors. 
 
EARNINGS OF VARIOUS INDUSTRIAL CLASSES. 773 
 
 labourers than they do now. At the beginning of the new BOOK vi. 
 industrial era a hundred years ago the artisans had lost much H ' XI " 
 of their old artistic traditions and had not yet acquired that 
 technical command over their instruments, that certainty and 
 facility in the exact performance of difficult tasks which 
 belong to the modern skilled artisan ; and observers early in 
 this century were struck by the social gulf that was opening 
 out between the artisan and the unskilled labourer. This rose 
 change was a consequence partly of the increase of the wages to 
 of the artisan, which rose to about double those of the un- 
 skilled labourer ; and partly of the same cause that secured 
 
 m J ning of the 
 
 him his high wages, that is the great increase in the demand century: 
 for highly skilled labour, especially in the metal trades, and 
 the consequent rapid absorption of the strongest characters 
 among the labourers and their children into the ranks of the 
 artisans ; for the breaking down, just at that time, of the old 
 exclusiveness of the artisans, had made them less than before 
 an aristocracy by birth and more than before an aristocracy 
 by worth. But about a generation ago, as has just been but now 
 explained, some of the simpler forms of skilled trades began dencyTs 
 to lose their scarcity value, as their novelty wore off; and at reversed - 
 the same time continually increasing demands began to 
 be made on the ability of those in some trades, that are 
 traditionally ranked as unskilled. The navvy for instance, 
 and even the agricultural labourer, have often to be trusted 
 with expensive and complicated machinery, which a little 
 while ago were thought to belong only to the skilled trades, 
 and the real wages of these two representative occupations 
 are rising fast 1 . 
 
 Again there are some skilled and responsible occupations, 
 such as those of the head heaters and rollers in iron works, 
 which require great physical strength, and involve much 
 discomfort : and in them wages are very high. For the 
 
 1 The rise of wages of agricultural labourers would be more striking than it is, 
 did not the spread of modern notions to agricultural districts cause many of the 
 ablest children born there to leave the fields for the railway or the workshop, to 
 become policemen, or to act as carters or porters in towns. Perhaps there is no 
 stronger evidence of the benefits of modern education and economic progress than 
 the fact that those who are left behind in the fields, though having less than an 
 average share of natural abilities, are yet able to earn much higher Real wages 
 than their fathers. 
 
774 
 
 THE INFLUENCE OF PROGRESS ON VALUE. 
 
 BOOK VI. 
 CH. XII. 
 
 There is a 
 relative 
 fall in the 
 wages of 
 elderly 
 men; 
 
 and a 
 rise in the 
 wages of 
 boys and 
 girls, 
 
 and of 
 women. 
 
 temper of the age makes those who can do high class work, 
 and can earn good wages easily, refuse to undergo hardship, 
 except for a very high reward. 
 
 10. We may next consider the changes in the relative 
 wages of old and young men, of women and children. 
 
 The conditions of industry change so fast that long expe- 
 rience is in some trades almost a disadvantage, and in many 
 it is of far less value than a quickness in taking hold of new 
 ideas and adapting one's habits to new conditions. In these 
 trades an elderly man finds it difficult to get employment 
 except when trade is brisk, at all events if he is a member 
 of a union which will not allow him to work for less than 
 the full wages of the district. In any case he is likely to 
 earn less after he is fifty years old than before he is thirty ; 
 and the knowledge of this is tempting artisans to follow the 
 example of unskilled labourers, whose natural inclination to 
 marry early has always been encouraged by the desire that 
 their family expenses may begin to fall off before their own 
 wages begin to shrink. Trades-unions are afraid that abuses 
 might creep in if they allowed men "with grey hairs" to 
 compete for employment at less than full wages ; but many 
 of them are coming to see that it is to their own interest, as 
 it certainly is to that of the community, that such men 
 should not be forced to be idle. 
 
 A second and even more injurious tendency of the same 
 kind is that of the wages of children to rise relatively to 
 those of their parents. Machinery has displaced many men, 
 but not many boys ; the customary restrictions which ex- 
 cluded them from some trades are giving way; and these 
 changes, together with the spread of education, while doing 
 good in almost every other direction, are doing harm in this 
 that they are enabling boys, and even girls, to set their 
 parents at defiance and start in life on their own account. 
 
 The wages of women are for similar reasons rising fast 
 relatively to those of men. And this is a great gain in so 
 far as it tends to develop their faculties; but an injury in 
 so far as it tempts them to neglect their duty of building up 
 a true home, and of investing their efforts in the personal 
 capital of their children's character and abilities. 
 
EARNINGS OF VARIOUS INDUSTRIAL CLASSES. 775 
 
 * 
 11. The relative fall in the incomes to be earned by BOOK vx. 
 
 moderate ability, however carefully trained, is accentuated ' 
 by the rise in those that are obtained by many men of 
 
 extraordinary ability. There never was a time at which ceptional 
 
 genius are 
 
 moderately good oil paintings sold more cheaply than now, rising, 
 and there never was a time at which first-rate paintings sold 
 so dearly. A business man of average ability and average 
 good fortune gets now a lower rate of profits on his capital 
 than at any previous time; while yet the operations, in 
 which a man exceptionally favoured by genius and good luck 
 can take part, are so extensive as to enable him to amass a 
 huge fortune with a rapidity hitherto unknown. 
 
 The causes of this change are chiefly two ; firstly, the as a result 
 general growth of wealth ; and secondly, the development of causes 
 new facilities for communication, by which men, who have 
 once attained a commanding position, are enabled to apply 
 their constructive or speculative genius to undertakings 
 vaster, and extending over a wider area, than ever before. 
 
 It is the first cause, almost alone, that enables some bar- of which 
 risters to command very high fees ; for a rich client whose almost 
 
 reputation, or fortune, or both, are at stake will scarcely count 
 any price too high to secure the services of the best man he ?jj 
 can get : and it is this again that enables jockeys and painters 
 and musicians of exceptional ability to get very high prices. 
 In all these occupations the highest incomes earned in our 
 .own generation are the highest that the world has yet seen. 
 But so long as the number of persons who can be reached by 
 a human voice is strictly limited, it is not very likely that 
 any singer will make an advance on the 10,000 said to have 
 been earned in a season by Mrs Billington at the beginning 
 of this century nearly as great as that which the business 
 leaders of the present generation have made on those of the 
 last. 
 
 For the two causes have co-operated to put enormous while both 
 power and wealth in the hands of those business men of our 
 
 own generation who have had first-rate genius, and have been 
 favoured by fortune. This is most conspicuous in America, comes - 
 where several men who began life poor, have amassed more 
 than 10,000,000 each. It is true that a great part of these 
 
THE INFLUENCE OF PROGRESS ON VALUE. 
 
 BOOK vi. gains have come, in some cases, from the wrecks of the rival 
 CH>xn - speculators who had been worsted in the race. But in others, 
 as for instance, that of the late Mr Vanderbilt, they were 
 earned mainly by the supreme economizing force of a great 
 constructive genius working at a new and large problem 
 with a free hand: and Mr Vanderbilt probably saved to 
 the people of the United States more than he accumulated 
 himself 1 . 
 
 Progress 1 12. But these fortunes are exceptional. The diffusion 
 
 proving of knowledge, the improvement of education, the growth of 
 tion C of n fhe prudent habits among the masses of the people, and the 
 
 opportunities which the new methods of business offer for 
 working the safe investment of small capitals : all these forces are 
 telling on the side of the poorer classes as a whole relatively 
 to the richer. The returns of the income tax and the house 
 tax, the statistics of consumption of commodities, the records 
 of salaries paid to the higher and the lower ranks of servants 
 of Government and public companies, tend in the same 
 direction, and indicate that middle class incomes are in- 
 creasing faster than those of the rich ; that the earnings of 
 artisans are increasing faster than those of the professional 
 classes, and that the wages of healthy and vigorous unskilled 
 labourers are increasing faster even than those of the average 
 artisan 2 . 
 
 1 It should be noticed however that some of these gains may be traced to those 
 opportunities for the formation of trade combinations engineered by a few able, 
 wealthy and daring men to exploit for their own benefit a great body of manu- 
 factures, or the trade and traffic of a large district. That part of this power, 
 which depends on political conditions, and especially on the Protective tariff, may 
 pass away. But the area of America is so large, and its condition so changeful, 
 that the slow and steady-going management of a great joint-stock company on 
 the English plan is at a disadvantage in competition with the vigorous and original 
 scheming, the rapid and resolute force of a small group of wealthy capitalists, 
 who are willing and able to apply their own resources in great undertakings to a 
 much greater extent than is the case in England. The ever-shifting conditions of 
 business life in America enable natural selection to bring to the front the best 
 minds for the purpose from their vast population, almost every one of whom, as 
 he enters on life, resolves to be rich before he dies. The modern developments of 
 business and of business fortunes are of exceptional interest and instruction to 
 Englishmen: but their lessons will be misread unless the essentially different con- 
 ditions of business life in the old world and the new are constantly borne in 
 mind. 
 
 2 A great body of statistics relating to nearly all civilized countries and uni- 
 formly tending in this direction is contained in M. Leroy Beaulieu's Essai sur la 
 
EMPLOYMENT IS NOT BECOMING MORE INCONSTANT. 777 
 
 It must be admitted that a rise in wages would lose part BOOK vi. 
 
 of its benefit, if it were accompanied by an increase in the _! ' 
 
 time spent in enforced idleness. Inconstancy of employment J t a n c nc f n 
 is a great evil, and rightly attracts public attention. But empioy- 
 
 , mentin 
 
 several causes combine to make it appear to be greater than modern 
 
 . industry 
 
 it really is. is apt to 
 
 When a large factory goes on half time, rumour bruits 
 the news over the whole neighbourhood, and perhaps the 
 newspapers spread it all over the country. But few people 
 know when an independent workman, or even a small em- 
 ployer, gets only a few days' work in a month ; and in conse- 
 quence, whatever suspensions of industry there are in modern 
 times, are apt to seem more important than they are relatively 
 to those of earlier times. In earlier times some labourers 
 were hired by the year : but they were not free, and were 
 kept to their work by personal chastisement. There is no 
 good cause for thinking that the mediaeval artisan had con- 
 stant employment. And the most persistently inconstant 
 employment now to be found in Europe is in those non- 
 agricultural industries of the West which are most nearly 
 mediaeval in their methods, and in those industries of Eastern 
 and Southern Europe in which mediaeval traditions are 
 strongest 1 . 
 
 In many directions there is a steady increase in the pro- 
 portion of employees who are practically hired by the year. 
 This is for instance the general rule in many of those trades 
 connected with transport which are growing fastest, and are 
 
 repartition des Eickesses, et sur la tendance a une moindre inegalite des conditions, 
 1881. Mr Goschen's Address to the Royal Statistical Society in 1887 on The 
 Increase of Moderate Incomes points the same way ; and above all so do the very 
 careful and instructive studies of wage statistics made by Mr Giffen in his private 
 and in his official capacity. 
 
 1 One instance, which has come under the present writer's observation, may 
 be mentioned here. In Palermo there is a semi-feudal connection between the 
 artisans and their patrons. Each carpenter or tailor has one or more large houses 
 to which he looks for employment ; and so long as he behaves himself fairly well, 
 he is practically secure from competition. There are no great waves of Depression 
 of Trade ; the newspapers are never filled with accounts of the sufferings of those 
 out of work, because their condition changes very little from time to time. But 
 a larger percentage of artisans are out of employment at the best of times in 
 Palermo, than in England in the centre of the worst depression of recent years. 
 
 On the probable instability of industry in the Middle Ages see Dr Cunningham's 
 Growth of English Industry and Commerce, Vol. i. p. 348. 
 
778 THE INFLUENCE OF PROGRESS ON VALUE. 
 
 BOOK vi. the representative industries of the second half of the nine- 
 CHJUI. ^gjjth cen tury, as the manufacturing trades were of the first 
 half. And though the rapidity of invention, the fickleness 
 of fashion, and above all the instability of credit, do certainly 
 introduce disturbing elements into modern industry ; yet, as 
 we shall see presently, other influences are working strongly 
 in the opposite direction, and there seems to be no good 
 reason for thinking that inconstancy of employment is in- 
 creasing on the whole. 
 But the Progress then has done much : but there still remains a 
 
 number of , , . , . , J . . 
 
 those who great, and in consequence of improved sanitation perhaps 
 for hard a growing Residuum of persons who are physically, mentally 
 mrta' d ear or mora ^y incapable of doing a good day's work with which 
 to dimin- to earn a good day's wage ; and some of those who are called 
 artisans, together with many unskilled labourers, work hard 
 for over long hours, and provide for others the means of 
 refinement and luxury, but obtain neither for themselves nor 
 their children the means of living a life that is worthy of man. 
 The temp- There is a strong temptation to over-state the economic 
 understate Qv ^ s of our own age, and to ignore the existence of similar 
 of prc> nefitS anc ^ worse evils in earlier ages ; for by so doing we may for 
 gress. the time stimulate others, as well as ourselves, to a more 
 intense resolve that the present evils shall no longer be 
 allowed to exist. But it is not less wrong, and generally it 
 is much more foolish, to palter with truth for a good than for 
 a selfish cause. And the pessimist descriptions of our own 
 age, combined with romantic exaggerations of the happiness 
 of past ages, must tend to the setting aside of methods of 
 progress, the work of which if slow is yet solid ; and to the 
 hasty adoption of others of greater promise, but which re- 
 semble the potent medicines of a charlatan, and while quickly 
 effecting a little good, sow the seeds of widespread and lasting 
 decay. This impatient insincerity is an evil only less great 
 than that moral torpor which can endure that we, with our 
 modern resources and knowledge, should look on contentedly 
 at the continued destruction of all that is worth having in 
 multitudes of human lives, and solace ourselves with the 
 reflection that anyhow the evils of our own age are less than 
 those of the past. 
 
IWflfcD OF COMFORT AND STANDARD OF LIFE. 779 
 
 13. We have not yet reached the stage at which we BOOK vi. 
 
 can profitably examine the general effects of economic pro- J ' 
 gress on human well being. But it will be well, before end- 
 
 ing this Book, to pursue a little further the line of thought ^ flu r e o nces 
 
 on which we started in Book ill., when considering wants in gress. 
 
 relation to activities. We there saw reasons for thinking that 
 
 the true key-note of economic progress is the development of 
 
 new activities rather than of new wants ; and we may now Connection 
 
 make some study of a question that is of special urgency in the man- 
 
 our own generation ; viz. what is the connection between 
 changes in the manner of living and the rate of earnings ; how 
 far is either to be regarded as the cause of the other, and how 
 far as the effect ? 
 
 Let us take the term the Standard of Life to mean the By the 
 standard of activities and of wants. Thus a rise in the stan- 
 dard of life implies an increase of intelligence, and energy 
 and self-respect ; leading to more care and judgment in ex- 
 penditure, and to an avoidance of food and drink that gratify well as of 
 the appetite but afford no strength, and of ways of living that 
 are unwholesome physically and morally. A rise in the stan- 
 dard of life for the whole population will much increase the 
 national dividend, and the share of it which accrues to each 
 grade and to each trade. A rise in the standard of life for 
 any one trade or grade will raise their efficiency and their own 
 real wages : it will increase the national dividend a little ; 
 and it will enable others to obtain their assistance at a cost 
 somewhat less in proportion to its efficiency. 
 
 But many writers have spoken of the influence exerted A rise in 
 on wages by a rise not in the standard of life, but in that of dard of 1 
 comfort ; a term that may suggest a mere increase of arti- comfort 
 
 ficial wants, among which perhaps the grosser wants may 
 predominate. It is true that every broad improvement in the through its 
 standard of comfort is sure to bring with it a better manner Influence 
 of living, and to open the way to new and higher activities ; }J ^JJJJ? 
 while those who have hitherto had neither the necessaries dard of 
 nor the decencies of life can hardly fail to get some increase 
 of vitality and energy from an increase of comfort, however 
 gross and material the view which they may take of it. Thus 
 a rise in the standard of comfort does to some extent involve 
 
THE INFLUENCE OF PROGRESS ON VALUE. 
 
 BOOK vi. a rise in the standard of life ; and in so far as this is the case 
 CH - xn - it d oes tend to increase the national dividend and to improve 
 
 the condition of the people. 
 
 A rise in Some writers however of our own and of earlier times 
 
 tai oT" have gone further than this, and have implied that a mere 
 consist^ 11 increase of wants tends to raise wages. But the only direct 
 entiybe^ e ff e ct of an increase of wants is to make people more 
 miserable than before. And if we put aside its probable 
 indirect effect in increasing activities, and otherwise raising 
 by a fx 8 tre n m y e the standard of life, it can raise wages only by another 
 Maithus- indirect effect, viz. by diminishing the supply of labour. 
 
 The doctrine that, merely through its action in diminish- 
 ing the supply of labour, a rise in the standard of comfort 
 raises wages, and is one of the most effective means for that 
 purpose, can be held consistently by those who believe that 
 population is pressing on the means of subsistence so hardly, 
 that the rate of growth of population exercises a predomi- 
 nating influence on the rate of wages. For if that be true, then 
 it is also true that at least one of the most efficient means of 
 raising wages is to induce people to adopt a higher standard of 
 comfort, in however mean and sordid a sense the term comfort 
 is used: since in order to indulge the new desires rising 
 out of their extended desire for comfort they may probably 
 marry late, or otherwise limit the number of their children. 
 But it cannot be held consistently by those who hold, as 
 most writers of the present generation do, that the new 
 facilities of transport have much diminished for the present 
 the influence which the law of diminishing return exercises on 
 production; that the countervailing influences of the law of 
 increasing return are strong and that an increase of numbers 
 does not tend greatly to reduce the average level of wages. 
 The influ- It is indeed still possible to contend that a mere diminu- 
 wages of a tion in the supply of manual labourers as a whole, or of any 
 supply 6 ! one c l ass f them in particular, will increase the competition 
 for their aid on the part of the higher grades of labour, and 
 the owners of material capital ; and that in consequence their 
 studied in wages will rise. This argument is no doubt valid so far as it 
 
 relation to "u .ti_ / 
 
 the hours # oes : but the rise of wages that can be got by any class of 
 >f work, labour simply by making itself scarce, and independently of 
 
CASES OF GAIN BY A LESSENING OF LABOUR. 781 
 
 any improvement in its standard of activities is generally not BOOK vi. 
 very great, except in the case of the lowest grades. We will J _ ' 
 conswiei^his problem in some detail with reference to that par- 
 ticlJKchange in the standard of living which takes -the form 
 of shortening the hours of labour, and of wise uses of leisure 1 . 
 
 5 14. The earnings of a human being are commonly To little 
 
 . . . , account is 
 
 counted gross ; no special reckoning being made for his wear- often taken 
 and-tear, of which indeed he is himself often rather careless ; and-tear of 
 
 and, on the whole, but little account is taken of the evil 
 effects of the overwork of men on the well-being of the 
 next generation, although the hours of labour of children are 
 regulated by law in their own interests and those of women 
 in the interests of their families. 
 
 When the hours and the general conditions of labour are it is waste- 
 such as to cause great wear-and-tear of body or mind or both, without* 
 and to lead to a low standard of living ; when there has been ^ leisure 
 a want of that leisure, rest and repose, which is one of the that are 
 necessaries for efficiency ; then the labour has been extra va- for effici- 
 gant from the point of view of society at large, just as it 
 would be extravagant on the part of the individual capitalist 
 to keep his horses or slaves overworked or underfed. In such The gain 
 a case a moderate diminution of the hours of labour would 
 
 diminish the national dividend only temporarily; for as 
 soon as the improved standard of life had had time to have 
 its full effect on the efficiency of the workers, their increased injurious 
 energy, intelligence and force of character would enable them 
 to do as much as before in less time ; and thus, even from the 
 point of view of material production, there would be no more 
 ultimate loss than is involved by sending a sick worker into 
 hospital to get his strength renovated. And, since material 
 wealth exists for the sake of man, and not man for the sake 
 of material wealth, the fact that inefficient and stunted human 
 lives had been replaced by more efficient and fuller lives 
 would be a gain of a higher order than any temporary 
 material loss that might have been occasioned on the way. 
 This argument assumes that the new rest and leisure raises thTrest 
 
 1 Mr Gunton's suggestive writings on the causes that govern wages seem to be 
 somewhat impaired by a lax use of the phrases " Standard of Comfort " and " Cost 
 of Production of Labour." 
 
THE INFLUENCE OF PROGRESS ON VALUE. 
 
 BOOK vi. the standard of life. And such a result is almost certain to 
 
 CH.XII. follow in tne extreme cases of overwork which we have been 
 
 and leisure now considering ; for in them a mere lessening of tension is 
 
 are turned . , 
 
 to good a necessary condition for taking the first step upwards. 
 
 This brings us to consider the lowest grade of honest 
 
 ai condi- wor k e rs. Few of them work very hard ; but they have little 
 
 tions of the 
 
 lowest stamina ; and many of them are so overstrained that they 
 workers, might probably, after a time, do as much in a shorter day as 
 they now do in a long one. Moreover they are the one class 
 of workers, whose wages might be raised considerably at the 
 expense of other classes by a mere diminution in the supply 
 of their labour. Some of them indeed are in occupations 
 that are closely pressed by the competition of skilled workers 
 using machinery ; and their wages are controlled by the law 
 of substitution. But many of them do work for which no 
 substitute can be found ; they might raise the price of their 
 labour considerably by stinting its supply ; and they might 
 have been able to raise it a very great deal in this way, were 
 not any rise sure to bring into their occupation other workers 
 of their own grade from occupations in which wages are 
 controlled by the law of substitution 1 . 
 
 in some 15. Again there are some branches of industry which 
 
 shorter a * present turn to account expensive plant during only ten 
 
 nours a day; and in which the gradual introduction of two 
 shifts of eight hours would be an unmixed gain. The change 
 would be would need to be introduced gradually ; for there is not enough 
 unmixed skilled labour in existence to allow such a plan to be adopted 
 
 at once in all the workshops and factories for which it is 
 cerned. suited. But some kinds of machinery, when worn out or 
 antiquated, might be replaced on a smaller scale; and, on 
 the other hand, much new machinery that cannot be profit- 
 ably introduced for a ten hours' day, would be introduced for 
 a sixteen hours' day ; and when once introduced it would be 
 improved on. Thus the arts of production would progress 
 more rapidly ; the national dividend would increase ; work- 
 ing men would be able to earn higher wages without tempting 
 capital to migrate to countries where wages were lower, and 
 all classes of society would reap benefit from the change. 
 
 1 See the end of Book vi. Ch. m. 
 
LESSENING OF OUTPUT LOWERS WAGES GENERALLY. 783 
 
 The\ijpportance of this consideration is more apparent BOOKVI. 
 
 CH. XII. 
 
 every year, since the growing expensiveness of machinery, 
 and the quickness with which it is rendered obsolete, are 
 constantly increasing the wastefulness of keeping the untiring 
 iron and steel resting in idleness during sixteen hours out of 
 the twenty-four. In any country, such a change would 
 increase the net produce, and therefore the wages of each 
 worker; because much legs than before would have to be 
 deducted from his total output on account of charges for 
 machinery, plant, factory-rent, &c. But the Anglo-Saxon 
 artisans, unsurpassed in accuracy of touch, and surpassing all 
 in sustained energy, would more than any others increase 
 their net produce, if they would keep their machinery going 
 at its full speed for sixteen hours a day, even though they 
 themselves worked only eight 1 . 
 
 It must however be remembered that this particular plea 
 for a reduction of the hours of labour applies only to those 
 trades which use, or can use, expensive plant ; and that in 
 some cases, as for instance in some mines and some branches 
 of railway work, the system of shifts is already applied so as 
 to keep the plant almost constantly at work. 
 
 16. There remain therefore many trades in which a But in 
 reduction of the hours of labour would certainly lessen the out- trades a 
 put in the immediate present, and would not certainly bring oJ m h e Utl 
 about at all quickly any such increase of efficiency as would hours of 
 
 1 Double shifts are used more on the Continent than in England. But they 
 have not a fair trial there, for the hours of labour are so long that double shifts 
 involve work nearly all the night through; and night work is never so good 
 as day work, partly because those who work at night do not rest perfectly during 
 the day. No doubt certain practical objections can be urged against the plan; for 
 instance, a machine is not so well cared for when two men share the responsibility 
 of keeping it in order, as when one man has the whole management of it ; and 
 there is sometimes a difficulty about fixing responsibility for imperfections in the 
 work done ; but these difficulties can be in a great measure overcome by putting 
 the machine and the work in charge of two partners. Again, there would be a little 
 difficulty in readjusting the office arrangements to suit a day of sixteen hours. 
 But employers and their foremen do not regard these difficulties as insuperable ; 
 and experience shews that workmen soon overcome the repugnance which they 
 feel at first to double shifts. One set might end its work at noon, and the other 
 begin then; or what would perhaps be better, one shift might work, say, from 
 5 a.m. to 10 a.m. and from T30 p.m. to 4'30 p.m., the second set working from 
 10.15a.m. to 1.15p.m. and from 4.45p.m. to 9.45p.m.; the two sets might change 
 places at the end of each week or mouth. 
 
BOOK vi. 
 
 THE INFLUENCE OF PROGRESS ON VALUE. 
 
 raise the average work done per head up to the old level. In 
 CH - *" s U ch ca ses the change would diminish the national dividend ; 
 labour an( j the greater part of the resulting material loss would fall 
 Sen pro- O n the workers whose hours of labour were diminished. It is 
 auction. ^^^ that .^ gome t ra( les a scarc ity of labour would raise its 
 price for a good long while at the expense of the rest of the 
 community. But as a rule a rise in the real price of labour 
 would cause a diminished demand for the product, partly 
 through the increased use of substitutes; and would also 
 cause an inrush of new labour from less favoured trades. 
 Origin of This leads us to consider the origin of the common 
 
 thtta ini n belief that a reduction of the hours of labour would raise 
 i?ssentn wages generally by merely making labour scarce, and inde- 
 of the pendently of any effect it might have in keeping machinery 
 
 hours of , , .1 i / 
 
 labour longer at work and therefore making it more efficient, or in 
 wages 1 * 6 preventing people from being stunted and prematurely worn 
 out by excessive work. This opinion is an instance of those 
 misunderstandings as to the ways in which a rise in the 
 standard of comfort can raise wages, to which we referred 
 a little while back. 
 
 The fallacy 17. It appears to rest on two fallacies. The first of 
 would these is that the immediate and permanent effects of a 
 C ermanent cnan g e will be the same. People see that when there are 
 increase competent men waiting for work outside the offices of a 
 
 in the de- 111 
 
 mandfor tramway company, those already at work think more of 
 keeping their posts than of striving for a rise of wages : and 
 that if these men were away, the employers could not resist 
 a demand for higher wages. They dwell on the fact that, if 
 tramway men work short hours, and there is no diminution 
 in the number of miles run by the cars on existing lines, then 
 more men must be employed probably at higher wages per 
 hour ; and possibly at higher wages per day. But they 
 overlook other consequences, which are more important, 
 though more remote ; viz. that tramway extensions will be 
 checked ; and that fewer men will be employed in the future 
 in making and in working tramways ; that many workpeople 
 and others will walk into town, who might have ridden ; and 
 many will live closely packed in the cities who might have 
 had gardens and fresher air in the suburbs. If it were true 
 
LESSENING OF OUTPUT LOWERS WAGES GENERALLY. 785 
 
 that the aggregate amount of wages could be increased by BOOKVI. 
 causing every person to work one-fifth less than now, then a CH ' xn " 
 diminution of the population by one-fifth would raise aggre- 
 gate wages, and therefore would increase average wages by 
 more than a fifth a proposition which goes beyond the 
 doctrine of extreme Malthusians. 
 
 The source of the error in this argument lies in the and that 
 assumption that there is a fixed Work-Fund, a certain fixed* 1S 
 amount of work which has to be done, whatever the price of 
 labour. On the contrary, the demand for work comes from 
 the national dividend ; that is, it comes from work : the less 
 work there is of one kind, the less demand there is for work 
 of other kinds ; and if labour were scarce, fewer enterprises 
 would be undertaken. Again, the constancy of employment Jt would 
 depends on the organization of industry and trade, and on asfikeiyto 
 
 the success with which those who arrange supply are able to 
 forecast coming movements of demand and of price, and to 
 adjust their actions accordingly. But this would not be employ- 
 better done with a short day's work than with a long one ; 
 and indeed the adoption of a short day, not accompanied by 
 double shifts, would discourage the use of that expensive 
 plant, the presence of which makes employers very unwilling 
 to close their works ; and it would therefore probably tend, 
 not to lessen, but to increase the inconstancy of employment. 
 
 18. The second fallacy is allied to the first. It is that The fallacy 
 all trades will gain by the general adoption of a mode 
 action which has been proved to enable one trade, under 
 certain conditions, to gain at the expense of others. It is 
 undoubtedly true that, if they could exclude external com- labour 
 petition, plasterers or shoemakers would have a fair chance 
 of raising their wages by a mere diminution of the amount 
 of work done by each. But these gains can be got only at 
 the cost of a greater aggregate loss to other sharers in the 
 national dividend 1 . It is a fact and, so far as it goes, an 
 important fact that some of these sharers will not belong to 
 the working classes; part of the loss will certainly fall on 
 employers and capitalists whose personal and material capital 
 is sunk in building or shoemaking, and part on the well-to-do 
 
 i See Book v. Ch. vi. 2, and Book vi. Ch. n. 4, 5. 
 
 M. 50 
 
786 THE INFLUENCE OF PROGRESS ON VALUE. 
 
 BOOK vi. users or consumers of houses or shoes. But a part of the 
 CHJUI. j ogs ^j] a jj Qn t k e working classes as users or consumers of 
 houses or shoes; and part of the loss resulting from the 
 plasterers' gain will fall on bricklayers, carpenters, &c., and a 
 little of it on brickmakers, seamen employed in importing 
 wood for building, and others. 
 
 One trade If then all workers reduce their output there will be a 
 
 limeade?" great loss of national dividend; capitalists and employers 
 
 S enS & ma y indeed bear a large share of the burden ; but they are 
 
 reduction sure no ^ to bear all. For to say nothing of the chance that 
 
 wouid PU they may emigrate and take or send their free capital for in- 
 
 diSish vestment abroad a great and general diminution of earnings 
 
 national of management and of interest on capital, would lead on the 
 
 diV d id h nd ' one nan d t some substitution of the higher grades of labour 
 
 wage- for the lower throughout the whole continuous descending 
 
 must bear scale of employment 1 , and perhaps to some falling-off in the 
 
 parfofthe ener gy an d assiduity of the leading minds of industry; 
 
 loss. while, on the other hand, it would check the saving of 
 
 capital 2 . And in so far as it had this last result it would 
 
 diminish that abundance of capital relatively to labour which 
 
 alone would enable labour to throw on capital a part of its 
 
 share of the loss of the national dividend 3 . 
 
 1 See Book vi. Ch. vn. 24. 
 
 2 See Book iv. Ch. vn. 9, and Book vi. Ch. vi. 11. 
 
 8 To take an illustration, let us suppose that shoemakers and hatters are in the 
 same grade, working equal hours, and receiving equal wages, before and after a 
 general reduction in the hours of labour. Then both before and after the change, 
 the hatter could buy, with a month's wages, as many shoes as were the Net 
 product of the shoemaker's work for a month (see Book vi. Ch. n. 7). If the 
 shoemaker worked less hours than before, and in consequence did less work, the 
 Net product of his labour for a month would have diminished, unless either by a 
 system of working double shifts the employer and his capital had earned profits 
 on two sets of workers, or his profits could be cut down by the full amount of 
 the diminution in output. The last supposition is inconsistent with what we 
 know of the causes which govern the supply of capital and business power. 
 And therefore the hatter's wages would go less far than before in buying shoes ; 
 and so all round for other trades. 
 
 A small part of the loss might be thrown on rent: but it is not necessary 
 to allow for much under this head. Also our argument assumed, what would be 
 sure to be approximately true, that, taken one with another, the values relatively 
 to shoes of the things that the employer had to buy remain unchanged. 
 
 It may be well to say here dogmatically, and in anticipation of the results 
 of the next volume, that the influence of foreign trade competition in this con- 
 nection can be proved to be different from what it at first sight appears. An 
 
LESSENING OF OUTPUT LOWEKS WAGES GENERALLY. 787 
 
 But we must be careful not to confuse the two questions BOOK vi. 
 whether a cause tends to produce a certain effect and whether c ^j^ 1 ' 
 that cause is sure to be followed by that effect. Opening & ^st 
 the sluice of a reservoir tends to lower the level of the water crude a /g u - 
 
 mentsfrom 
 
 in it ; but if meanwhile larger supplies of water are flowing facts : the 
 in at the other end, the opening of the sluice may be fol- 
 lowed by a rising of the level of the water in the cistern. 
 And so although a shortening of the hours of labour would 
 tend to diminish output in those trades which are not already 
 overworked, and in which there is no room for double shifts ; 
 yet it might very likely be accompanied by an increase of 
 production arising from the general progress of wealth and 
 knowledge \ 
 
 international agreement to diminish simultaneously the hours of labour in all 
 trades would indeed have the important effect of preventing the workers in any 
 one country from having to fear that capital would leave it for others ; and further 
 a reduction in the hours of labour whether by a given percentage, or down to a 
 given minimum, would diminish output in unequal proportions in different trades, 
 and would therefore disturb relative values and relative wages; and these dis- 
 turbances would be aggravated by competition from a foreign country that was not 
 passing through the same changes. If however the hours of labour could be 
 reduced, not on any rigid plan, but in such a way as not to disturb relative values, 
 the change would not directly affect the course of foreign trade, whether other 
 nations adopted the movement or not. For if it just, but only just, paid to export 
 cutlery and import in exchange sewing machines before the change ; then after 
 the change, relative values remaining unaltered, it would still pay, and only just 
 pay, to do the same. International agreements are therefore likely to go less far, 
 than at first sight appears, towards lessening the evils of a general diminution 
 of output. 
 
 1 We mast distrust all attempts to solve the question, whether a reduction of 
 the hours of labour reduces production and wages, by a simple appeal to facts. 
 For whether we watch the statistics of wages and production immediately after 
 the change or for a long period following it, the facts which we observe are likely 
 to be due chiefly to causes other than that which we are wishing to study. Firstly, 
 the effects which immediately follow are likely to be misleading for many reasons. 
 If the reduction was made as a result of a successful strike, the chances are that 
 the occasion chosen for the strike was one when the strategical position of the 
 workmen was good, and when the general conditions of trade would have enabled 
 them to obtain a rise of wages if there had been no change in the hours of labour : 
 arid therefore the immediate effects of the change on wages are likely to appear 
 more favourable than they really were. And again many employers, having 
 entered into contracts which they are bound to fulfil, may for the tune offer 
 higher wages for a short day than before for a long day: but this is a result of 
 the suddenness of the change, and is a mere flash in the pan. On the other hand, 
 if men have been overworked, the shortening of the hours of labour will not at 
 once make them strong : the physical and moral improvement of the condition of 
 the workers, with its consequent increase of efficiency and therefore of wages, 
 cannot show itself at once. 
 
 502 
 
7gy THE INFLUENCE OF PROGRESS ON VALUE. 
 
 BOOK vi. 19. All this tends to show that a general reduction of 
 
 CHJUI. the hourg of i abour i s }ik e iy to cause a little net material loss 
 
 General an ^ muc h moral good, that it is not adapted for treatment 
 
 as to the by a rigid cast-iron system, and that the conditions of each 
 
 i h aZi S r 0f class of trades must be studied separately. 
 
 Well-spent Perhaps 100,000,000 annually are spent even by the 
 
 wouidbe working classes, and 40*0,000,000 by the rest of the popula- 
 
 rlTwo'rth tion of England in ways that do little or nothing towards 
 
 than a making life nobler or truly happier. And it would certainly 
 
 of our*" be well that all should work less, if we could secure that the 
 
 enjoy?* new leisure be spent well, and the consequent loss of material 
 
 ment8 ' income be met exclusively by the abandonment by all classes 
 
 of the least worthy methods of consumption. But this result 
 
 is not easy to be attained : for human nature changes slowly, 
 
 and in nothing more slowly than in the hard task of learning 
 
 to use leisure well. In every age, in every nation, and in 
 
 every rank of society, those who have known how to work 
 
 well have been far more numerous than those who have 
 
 known how to use leisure well ; but on the other hand it is 
 
 only through freedom to use leisure as they will, that people 
 
 can learn to use leisure well : and it is true that no class of 
 
 And secondly, the statistics of production and wages several years after the 
 reduction of hours are likely to reflect changes in the prosperity of the country, 
 or of the trade in question, or of the methods of production, or lastly of the pur- 
 chasing power of money : and it may be as difficult to isolate the effects of reduction 
 of the hours of labour as it is to isolate the effects on the waves of a noisy sea 
 caused by throwing a stone among them. 
 
 For instance, when we look at the history of the introduction of the eight hours' 
 day in Australia we find great fluctuations in the prosperity of the mines and the 
 supply of gold, in the prosperity of the sheep farms and the price of wool, in the 
 borrowing from old countries capital with which to employ Australian labour 
 to build railways, &c., in immigration, and in commercial credit. And all these 
 have been such powerful causes of change in the condition of the Australian 
 working man as to completely overlay and hide from view the effects of a reduc- 
 tion of the hours of labour from 10 gross (8| net after deducting meal times) to 
 8 net. Money wages in Australia are much lower than they were before the hours 
 were shortened ; and, though it may be true that the purchasing power of money 
 has increased, so that real wages have not fallen, yet there seems no doubt that 
 the real wages of labour in Australia are not nearly as much above those in 
 England as they were before the reduction in the hours of labour : and it has not 
 been proved that they are not lower than they would have been if that change 
 had not taken place. And it is not certain that the recent commercial troubles in 
 Australia have not been in part caused by over sanguine estimates of the economic 
 efficiency of short hours of labour. 
 
GENERAL CONCLUSION AS TO LABOUR AND LEISURE. 789 
 
 workers who are devoid of leisure can have much self-respect BOOK vi. 
 and become full citizens : some time free from fatigue and free 
 from work are necessary conditions of a high Standard of Life 1 . 
 
 A person can seldom exert himself to the utmost for 
 more than eight hours a day with advantage to anyone ; 
 but he may do light work for longer, and he may be "on 
 duty," ready to act when called on, for much longer. And 
 since adults, whose habits are already formed, are not likely 
 to adapt themselves quickly to long hours of leisure, it would 
 seem more conducive to the well-being of the nation as a 
 whole, to take measures for increasing the material means of 
 a noble and refined life for all classes, and especially the 
 poorest, than to secure a sudden and very great diminution 
 in the hours of labour of those who are not now weighed 
 down by their work. 
 
 In this, as in all similar cases, it is the young whose faculties Leisure for 
 and activities are of the highest importance both to the moral- tbe young - 
 ist and the economist. The most imperative duty of this 
 generation is to provide for the young the best education for 
 the work they have to do as producers and as men or women, 
 together with long- continued freedom from mechanical toil, 
 and abundant leisure for school and for such kinds of play as 
 strengthen and develop the character. 
 
 And, even if we took account only of the injury done to The in- 
 the rising generation by living in homes in which the father 
 
 and the mother lead joyless lives, it would be in the interest generation 
 of society to afford them some relief. Able workers and good hours of 
 citizens are not likely to come from homes from which the o*f their 
 mother is absent during a great part of the day, nor from P arents - 
 homes to which the father seldom returns till his children 
 are asleep. And therefore not only the individuals im- 
 mediately concerned, but society as a whole, has a direct 
 interest in the curtailment of extravagantly long hours of 
 duty away from home even for mineral-train-guards and 
 others, whose work is not in itself very hard. 
 
 And now we must conclude this part of our study of 
 Distribution and Exchange. We have reached very few prac- 
 
 1 This is well argued by Mr Sidney Webb and Mr Harold Cox in their plea 
 for An Eight Hours' Day. 
 
790 THE INFLUENCE OF PROGRESS ON VALUE. 
 
 BOOK vi. tical conclusions ; because it is generally necessary to look at 
 CH^XII. ^ W j 10 i e O f the economic, to say nothing of the moral and 
 other aspects of a practical problem before attempting to 
 deal with it at all : and in real life nearly every economic 
 issue depends, more or less directly, on some complex actions 
 and reactions of credit, of foreign trade, and of modern 
 developments of combination and monopoly. But the ground 
 which we have already traversed is, in some respects, the 
 most difficult of the whole province of economics ; and it 
 commands, and, so to speak, holds the key of, that which lies 
 yet before us. 
 
APPENDIX 
 
 OF MATHEMATICAL NOTES. 
 
 NOTE I. (p. 169). The law of diminution of marginal utility may be 
 expressed thus : If u be the total utility of an amount a; of a commodity 
 to a given person at a given time, then marginal utility is measured by 
 
 -T- ; and, subject to the qualifications mentioned in the text, ^ is always 
 negative. 
 
 NOTE II. (p. 171). If m is the amount of money or general purchasing 
 power at a person's disposal at any time, and u. represents its total utility 
 
 to him, then -- represents the marginal utility of money to hTm. 
 
 If p is the price which he is just willing to pay for an amount x of the 
 commodity which gives him a total pleasure w, then 
 
 du. 4 , da dp du 
 
 ^-Ap = AM; and ^./-s . 
 
 dm dm dx dx 
 
 If p' is the price which he is just willing to pay for an amount x' of 
 another commodity, which affords him a total pleasure u' '; then 
 
 dfj. dp' du' 
 
 dm ' dx' ~ dx' ' 
 
 dp dp' du du' 
 
 and therefore - : --. = 3- : 3-7 . 
 
 dx dx dx dx 
 
 (Compare Jevons' chapter on the Theory of Exchange, p. 151.) 
 
 Every increase in his means diminishes the marginal utility of money to 
 
 him ; that is, -5-^ is always negative. 
 um- 
 
 Therefore, the marginal utility to him of an amount x of a commodity, 
 , 
 
 du du du. 
 
 , remaining unchanged, an increase in his means increases -jr:r?j 
 
 i.e. it increases -, that is, the rate at which he is willing to pay for 
 
792 
 
 APPENDIX. 
 
 further supplies of it. Treating u as variable, that is to say, allowing for 
 possible variations in the person's liking for the commodity in question, 
 
 we may re 
 
 gard as a function or m, u, and x ; and then we have 
 
 dx 
 
 always positive. Of course P is always positive. 
 
 NOTE III. (p. 179). Let P, P' be consecutive points on the demand 
 curve ; let PRM be drawn perpendicular to Ox, and let PP' cut Ox and Oy 
 
 in T and t respectively; so that P'R is 
 that increment in the amount demanded 
 which corresponds to a diminution PR in 
 the price per unit of the commodity. 
 
 Then the elasticity of demand at P is 
 measured by 
 
 P'R PR . P'R PM 
 
 OM^Pl/' 1>e> y PR X OM> 
 TM PM 
 
 TH 
 
 Olf r 
 
 PT 
 PT 
 
 When the distance between P and P' is diminished indefinitely, PP' becomes 
 the tangent ; and thus the proposition is proved. 
 
 It is obvious a priori that the measure of elasticity cannot be altered 
 by altering relatively to one another the scales on which distances parallel to 
 Ox and Oy are measured. But a geometrical proof of this result can be got 
 easily by the method of projections : while analytically it is clear that 
 
 -4- ^-^ , which is the analytical expression for the measure of elasticity, 
 
 does not change its value if the curve y =f (x) be drawn to new scales, so that 
 its equation becomes qy-f(px) ; where p and q are constants. 
 
 If the elasticity of demand be equal to unity for all prices of the 
 commodity, any fall in price will cause a proportionate increase in the 
 amount bought, and therefore will make no change in the total outlay 
 which purchasers make for the commodity. Such a demand may therefore 
 be called a Constant Outlay demand. The curve which represents it, a 
 Constant Outlay curve, as it may be called, is a rectangular hyperbola with 
 Ox and Oy as asymptotes ; and a series of such curves are represented by 
 the dotted curves in the following figure. 
 
 There is some advantage in accustoming the eye to the shape of these 
 curves ; so that when looking at a demand curve one can tell at once 
 whether it is inclined to the vertical at any point at a greater or less angle 
 than the part of a constant outlay curve, which would pass through that 
 point. Greater accuracy may be obtained by tracing constant outlay 
 curves on thin paper, and then laying the paper over the demand curve. 
 By this means it may, for instance, be seen at once that the demand curve 
 in the figure represents at each of the points A, B, C and D an elasticity 
 about equal to one : between A and B, and again between C and D, it repre- 
 
APPENDIX. 
 
 793 
 
 sents an elasticity greater than one ; while between B and C it represents 
 an elasticity less than one. It will be found that practice of this kind 
 
 makes it easy to detect the nature of the assumptions with regard to the 
 character of the demand for a commodity, which are implicitly made in 
 drawing a demand curve of any particular shape ; and is a safeguard against 
 the unconscious introduction of improbable assumptions. 
 
 The general equation to demand-curves representing at every point an 
 
 elasticity equal to n is \-n ~=0, i.e. xy n =G. 
 
 It is worth noting that in such a curve ~ = ^ ; that is, the pro- 
 portion in which the amount demanded increases in consequence of a small 
 fall in the price varies inversely as the (?i + l) th power of the price. 
 In the case of the constant outlay curves it varies inversely as the square 
 of the price ; or, which is the same thing in this case, directly as the square 
 of the amount. 
 
 NOTE IV. (p. 186). The lapse of time being measured downwards along 
 Oy ; and the amounts, of which record is being made, being measured by 
 distances from Oy ; then P' and P being adjacent 
 points on the curve which traces the growth of 
 the amount, the rate of increase in a small unit 
 of time N'N is 
 
 PII _ PH_ PH _ PN P'H _ P'H 
 P'N' ~ P'H ' 'FN' ~ Nt ' PW ~ "Nt ' 
 since PN and P'N' are equal in the limit. 
 
 If we take a year as the unit of time we find 
 the annual rate of increase represented by the in- 
 verse of the number of years in Nt. 
 
794 APPENDIX. 
 
 The rate of increase would be constant for all points of the curve if Nt 
 were constant and always=a, that is, if -*% = * for all values of *; that 
 is, if the equation to the curve were y = - a log x. 
 
 NOTE V. (p. 199). We have seen in the text that the rate at which future 
 pleasures are discounted varies greatly from one individual to another. Let 
 r be the rate of interest per annum, which must be added to a present 
 pleasure in order to make it just balance a future pleasure, that will be of 
 equal amount to its recipient, when it comes ; then r may be 50 or even 200 
 per cent, to one person, while for his neighbour it is a negative quantity. 
 Moreover some pleasures are more urgent than others ; and it is conceivable 
 even that a person may discount future pleasures in an irregular random 
 way ; he may be almost as willing to postpone a pleasure for two years as for 
 one ; or, on the other hand, he may object very strongly indeed to a long 
 postponement, but scarcely at all to a short one. There is some difference 
 of opinion as to whether such irregularities are frequent ; and the question 
 cannot easily be decided ; for since the estimate of a pleasure is purely sub- 
 jective, it would be difficult to detect them if they did occur. In a case in 
 which there are no such irregularities, the rate of discount will be the same 
 for each element of time; or, to state the same thing in other words, it will 
 obey the Exponential Law. And if h be the future amount of a pleasure of 
 which the probability is p, and which will occur, if at all, at time t ; and if 
 J2 = l + r; then the present value of the pleasure is phE -t . It must, how- 
 ever, be borne in mind that this result belongs to Hedonics, and not properly 
 to Economics. 
 
 Arguing still on the same hypothesis we may say that, if or be the 
 probability that a person will derive an element of happiness, Afc, from the 
 possession of, say, a piano in the element of time A, then the present value 
 
 of the piano to him is I wE't -^ dt . If we are to include all the happiness 
 that results from the event at whatever distance of time we must take T=oo . 
 If the source of pleasure is in Bentham's phrase " impure," ~ will probably 
 
 be negative for some values of t ; and of course the whole value of the 
 integral may be negative. 
 
 NOTE VI. (p. 208). If y be the price at which an amount # of a com- 
 modity can find purchasers in a given market, and y=f(x) be the equation 
 to the demand-curve, then the total utility of the commodity is measured by 
 
 I f(x) dx, where a is the amount consumed 
 J o 
 
 If however an amount b of the commodity is necessary for existence, 
 
 /(*) will be infinite, or at least indefinitely great, for values of x less than 
 
 ' 7 e . must therefore take life for granted, and estimate separately the 
 
 ility of that part of the supply of the commodity which is in excess 
 
 of absolute necessaries : it is of course f*/{*)'4r. 
 
 If there are several commodities which will satisfy the same imperative 
 
APPENDIX. 795 
 
 want, as e.g. water and milk, either of which will quench thirst, we shall 
 find that, under the ordinary conditions of life, no great error is introduced 
 by adopting the simple plan of assuming that the necessary supply comes 
 exclusively from that one which is cheapest. 
 
 It should be noted that, in the discussion of consumers' rent, we assume 
 that the marginal utility of money to the individual purchaser is the same 
 throughout. Strictly speaking we ought to take account of the fact that if 
 he spent less on tea, the marginal utility of money to him would be less 
 than it is, and he would get an element of consumers' rent from buying 
 other things at prices which now yield him no such rent. But these changes 
 of consumers' rent (being of the second order of smallness) may be neg- 
 lected, on the assumption, which underlies our whole reasoning, that his 
 expenditure on any one thing, as, for instance, tea, is only a small part of 
 his whole expenditure. (Compare Book v. Ch. n. 3.) If, for any reason it 
 be desirable to take account of the influence which his expenditure on tea 
 exerts on the value of money to him, it is only necessary to multiply f(x), 
 within the integral given above by that function of xf (x) (i.e. of the amount 
 which he has already spent on tea) which represents the marginal utility to 
 him of money when his stock of it has been diminished by that amount. 
 
 NOTE VII. (p. 210). Thus if a lt a 2 , a 3 ... be the amounts consumed of 
 the several commodities of which & lt & 2 , b s ... are necessary for existence, 
 if y=f l ( x ), y=f>i(x), y=f 3 (x)... be the equations to their demand curves 
 and if we may neglect all inequalities in the distribution of wealth ; then 
 the total utility of income, subsistence being taken for granted, might be 
 
 represented by 2 / / (x) dx, if we could find a plan for grouping together in 
 
 one common demand curve all those things which satisfy the same wants, and 
 are rivals ; and also for every group of things of which the services are com- 
 plementary (see Book v. Ch. vi. ). But we cannot do this : and therefore the 
 formula remains a mere general expression, having no practical application. 
 See footnote on pp. 207, 8 ; also the latter part of Note XIV. 
 
 NOTE VIII. (p. 211). If y be the happiness which a person derives from 
 an income x ; and if, after Bernoulli, we assume that the increased happi- 
 ness which he derives from the addition of one per cent, to his income is the 
 
 same whatever his income be, we have x-jjt = K, and /. y = Klogx + C 
 
 when K and C are constants. 
 
 Let a be the income sufficient to purchase the necessaries of life, so 
 defined that the total pleasure derived from life with an income less than a 
 
 is a negative quantity; then our equation becomes y = Klog-. Of course 
 both K and a vary with the temperament, the health, the habits, and the 
 social surroundings of each individual. Laplace gives to x the name fortune 
 physique, and to y the name fortune morale. 
 
 Bernoulli himself seems to have thought of x and a as representing 
 certain amounts of property rather than of income ; but we cannot estimate 
 the property necessary for life without some understanding as to the length 
 of time during which it is to support life, that is, without really treating it 
 as income. 
 
APPENDIX. 
 
 Perhaps the guess which has attracted most attention after Bernoulli's 
 is Cramer's suggestion that the pleasure afforded by wealth may be taken 
 to vary as the square root of its amount. 
 
 NOTE IX. (p. 211). The argument that fair gambling is an economic 
 blunder is generally based on Bernoulli's or some other definite hypothesis. 
 But it requires no further assumption than that firstly the pleasure of 
 gambling may be neglected, and secondly 0" (x) is negative for all values 
 of a-, where (x) is the pleasure derived from wealth equal to x. 
 
 For suppose that the chance that a particular event will happen is p, 
 and a man makes a fair bet of py against (l-p)y that it will happen. 
 By so doing he changes his expectation of happiness from 
 
 0(a?) to p<j>{x + ( 
 This when expanded by Taylor's Theorem becomes 
 
 assuming 0" (x) to be negative for all values of x, this is always less 
 than 0(*). 
 
 It is true that this loss of probable happiness need not be greater than 
 the pleasure derived from the excitement of gambling, and we are then 
 thrown back upon the induction that pleasures of gambling are in Bentham's 
 phrase "impure," since experience shows that they are likely to engender a 
 restless, feverish character, unsuited for steady work as well as for the 
 higher and more solid pleasures of life. 
 
 NOTE X. (p. 217). Following on the same lines as in Note I., let us 
 take v to represent the disutility or discommodity of an amount of labour I, 
 
 then ,j measures the marginal disutility of labour ; and, subject to the 
 
 qualifications mentioned in the text, ^ is positive. 
 
 Let m be the amount of money or general purchasing power at a person's 
 
 disposal, n its total utility to him, and therefore its marginal utility. 
 
 dm 
 
 Thus if Air be the wages that must be paid him to induce him to do labour 
 
 du, , dw du. dv 
 
 A/, tnen A20 = Av, and = 
 dm dl dm dl ' 
 
 If we assume that his dislike to labour is not a fixed, but a fluctuating 
 quantity, we may regard -^ as a function of m, v, and I ; and then both 
 d?w d?w 
 
 : dvdi are always P sitive - 
 
 NOTE XI. (p. 306). If members of any species of bird begin, to adopt 
 aquatic habits, every increase in the webs between their toes whether coming 
 about gradually by the operation of natural selection, or suddenly as a sport, 
 >r (as a minority of biologists still think) partly from the inherited effects of 
 use, will cause them to find their advantage more in aquatic life, and will 
 make their chance of leaving offspring depend more on the increase of the web. 
 
APPENDIX. 
 
 797 
 
 So that, if f(t) be the average area of the web at time t, then the rate 
 of increase of the web increases (within certain limits) with every increase 
 in the web, and therefore /" (t) is positive. Now we know by Taylor's 
 Theorem that 
 
 f(t + V = 
 
 /" (t + Oh) ; 
 
 and if h be large, so that h- is very large, then f(t + h) will be much greater 
 than/() even though/' (t) be small and/" (t) is never large. There is more 
 than a superficial connection between the advance made by the applications 
 of the differential calculus to physics at the end of the last century and the 
 beginning of this, and the rise of the theory of evolution. In sociology as 
 well as in biology we are learning to watch the accumulated effects of forces 
 which, though weak at first, get greater strength from the growth of their 
 own effects ; and the universal form, of which every such fact is a special 
 embodiment, is Taylor's Theorem ; or, if the action of more than one cause 
 at a time is to be taken account of, the corresponding expression of a 
 function of several variables. 
 
 NOTE XII. (p. 408). If, as in Note X., v be the discommodity of the 
 amount of labour which a person has to exert in order to obtain an amount 
 # of a commodity from which he derives a pleasure u, then the pleasure of 
 having further supplies will be equal to the pain of getting them when 
 du _ dv 
 dx~dx' 
 
 If the pain of labour be regarded as a negative pleasure ; and we write 
 
 U= -v : then + =0, i.e. u+ U=& maximum at the point at which his 
 dx dx 
 
 labour ceases. 
 
 represents 
 
 NOTE XII. Ms (p. 415). In an article in the Giornale degli Economisti for 
 February, 1891, Prof. Edgeworth draws the adjoining diagram to represent 
 the cases of barter of apples for nuts described on pp. 395-6. Apples are 
 measured along Ox, and nuts along Oy ; Op 4, pa = 40 ; and 
 the termination of the first bargain in 
 which 4 apples have been exchanged 
 for 40 nuts, in the case in which A gets 
 the advantage at starting : b represents 
 the second, and c the final stage of that 
 case. On the other hand, a' represents 
 the first, and &', c', d' the second, third, 
 and final stages of the set of bargains in 
 which B gets the advantage at starting. 
 QP, the locus on which c and d' must 
 both necessarily lie, is called by Prof. 
 Edgeworth the Contract Curve. 
 
 Following a method adopted in his Mathematical Psychics (1881), he 
 takes U to represent the total utility to A of apples and nuts when he has 
 given up x apples and received y nuts, V the total utility to B of apples and 
 
 o P 
 
798 
 
 APPENDIX. 
 
 nuts when he has received x apples and given up y nuts. If an additional 
 Ax apples are exchanged for Ay nuts, the exchange will be indifferent to A if 
 
 dx dy 
 
 and it will be indifferent to B if Ax + Ay = 0. These, therefore, are 
 
 the equations to the indifference curves OP and OQ of the figure respectively; 
 and the contract curve which is the locus of points at which the terms of 
 exchange that are indifferent to A are also indifferent to B has the elegant 
 
 dU dU dV . dV 
 equation --h^ = ^-^. 
 
 If the marginal utility of nuts be constant for A and also for B, -p and 
 
 dV become constant ; U becomes $ (a - x) + ay, and F becomes & (a - x) + py 
 dy 
 
 and the contract curve becomes F(x)==Q; or x=C ; that is, it is a straight 
 line parallel to Oy, and the value of Ay : Ax given by either of the indifference 
 curves, a function of Q\ thus showing that by whatever route the barter 
 may have started, equilibrium will have been found at a point at which G 
 apples have been exchanged, and the final rate of exchange is a function of 
 C; that is, it is a constant also. This last application of Prof. Edgeworth's 
 mathematical version of the theory of barter, to confirm the results reached 
 in the text, was first made by Mr Berry, and is published in the Giornale 
 degli Economisti for June, 1891. 
 
 Prof. Edgeworth's plan of representing U and F as general functions of x 
 and y has great attractions to the mathematician ; but it seems less adapted 
 to express the everyday facts of economic life than that of regarding, as 
 Jevons did, the marginal utilities of apples as functions of x simply. In 
 that case, if A had no nuts at starting, as is assumed in the particular 
 case under discussion, U takes the form 
 
 similarly for F. And then the equation to the contract curve is of the form 
 
 which is one of the Equations of Exchange in Jevons's Theory, 2nd Edition 
 p. 108. 
 
 NOTE XIII. (p. 430). Using the same notation as in Note V., let us take 
 our starting-point as regards time at the date of beginning to build the house, 
 and let T be the time occupied in building it. Then the present value of the 
 pleasures, which he expects to derive from the house, is 
 
 rt dt. 
 
 Let Av be the element of effort that will be incurred by him in building 
 the house in the interval of time At (between the time * and the time t + At), 
 then the present value of the aggregate of effort is 
 
 V= R-t^dt. 
 
APPENDIX. 799 
 
 If there is any uncertainty as to the labour that will be required, every 
 possible element must be counted in, multiplied by the probability, cr', of 
 
 its being required ; and then 7 becomes I w'R-* ~ dt. 
 
 If we transfer the starting-point to the date of the completion of the 
 house, we have 
 
 . 
 
 dt J -r dt 
 
 where T 1 = T-T'; and this starting-point, though perhaps the less natural 
 from the mathematical point of view, is the more natural from the point of 
 view of ordinary business. Adopting it, we see V as the aggregate of esti- 
 mated pains incurred ; each bearing on its back, as it were, the accumulated 
 burden of the waitings between the time of its being incurred and the time 
 when it begins to bear fruit. 
 
 Jevons's discussion of the investment of capital is somewhat injured by 
 the unnecessary assumption that the function representing it is an expression 
 of the first order ; which is the more remarkable as he had himself, when 
 describing Gossen's work, pointed out the objections to the plan followed by 
 him (and Whewell) of substituting straight lines for the multiform curves 
 that represent the true characters of the variations of economic quantities. 
 
 NOTE XIV. (p. 430). Let a 1} a 2 , a 3 ... be the several amounts of different 
 kinds of labour, as, for instance, wood-cutting, stone-carrying, earth- digging, 
 &c., on the part of the man in question that would be used in building the 
 house on any given plan ; and /J, p', /3", &c., the several amounts of 
 accommodation of different kinds such as sitting-rooms, bed-rooms, offices, 
 <fec. which the house would afford on that plan. Then, using V and H 
 as in the previous note, F, /3, /3', p" are all functions of a 1? a 2 , a 3 ..., and H 
 being a function of /3, /3', ft" ... is a function also of a lf a 2 , a 3 .... We have, 
 then, to find the marginal investments of each kind of labour for each kind 
 of use. 
 
 dV = dJt d]3^dH d?_dH dp" 
 
 dttj ~ dp da^ ~ dp' da-! ~~ dp" da.^ '" 
 
 dV_ dH dp _ dH dp _ dJff dp^_ 
 da 2 ~~ dp da 2 ~ dp' da 2 ~ dp" da z ~ ' 
 
 These equations represent a balance of effort and benefit. The real cost 
 to him of a little extra labour spent on cutting timber and working it up is 
 just balanced by the benefit of the extra sitting-room or bed-room accommoda- 
 tion that he could get by so doing. If, however, instead of doing the work 
 himself, he pays carpenters to do it, we must take V to represent, not his 
 total effort, but his total outlay of general purchasing power. Then the 
 rate of pay which he is willing to give to carpenters for further labour, his 
 
 marginal demand price for their labour, is measured by - ; while -r , , 
 
 da. dp dp 
 
 are the money measures to him of the marginal utilities of extra sitting- 
 room and bed-room accommodation respectively, that is, his marginal demand 
 
 prices for them ; and -= , -~ are the marginal efficiencies of carpenters' 
 labour in providing those accommodations. The equations then state that 
 
800 
 
 APPENDIX. 
 
 the demand price for carpenters' labour tends to be equal to the demand 
 price for extra sitting-room accommodation, and also for extra bed-room 
 accommodation and so on, multiplied in each case by the marginal efficiency 
 of the work of carpenters in providing that extra accommodation, proper 
 units being chosen for each element. 
 
 When this statement is generalized, so as to cover all the varied demand 
 in a market for carpenters' labour, it becomes : the (marginal) demand price 
 for carpenters' labour is the (marginal) efficiency of carpenters' labour in 
 increasing the supply of any product, multiplied by the (marginal) demand 
 price for that product. Or to put the same thing in other words, the wages 
 of a unit of carpenters' labour tends to be equal to the value of such part of 
 any of the products, to producing which their labour contributes, as repre- 
 sents the marginal efficiency of a unit of carpenters' labour with regard to 
 that product ; or, to use a phrase, with which we shall be much occupied in 
 Book vi. Ch. i., it tends to be equal to the value of the "net product " of 
 their labour. This proposition is very important and contains within itself 
 the kernel of the demand side of the theory of Distribution. 
 
 There will be an advantage in developing it with some fulness here; 
 although to do so will partially anticipate later discussions, especially those 
 in the sixth and seventh chapters of Book v. and in the first two chapters of 
 Book vi. : and indeed its full significance will hardly be seen until it is read 
 in connection with the last-named chapters. 
 
 Let us then suppose a master builder to have it in mind to erect certain 
 buildings, and to be considering what different accommodation he shall 
 provide ; as, for instance, dwelling-houses, warehouses, factories, and retail 
 shop-room. There will be two classes of questions for him to decide : how 
 much accommodation of each kind he shall provide, and by what means 
 he shall provide it. Thus, besides deciding whether to erect villa residences, 
 offering a certain amount of accommodation, he has to decide what agents 
 of production he will use, and in what proportions : whether e.g. he will 
 use tile or slate ; how much stone he will use ; whether he will use steam 
 power for making mortar etc. or only for crane work ; and, if he is in a large 
 town, whether he will have his scaffolding put up by men who make that 
 work a speciality or by ordinary labourers ; and so on. 
 
 Let him then decide to provide an amount ft of villa accommodation, an 
 amount ft' of warehouse, an amount ft" of factory accommodation, and so 
 on, each of a certain class. But, instead of supposing him to hire simply 
 ttj, a 2 ... quantities of different kinds of labour, as before, let us class his 
 expenditure under the three heads of (1) wages, (2) prices of raw material, 
 and (3) interest on capital : while the value of his own work and enterprise 
 makes a fourth head. 
 
 Thus let x l , x 2 . . . be the amounts of different classes of labour, including 
 that of superintendence, which he hires ; the amount of each kind of labour 
 being made up of its duration and its intensity. 
 
 ^ e * y\> 2/2 be amounts of various kinds of raw materials, which are 
 used up and embodied in the buildings ; which may be supposed to be sold 
 freehold. In that case, the pieces of land on which they are severally built 
 are merely particular forms of raw material from the present point of view, 
 which is that of the individual undertaker. 
 
APPENDIX. 801 
 
 Next let z be the amount of locking up, or appropriation of the employ- 
 ment, of capital for the several purposes. Here we must reckon in all forms 
 of capital reduced to a common money measure, including advances for 
 wages, for the purchase of raw material ; also the uses, allowing for wear 
 and tear etc. of his plant of all kinds : his workshops themselves and the 
 ground on which they are built being reckoned on the same footing. The 
 periods, during which the various lockings up run, will vary ; but they must 
 be reduced, on a "compound rate," i.e. according to geometrical progres- 
 sion, to a standard unit, say a year. 
 
 Fourthly, let u represent his own labour, worry, anxiety, wear and tear 
 etc. involved in the several undertakings. 
 
 In addition, there are several elements, which might have been entered 
 under separate heads ; but which we may suppose combined with those 
 already mentioned. Thus the allowance to be made for risk may be shared 
 between the last two heads. A proper share of the general expenses of 
 working the business (" Supplementary Costs," see p. 434) will be distributed 
 among the four heads of wages, raw materials, interest on the capital value 
 of the organization of the business, (its goodwill etc.) regarded as a going 
 concern, and remuneration of the builder's own work, enterprise and anxiety. 
 
 Under these circumstances V represents his total outlay, and H his total 
 receipts ; and his efforts are directed to making H - V a maximum. On 
 this plan, we have equations similar to those already given, viz. : 
 
 dV _dH dJ^_dH dp^^ 
 dx-i dp ' dx-, dp' ' dx-t 
 
 dT_dff dp _dH d_p__ 
 
 fy\ ~~ dp ' dy l ~ dp ' dy l ~ 
 
 dV_dH dp_dJH dp__ 
 ~dz ~ dp ' dz ~ dp ' dz ~ 
 
 dV _dH dp _dH dp _ 
 Ufa ~ lip ' du ~ lip' ' dw ~ 
 
 That is to say, the marginal outlay which the builder is willing to make 
 
 dV 
 for an additional small supply, 6x lt of the first class of labour, viz. dxj_ is 
 
 equal to - . ~ dx, ; i.e. to that increment in his total receipts H, which he 
 dp dx l 
 
 will obtain by the increase in the villa accommodation provided by him that 
 will result from the extra small supply of the first class of labour, this will 
 equal a similar sum with regard to warehouse accommodation, and so on. 
 Thus he will have distributed his resources between various uses in such a 
 way that he would gain nothing by diverting any part of any agent of 
 production labour, raw material, the use of capital, nor his own labour and 
 enterprise from one class of building to another : also he would gain nothing 
 by substituting one agent for another in any branch of his enterprise, nor 
 
 M. 51 
 
8 Q 2 APPENDIX. 
 
 indeed by any increase or diminution of his use of any agent. From this 
 point of view our equations have a drift very similar to the argument of 
 Book in Ch v as to the choice between different uses of the same thing. 
 (Compare one of the most interesting notes (/) attached to Prof. Edgeworth's 
 brilliant address to the British Association in 1889.) 
 
 There will be much more to be said, especially in Book vi. Ch. i. 8, on 
 the difficulty of interpreting the phrase the "net product" of any agent of 
 production, whether a particular kind of labour or any other agent : but one 
 minor difficulty may be noticed here. The builder paid ^ 5^ for the 
 last element of the labour of the first group because that was its net 
 product; and, if directed to building villas, it brought him in ^. | te lf 
 
 as special receipts. Now if p be the price per unit, which he receives for an 
 amount p of villa accommodation, and therefore pp the price which he 
 receives for the whole amount p ; and if we put for shortness A in place 
 
 O f d P Sx the increase of villa accommodation due to the additional element 
 
 dx l 
 
 of labour Sx t ; then the net product we are seeking is not pA/3, but p A/3 + /3Ap ; 
 where Aj> is a negative quantity, and is the fall in demand price caused by 
 the increase in the amount of villa accommodation offered by the builder. 
 We have to make some study of the relative magnitudes of these two elements 
 
 If the builder monopolized the Supply of villas, ft would represent the 
 total supply of them : and, if it happened that the elasticity of the demand 
 for them was less than unity, when the amount j8 was offered, then, by 
 increasing his supply he would diminish his total receipts ; and pA/3 + (3Ap 
 would be a negative quantity. But of course he would not have allowed the 
 production to go just up to an amount at which the demand would be thus 
 inelastic. The margin which he chose for his production would certainly be 
 one for which the negative quantity jSAp is less than 2?A/3, but not necessarily 
 so much less that it may be neglected in comparison. This is a dominant 
 fact in the theory of monopolies discussed in Book v. Chapter xn. 
 
 It is dominant also in the case of any producer who has a limited trade 
 connection which he cannot quickly enlarge. If his customers have already 
 as much of his wares as they care for, so that the elasticity of their demand 
 is temporarily less than unity, he might lose by putting on an additional 
 man to work for him, even though that man would work for nothing. 
 This fear of temporarily spoiling a man's special market is a leading influence 
 in many problems of value relating to short periods (see Book v. Ch. v. vn. 
 xi.); and especially in those periods of commercial depression, and in those 
 regulations of trade associations, formal and informal, which we shall have 
 to study in the second volume. There is an allied difficulty in the case of 
 commodities of which the expenses of production diminish rapidly with 
 every increase in the amount produced : but here the causes that govern the 
 limits of production are so complex that it seems hardly worth while to 
 attempt to translate them into mathematical language. See Book v. Ch. xi. 
 and foot-note on p. 584. 
 
APPENDIX. 803 
 
 When however we are studying the action of an individual undertaker 
 with a view of illustrating the normal action of the causes which govern the 
 general demand for the several agents of production, it seems clear that we 
 should avoid cases of this kind. We should leave their peculiar features to 
 be analysed separately in special discussions, and take our normal illustra- 
 tion from a case in which the individual is only one of many who have 
 efficient, if indirect, access to the market. If fi&p be numerically equal to 
 pA/3, where /3 is the whole production in a large market ; and an individual 
 undertaker produced /3', a thousandth part of /3 ; then the increased receipt 
 from putting on an additional man is pAfi f which is the same as jpA/3 ; and the 
 deduction to be made from it is only jS'A^, which is a thousandth part of 
 /3Ap and may be neglected. For the purpose therefore of illustrating a part 
 of the general action of the laws of distribution we are justified in speaking 
 of the value of the net product of the marginal work of any agent of pro- 
 duction as the amount of that net product taken at the normal selling value 
 of the product, that is, as p&p. 
 
 It may be noticed that none of these difficulties are dependent upon the 
 system of division of labour and work for payment ; though they are brought 
 into prominence by the habit of measuring efforts and satisfactions by price, 
 which is associated with it. Eobinson Crusoe erecting a building for himself 
 would not find that an addition of a thousandth part to his previous 
 accommodation increased his comfort by a thousandth part. What he added 
 might be of the same character with the rest ; but if one counted it in at the 
 same rate of real value to him, one would have to reckon for the fact that 
 the new part made the old of somewhat less urgent need, of somewhat lower 
 real value to him (see note 2 on p. 582). On the other hand, the law of in- 
 creasing return might render it very difficult for him to assign its true net 
 product to a given half-hour's work. For instance, suppose that some small 
 herbs, grateful as condiment, and easily portable, grow in a part of his island, 
 which it takes half a day to visit; and he has gone there to get small 
 batches at a time. Afterwards he gives a whole day, having no important 
 use to which he can put less than half a day, and comes back with ten times 
 as great a load as before. We cannot then separate the return of the last 
 half -hour from the rest ; our only plan is to take the whole day as a unit, and 
 compare its return of satisfaction with those of days spent in other ways ; 
 and in the modern system of industry we have the similar, but more difficult 
 task of taking, for some purposes, the whole of a process of production as 
 a single unit. 
 
 It would be possible to extend the scope of such systems of equations as 
 we have been considering, and to increase their detail, until they embraced 
 within themselves the whole of the demand side of the problem of 
 distribution. But while a mathematical illustration of the mode of action 
 of a definite set of causes may be complete in itself, and strictly accurate 
 within its clearly defined limits, it is otherwise with any attempt to grasp 
 the whole of a complex problem of real life, or even any considerable part of 
 it, in a series of equations. For many important considerations, especially 
 
 512 
 
304 APPENDIX. 
 
 those connected with the manifold influences of the element of time, do not 
 lend themselves easily to mathematical expression: they must either be 
 omitted altogether, or clipped and pruned till they resemble the conventional 
 birds and animals of decorative art. And hence arises a tendency towards 
 assigning wrong proportions to economic forces ; those elements being most 
 emphasized which lend themselves most easily to analytical methods. No 
 doubt this danger is inherent in every application not only of mathematical 
 analysis, but of analysis of any kind, to the problems of real life. It is a 
 danger which more than any other the economist must have in mind at 
 every turn. But to avoid it altogether, would be to abandon the chief 
 means of scientific progress: and in discussions written specially for 
 mathematical readers it is no doubt right to be very bold in the search for 
 wide generalizations. 
 
 In such discussions it may be right, for instance, to regard H as the sum 
 total of satisfactions, and V as the sum total of dissatisfactions (efforts, 
 sacrifices &c.) which accrue to a community from economic causes; to 
 simplify the notion of the action of these causes by assumptions similar 
 to those which are involved, more or less consciously, in the various 
 forms of the doctrine that the constant drift of these causes is towards 
 the attainment of the Maximum Satisfaction, in the net aggregate for the 
 Community (see above, pp. 526-7); or, in other words, that there is a 
 constant tendency to make H - V a maximum for society as a whole. On 
 this plan the resulting differential equations of the same class as those 
 which we have been discussing, will be interpreted to represent value as 
 governed in every field of economics by the balancing of groups of utilities 
 against groups of disutilities, of groups of satisfactions against groups of 
 real costs. Such discussions have their place : but it is not in a treatise 
 such as the present, in which mathematics are used only to express in terse 
 and more precise language those methods of analysis and reasoning which 
 ordinary people adopt, more or less consciously, in the affairs of every-day 
 life. 
 
 It may indeed be admitted that such discussions have some points of 
 resemblance to the method of analysis applied in Book m. to the total 
 utility of particular commodities. The difference between the two cases is 
 mainly one of degree : but it is of a degree so great as practically to amount 
 to a difference of kind. For in the former case we take each commodity by 
 itself and with reference to a particular market; and we take careful 
 account of the circumstances of the consumers at the time and place under 
 consideration. Thus we follow, though perhaps with more careful pre- 
 cautions, the practice of ministers of finance, and of the common man when 
 discussing financial policy. We note that a few commodities are consumed 
 mainly by the rich ; and that in consequence their real total utilities are 
 less than is suggested by the money measures of those utilities. But we 
 assume, with the rest of the world, that as a rule, and in the absence of 
 special causes to the contrary, the real total utilities of two commodities 
 that are mainly consumed by the rich stand to one another in about the 
 same relation as their money measures do: and that the same is true of 
 commodities the consumption of which is divided out among rich and middle 
 classes and poor in similar proportions. Such estimates are but rough 
 
APPENDIX. 805 
 
 approximations ; but each particular difficulty, each source of possible error, is 
 pushed into prominence by the definiteness of our phrases: we introduce no 
 assumptions that are not latent in the practice of ordinary life ; while we 
 attempt no task that is not grappled with in a rougher fashion, but yet 
 to good purpose, in the practice of ordinary life: we introduce no new 
 assumptions, and we bring into clear light those which cannot be avoided. 
 But though this is possible when dealing with particular commodities with 
 reference to particular markets, it does not seem possible with regard to the 
 innumerable economic elements that come within the all-embracing net of 
 the doctrine of Maximum Satisfaction. The forces of supply are especially 
 heterogeneous and complex : they include an infinite variety of efforts and 
 sacrifices, direct and indirect, on the part of people in all varieties of 
 industrial grades : and if there were no other hindrance to giving a concrete 
 interpretation to the doctrine, a fatal obstacle would be found in its 
 latent assumption that the cost of rearing children and preparing them for 
 their work can be measured in the same way as the cost of erecting a 
 machine. 
 
 For reasons similar to those given in this typical case, our mathematical 
 notes will cover less and less ground as the complexity of the subjects 
 discussed in the text increases. A few of those that follow relate to 
 monopolies, which present some sides singularly open to direct analytical 
 treatment. But the majority of the remainder will be occupied with 
 illustrations of joint and composite demand and supply which have much in 
 common with the substance of this note : while the last of that- series 
 Note XXI. goes a little way towards a general survey of the problem of 
 distribution and exchange (without reference to the element of time), but 
 only so far as to make sure that the mathematical illustrations used point 
 towards a system of equations, which are neither more nor less in number 
 than the unknowns introduced into them. 
 
 NOTE XIV. Ms (p. 455). In the diagrams of this chapter the supply 
 curves are all inclined positively ; and in our mathematical versions of them 
 we shall suppose the marginal expenses of production to be determined with 
 a definiteness that does not exist in real life; and we shall take no account 
 of the time required for developing a business with the internal and external 
 economics of production on a large scale. And we shall ignore the law 
 of increasing return and all those difficulties connected with it which are 
 discussed in Book v. Ch. xi. To adopt any other course would lead us to 
 mathematical complexities, which though perhaps not without their use 
 would be unsuitable for a Treatise of this kind. The discussions therefore 
 in this and the following Notes must be regarded as sketches rather than 
 complete studies. 
 
 Let the factors of production of a commodity A be a x , a 2 &c. ; and let 
 their supply equations be y = <f>i(x), y = <j>-2(%), & c - Let the number of 
 units of them required for the production of x units of A be m^x, m^, ... 
 respectively; where %, ra 2 ... are generally not constants but functions of 
 x. Then the supply equation of A is 
 
 y = $> ( x ) = m^ ( mi x) + m 2 <f>. 2 (m. 2 x) + . . . = S { w0 (mx) } . 
 
8Q6 APPENDIX. 
 
 Let y = F(x) be the demand equation for the finished commodity, then 
 the derived demand equation for a r the r> factor is 
 
 y = F (X) - {* (X) - m r <f> r (mrX) } . 
 
 But in this equation y is the price, not of one unit of the factor but of 
 m r units ; and to get an equation expressed in terms of fixed units let i, b< 
 the price of one unit, and let $=*,*, then ^ . </ and the equation be- 
 
 comes ,-,- 
 
 If m is a function of x say = fc. (x) ; then x must be determined in terms 
 of $ by the equation =OM/V (*), so that m r can be written Xr () ; substituting 
 this we have r, expressed as a function of $. The supply equation for a r is 
 simply i? = r () 
 
 NOTE XV. (p. 456). Let the demand equation for knives be 
 
 y=F(x) ................................. (1), 
 
 let the supply equation for knives be y=$>(x) ................................. (2), 
 
 let that for handles be y = <j>i(x) ................................. ( 3 ) 
 
 and that for blades be S/ = 2 (*) ................................. < 4 )' 
 
 then the demand equation for handles is 
 
 y=f l (x) = F(x)-<h(x) ................... (5). 
 
 The measure of elasticity for (5) is - {7*?' | , that is, 
 
 I /i 1*1 I 
 
 \x 
 
 "1 
 
 that is XF>(X] F(X) 
 
 This will be the smaller the more fully the following conditions are 
 
 satisfied : (i) that - X -,/\ , which is necessarily positive, be large, i.e. that 
 
 * ( x ) 
 
 the elasticity of the demand for knives be small ; (ii) that 2 ' (x) be positive 
 and large, i.e. that the supply price for blades should increase rapidly with 
 an increase, and diminish rapidly with a diminution of the amount supplied ; 
 
 and (iii) that j- ^ should be large; that is, that the price of handles should 
 
 /i ( x ) 
 be but a small part of the price of knives. 
 
 A similar, but more complex inquiry, leads to substantially the same 
 results, when the units of the factors of production are not fixed, but vary as 
 in the preceding note. 
 
 NOTE XVI. (p. 457). Suppose that m bushels of hops are used in making 
 a gallon of ale of a certain kind, of which in equilibrium x' gallons are 
 sold at a price y'=F(x'). Let m be changed into m + Am ; and, as a result, 
 when x' gallons are still offered for sale let them find purchasers at a price 
 
 y' + A?/' ; then -- represents the marginal demand price for hops : if it is 
 
APPENDIX. 807 
 
 greater than their supply price, it will be to the interest of the brewers to 
 put more hops into the ale. Or, to put the case more generally, let 
 y = F(x, m), y = $(x, m) be the demand and supply equations for beer, x 
 being the number of gallons and m the number of bushels of hops in each 
 gallon. Then F (x, m) = $(x, m) = excess of demand over supply price. In 
 equilibrium this is of course zero : but if it were possible to make it a 
 positive sum by varying m the change would be effected : therefore 
 (assuming that there is no perceptible change in the expense of making 
 the beer, other than what results from the increased amount of hops) 
 
 dF d& 
 
 -j = , the one representing the marginal demand price, and the other the 
 
 marginal supply price of hops ; and the two are equal. 
 
 This method is of course capable of being extended to cases in which 
 there are concurrent variations in two or more factors of production. 
 
 NOTE XVII. (p. 458). Suppose that a thing, whether a finished commodity 
 or a factor of production, is distributed between two uses, so that of the 
 total amount x the part devoted to the first use is x l , and that devoted to 
 the second use is x 2 . Let y = <f>(x) be the total supply equation ; y=f^ (x^) 
 and y =f 2 (x. 2 ) be the demand equations for its first and second uses. Then 
 in equilibrium the three unknowns x, x l , and x 2 are determined by the three 
 equations /j (a^) =/ 2 (# 2 ) = (x) ; x l + x 2 = x. 
 
 Next suppose that it is desired to obtain separately the relations of 
 demand and supply of the thing in its first use, on the supposition 
 that, whatever perturbations there may be in its first use, its demand and 
 supply for the second use remains in equilibrium ; i.e. that its demand 
 price for the second use is equal to its supply price for the total amount 
 that is actually produced, i.e./ 2 (x 2 ) <f> (x t + x 2 ) always. From this equation 
 we can determine x 2 in terms of x , and therefore x in terms of x 1 ; and 
 therefore we can write </> (x) = \f/(x l ). Thus the supply equation for the 
 thing in its first use becomes y = \{/ (x^ ; and this with the already known 
 equation y=fi(x l ) gives the relations required. 
 
 NOTE XVIII. (p. 459). Let a x , a 2 ... be joint products, mjX t m^x... of them 
 severally being produced as the result of x units of their joint process of 
 production, for which the supply equation is y = <f> (x). Let 
 
 y=/i(*). y =/ 2 (*) 
 
 be their respective demand equations. Then in equilibrium 
 
 m ifi ( m i x ) + 2 /a K*) + =<t>(x). 
 
 Let x' be the value of x determined from this equation ; then / x (m^'), 
 / 2 (m 2 x f ) &c. are the equilibrium prices of the several joint products. Of 
 course m lt w 2 , are expressed if necessary in terms of x'. 
 
 NOTE XIX. (p. 460). This case corresponds, mutatis mutandis, to that 
 discussed in Note XVI. If in equilibrium x' oxen annually are supplied 
 and sold at a price y' = <f> (x f ) ; and each ox yields m units of beef: and if 
 breeders find that by modifying the breeding and feeding of oxen they can 
 increase their meat-yielding properties to the extent of Am units of beef 
 (the hides and other joint products being, on the balance, unaltered), and 
 
APPENDIX. 
 
 that the extra expense of doing this is Ay', then ^ represents the marginal 
 supply price of beef : if this price were less than the selling price, it would 
 be to the interest of breeders to make the change. 
 
 NOTE XX. (p. 461). Let a lt a a ... be things which are fitted to subserve 
 exactly the same function. Let their units be so chosen that a unit of any 
 one of them is equivalent to a unit of any others. Let their several supply 
 equations be y^fa (#1)? y 2 = 02 (x^)- 
 
 In these equations let the variable be changed, and let them be written 
 x^hfa), x z =h(y 2 ).... Let y=f(x) be the demand equation for the service 
 for which all of them are fitted. Then in equilibrium x and y are deter- 
 mined by the equations y=f(x)\ x = x l + x 2 + ..., */i = 2/ 2 =--- =2/- (The 
 equations must be such that none of the quantities x lt # 2 ... can have a nega- 
 tive value. When y l has fallen to a certain level x l becomes zero ; and for 
 lower values x 1 remains zero ; it does not become negative.) As was observed 
 in the text, it must be assumed that the supply equations all conform to 
 the law of diminishing return ; i.e. that ^ (x), 2 ' (#) are always positive. 
 
 NOTE XXI. (p. 463). We may now take a bird's-eye view of the problems 
 of joint demand, composite demand, joint supply and composite supply 
 when they all arise together, with the object of making sure that our 
 abstract theory has just as many equations as it has unknowns, neither 
 more nor less. 
 
 First, in a problem of joint demand we may suppose that there are 
 n commodities A lt A 2 ...A n . Let A-^ have a x factors of production, let A^ 
 have a 2 factors, and so on, so that the total number of factors of production 
 is S^a,. : let this = m. 
 
 First, suppose that all the factors are different, so that there is no com- 
 posite demand; that each factor has a separate process of production, so 
 that there are no joint products ; and lastly, that no two factors subserve the 
 same use, so that there is no composite supply. We then have 2n + 2m 
 unknowns, viz. the amounts and prices of n commodities and of m factors : 
 and to determine them we have 2m + 2n equations, viz. (i) n demand equa- 
 tions, each of which connects the price and amount of a commodity ; (ii) n 
 equations, each of which equates the supply price for any amount of a com- 
 modity to the sum of the prices of corresponding amounts of its factors; 
 (iii) m supply equations, each of which connects the price of a factor with 
 its amount ; and lastly, m equations, each of which states the amount of a 
 factor which is used in the production of a given amount of the commodity. 
 
 Next, let us take account not only of joint demand but also of composite 
 demand. Let ft of the factors of production consist of the same thing, 
 say carpenters' work of a certain efficiency ; in other words, let carpenters' 
 work be one of the factors of production of ft of the n commodities A lt A 2 .... 
 Then since the carpenters' work is taken to have the same price in whatever 
 production it is used, there is only one price for each of these factors of 
 production, and the number of unknowns is diminished by ft - 1 ; also the 
 number of supply equations is diminished by ft - 1 ; and so on for other 
 cases. 
 
APPENDIX. 809 
 
 Next, let us in addition take account of joint supply. Let y l of the things 
 used in producing the commodities be joint products of one and the same 
 process. Then the number of unknowns is not altered; but the number of 
 supply equations is reduced by fa - 1) ; this deficiency is however made up 
 by a new set of (y l - 1) equations connecting the amounts of these joint 
 products; and so on. 
 
 Lastly, let one of the things used have a composite supply made up from 
 5j rival sources, then reserving the old supply equations for the first of 
 these rivals, we have 2 (d 1 - 1) additional unknowns, consisting of the prices 
 and amounts of the remaining (dj - 1) rivals. These are covered by (5 X - 1) 
 supply equations for the rivals, and (d l - 1) equations between the prices of 
 the S 1 rivals. 
 
 Thus, however complex the problem may become, we can see that it is 
 theoretically determinate, because the number of unknowns is always exactly 
 equal to the number of the equations which we obtain. 
 
 NOTE XXII. (p. 535). If y=f 1 (x), y=f. 2 (x) be the equations to the de- 
 mand and supply curves respectively, the amount of production which affords 
 the maximum monopoly revenue is found by making {xf 1 (x)-xf 2 (x)\ a 
 maximum ; that is, it is the root, or one of the roots of the equation 
 
 The supply function is represented here by / 2 (x) instead of as before by 
 (x), partly to emphasize the fact that supply price does not mean exactly 
 the same thing here as it did in the previous Notes, partly to fall in with 
 that system of numbering the curves which is wanted to prevent confusion 
 now that their number is being increased. 
 
 NOTE XXIII. (p. 537). If a tax be imposed of which the aggregate amount 
 is F(x), then in order to find the value of x which makes the monopoly 
 
 revenue a maximum, we have {xf (x) - xf 2 (x) - F (x) } = ; and it is clear 
 
 d*K 
 
 that if F (x) is either constant, as in the case of a license duty, or varies 
 as xf l (x) -xf^(x), as in the case of an income-tax, this equation has the 
 same roots as it would have if F (x) were zero. 
 
 Treating the problems geometrically, we notice that, if a fixed burden 
 be imposed on a monopoly sufficient to make the monopoly revenue curve 
 fall altogether below Ox, and q' be the point on the new curve vertically 
 below L in fig. (36), then the new curve at q' will touch one of a series of 
 rectangular hyperbolas drawn with yO produced downwards for one asymp- 
 tote and Ox for the other. These curves may be called Constant Loss curves. 
 
 Again, a tax proportionate to the monopoly revenue, and say m times 
 that revenue, (m being less than 1), will substitute for QQ' a curve the length 
 of each ordinate of which is (1 -m) x the length of the corresponding point 
 on QQ' \ i.e. the point which has the same abscissa. The tangents to cor- 
 responding points on the old and new position of QQ' will cut Ox in the 
 same point, as is obvious by the method of projections. But it is a law of 
 rectangular hyperbolas which have the same asymptotes that, if a line be 
 drawn parallel to one asymptote to cut the hyperbolas, and tangents be 
 
810 APPENDIX. 
 
 drawn to them at its points of intersection, they will all cut the other 
 asymptote in the same point. Therefore if q s ' be the point on the new posi- 
 tion of QQ' corresponding to q 3 , and if we call G the point in which the 
 common tangent to the hyperbola and QQ' cuts Ox, Gq 3 ' will be a tangent 
 to the hyperbola which passes through q s ' ; that is, q 3 ' is a point of maximum 
 revenue on the new curve. 
 
 The geometrical and analytical methods of this Note can be applied to 
 cases, such as are discussed in the latter part of 4 in the text, in which the 
 tax is levied on the produce of the monopoly. 
 
 NOTE XXIII. bis (p. 544). These results have easy geometrical proofs by 
 Newton's method, and by the use of well-known properties of the rectangular 
 hyperbola. They may also be proved analytically. As before let y =/ : (x) be 
 the equation to the demand curve; y=/ 2 (x) that to the supply curve; and 
 that to the monopoly revenue curve is y=/ 3 (x), where f 9 (x)=f 1 (x)-f a (x) 
 the equation to the consumers' rent curve y =/ 4 (x) ; where 
 
 o 
 That to the total benefit curve is y =/ 5 (x) ; where 
 
 i (a) <fe - 
 
 a result which may of course be obtained directly. That to the compromise 
 benefit curve is y=f B (x); where f s (x)=f 3 (x)+nf 4 (x); consumers' rent 
 being reckoned in by the monopolist at n times its actual value. 
 
 To find OL (fig. 38), that is, the amount the sale of which will afford the 
 maximum monopoly revenue, we have the equation 
 
 ^{*/ 3 (*)}=0; i.e. f l (x)-Mx) = x{/ 9 f (x)-f 1 '(x)}i 
 
 the left-hand side of this equation is necessarily positive, and therefore so 
 is the right-hand side, which shows, what is otherwise obvious, that if Lq 3 be 
 produced to cut the supply and demand curves in g a and 9l respectively, the 
 supply curve at q 2 (if inclined negatively) must make a greater angle with 
 the vertical than is made by the demand curve at q 1 . 
 
 To find OW, that is, the amount the sale of which will afford the maxi- 
 mum total benefit, we have 
 
 To find OF, that is, the amount the sale of which will afford the maximum 
 compromise benefit, we have 
 
 
 0; i. e . ~{(l-n)xf l (x)-xf,(x) + n F 
 
 If OL = c, the condition that OY should be greater than ON is that - { x f (x}\ 
 
 dx l J * n 
 
 be positive when c is written for x in it; i.e. since | {x f,(x)\ = 0whena=c, 
 
APPENDIX. 811 
 
 that --T- {xft(x)} be positive when x = c; i.e. that / x ' (c) be negative. But 
 
 this condition is satisfied whatever be the value of c. This proves the first 
 of the two results given at the end of Book v. Chap. vin. 7 ; and the proof 
 of the second is similar. (The wording of these results and of their proofs 
 tacitly assumes that there is only one point of maximum monopoly revenue.) 
 One more result may be added to those in the text. Let us write OH=a, 
 
 then the condition that OF should be greater than OH is that -=- {nf 6 (x)} be 
 
 positive when a is written for x: that is, since /j (#) =/ 2 ( a )> that 
 (1 - n)fi (a) -/ 2 ' (a) be positive. Now // (a) is always negative, and there- 
 fore the condition becomes that / 2 ' (x) be negative, i.e. that the supply obey 
 the law of increasing return and that tan be numerically greater than 
 (l-7i)tan0, where 6 and <f> are the angles which tangents at A to the 
 demand and supply curves respectively make with Ox. When n=l, the 
 sole condition is that tan <f> be negative : that is, OW is greater than OH 
 provided the supply curve at A be inclined negatively. In other words, if the 
 monopolist regards the interest of consumers as identical with his own, he 
 will carry his production further than the point at which the supply price (in 
 the special sense in which we are here using the term) is equal to the demand 
 price, provided the supply in the neighbourhood of that point obeys the 
 law of increasing return : but he will carry it less far if the supply obeys 
 the law of diminishing return. 
 
 NOTE XXIV. (p. 644). Let Aar be the probable amount of his production 
 of wealth in time A, and Ay the probable amount of his consumption. 
 
 Then the discounted value of his future services is / R~* ( ) dt : 
 
 Jo \dt dtj 
 
 where T is the maximum possible duration of his life. On the like plan the 
 
 past cost of his rearing and training is / R^t-j^- - -^ ) dt, where T' is 
 
 J -T' \dt at J 
 
 the date of his birth. If we were to assume that he would neither add to nor 
 take from the material well-being of a country in which he stayed all his 
 
 life, we should have / R~* ( ^ - ^\ dt=0- or, taking the starting-point 
 J - r \dt at J 
 
 of time at his birth, and Z=T' + T=:the maximum possible length of his 
 
 life, this takes the simpler form, \ R-^^f- -^-\dt = Q. 
 
 Jo \dt dt J 
 
 In saying that A# is the probable amount of his production in time A, 
 we have put shortly what may be more accurately expressed thus: let 
 Pi> P*---> be the chances that in time Ai he will produce elements of wealth 
 A^, Agtf..., where p l +p 2 + ... cannot exceed unity : then 
 
INDEX. 
 
 [Wherever a reference is given to the contents of a chapter, that indicates that the 
 subject in question is discussed at length in that chapter, and the reader is referred 
 for more details to the analysis of the chapter in the table of contents.'] 
 
 Abstinence 314. (See Waiting) 
 
 Accumulated outlay 431 
 
 Action of a law 107 
 
 Activities in relation to wants 165 6 
 
 Adams, H. C. 531 n. 
 
 Agents of production, classification of 
 214,5 
 
 Agricultural Holdings Act 743 n. 
 
 Improvements 40 n., 743; 
 
 slow movement of 737 
 Labourers, diminution of, 
 less than appears 355 6 ; 
 movement of ablest to 
 other employments 773 n. 
 
 Agriculture, qualities of soil required for 
 22123 ; nature's part in 2248 ; Law 
 of Diminishing Return in 229232; 
 must be relative to time and place 
 236 245 ; influence of a dense popula- 
 tion on 245 6 ; large and small pro- 
 duction 370, 736 9 ; improvements in 
 718 21 ; tendency towards methods of 
 manufacture 737 ; English system of 
 36, 40, 7339. (See also Land, Land 
 Tenure, Law of Diminishing Return) 
 
 Allbutt, Clifford 282 n. 
 
 Allotments 740 
 
 Allowances in aid of wages 630 2 
 
 American, influence on economic practice 
 49 ; influence on economic theory 68 9, 
 693 ; birth rate 2623, 272, 283 ; inven- 
 tiveness 293; recent improvements in 
 cities 305 n. ; agriculturist 345 ; factory 
 workers 345 n. ; insurance companies 
 469 n. ; war, price of cotton during 
 513 14 ; economy of high wages 628 ; 
 truck system 633 n. ; choice of occupa- 
 tion by different nationalities 637 ; plan 
 of building 721 ; land tenure 732 3 ; 
 shifting conditions of business life 
 701 n., 776 n. 
 
 Anderson 56, 249 
 
 Applied and Pure Economics 1089, 118 
 
 Apprenticeships 2923, 645 
 
 Arbitration 756 
 
 Argyll, Duke of, on Runrig cultivation 
 16 n. ; on Rent 604 n., 608 n., 734 n. 
 
 Aristotle 3 n., 18 n., 253 n., 157 n., 666 
 
 Art Education 2959 
 
 Art of Economics 110, 118 
 
 Artisan work, its educational value 771 n. 
 
 Ashley, on Canonist doctrine 29 n. ; 54 n., 
 93 n. ; on the work of the historian 
 99 n. ; 259 n., 370 n. ; on Ricardo 561, 
 570 n. ; 665 n., 722 n. 
 
 Atkinson 630 n. 
 
 Auspitz 177 n. 
 
 Australia's position in Economics 50; 
 eight hours day in 788 n. 
 
 Austrian economists 68, 217 n. ; their 
 tendency to minimise influence of cost 
 of production on value 604 n. (See 
 also Bohm-Bawerk, Menger, Wieser) 
 
 Auxiliary Capital 150; increase of ex- 
 pensive forms in recent years 303 5 
 
 Avenel, Vicomte d' 320 
 
 Babbage 345, 359 n. 
 
 Bacon 133 n. 
 
 Bagehot66 ; on definition 122 n. ; on early 
 
 forms of saving 302 n. ; 322 n., 382 n. ; 
 
 on business management 639 n., 680 n., 
 
 682, 6856 
 Banfield, on the theory of consumption 
 
 1667 n. 
 Barbaret 192 n. 
 
 Barbon, anticipates Cantillon 55 n.; 58 n. 
 Barone 208 n. 
 Barter, equilibrium of Supply and Demand 
 
 in 4089, 41315 
 Bastiat, 226 n. ; on natural organization 
 
 64 n. 
 
 Bauer 54 n. 
 Beaulieu-Leroy 226 n. ; on tendency of 
 
 poor lands to rise in value 241 2 ; 264, 
 
 320, 701 n., 777 n. 
 Bell, Sir Lowthian 292 n., 350 n. 
 Bentham, his influence on English econ- 
 
814 
 
 INDEX. 
 
 omists 60, 66 n. ; his analysis of wants 
 167 n. ; 205 n., 665 n. 
 Bernouilli, Daniel 210 
 
 Biology, its influence on Economics 65, 
 95, 108 n., 120, 3212 
 
 Black Death 266 n. 
 
 Blanc, Louis 68 
 
 Blanqui 22 n. 
 
 Bodio 285 u. 
 
 Bohm-Bawerk v., criticism of earlier 
 writers 142 n., 149 n. ; definition of 
 capital 152 n.; mathematical tone of 
 177 n. ; on derived demand price 457 n.; 
 565, 593 n., 598 n., 664 n. 
 
 Bonar 54 n., 132 n., 259 n. 563 
 
 Booth, Charles, 192 n. ; on birth rate and 
 death rate in London 263 n. ; on occu- 
 pations in the United Kingdom 357 n., 
 627 n., 653 n. 
 
 Bounties, effect of on supply and con- 
 sumers' rent 522 29 ; indirect cost of 
 528 9 ; on monopolies 535 8 
 
 Brentano, on wages and the price of 
 corn 570 n. ; his contributions to the 
 study of demand and supply in relation 
 to labour 649 n. 
 
 Brown, W. A. 22 n. 
 
 Brownell 263 n. 
 
 Buchenberger 215 n. 
 
 Buckle, on the influence of climate 11 
 
 Budgets, working men's 191 2 
 Business Management (See Contents 
 Book iv. Chs. xi. xii. and Book vi. 
 Chs. vii. vm. See also Management, 
 Earnings of) 
 
 Caird 743 n. 
 
 Cairnes, Slave Power 21 n., 66 ; on de- 
 finition 122 n. ; on demand 172 3 n. ; 
 on grades of labour 301 n. ; on cost of 
 production 418 n. ; on Wages Fund 
 theory 6212 
 
 Cannan 150 n., 249 ; on Malthus 2589 n. ; 
 on growth of suburban population 
 280 n. ; 623, 718 n. 
 
 Cantillon, 55 n., 58 n., 192 n., 643 n. 
 
 Capital, Demand for governed by pro- 
 ductiveness 142; supply of limited by 
 prospectiveness 142 ; a correlative term 
 with income 143; definitions of 149 
 154 ; Standard use of term 152 ; growth 
 of 302, 598601; adjustment of, to 
 business ability 390392 ; demand for, 
 in a trade 585 7 ; in relation to wages 
 in general 61115 ; " industry is limited 
 by" 622 (See as to definition and use 
 of terms, Contents Book n. Ch. iv., as 
 to demand for and supply of, Contents 
 Book vi. Chs. vi. vm.) 
 
 arey, his relation to the 'American 
 school ' 68 ; to List 69 n. ; 226 n. ; his 
 misunderstandings of Ricardo 2445 ; 
 254, 400n. ; on cost of Reproduction 471 
 
 Carlyle 83 
 
 Carrying trades 3689 
 
 Carver 598 
 
 aste system 326 
 
 Character, influence of work on, 1 ; in- 
 fluence of poverty on, 1 2 
 Child, Sir Josiah 254, 316 
 Children, employment of 46, 48; mortality 
 
 of 277 ; education of 289 
 Christianity, gradual influence of 19 27 
 Church, the mediaeval 28 9 ; its relation 
 
 to " usury " 289 n., 6657 
 Circulating Capital 154 
 Clark, J B. 177 n., 184 n. ; on " pure 
 
 capital " 599 n. ; 606 n. 
 Classification, principles of 119 123 
 Cliffe Leslie 66 ; on the Love of Money 
 83 n. ; 621 ; on local variations of wages 
 625 ; on usury 665 6 n. ; on profits 
 6867 
 
 Climate, influence of 11, 12, 18, 2767 
 Coke 224 n. 
 Colbert 53 
 Collective action, modern tendencies of 
 
 49, 878, 744, 749 
 Collective goods 129 ; property 87 8 ; 
 
 use of wealth 20910, 213 
 Colonies, causes of vigour in 279, 757 760 
 Colquhoun 320 
 Combinations, weakest members often 
 
 their rulers 445 n. ; 447 n., 649, 756 
 Commodity 125 
 Common-sense, its use in economics 90, 
 
 102 
 
 " Comparative " study of economics 70 
 Competition, fundamental characteristics 
 of 5 8; its tendency to apportion 
 wages to efficiency 6268 ; Law of 
 Substitution a form of 611 
 Composite, demand 176, 184 ; supply 460 ; 
 
 Rent 498; quasi-rent 753 
 Compromise Benefit 543 
 
 Curve 543 n. 
 Comte 64, 65, 735 
 Conciliation 716 7 
 Conjuncture 201 ; as affecting profits and 
 
 earnings 703 
 Constant Return 398; Curve 523 (See 
 
 Law of) 
 
 Constant Revenue Curve 534 
 Consumers' associations 210 
 Consumers' Rent 200, 605; analysis of 
 200209; how affected by bounties 
 and taxation 52329, 5417 
 Consumers' Rent Curve 542 n. 
 Consumption 133 ; ethical aspects of 210 
 13, 7889; of different grades 179 
 184 (See Contents Book in.) 
 Consumption or Consumers' 1 goods 133 ; 
 
 Capital 150 
 Continuity in economic problems 437 n., 
 
 449, 745, 749 
 
 Conventional necessaries 140, 595 
 Cooke Taylor 370 n. 
 
 Co-operation 210, 312; its difficulties 
 3846 ; hopes for its future 387, 684, 
 755 ; in agriculture 741 
 Cosmopolitan wealth 131 
 Cossa 54 n. 
 
 Cost of marketing (see Marketing) 
 Cost of Production 417 ; its influence on 
 Value 4278, 55765 
 
INDEX. 
 
 815 
 
 Cost of Eeproduction 4712 
 
 Cournot, metaphor of the mean sun 9 n.; 
 
 68, 177 n., 205 n. ; on markets 4012 ; 
 
 481 n., 505 n., 564 
 Courtney 352 n. 
 Cox, 789 n. 
 
 Crusades, influence on trade, 29 n. 
 Cumulative, distinction between causes 
 
 whose effects are or are not 16, 81 n., 
 
 82 n., 6389, 641, 649 
 Cunningham 54 n. ; on Adam Smith 
 
 57 n.; 370 n., 665 n.; on mediaeval 
 
 theories of interest 667 n. ; 777 n. 
 Cunynghame, on supply curves 518 n. 
 Custom 6, 10 16 ; its influence generally 
 
 greater or less than appears, as it is or 
 
 is not cumulative 16, 81 n., 82 n., 638 
 
 9 ; its plasticity in land tenure 722 7 ; 
 
 its protective force 1314, 726 
 
 Darwin 120, 263 n., 333 n. 
 
 Davenant on personal wealth 128 n. ; on 
 population of London 280 n. 
 
 Deduction and induction 9194, 96; 
 Schmoller on 96 n. 
 
 Definition, principles of 119123 
 
 Defoe 349 n. 
 
 Deloume 22 n. 
 
 Demand, its increasing prominence in 
 economic discussions 160 1; increase 
 of 171; point 172 n. ; Law of 175; 
 Mill's use of term 1723 n.; elas- 
 ticity of 178189, 5223; element 
 of time in 185 8 ; of rich and poor 
 179 182; for necessaries 182; joint 
 and derived 452 8 ; composite 458 ; 
 effects on price of increase and falling 
 off of normal 51921 (See Contents 
 Book in.) 
 
 Demand curve 172 n. ; elasticity of 178 n. ; 
 for various classes of consumers 180 n., 
 188 n. ; for rival commodities 181 n., 
 207 n. ; for wheat 182 n. ; for tea, illus- 
 trating consumers' rent 204 5 n. ; 
 whole length of, seldom required 209 n.; 
 contrasted with demand and supply 
 surface 516 n. 
 
 Demand price 170 ; measures marginal 
 utility not average utility 202 n.; of 
 accumulation 315 
 
 Demand schedule 171 ; raising of 173, 
 516 17, 518; negative inclination of 
 175 n. (See Demand Curve) 
 
 Depreciation 432 n. 
 
 Depression of trade 777 8 
 
 Derived Demand 453 ; schedule of 454 ; 
 law q/"454 
 
 Derived Supply schedule 459 
 
 Derived value has something in common 
 with Imputed value 463 n. 
 
 "Detriment" 78 n. 
 
 Devas 426 n. 
 
 Development of faculties by use 3289 
 
 Differentiation 322 
 
 Diminishing Return 230; Law of (See 
 Law) 
 
 Direct Cost 434 (See Prime Cost) 
 
 Discommodity 216 
 
 Discounted value 196, 431 
 Discounting future pleasures and pleasure- 
 able events 1959, 3067 
 "Dissatisfaction" 78 n. 
 Distribution (See Contents Bk. vi. Chs. 
 i. and n.) ; in relation to Exchange 
 620 
 
 Distribution of means between wants ac- 
 cording to marginal utilities 193 9, 
 31213 
 
 Division of labour, its growth in England 
 39 40; in agriculture 40; its advan- 
 tages and disadvantages (See Contents 
 Book iv. Ch. ix.) ; its relation to growth 
 of machinery 366 338 
 Domestic economy, its faults due to pro- 
 duction as well as to con- 
 sumption 195 n. 
 industry 375 6 
 servants, their labour not neces- 
 sarily unproductive 135 ; 
 wages of 614 n., 631, 648 
 Dose 169 n., 232 
 
 Dose of Capital and Labour 250 
 Draper 24 n. 
 Dunbar 557 
 
 Dupont de Nemours 55 n. 
 Dupuit 177 n., 205 n., 531 n. 
 
 Earnings, early theories of 566 71; law 
 of 569 70; in relation to efficiency 
 5701, 6268, 6937; equal to net 
 product of labour 581 4, 60910 ; in- 
 fluence of, on willingness to work 592 
 4; their relation to supply of labour 
 301, 5928 ; general rate of 598, 611 
 18; time 626; piece work 626; task 
 627 n.; efficiency 626 ; Ricardo on 628 
 9 n. ; real and nominal 629 ; influence of 
 uncertainty on 633 4 ; fluctuations of 
 6537, 7001, 7526 ; supplementary 
 and family 635 ; high in new countries 
 757 760 ; of artizans relatively to un- 
 skilled labour 772 3; of elderly men 
 tend to fall 774 ; of women and children 
 to rise 774 ; of professions 775 6 (See 
 Contents Book vi. Chs. i. v.) 
 
 Earnings of Management 156 ; see Man- 
 agement 
 
 Earnings of Undertaking 156 
 
 Economic Freedom 8 ; growth of 10 51 
 
 Economic Goods 127 
 
 Economic Harmony 530 
 
 Economic Laio 104 ; nature of 105 108 
 
 "Economic man" 89 
 
 Economic method 91 110 (See Contents 
 Book i. Ch. v. and vi.) 
 
 Economic motives 75 90; not exclu- 
 sively selfish 837, 30910 ; generally 
 measurable 75 8, 89 90 
 
 Economics, provisional definition 1 ; a 
 modern science 4 5; growth of 52 
 72 ; modern tendencies of 64 8 ; 
 its relation to social science 73 5; 
 concerned chiefly with measurable mo- 
 tives 7590, 4445 ; its claims to be 
 a science 89, 114; methods of study 
 91 104 ; questions it investigates 115 
 
816 
 
 INDEX. 
 
 18; practical issues which point to 
 these inquiries 116 18 
 
 Ede, Moore 228 n. 
 
 Eden 59, 192 n., 267 u. 
 
 Edeeworth 79 n., 177 n. ; on consumers 
 rent 203 n., 208 n.; 797,8; 801 
 
 Education, general 28990; technical 
 291 4; in art 2959; as a national 
 investment 299300 
 
 Efficient demand 323 
 
 Efficiency framings 626; tend to equality 
 625 7; effect of improved machinery 
 on 627 u. 
 
 Elasticity of Demand 179 
 
 Ellison 344 n. 
 
 Engel, statistics of expenditure 191; on 
 elements of efficiency 275 n., 643 n. 
 
 England, growth of free industry and 
 enterprise in 31 44 ; her geographical 
 advantages 2932 ; growth of popula- 
 tion of 254, 264271; movements of 
 industry in 3558; land tenure of 
 669 70; her gains from cheap trans- 
 port 7604 
 
 English, characteristics of 33 4, 329 
 
 English economists early in the century 
 6064; regarded savings as made al- 
 most entirely from profits 311; 5956, 
 615 n., 618 19 
 
 Environment 2001 
 
 Equilibrium, simple case of 408; instance 
 of temporary 40911, 442; in excep- 
 tional cases 409 n. ; of normal demand 
 and supply 416 451 ; amount 424 ; 
 price 424; stable 424; unstable 424 n., 
 512 13 n.; multiple positions of 511 
 15, 528 n. ; change in general conditions 
 of during a long period 505 
 
 Equilibrium amount ond. price 424 
 
 Exchangeable goods 126 
 
 Expenses of Production 417 ; "average" 
 and "aggregate" 500501 
 
 External and Internal economies 347, 
 
 3656, 393, 494 
 goods 1256 
 
 Factors of Production 418 
 
 Factory farms 738 n. 
 
 Factory system, rise of, 41 44; improve- 
 ment in 280 
 
 Fallmer 192 n. 
 
 Farms, large and small 736 9 
 
 Farr 268 9 n., 277 n., 279 n., 597 n., 643 n. 
 
 Fashion, influence of 164 n., 186 n., 510, 
 517, 778 
 
 Feilbogen58n. 
 
 Fertility of land, conditions of 221 28, 
 238 -9; relative to time and place 
 239242 ; importance ascribed to it by 
 English economists 709 n. 
 
 Feudalism 27 30 
 
 Field of employment 717 
 
 Final utility 177 n. (See Marginal) 
 
 Fisher 177 n., 460 n. 
 
 Fisheries 247 
 
 Fixed capital 154 
 
 Fleeming Jenkin 531 n. 
 
 Flux 604 n. 
 
 Foley, Miss 186 n. 
 
 Foot-pounds, measurement by 274 
 
 Foreign trade, 755 n. ; England's gain 
 
 from 761 4 ; competition and hours of 
 
 labour 7867 n. 
 Fourier 68 
 Foville, de 320 
 Foxwell, H. S. 314 n., 635 n. 
 France 31 ; population of 254 5 n., 264 n., 
 
 2723 n., 283 ; taste in 298 ; Metayage 
 
 in 72930 n. ; agriculture in 733 4 n. 
 Free competition 420 
 Freedom, Economic 8 
 Freedom, objective and subjective 19 n. 
 Freedom of Industry and Enterprise 8; 
 
 growth of (See Contents Bk. i. Chs. n. 
 
 m.) 
 
 Free goods 126 
 French economists 68, 566 8, 595 6 
 
 (See Physiocrats) 
 French revolution 46; its influence on 
 
 Bentham 60 n. 
 Friedlander 21 n. 
 Fuller 350 n. 
 "Futures" dealings in 416 
 
 Galton, F. 12 n., 2623, 281 n., 283 n., 
 289 n., 302 n. 
 
 Gambling involves economic loss 211 n. 
 
 Garcke and Fells 434 n. 
 
 General ability 289; causes determining 
 the supply of 28990 
 
 George, Henry 400 n., 760 n. 
 
 German influence on economic practice 
 50 1 ; on economic theory 68 72, 85 
 n., 129, 151 
 
 Germany, technical education in 291, 293 
 
 Giddings 177 n.; on classification of 
 labour 301 n. ; 770 n. 
 
 Gide 144 n., 149 n. 
 
 Giffen 208, 320, 768 n. ; on wage statistics 
 777 n. 
 
 Gilds, their influence on industry, 26 7, 
 44, 100 n. 
 
 Godwin 64 n., 257 n. 
 
 Goethe 65 
 
 Gonner 375 n. 
 
 Goods 124 ; classification of 1245, 133 
 
 Goschen 777 n. 
 
 Gossen 177 n., 606 n. 
 
 Government undertakings 384, 497 n., 
 531, 543, 544 n. 
 
 Graded goods, marketing of 403, 508, 761 
 
 Grades of labour 301 
 
 Greece, Ancient 16 19; population of 
 253 
 
 Green, D. I. 177 n. 
 
 Green, T. H., on the relation of pleasure 
 to duty 78 n. 
 
 Gross Earnings of Management 392, 675 
 
 Gross income 154 5 
 
 Gross interest 669; analysis of 66971; 
 does not tend to equality 672 
 
 Gross, on free towns 27 n. ; on gild regu- 
 lation 44 n. 
 
 Ground-rent, theory of 4825, 71416; 
 highest generally paid by trading es- 
 tablishments 714; its relation to whole- 
 
INDEX. 
 
 817 
 
 sale and retail prices 714 16; rise 
 
 in 567 
 Gruber 192 
 Ganton 781 n. 
 
 Haeckel 322 n. 
 
 Harris 58 n.; on value and use 206 n.; 
 254 n., 319 
 
 Harrison 192 n., 266 n. 
 
 Hasbach 57 n. 
 
 Hay craft on race progress 282 n. 
 
 Hearn 167 n., 322 n. 
 
 Heather Bigg, Miss 186 n. 
 
 Hedonism and economics 77 8 n. 
 
 Hegel, influence of physical surroundings 
 11 n. ; on objective and subjective free- 
 dom 1920 n., 23 n., 36 n.; influence 
 of biological sciences on 65 
 
 Held 43 n., on definition of capital as 
 related to practical problems 150 n. 
 
 Heredity, principle of 323, 329 
 
 Hermann 71, 85 n. ; on external and in- 
 ternal goods 125 n. ; on capital 148 n. ; 
 on classification of wants 166 7 n. ; 
 474, 617 n. 
 
 Hewins 29 n., 54 n. 
 
 Higgs, on Cantillon 55 n. ; on workmen's 
 budgets 192 
 
 Historical School 701, 92 n., 99101 
 
 Hobbes 58 n. 
 
 Hobson 354 n., 370 n. 
 
 Holland, her achievements 31 
 
 Hollander 706 n 
 
 Hours of labour, limitation of 593 n., 770, 
 7847 
 
 House industry 375 
 
 Howell 64.9 
 
 Hume 56; on Wealth of Nations 59 n.; 
 253 n., 567 n. 
 
 Humphreys, Noel 279 n, 2845 n. 
 
 Hunter, Sir W. 701 n., 726 n. 
 
 Huxley 292 n. 
 
 Hypotheses in economics 107 8 
 
 Ideas, their reality 104 n. 
 
 Immigrant, estimation of value of an 
 
 6434 n. 
 Improvements in agriculture 718 21; 
 
 compensation for 743 n. 
 Imputed value, Austrian doctrine of 463 n. 
 Income; its relation to capital 1434, 
 
 152 3; gross 1545; net 155; social 
 
 156 8; relation to national wealth 
 
 157_8, 210 
 Inconstancy of employment 6325, 777 
 
 8 
 
 Increasing Return 229 (see Law) 
 India, want of thrift in 307 ; illustration 
 
 of Government undertaking in 544 5 n. 
 Indian forms of land tenure 726 8n., 
 
 741 n., 743 n. 
 Individual capital 143 
 Induction and deduction 9194, 96; 
 
 Schmoller on 96 n. 
 Industrial, efficiency 274285; training 
 
 286301 
 Industrial environment 200 1, 494 8, 
 
 743 n. 
 
 M. 
 
 Industrial Organization (See Organiza- 
 tion) 
 
 Industry : characteristics of modern 6 7 
 
 " Industry is limited by Capital " 622 
 
 Ingram 22 n., 29 n., 54 n., 66 n., 74 n. 
 
 Instrumental capital 151 
 
 Instrumental goods 133, 151 2 n. 
 
 Insurance against risk 468 470, 693 4 
 
 Integration 322 
 
 Interchangeable Parts 3378, 761 
 
 Interest 121 n., 156, 392 ; its relation to 
 saving 315 17, 318; to demand for 
 capital 585 8 ; rate of, how determined 
 598-^601 ; equilibrium level of 600 ; in 
 relation to old and new investments 
 599600; history of theory 6659; 
 Gross and Net 669 ; in relation to 
 changes in purchasing power of money 
 6734 
 
 Intermediate goods 133, 613 n., 664 n. 
 
 Internal economies 347, 506 10 
 
 Internal goods 125 
 
 Interpretation clauses, may be used to 
 supplement definitions in economics 
 1223 
 
 Investment of resources for a distant 
 return 429^35 
 
 Ireland, influence of potato famine on 
 271 ; land tenure in 740 
 
 "Iron" or "brazen" law of wages 569, 
 570 n., 5,96 
 
 Irregularity of employment 632 5, 777 
 8 
 
 Jenkin, Fleeming 531 n, 
 
 Jessop 670 n, 
 
 Jevons, on Cantillon, 55 n. ; on the pain 
 of idleness 134 n. ; on capital 149 n.; 
 on the theory of wants 1667 n., 189 ; on 
 estimation of future pleasures 199 n. ; 
 on total utility 205 n. ; on gambling 
 211 n.; on labour 217, 370 n.; on 
 markets 402, 461 n. ; on ground-rent 
 483 4 n, ; on value 561 5, 578 ; on 
 advantage of capital to industry 587 n. ; 
 606 n. ; 621, 791, 798 
 
 Jewish influence on economic thought 
 51, 61 n., 71 
 
 Joint demand 452 
 
 Joint products 459460 
 
 Joint- Stock Companies 381 4, 683 4 
 
 Joint supply 459 
 
 Jones, Kichard 311 n, 
 
 Jowett 253 n. 
 
 Kautz 20 n,; first recognised Cantillon 
 75 n.; 665 n. 
 
 Kebbel 633 n. 
 
 Keynes 73 n., 105 n, 
 
 Kidd 329 
 
 King, Gregory 182 n., 280 n., 320 
 
 Knies 11 n., 21 n.; Progress of different na- 
 tions tends to synchronise 50 n. ; Adam 
 Smith not guilty of Smithianismus 58 
 n., 69 n. ; non-purchasable pleasures 
 tend to increase 85 n. ; used analytical 
 methods 92 n. ; 146 n. ; 665 n. 
 
 Korosi 260 n. 
 
 52 
 
818 
 
 INDEX. 
 
 Labour 134, 214; marginal disutility of 
 217- its permanent surplus or rent 217; 
 its supply price 218 ; quasi-rent of 219 
 i 6537? skilled and unskilled 287; 
 efficiency of 274301 ; disputes, illus- 
 tration of derived demand 4528 ; in- 
 constancy of employment of 6325, 
 778; limitation of hours of 593 n., 
 7817 (See Earnings) 
 Labour market, changes in marginal 
 utility of money as affecting 412 ; pecu- 
 liarities of 638660 
 Labour value 708 
 
 Laisser faire, laisser aller 56 n., 567 n. 
 Land 214, 22021; fertility of 22028, 
 236; original and artificial properties 
 of 2258, 663 4; order of fertility of, 
 changes with circumstances 236 42; 
 value of, in different countries 31920 ; 
 rent of, in a new country 486 7 ; in an 
 old country 488 90 ; difference between 
 it and other agents of production 601 4, 
 6078, 71213 ; capital value of 716 ; 
 influence of transport on value of 767 8 
 (See Kent) 
 
 Land Tenure, historical study of 100 n. ; 
 early forms of, their plasticity 7227 ; 
 in India 7268 ; in Latin Europe 728 
 32; in America 7323; in England 
 73342 
 LassaUe 570 u. 
 
 Lauderdale, Lord 182 n., 334 n. 
 Launhardt 177 n. 
 Lavolle'e 192 n. 
 Law 105 ; nature of 106 7 ; meaning of 
 
 the phrase " the action of a law," 107 
 Law of Constant Return 398, 425 n., 427, 
 
 520, 5223 n. 
 Demand 168177 
 Derived Demand 454 
 Diminishing Return 228235 ; 
 provisional statement of 229; 
 relates to amount of produce 
 231; final statement of 232; 
 Eicardo's statement of, was in- 
 accurate 242 ; applies to build- 
 ing land 248 9 n. ; in relation 
 to Mines and Fisheries 2478 ; 
 analogy between it and law of 
 diminishing utility 169 n., 
 235 n. ; note on 249251 ; gra- 
 phical illustrations of 2348, 
 240 1; hi relation to law of 
 increasing return 393 400 ; 
 in relation to taxation and 
 bounties 52031 ; counteracted 
 by cheap transport 762 
 Diminishing Utility 168 9 ; ana- 
 logies with law of diminishing 
 return from land 169 n., 275 n. 
 Increasing Return 229, 397; in 
 relation to law of diminishing 
 return 392400, 736; and 
 supply price 425 n., 50410; 
 and rival commodities 460 1 ; 
 and cost of marketing 466 7, 
 50610 ; seldom shows its 
 action in short periods 505 
 
 9; character of commodities 
 in which it acts strongly 508 ; 
 its relation to taxation and 
 bounties 520531 
 Law of Nature 22 u. 
 
 Satiable Wants 168 
 Substitution 194 n., 419, 4323 ; 
 in relation to theory of distri- 
 bution 576; known to early 
 economists 590; a form of 
 competition 611 ; its relation 
 to Law of Survival of Fittest 
 676 ; its action in controlling 
 Earnings of Management 677 
 685, 7489 
 Survival of the Fittest 2825, 
 
 323330 
 
 Lawes, Sir John 89 n. 
 Lecky 351 n., 632 n., 665 n 
 Leicester, Lord 224 n., 
 Leisure 278, 781 ; difficulty of using it 
 
 weU 7889 
 Le Play on extensive and intensive study 
 
 of statistics 192 n., 264 n. 
 Levasseur on growth of population in 
 
 France 264 n., 271 n., 281 n. ; 320 
 Levermore 245 n. 
 Lieben 177 n. 
 Liebenam 21 n. 
 Liebig 222 n. 
 List, overlooked the tendency of nations 
 
 to snychronize 55 n., 69 70; 226 
 Localized industries, early forms 41, 348 
 
 9; causes of 349354 
 Locke anticipated the Physiocrats 55 
 
 n., 58 n. 
 
 London, death rate of 2801 n. 
 Long leases and improvement in agricul- 
 ture 100 n., 743 
 Long-period supply price 441 
 Longe 621 
 
 "Long run," meaning of the phrase 426 
 8 ; in relation to normal value 437 
 8 
 
 Longstaff 281 n. 
 Lucrative capital 144 n. 
 Luxuries, elasticity of demand for 181 4 
 
 Machinery, analogy between scientific 
 reasoning and 103 4; in relation to 
 division of labour 336 7; lessens 
 fatigue 343 ; and monotony of life 344 
 5 ; in relation to large factories 360 
 2 ; duration of 360 n. ; earnings of 490 
 1 ; its effect on wages 
 
 Mackay 138 n. 
 
 Mackenzie 78 n. 
 
 Macleod 149, 565 
 
 Mac Vane 615 
 
 Mahan on strategy and tactics 101 
 
 Maine 13 n. 
 
 Maitland 723 n. 
 
 Malthus, his study of facts 59 ; his rela- 
 tion to Godwin 64 n. ; definition of 
 capital 151 n. ; 192 n. ; on population 
 2579, 263 n., 264 n; on importation 
 of foreign corn 531 n. ; his correspond- 
 ence with Eicardo on value 557 8; 
 
INDEX. 
 
 819 
 
 on wages 56870, 581 n., 629 n.; on 
 improvements in agriculture 717, 
 768 
 
 "Malthusian" doctrines 780 
 
 Man, both the end and an agent in pro- 
 duction 215, 252, 346 
 
 Management, Earnings of 156, gross and 
 net 392, 675; various forms of , adjusted 
 by Law of Substitution 677685, 748 
 9; in joint stock companies 683 4; 
 their adjustment to difficulty of work 
 done 684 8 ; accurate knowledge as to, 
 difficult to obtain 686 7 ; are high when 
 circulating capital is large relatively to 
 fixed 6923 (See Contents Book vi. 
 chs. vi., vii., VHI.) 
 
 Mangoldt 474 
 
 Manufacture 359 ; percentage of English 
 population engaged in, not increasing 
 357 
 
 Manures 2234 
 
 Margin of building 482 
 
 cultivation 233 
 profitableness 433 
 
 Marginal disutility of labour 217 
 demand-price 170 
 dose 233 
 shepherd 5823 
 uses, do not govern value 580 
 increment 168 
 return 233 
 supply price 446 7 
 utility 168; of money varies 
 with a person's income 170 
 1 ; influence of, on value 427 ; 
 Jevons on 561 5 
 
 Mark system 15 n. 
 
 Market 188, 4017, wliolesale and retail 
 406 ; highly organized 4045 ; local 407 ; 
 in relation to time and space 407, 450 
 n. ; of individual producer is limited 
 5089 
 
 Marketing, cost of 3634, 4668; in 
 relation to law of increasing return 
 50610 
 
 Marriage-rate, causes affecting 260 73 
 
 Marx, Karl; on definition of capital 146; 
 his misunderstanding of Kicardo 560, 
 561, 668 
 
 Material and Immaterial goods 124 
 
 Matheson 432 n. 
 
 Maximum satisfaction 408 ; and taxation 
 526531 ; limitations to doctrine 526 
 7, 5301, 5567, 584 n. 
 
 Mayhew 192 n. 
 
 Mayo Smith 644 n. 
 
 M'Culloch 67; on wants 166; on wages 
 570 n. 
 
 Medieval, towns 267 ; artisan 2968, 
 theories of interest 6657 
 
 Menger, Anton 630 n. 
 
 Menger, Carl, his controversy with 
 Schmoller 92 3 n. ; on ' orders ' of 
 goods 134 n. ; 167 n., 565, 668 n. 
 
 Mercantilism 53 5, 134 n. 
 
 Metayer system 728731 
 
 Method 91104, 11314 (See Contents 
 Book i. Ch. vi.) 
 
 Middle Ages, rate of profits in 697 n. ; 
 labour value of commodities in 784 6 
 
 Migration, hindrances to in Middle Ages 
 2657 ; from country to town 2802, 
 357 
 
 Mill, James 66 n. ; on labour 132 n., 160 ; 
 on the term Dose 232 
 
 Mill, John Stuart, influence of socialists 
 on 64; his relation to abstract econ- 
 omics 66, 85 n. ; on Comte 745, 
 75 6 n., 93 ; on definition 120 ; on 
 capital 151 n., 154 n. ; on demand 
 172 3 n., 249; on grades of labour 
 301, 575 n. ; on change of occupation 
 333 n. ; 400 ; on cost of production 
 417 18 n., 474, 480; in relation to 
 Jevons 561 4 ; on improvements in 
 agriculture 720 1 ; on wages 570 1, 
 575, 617 ; on the wages fund 619623 
 
 Mines, whether Law of Diminishing Re- 
 turn is applicable to 247 8 ; large and 
 small 369 ; rent of 485 
 
 Mobility of labour 3001, 357 
 
 Mommsen 20 n. ; on Koman trade 21 n. 
 
 Money, 9 10; its use as a measure of 
 motive 83 4; changes in purchasing 
 power of 185, 208, 319, 432 n., 6734 ; 
 effect on spending and saving 308 9; 
 changes in marginal utility of 80, 170 
 1, 2067, 208 n., 41113, 5278, 
 530 
 
 Money cost of Production 417 
 
 Money Income 144 
 
 Monopolies ; in relation to national wealth 
 130 n. ; rent of 4812 n., 495 n., 499 ; 
 in relation to law of increasing return 
 505 n. ; theory of 532 547 ; Revenue 
 533 
 
 Monopoly Revenue, Curve 534n.; Schedule 
 534 
 
 Monotony of life, and in some cases of 
 work, diminished by machinery 343 4 
 
 Montesquieu, on the influence of climate 
 11 n., 12 n. ; 264 n. 
 
 Morton 304 n. 
 
 Motives, measurement of 75 90 ; Wag- 
 ner's analysis of 85 n. 
 
 Multiple positions of equilibrium 511 15, 
 528 n. 
 
 Nasmyth 291 n. 
 
 National Dividend 152; estimation of 153. 
 1556, 5889, 6045 ; a stream not a 
 fund 588 ; goes exclusively to consumers 
 616 17 ; influences affecting growth 
 of in England 760 ; in relation to les- 
 sening of hours of labour 786 7 
 
 National Income 157; growth of 48 n.; 
 comparisons of 158 n. (see National 
 Dividend) 
 
 National Wealth 130 
 
 " Natural," Adam Smith's use of the word 
 57 n., 327 
 
 Natural and artificial selection 282 5 
 
 Natural Increase of population 260 
 
 Nature, rule of 55 6 
 
 Necessaries for life, for efficiency, con- 
 ventional 137 140, 595 ; nature of de- 
 
820 
 
 INDEX. 
 
 mancl for 1824 ; taxation of, its effect 
 on consumers' rent 523 n. 
 
 Negatire inclination of curves 175 n. 
 
 Nervous strength distinguished from ner- 
 vousness 275 n. 
 
 Net Advantages 1556, 636 ; vary with 
 individuals and races, 637 
 
 Net Earnings of Management 392, 675 
 
 Net Income 155 
 
 Net Interest 669 ; tends to equality 6723 
 
 .\, f 1'mduct of labour 5814 
 
 Netherlands 31 ; agriculture in 733 n. 
 
 Neumann and Partsch 18 n. 
 
 Neumann, on relation of " Natural and 
 economic laws" 105 n. ; 146 n. 
 
 Newcomb, on capital 149 n. ; 588 n. 
 
 New countries, causes of high wages and 
 interest in 75860 
 
 Neymarck 320 
 
 Nicholson, on Consumers' rent 203 n., 
 208 n., 259 n. ; on living capital of 
 United Kingdom 644 n. ; 665 n. ; on agri- 
 cultural improvements 743 n. 
 
 Nominal Wages 629 
 
 Normal 106 ; elasticity of term 439, 443 ; 
 supply price 421 4, 446 ; in relation to 
 "average" and "aggregate" 500 502, 
 5534; hi a stationary state 5034 
 (See Contents Book v. Chs. m. v.) 
 
 North, Dudley 55 
 
 Occupation, its influence on character 1, 
 
 on health 27980 
 Ochenkowski 7 n., 40 n. 
 Ogle, on marriage returns 260 1 n. ; on 
 
 decrease in rural population 356 n. 
 Open Spaces, public interest in 282 n.. 
 
 744 
 
 Opportunity 200, 703 
 Orders of goods 1334, 452 n. 
 Organization of industry, its growth in 
 
 England 39 44 (See Contents Book iv> 
 
 Ch. vni. etc.) 
 Organization, an agent of production, 
 
 214 15 
 Organized markets 404 5 
 
 Pantaleoni 177 n., 320 
 
 Pareto 177 n. 
 
 Particular Expenses Curve 503 n. 
 
 Partnership 3801 ; in land 7223 
 
 Passy on tendency of poor land to rise in 
 value relatively to rich 242 n. 
 
 Patents 362 n. 
 
 Patten 177 n. ; on Consumers' Eent 208 n. 
 
 Peasant proprietors, prudence of 263 4 n. , 
 731; contrasted with American "far- 
 mer" 732; compared with heads of 
 small businesses 735 n.; should not 
 be artificially sustained or hindered 
 740 
 
 Pell 226 n. 
 
 Periods, long and short 41829 
 
 Perozzo285u. 
 
 Personal capital 154 
 goods 1245 
 risks 671 
 wealth 127 
 
 Petty 58 n., 192 n., 254, 320; on the term 
 "corn" 570 n.; 643 n.; on law of rent 
 71011 n. 
 
 Phear 304 n. 
 
 Physiocrats 55 7, 58 n.; their cosmo- 
 politan principles 69 70; on produc- 
 tive labour 134 n. ; on capital 148 n. ; 
 on population 255 ; on wages 566 7, 
 596 ; on Producer's Surplus 709 
 
 Piece-work wages 626 
 
 Pitt 254 
 
 Place, Francis 258 n. 
 
 Plato 18 n., 253 n., 257 n. 
 
 Political Economy. (See Economics) 
 
 Poor Law, its influence on population 256, 
 2668 ; on saving 308 
 
 Population, Doctrine of 252 9; causes 
 that govern the growth of 259 264; 
 history of, in England 266271 ; sta- 
 tistics of 2601 n., 264 n., 266 n., 268 
 273 ; health and strength of 274285 ; 
 influence of natural and artificial se- 
 lection on 282 5 ; pressure of, on means 
 of subsistence 399 
 
 Porter 768 n. 
 
 Poverty, a cause of degradation 2 
 
 Prediction in Economics 96 7 
 
 Price 8; its use as a measure 79 81, 
 200210; equilibrium 410, 424 ; supply 
 422 ; market and normal 427 8, 440- 1 ; 
 short and long period normal supply 
 439 450 ; marginal supply 446 ; periods 
 for which reckoned 450 n. 
 
 Price, L. L. 57 n., 756 n. 
 
 Prime Cost 434; its relation to normal 
 price 434 8 ; in relation to joint pro- 
 ducts 4645; in relation to supple- 
 mentary costs 509; of human effort 
 difficult to separate from supplemen- 
 tary cost 6067 
 
 Primogeniture, its influence in England 
 33, 35 
 
 Processes of Production 510 
 
 Producers' goods 133 
 Rent 217 
 Surplus 217 See Eent 
 
 Production on a large scale 359 (See Con- 
 tents Book iv. Ch. xi.) 
 
 Production goods 133 
 
 Productive 134 ; a transitive adjective 136 
 
 Productive Consumption 136 7 
 
 Profit and Loss sharing 386, 755 
 
 Profits 156 ; analysis of 689 ; how far a 
 tendency to equality 689697 ; on the 
 "turnover" 695 7; a "fair" rate of 
 696 7; in relation to fluctuations in 
 price 7001, 7526; in relation to 
 quasi-rent in English land tenure 710 
 
 Progress, its influence on values 764 7 ; 
 
 on rent 7689 ; on interest 76970 ; 
 
 on earnings 7716 (See Contents, 
 
 Book vi. ch. xn.) 
 Protection 622 
 Prothero 736 n. 
 Proudhon 68 
 Pry me 258 n. 
 Purchasing power, fictitious unit of con- 
 
INDEX. 
 
 821 
 
 slant, corresponds to "mean sun" 9n.; 
 
 changes in purchasing power of money 
 
 affect rate of interest 673 4 
 Pure and applied Economics 108 9, 11& 
 Pusey 724 n., 743 n. 
 
 Quasi-rent 219, 425 ; its relation to &""- 
 plementary Cost 435 438, 4478 ; its 
 fetation to KenTT75 6, 477, 4912, 
 4978, 6014, 608 n., 657660; not 
 found in a stationary state 502; of 
 labour 607, 6537, 7526 ; of business 
 undertaker 702 4; of a particular 
 business affected by environment 703 
 4; in relation to profits in English 
 land tenure 711 13 ; composite 753 
 
 Quesnay 55 ; on population 255 
 
 Railways, relation of charges to prune 
 
 cost 465 n. (See Transport) 
 Raising the Demand Schedule 173 
 Kaven stein 259 n. 
 Rawson, Sir Rawson, on harvests and 
 
 marriage rate in Sweden 270 n. 
 Heal Cost of Production 417 
 Value 708 
 Wages 629 
 Reformation 28 ; its influence on industry 
 
 36 g ; on art 37 n. 
 Remuneratory Capital 150 
 Rent 156, 234 5, 707; graphic represen^ 
 
 differences bet ween rent and other 
 eaniffigsGDl i, 6078 ; in relajiflii to 
 pfoffEs 471, 497_jl_^_does not enter_jnto 
 cost of production" ^75, 479485; its 
 . 477. 
 
 4D2; ?01 4T607 8 t 71011 ; composite 
 7 incidence of taxes on 477 8, 
 
 529 n.; of natural ability 702 4 ; effects 
 of improvements on 7089, 71821; 
 in relation to retail prices 714 16; 
 difficulty of deciding a normal 741 2 ; 
 estimates of changes in English rents 
 7689 n. (See Contents, Book iv. ch. 
 ii. in. Book v. ch. vin. x. Book vi. 
 ch. n. ix. x.) 
 
 Representative Firm 397, 421, 448, 501 
 
 Reproduction, Cost of 471 '2 
 
 Residuum 2, 778 
 
 Retail prices, variations in 696 n., 714 
 16 - 
 
 Retail trade, advantages of large and 
 small establishments 3668 
 
 Return of pleasure 169 n. 
 
 Return Schedule 2356 n. 
 
 Ricardo 61, 634, 66, 689, 11213 ; his 
 method 93, 102; his analysis of rent 
 102 ; definition of capital 151 n., 154 n. ; 
 stress laid on cost of production 160, 
 177 n., 206 n., 220 n.; on law of 
 diminishing return 233 n., 2429, 
 445 n.; on value 450 n., 557 565; on 
 rent and cost of production 475, 479 
 485, 551 2 ; on effect of improvements 
 
 on rent 70910, 71621, 768 ; on wages 
 569, 570 n., 571 n., 590, 629 n. ; 668 
 
 Risks 46870 ; Trade 671 ; Personal 671 ; 
 in relation to profits 6934 
 
 Ritchie 105 n. 
 
 Rival commodities; in relation to elas- 
 ticity of demand 181 n. ; in relation to 
 law of increasing return 460 2 
 
 Rodbertus 560, 561, 668 
 
 Rogers, on early commutation of person- 
 al for money dues 39 n. ; on the value 
 of land 35 n., 241 n., 262 n., 265 n., 
 266 n. ; on localized industries 349 n. ; 
 728 n., 764, 765 n. 
 
 Rome, Ancient: her economic strength 
 and weakness 19 21 ; the influence on 
 economic history of her law of property 
 22 ; population in 2523 
 
 Roscher 20 n., 21 n., 92 n., 243 n.; on 
 population 253 ; on manufacture 359 n. ; 
 on wages 569 n. ; 665 n. 
 
 Rousseau, his influence on Physiocrats 
 55 n. 
 
 Royalties 248; enter into cost of pro- 
 duction 485 ; are not rent 552 
 
 Rule (Regel) as a substitute for Law 
 105 n. 
 
 Riimelin 253 n., 266 n. 
 
 Ruskin 83 
 
 Sadler 263 n. 
 
 Sanger 208 n. 
 
 Saracens, influence of 24 
 
 Sargant 192 n. 
 
 " Satisfaction " 78 n. 
 
 Saving, slow growth of habits of 306 7 ; 
 conditions of 30710; its connection 
 with rate of interest 31618, 6614 
 
 Say 68, 563 
 
 Schaffle 73 n., 322 n. 
 
 Schloss 627 n. 
 
 Schmoller, on trading companies 21 n. ; 
 on induction and deduction 91, 92 3n., 
 96 n. 
 
 Schbnberg 253 n., 266 n., 375 n. 
 
 Scotland, education in 271, 295; long 
 leases hi 743 
 
 Scott Burn 225 n. 
 
 Scott Russell 292 n. 
 
 Secular movements of normal price 450 n. 
 
 Seebohm, estimates of population 266 n. ; 
 on village communities 722 n. 
 
 Senior, on consumption 133 n., 137 n.; 
 definition of capital 151 n. ; on desire 
 for distinction 167, 163 n. ; on rent and 
 profits 474, 531; on Ricardo's use of 
 the term wages 629 n. ; on rate of 
 profits on large and small capitals 
 690 n. 
 
 Settlement Laws 2667 
 
 Shaftesbury, Lord 766 
 
 Sheffield trades 376 
 
 Shift system 7823 
 
 Ships, advantages of large 369 
 
 Shops, advantages of large 366 8 
 
 Short-period normal price 450 n. 
 
 Short-period supply price 441, 446 7 
 
 Siemens 292 n. 
 
822 
 
 INDEX. 
 
 Situation, its importance in determining 
 value of land in new countries 709 n. 
 
 Situation-rent 495 
 
 Skill, a relative term 2878, 7712 
 
 Slavery: among the Greeks 6, 18; the 
 Komans 1821 ; Adam Smith on 640 n., 
 
 " Slight-change " industries, 694 n. 
 
 Small holdings 73940 
 
 Smiles 38 n., 337 n., 351 n. 
 
 Smith, Adam: on the word value 8; un- 
 dertakers 40 n. ; his genius 567 ; his 
 relation to the Physiocrats 57 8; on 
 measurement of motives 58 9; his 
 study of facts 59 n. ; his omission of 
 conditioning clauses 108 n.; on Per- 
 sonal Wealth 127 n. ; his use of the 
 word productive 1345 n. ; definition 
 of capital 143, 148 n., 154 n. ; 163, 206 
 n., 220 n., 248 n. ; on population 256, 
 263 n. ; on Settlement Laws 2667 n. ; 
 on division of labour 321, 327, 334, 337, 
 343; 'on natural value 426, 470 n.; on 
 rent 479 n., 709, 717 ; on wages 566 
 
 8, 629, 636 ; on slave labour 640 n., 
 643 n.; on comparison between ma- 
 chinery and skilled labour 650; on 
 profits 6734, 689-90, 694 
 
 Smith, H. LI. 653 n. 
 
 Smithianismus 58, 327 n. 
 
 Social capital 143 ; income 156 ; wealth 129 
 
 Social Law 105 
 
 Socialists, their influence on economics 
 64, 619 ; in France 68 ; hi Germany 71 ; 
 on pleasurableness of work 592 
 
 Southwood 3401 n. 
 
 Special Cost 434 (See Prime Cost] 
 
 Specialized Ability 289 ; capital 154 
 
 Spencer, Herbert 13 n., 73, 192 n., 212, 
 263, 322 n. ; on development of faculties 
 by use 328 
 
 Stable equilibrium 424 ; oscillations about 
 4246; theory of 416 28 
 
 Standard of Comfort hi relation to wages 
 594-8, 779781 
 
 Standard of Life 779 
 
 Statical method, deficiencies of in Econo- 
 mics 515 17 
 
 Stationary state 5013 
 
 Statistical tables of 
 Expenditure 191 
 
 Population 266 n., 2689 n., 2723 
 Growth of wealth 320 
 Investment of capital in land 226 n. 
 
 Statistics, difficulty of interpreting 188 
 
 9, 546 7,694 n.; shopkeepers' facilities 
 for collecting 18991 ; need for further 
 531, 5457 
 
 St Chrysostom on usury 28 9 n., 665 n. 
 Steuart (Sir James) 56, 140 n. ; on popu- 
 lation 255 n. 
 
 Stock Exchange securities 4045 
 Stoics 223, 55 n. 
 Strategy and tactics 1012 n. 
 Struggle for survival 32325 
 St Simon 68 
 Sturge 768 n. 
 Subnormal 450 
 Subsidiary trades 360 
 
 Substitution (See Law of) 
 
 Supplementary Cost 434; its relation to 
 Quasi-rent 43538 
 
 Supply Curve 422 3 n. ; distinguished 
 from Particular Expenses Curve 503 n.; 
 of individual producer must be coupled 
 with demand curve of his special mar- 
 ket 509 n. ; lowering of 51819 
 
 Supply Point 422 n. 
 
 Supply Price 218; long-period and short- 
 period 44050 
 
 Supply Schedule 218, 4223 
 
 Surplus Produce 234 ; its relation to Rent 
 234, 4767 
 
 Surplus, consumers' 200, 605 (See Con- 
 sumers' Eent) ; worker's 606 7; saver's 
 or waiter's 606 ; relation of these sur- 
 pluses to one another 607 
 
 Survival of the fittest, law of 3235 ; its 
 relation to Law of Substitution 676 
 
 Sweating system 3756, 682 
 
 Switzerland, 26 
 
 Syme 85 n. 
 
 Synionds 192 n. 
 
 Task-wages, ambiguity of the term 627 n. 
 
 Taussig 617 n., 623 
 
 Taxation, its influence on smuggling 
 188 n.; its incidence on rents, quasi- 
 rents and profits 477 8; theory of, 
 an integral part of theory of value 
 519 n.; its effects on supply and con- 
 sumers' rent 523 531 ; on agricultural 
 produce 529 n. ; indirect costs of 528 9 ; 
 ad valorem 530 1 ; of monopolies 
 535 539 ; building ground 744 n. 
 
 Technical education 2915, 645 
 
 Temporary equilibrium 408 13, 440 
 
 Tenant's- share Curve 729 n. 
 
 Tenure of land (See Laud Tenure) 
 
 Teutonic spirit 22 
 
 Thompson, H. M. 604 n. 
 
 Thompson, William 668 
 
 Thorburn 665 n. 
 
 Thornton 574 
 
 Thiinen, Von 205 n.; his phrase 'Dor 
 Boden an sich ' 220 n. ; on business 
 risks 470 n.; 495 n., 505; on relative 
 efficiency of capital and labour 57980 
 
 Tides, science of, its analogies to econo- 
 mics 97 n. 
 
 Time, the element of, in economic pro- 
 blems 18588, 407, 4258, 437450, 
 4734, 565 
 
 Time Earnings do not tend to equality 
 626 ; high in new countries 75860 
 
 Tithes, incidence of 716 18 
 
 Tooke 62; on fluctuations in demand 
 444 n.; 742 n. 
 
 Total Benefit 5412, Curve 542 n. 
 
 Total Cost 434 
 
 Total Utility 168 
 
 Town life, influence of 2802, 744 
 
 Toynbee 462 n. 
 
 Trade capital 1446 
 
 Trade combinations. See Combinations 
 
 Trade Risks 671 
 
 Trade Unions, early policy of 44, 47 ; in 
 
INDEX. 
 
 823 
 
 relation to Law of Derived Demand 
 45 % 2 58 ; their influence on wages 
 6478, 7556 
 
 Transferable and non-transferable goods 
 125 
 
 Transport, improvements in, effect on 
 geographical distribution of industries 
 8547 ; their influence on value 7639 
 
 Trowbridge 338 n. 
 
 Truck system 6312 
 
 Trusts 435 n., 532, 761 
 
 Tuckett 192 n. 
 
 Turgot 58 n. ; on law of Diminishing Re- 
 turn 249 50 n. ; on population 255 n. ; 
 on iron law of wages 566 n. 
 
 Turnover, profits on 695 7 
 
 Twiss, Travers 54 n. 
 
 Tylor 302 n. 
 
 Undertaker 40, 373; gradual rise of 40, 
 43, 45 (See Business Management) 
 
 Undertaking, Earnings of 156 (See Man- 
 agement, Earnings of) 
 
 Unit of the family 635 
 
 United Kingdom, marriage rate in 272 3 ; 
 value of land in 319 ; statistics of 
 wealth of 320 ; living capital of 644 n. 
 
 United States; property returns of 318; 
 value of land of 319 
 
 Unskilled labour 2878 
 
 Unstable equilibrium 424 n. 
 
 Urban ground-rent 714 16 (See Ground- 
 rent) 
 
 Usance of wealth 156 
 
 Usury, its condemnation by the Church 
 28 9 n., 665 n. ; its relation to interest 
 121 n. 
 
 Utilization of waste products 2289 n. 
 
 Utilitarianism and Economics 77 8n. 
 
 Utility 132; Total 168; Marginal 168; 
 measurement of 201 210 ; influence of 
 on value 4278 
 
 Value 8 
 
 Vanderbilt 776 
 
 Vauban 56 n. 
 
 Venn 107 n. 
 
 Vigour, general conditions of 274 285 
 
 Wage Capital 150 
 Wages (See Earnings) 
 Wages Fund 572, 618623 
 
 Wagner 57 n., 70 n.; his analysis of. mo- 
 tives 85 n.; 105 n., 131 n., 146 n.; on 
 Capital 151 n. ; his definition of Con- 
 juncture 231 ; on the study of produc- 
 tion 215 n. ; on Malthus 258 n. 
 
 Waiting rather than abstinence, involved 
 in saving and rewarded by interest ; 
 this term first used by Prof. MVane 
 315 n. 
 
 Wakefield 254, 744 
 
 Walker, F. 227 n., 293 n. ; on wages 571, 
 630 n. ; on the wages fund 623 ; on 
 business power 685 n. ; on profits 704 n. 
 
 Walker, J. H. 701 n. 
 
 Walras, on Capital 148 n., 177 n., 565 
 
 Wants, 1627 ; classification of 166 7n. ; 
 in relation to Activities 165 6 
 
 Waste products, utilization of 359 60 
 
 Wealth 124131; and well being 12, 
 210213; growth of 302 320; modern 
 forms of 3045 
 
 Webb, Sidney 789 n. 
 
 Wedgwood 389 n. 
 
 Wells 701 n. 
 
 Westcott, on the Reformation 36 n. 
 
 Wheat, price of 182, 256 n. ; its connection 
 with marriage rate 269 ; and mortality 
 277 
 
 Wicksteed 177 n. ; on rent 241 n. ; 604 n., 
 605 n. 
 
 Wieser, 177 n., 565 
 
 Wilkinson, 680 n. 
 
 Willcox 271 n. 
 
 Women, wages of 774 
 
 Work-Fund, fallacy of 7847 
 
 Working classes, condition of, early in the 
 century 43 47; latent genius among 
 295 ; improvement in condition of 776 
 
 Working man, his opportunities of rising 
 387, and his difficulties 388; a rapid 
 rise not an unmixed benefit 389 
 
 Wright, Carroll 43 n. 
 
 Xenophon, on division of labour 334 5 n. 
 
 Yeoman, English, precursor of English 
 
 artisan 34 
 Young, Arthur, his study of facts 56, 59, 
 
 192 n. 
 
 Zeyss 58 n. 
 Zumpt 253 n. 
 
PRINTED BY J. AND C. F. CLAY, 
 AT THE UNIVERSITY PRESS. 
 
PETURN 
 
 14 DAY USE 
 
 DESK FROM WHICH BORROWED 
 
 LOAN DEPT. 
 
 RETURN CIRCULATION DEPARTMENT 
 
 TO ^ 202 Main Library 
 
 LOAN PERIOD 1 
 HOME USE 
 
 2 
 
 3 
 
 4 
 
 5 
 
 6 
 
 ALL BOOKS MAY BE RECALLED AFTER 7 DAYS 
 
 Renewals and Recharges may be made 4 days prior to the due date. 
 
 Books may be Renewed by calling 642-3405. 
 
 DUE AS STAMPED BELOW 
 
 AUU) WSGLAUR03 * 
 
 * 
 
 
 
 AUTOOISCJU615 "W 
 
 
 DEC o 1969 
 
 MM 8 2003 
 
 
 RECEIVED BY 
 
 
 ucu i y lUg 
 
 
 CIRCULATION 
 
 HO "T n. ** 
 
 frppy 
 
 
 OCT ^ ;::; 
 
 REtMOrriTT OCT 1 1*94 
 
 
 AUTO DISC CIRC fCTO^ 
 
 
 
 
 
 
 
 
 
 
 
O' *U 
 
 U.C. BERKELEY LIBRARIEl 
 
 CDomicnao 
 
 9^oi 
 
 THE UNIVERSITY OF CALIFORNIA LIBRARY 
 
E