f 'V it «■ 11 STONYHURST PHILOSOPHICAL SERIES if POLITICAL ECONOMY BY CHARLES S.DEVAS SITY OF CALIFORNIA LOS ANGELES STONYHURST PHILOSOPHICAL SERIES STOXYHURST PHILOSOPHICAL SERIES POLITICAL ECONOMY CHARLES S. DEVAS, M.A. OXON. SOMETIME EXAMINER IN POLITICAL ECONOMY AT THE ROYAL UNIVERSITY OF IRELAND » » 5 V 'SI Ov^ t] aVTI] T)J OLKOVOfXlK]] t] '^pi]/J.aTLaTlKi]. Aristot. Polit. I. 3. 2. THIRD EDITION (Tenth to Twelfth Thousand) LONGMANS, GREEN, AND CO, 39 PATERNOSTER ROW, LONDON NEW YORK. BOMBAY, AND CALCUTTA ' ' ' • - . ' 19/0' ' ■ • • ... ROEHAMI'TON: PRINTED HY JOHK GRIFFIN. c c 1 C c ' :d ^'\ ? I f /(^ ;- PREFACE TO THE SECOND > EDITION. This edition has been enlarged, rewritten in many r parts, and everywhere revised in view of the many changes in laws, economic conditions, and prevalent opinions since the first edition was published, and in view of the many new books and periodicals on economics, such as the nine volumes of the Economic Journal, and the standard work of Pro- fessor Bastable on Public Finance. The doctrines of the Austrian School and discussions on value have been so much developed, especially in America, o as to require more attention than formerly; the o teachings of Ruskin are now so much studied as to g require a place in a guide book to economics ; and questions of practical reform by their nature require frequent revision. I have profited by the many ^additions of Dr. Walter Kaempfe to the German "^translation of this work, though not in agreement oc with all of them. The references to Professor Marshall's Principles of Economics have been entirely revised ; for his language, if not his doctrine, has been much changed since his work was first pub- 458098 a. viii PREFACE. lished in i8go ; and all the present references are to the Fourth Edition published in 1898. I wish to acknowledge my obligations in the chapters on Exchange to the second volume of Professor Nicholson's Political Economy, and in the chapters on Public Finance to Professor Bastable's work already named. The larger type is meant, as before, for the general reader : the smaller type for students. Also for the convenience of students, numbered paragraphs have been inserted with headlines in thick type ; references have been given to easily accessible books ; and much care has been taken to make the Index complete. It is an encouragement to the author to note that several views upheld in this book and opposed to the current teaching of the time, are now widely recognised as true ; for example, that consumption requires almost as much study as production ; that combination is just as "natural" a force as com- petition, and may be just as powerful; that neither differential gains nor the " law of diminishing returns " are confined to agriculture. Above all, the main and central doctrine, that economic science is essentially ethical, has made great progress ; and this allows the hope that the anarchy and confusion lamented by the late Dr. Sidgwick, may at last be followed by order and agreement. PREFACE. ix- It is also an encouragement to note a practica- movement towards some of the reforms urged in the first edition of this work ; for example, the efforts of the legislature to repress usury, to repress fraud.s and to enforce employer's responsibility. I wish to express my many obligations and my debt of thanks to the Rev. Michael Maher and the Rev. Henry Irwin for their continued help, their valuable suggestions, and their correction of the proof sheets. January, 1901. PREFACE TO THE THIRD EDITION. This edition has been carefully revised, later figures substituted where possible for earlier, and a brief Appendix added with some explanations and references for the use of students. The author is glad to note that since the last edition of this book economic opinion has drawn nearer to the principles it upheld, and in four ways r First, the controversy between free-trade and pro- tection that was renewed in 1903, was a confirmation of the principle that the question between them was rather in the concrete than in the abstract, and depended on particular and ever varying circum- PREFACE. Stances. Then the keen desire for some remedy for unemployment confirms the principles of workmen's insurance and of employer's responsibility. Thirdly, the appointment in 1905 of a new Poor Law Com- mission is a welcome confession of the failure of the existing poor law, that disastrous barrier to individual reformation and to social works of reform. Finally, the danger from a falling birth- rate, pointed out by the author twenty years ago, has at last been realised, and the alarming phrase **race suicide" has been added from across the Atlantic to our language. But the author must repudiate any claim (which a critic alleged he made) to have been an economic beacon in a dark age. It is true he opposed much of the teaching formerly current in England ; but he was anticipated by many German writers, and in England by various insurgents against the yoke of "orthodox political economy," such as Cliffe Leslie, David Syme, Jevons, and Ruskin, to say nothing of ecclesiastical authorities who through good report and evil report have constantly upheld the notions of responsible property, of fair contracts, fair wages, fair prices, the supreme importance of family life, the duty of almsgiving, the wrongfulness of usury. Honour then to whom honour is due. October, 1906. CONTENTS. PROLOGUE. Pp. I — 25. § I. Meaning of Political Economy. 2. The Word Economic 3. Economic Laws — Normal. 4. Meaning of Economic Goods: Distinction of Positive from Negative Goods. 5. Distinction of Personal Goods from Material Goods or Wealth. 6. Meaning of Property. 7. Distinction of Objects of Enjoyment from Means of Production. S. Meaning of Value. 9. Distinction of Individual from Social Value. 10. Meaning of Exchange. 11. Meaning of Price. 12. Difficulties surrounding the Definition of Value : Adam Smith and the Modern Austrian School. 13. Meanings of Cost and of Labour. 14. Industrial and Non-Industrial Labour. 15. Meaning of Income or Revenue. 16. Complications. 17. Meaning and Varieties of Capital. 18. Meaning of Expenditure. 19. Cautions on the Use of Economic Terms : Professor Marshall on Continuity. 20. Note on the Distinction of Industrial and Non-Industrial. 21. Over-Reaction against Adam Smith. BOOK I. Production and Consumption. CHAPTER I. Productive Capacities of the Earth . . Pp. 26 — 38 § I. The Two Primary Factors of Production. 2. Points of Physical Geography Important for the Economist. 3. Conclusion from Physical Geography. 4. Limitation of the Earth's Resources. 5. Intensity of lYoduction. 6. Law of Diminishing Returns. 7. Common Misapprehension of the Law. 8. Suitable Degree of Intensity. xii CONTENTS. CHAPTER II. Productive Capacities of Man .... Pp. 39 — 57 § I. Variations of Man's Productive Capacity : Race Problems. 2. Points of Anthropology for Economists. 3. Meaning of Country, Nation, and Civilisation. 4. Productive Capacity according to Nationality. 5. According to Locality and Morality. 6. Education in the Wide Sense. 7. Question of Technical Education. 8. Dis- tinction of General Education from Special. 9. Technical Education, Higher and Secondary. 10. Primary Technical Education. 11. Mistakes on Technical Education. 12. Costs of Technical Education. 13. Limits of Technical Education. 14. Further Limits to National Productive Capacity. CHAPTER III. Industrial Organisation Pp. 58 — 73 § I. Meaning of Concerted Labour. 2. Advantages of Con- certed Labour. 3. Limitation to these Advantages. 4. Result of Concerted Labour : Law of Increasing Returns. 5. Exaggeration of the Law of Increasing Returns : Modern Form of this Mistake. 6. Evils connected with Industrial Organisation : I. Increase of Misdirected Production. 7. II. Increase of Misdirected Consumption. 8. III. Increase of Dishonesty. 9. Minor Evils connected with Indus- trial Organisation : Increase of Carelessness, Physical Injury, Mental Degradation. 10. Exaggerations on Division of Labour and Machinery. CHAPTER IV. Industrial Progress Pp. 74 — 95 § I. Meaning of Industrial Progress. 2. Historical Survey of Industrial Progress. 3. The Industrial Revolution. 4. Some Details on the Industrial Revolution. 5. Estimate of the Gain from the Industrial Revolution. 6. Difficulty : Why the Gain has Profited us so little. 7 Four Mistaken Explanations of the Diffi- culty. 8. The Real Explanation of the Difficulty. 9. Improvements less Important than they seem. 10. Misdirection of Efforts and Wants. II. Destruction and Damage. 12. Work made Unpleasant or Injurious. 13. Artistic Loss. 14. Depreciation of Faculties. 15. Technical Progress as a Compensation for Injury to the Earth : Four Heads of Injury. 16. Destruction of Forests the Worst Injury. 17. Probable Secular Equilibrium. 18. Note on Machinery and the Demand for Labour. CONTENTS. xui CHAPTER V. Industrial Locality and Dimensions . . . Pp. 96 — 124 § I. Reasons for the Locality of Industry. 2. Advantages of Concentration (Localisation of Industry). 3. Influence of the New Facilities of Transport. 4. The Explanation of Modern Urban Concentration. 5. Industrial Dimensions : Meaning of Industry and Business. 6. Varieties of Large-Scale and Small-Scale of Business. 7. Respective Advantages. 8. Complexity of the Question of Dimensions. 9. Conclusion on Large Undertakings versus Small. 10. Is Agriculture an Exception? 11. Probabilities for the Future. 12. Future of Agriculture. 13. Business Manage- ment : the Entrepreneur. 14. Two Kinds of Business Ability. 15. Three Main Varieties of Business Partnerships : Business Firm, Business Company, and Co-operative Business. 16. Modern Development of Joint-Stock Companies. 17. Alleged Social Evil of Joint-Stock Companies 18. Modern Development of Co- operation, ig. Significance of the Co-operative Movement. 20. Confusion and Illusion about Co-operation. CHAPTER VI. Theory of Consumption Pp. 125 — 139 § I. Explanation of Terms. 2. Former Neglect of Consumption by English Economists. 3. Limitation of Human Wants. 4. Theory of Marginal Value. 5. Use of the Theory of Marginal Value. 6. Exaggerated into the Theory of Marginal Utility. 7. Professor Marshall on Marginal Utility. 8. Consumption as an Art. 9. Necessaries, Absolute and Conventional. 10. Standard of Life. II. Superfluities. 12. When Superfluities are Luxuries. 13. Opposing Mistakes on Consumption. CHAPTER VII. Particulars of Consumption .... Pp. 140 — 167 § I. Ten Principal Heads of Consumption: I. Food. 2. Mistake of the Vegetarians. 3. Famines and their Prevention. 4. Homicidal "Political Economy." 5. II. Dwellings. 6. Importance of Dwellings for the Poorer Classes. 7. Grave Problem in Modern Towns. 8. Exaggerations and Mistakes. 9. Means of Reformation. 10. III. Fuel and Light. 11. IV. Clothing and Personal Adornment. 12. V. Furniture. 13. VI. Medical Expenditure. 14. VII. General Education. 15. VIII. Religious Expenditure. 16. IX. Justice. 17. X. Recreations. 18. Rough Classification of Recreations, ig. Vicious Recreations. 20. The Drink Traffic Problem. 21. The Solution. 22. Mistakes on the Drink Question and on Sumptuary Laws. xiv CONTENTS. CHAPTER VIII. Family Life and Law Pp. 168—182 § I. Fundamental Importance of the Family. 2. Christian Family Life. 3. Family Law in General. 4. Law on Married Women's Property. 5. Married Women in Factories. 6. Laws on Wills and Intestacy. 7. English Law of Intestacy and its Reform. 8. Parental Control over Children and their Earnings. 9. Joint Families and their Importance. 10. The Complex Joint Family. CHAPTER IX. Growth and Decay of Nations .... Pp. 183—205 § I. Excess of Births over Deaths. 2. Difficulty from the Prospect of Over-Population. 3. Colonisation and its Importance. 4. Evils of a Low Birth-rate. 5. Apparent Dilemma. 6. First Historical Answer. 7. Second Historical Answer. 8. Conclusion on Over-Population. 9. Essence of Malthusianism. 10. Misrepre- sentations about Malthus. 11. Explanation of the Prevalence of Malthusianism. 12. Answer to Two Difficulties. 13. Disastrous Results of Malthusianism. 14. Policy of Government on Popu- lation. 15. The Evil of withholding National Resources. 16 Historical Examples. BOOK II. Exchange. CHAPTER I. Trade in General Pp. 207 — 215 § I. Meaning of Exchange and Trade. 2. Five Main Reasons for Trade. 3. Principle of Comparative .\dvantage. 4. Advantages and Drawbacks of Trade. 5. Recapitulation on Value, Price, and Money-Price. 6. Discussion on the Relativity of Value or Price. 7. The Question before Us. CHAPTER II. Market Prices Pp. 216 — 244 § I. Meaning of a Market. 2. Four Factors determining Market Price. 3. The Working of Demand and Supply. 4. Meaning of Free Competition. 5. Private Costs of Production. 6. Variation CONTENTS. XV and Complexity of Costs. 7. Distinction of Public and Private Costs of Production. 8. Private Utility. 9. The Order of Wants. 10. Benefit of Markets: Elimination of the Unfit. 11. Scarce Goods and Scarcity Market Price. 12. Caution on the Benefit of Markets. 13. Fluctuations in Market Prices. 14. Evils of Fluctu- ations in Prices; and whether increasing. 15. Average Market Prices. 16. Theory of Normal Value. 17. Criticism of the Theory of Normal Value. 18. Summary on Value and Market Prices. CHAPTER III. Non-Market Prices Pp. 245—269 § I. Distinction of Non-Market from Market Prices. 2. Monopoly and Monopoly Price. 3. Practical Danger of Monopolies. 4. Adam Smith on Forestalling and Engrossing. 5. Mistaken Apology for Monopolies. 6. Dilemma : Waste through Competition. 7. How Monopolies can be a Benefit. 8. Patents and Copyright. 9. Retail Dealing: General Conditions. 10. Exorbitant Retail Prices. 11. Parasitic Retailers. 12. Customary or Legal Prices, or Tariffs. 13. Problem of Railway Rates. 14. Theory of Fair Prices. CHAPTER IV. Differential Gains Pp 270 — 284 § I. Meaning of Differential Gains or "Economic Rent." 2. Note on " Consumer's Rent." 3. Grounds of Differential Gains: Personal Capacity. 4. Favourable Connections ; Fortunate Acci- dents ; Possession of Trade Secrets. 5. Less Wages to Pay. 6. Less Rent or Interest to Pay. 7. Action of the Law of Increasing Returns. 8. Superannuation of Fixed Capital. 9. Action of the Law of Diminishing Returns. 10. Capitalisation of Differential Gains. 11. Note on the Ricardian Theory of Rent. 12. The use of " Rent " for Differential Gains a Cause of Confusion. CHAPTER V International Trade Pp 2S5 — 310 § I. Reasons for Treating International Trade separately. 2. Mistaken Reasons: Professor Bastable's Restatement. 3. National Advantages from Foreign Trade, and Drawbacks. 4. Mill's Mistaken Criticism of Adam Smith. 5. Distribution within a Nation of the Gains from Foreign Trade. 6. Proportional Gain of Different Nations. 7. International Balance of Indebtedness. xvi CONTENTS. 8. Supplementary Grounds of International Indebtedness. 9. The Question of Free Trade veysus Protection. 10. Four Valid Grounds for Protection: I. Acclimatisation of Industries, ir. II. Preserva- tion of Existing Industries. 12. III. Political Security. 13. IV. Social Peace and Fair Distribution. 14. Application to Oppressed Workpeople. 15. Summary on Free Trade and Protection. 16. " Imperial Free Trade" and "Fair Trade." 17. Free Trade and the Laws of Diminishing and of Increasing Returns. 18. Curious Character of the Free Trade Controversy. CHAPTER VI. Money Pp- 311—329 § I. Inconvenience of Barter : Need of a Medium of Exchange. 2. Need of a Measure of Value. 3. Definition of Money, Currency, and Legal Tender. 4. Difficulties in Defining Money. 5. Different Goods used as Money. 6. The Terms Value' and Price as applied to Money : Appreciation and Depreciation of Money. 7. Measure- ment of Changes in the Value of Money : Index Numbers. 8. Peculiarities of the Costs of Money. g. Peculiarities of the Utility of Money. 10. Rapidity of Circulation or Efficiency of Money. 11. Variation in the Amount of Money Payments. 12. Withdrawal of Real Money from Circulation. 13. Gresham's Law. 14. Cautions against Mistakes on Money. 15. Effect of a Depre- ciation or of an Appreciation of Money. 16. Note on the Quantity Theory of Money. CHAPTER VII. Coinage and Tokens ...... Pp. 330 350 § I. Advantage of Coins over Metallic Currency by Weight. 2. The Standard Unit of Value: Denomination of Coins. 3. Distinction of Standard and Token Coins. 4. Use and Abuse of Token Coins. 5. How to prevent Degradation of the Coinage. ■6. Debasement of the Currency. 7. Use of Inconvertible Paper Currency. 8. Abuse of Over-issue. 9. Regulation of an Incon- vertible Paper Currency. 10. Enhancement of the Currency. II. Working of the Indian Coinage Act. 12. Bimetallism explained. 13. Working of a Bimetallic Union. 14. Grave Divergence of Interests an Obstacle to Bimetallism. CHAPTER VIII. Credit and Banking Pp. 351 — 369 § I. Meaning of Credit and Cash. 2. Banking in General, 3. Chief Functions of Banks: I. Specific Deposit. 4. II. Generic X)eposit. 5. III. Setthng Debts. 6. Note on the Clearing System. CONTENTS. xvii 7. IV. Lending on Pledge. 8. V. Lending on Mortgage, g. VI. Lending on Personal Security : Bills of Exchange and Bill-Dis- counting. 10. VII. Exchange Business. 11. VIII. Issue of Bank- Notes. 12. Advantages of an Elastic Currency. 13. Question of Free Banking. 14. The English Bank Act of 1844. 15. The Chief Provisions of the Bank Act. 16. IX. Dealing in Securities. 17. X. Banking for Government. CHAPTER IX. The Foreign- Exch.\nges Pp. 370—383 § I. The Foreign Exchanges in General. 2. The Mint Par of Exchange. 3. The Real or True Rate of Exchange. 4. Gold and the Exchanges. 5. The Rate of Discount and the Exchanges. 6. The so-called Money Market. 7. Grounds for the Anxiety about Gold. 8. Single Reserve System of English Banking. 9. Political Danger from Lack of a Reserve. 10. Note on Money and Foreign Trade. 11. Does Depreciation foster Exports? 12. Do the Ex- changes affect Prices in General ? CHAPTER X. Use a.nd Abuse of Commercial Credit . , Pp. 386 — 405 § I. Great Power of Credit and Banking. 2. Meaning of Investing and Saving. 3. Benefits from Credit and Banking. 4. Benefits from Stock Exchanges. 5. Drawbacks of Commercial Credit : Fostering the Worst Men. 6. Misdirection of Enterprise. 7. Frauds on the Stock Exchange. 8. Gambling on the Stock Exchange, g. Gambling on the Produce Exchanges. 10. Great Controversy on "Futures." 11. Reform of the Stock and Produce Exchanges. 12. Insolvency Laws and their Reformation. 13. Causes of a Commercial Crisis. 14. Prevention or Alleviation of a Commercial Crisis. 15. Mistakes on Commercial Crises and Trada Depressions. CHAPTER XI. U.ncommercial Credit Pp. 406—423 § I, Meaning of Uncommercial Credit. 2. Public Lending. 3. Agrarian Credit and its Four Different Purposes. 4. Mis- cellaneous Credit : Nature of Usury. 5. Mistakes on the Doctrine of Usury. 6. Charges against Catholic Teaching on Usury. 7. Prevalence of Usury. 8. Usury Laws and their Necessity. 9. Abolition and Renewal of Usury Laws. 10. Objections alleged against Usury Laws. 11. Need of Humane Laws of Debt. 12. Co-operative Associations as Averters of Usury. 13. Charitable and Public Lending. xviii CONTENTS. BOOK III. Distribution. CHAPTER I. Distribution in General Pp. 425 — 433 § I. The Problems of Distribution. 2. Triple Division of Income. 3. Distinction of Industrial and Non-Industrial applied to Wages, Interest, and Profits. 4. Note on the Words Interest and Rent. 5. Various Classifications of Income : Adam Smith's, Mill's, Walker's. 6. Nicholson's, Marshall's, Gide's. 7. Is any Classifi- cation Desirable ? 8. Complications in the Problems of Distribution. CHAPTER II. Profits Pp. 434 — 442 § I. Amount and Rate of Profit distinguished. 2. Rate of Profit on Total and on Single Transactions. 3. Real and Nominal Profits. 4. Compensation for Unpleasantness. 5. Question of the Equality of Profits. 6. Mistake of Adam Smith and his Followers. 7. Hiddenness of Profits. 8. Movements of Labour and Capital fail to equalise Profits. 9. Conclusion. CHAPTER III. Interest Pp. 443 — 459 § I. Various Forms of Interest. 2. Amount and Rate of Interest distinguished, 3. Real and Nominal Interest. 4. Question of the Equality of Rates of Interest. 5. Various Current Rates of Interest. 6. Grounds for the Varying Rates of Interest and Discount. 7. Five Influences affecting Average Rates of Interest : I. The Productivity of Industry. 8. II. The Desire of Future Income. 9. III. The Desire of Pr.'^sent Ease. 10. IV. Private Non- Industrial Borrowing. 11. V. Public Borrowing. 12. Interaction of the Five Influences. 13. Question of the Equality of Rates of Interest. 14. Movements of Labour and Capital fail to equalise Interest. 15. Alleged Historical Decline in Rates of Interest. 16. Two Facts seeming to indicate such a Decline. -■o CHAPTER IV. Wages Pp. 460 — 476 § I. Industrial and Non-Industrial Wages. 2. Time-Wages and Piece-Wages. 3. Definite and Indefinite Wages. 4. Amount of Wages, Rate of Wages, Proportional Wages. 5. Real and Nominal CONTENTS. xix Wages. 6. Great Difficulty of ascertaining Real Wages. 7. Maxi- mum and Minimum Wages. 8. Question of the Equality of Wages. 9. Four Wrong Assumptions. 10. Conclusion. 11. The Wages-Fund Theory. 12. Pessimist and Optimist Wage-Theories. 13. Elements of Truth in Mistaken Wage-Theories. 14. Theory of the Economy of High Wages. CHAPTER V. Rich .and Poor ..... Pp. 477 — 491 § I. Prerequisites of Civilisation. 2. Distinction of Rich and Poor in Civilised States. 3. The Limitations to the Inequality of Incom.es. 4. How these Limitations are removed by the Employ- ment of a Serving Class. 5. Proportional Numbers of Masters and Servants. 6. Further Explanations. 7. Theory of Surplus Produce •or Unearned Income. 8. Modern Restatement of the Nature of Unearned Income. 9. Causes of Enrichment and Impoverishment. 3o. Particular Origins of Enrichment. 11. Particular Origins of Impoverishment. 12. Important Doctrine of Prescription. CHAPTER VI. An Apologia for the Rich Pp. 492—505 § I. The Defence of Riches a Distinct Task from the Defence of Property. 2. The Four Arguments for Inequality : Industrial, Intellectual, Political, and Religious. 3. The Arguments for Inequality strengthened by Christianity. 4. How the Arguments for Inequality modify the Doctrine of Unearned Income. 5. How the Arguments for Inequality make Riches and Responsibility Inseparable. 6. Four Heads of Duties of the Rich. 7. Danger from the Neglect of these Duties. 8. Fair Treatment of the Poorer Classes. 9. Note on Fair Wages. 10. Wages and Strict Justice. CHAPTER VII. Mistaken Theories on Riches .... Pp. 506—526 § I. General Character of the Argument. 2. Theory of the Reward of Abstinence. 3. Theory of Discounting the Future. 4. Theory of the Reward for Waiting. 5. Theory of the Reward of Service. 6. Theory of the Reward of Ability or Mental Labour. 7. Legalistic Theory. 8. Cynical Theories. 9. General Character of Socialism. 10. Cautions on the Word Socialism. 11. Extreme 'I'heories : Communism and Anarchism. 12. Elaborate Theories; Collectivism. 13. The Answer to Collectivism. 14. Collectivism xk CONTENTS. Fatal to Simple Rights of Property. 15. Milder Theories : Land Nationalisation. 16. State Socialism. 17. How to Distinguish State Socialism from Social Reform. CHAPTER Vni. Liberty and Law .... . . Pp. 527 543 § I. Classification of Social Relations. 2. FeudaUsm and Slavery. 3. Meaning of an Unregulated Regime. 4. Classical Example of an Unregulated Regime ; England 1800— 1850. 5. Restoration of Regulation. 6. Factory Laws. 7. Historical Sketch of the English Poor Laws. 8. The New Poor Law of 1834 and its Issue, g. Poor Law Reform. CHAPTER IX. Association and Responsibility .... Pp. 544 — 567 § I. The Mediaeval Trade Guilds. 2. Characteristics of Trade Unions. 3. Good Results from English Trade Unions. 4. Weak Points of Trade Unions. 5. Employer's Associations. 6. Boards of Arbitration and Conciliation. 7. Their Weak Points. 8. Sliding Scales, g. Industrial Partnership or Profit Sharing. 10. Weak Points of Profit Sharing. 11. Need of Strengthening the Organs of Conciliation. 12. The Incorporation of Trade Unions and Com- pulsory Arbitration. 13. The Quadrupal Insurance of Workpeople. 14. Law of Responsibility. 15. How Friendly Societies would profit by the Law of Responsibility. 16. Encouraging Examples : Welfare Institutions. 17. Question of Old Age Pensions. BOOK IV. Public Finance. CHAPTER I. Functions and Cost OF Government . . . Pp. 569 —582 § I. General Character of Public Finance. 2. Summary on the Nature of the State. 3. Primary Functions of Government. 4. Secondary Functions of Government. 5. Private Exercise of Public Functions. 6. Public Exercise of Private Functions. 7. Three Ways of meeting the Cost of Government. 8. Grave Danger of Over-Taxation. 9. Taxable Capacity Different in Different Countries. CONTENTS. xxi CHAPTER II. Public Ownership and Management . . . Pp. 583 — 592 § I. Public Receipts either Non-Tax Revenue or Ta.\ Revenue. 2. Public Property which yields no Revenue. 3. Varieties of Non- Tax Revenue. 4. Objections in General to Public Ownership or Management. 5. Cases where these Objections are outweighed. 6. Question of Public Revenue in the Shape of Interest. 7. Question of Monopolies, especially Railways, and the State, CHAPTER III. Principles of Taxation ..... Pp. 59J — 607" § I. Restatement on the Nature of Taxation. 2. Problem of Fair Taxation. 3. Principle of Special Benefit. 4. Principle of- Taxable Capacity. 5. Explanation on Progressive Taxation.. 6. Objections raised against Progressive Taxation. 7. Subordinate'- Principles to be regarded in Taxation. 8. The Opportunist Theory of Taxation : Doctrine of Diffusion of Ta.xes. 9. Note on the; Shifting and Incidence of Taxation. 10. Technical Canons off Taxation. CHAPTER IV. Different Kinds OF Taxes .... Pp. 608— 621 § I. Classification of Taxes. 2. First Head of Ta.xation : Impersonal Taxes on Property or Produce. 3. Second Ilead of Ta.xation : Personal Taxes on Capital or Income. 4. Third Head of Taxation : Direct Taxes on Expenditure. 5. Fourth Head of Taxation : Indirect Taxes on Expenditure. 6. Objections to these Taxes. 7. In some Cases outweighed. 8. P'ifth Head of Ta.xation : Taxes on Occasions. 9. Discussion on Death Duties. 10. Taxes on Contracts. CHAPTER V. Public Debts Pp. 622 — 632 § I. Character of Public Debts. 2. How to meet Extraordinary Public Expenditure. 3. Advantages of Borrowing. 4. Whetlicr Debts should ever be paid off. 5. Grave Abuses connected with Public Debts. 6. Reasonable listimate of these Abuses. 7. Con- clusions, Moral and Technical. xxii dONTENT^. EPILOGUE. PART I. Scope and Method of Econ'omic Science . , Pp. 633 — 646 § r. Causes of Disagreement among Economists. 2. Economics a Part of Ethics. 3. Distinction of Sciences and Arts: Economics a Science not an Art. 4^ Bearing of Physical Science and Psychology on Economics. 5. Note on Normative and Positive Science. 6. Bearing of History on Economics: Exaggerations of the His- torical School. 7. Theories of Sociology. 8. Both Theory and Observation, Deduction and Induction, needed for Economics. 9. Use of Mathematics and Statistics. PART II. History of Economic Science . . . • Pp 647 — 662 S I. The Greeks and Romans. 2. The Scholastic Period, 3. The Mercantile Period. 4. Period of Economic Liberalism. 5. Adam Smith and the Physiocrats. 6. '• Orthodox " or '■ Classical " Political Economy. 7. The Overthrow of Economic Liberalism. 8. Critical Estimate of Ruskin as an Economist. 9. Modern Schools of Economists. .Appendix A— T 663 kIp POLITICAL ECONOMY. Prologue, § I. Meaning of Political Economy. — The names political economy,or economics, or economic science, which are all three used as equivalents, express one of the moral or ethical sciences, and thus have as their subject-matter the free actions of men. The simplest division of these moral sciences is to distinguish general ethics, dealing with the foundations and nature of morality, from parti- cular ethics, dealing with human actions in particular departments. These departments are not of them- selves marked out distinctly, but for the convenience of study may be divided into two groups according as men are associated for getting their living and preserving their race, or for keeping the peace and preserving justice. In the one case the family or household, in the other the State or commonwealth is the most conspicuous agency ; and thus the study of human actions is called in the one case economic science, and in the other political science. These two sciences are intimately connected, and fre- quently overlap. Thus economic science takes note of cohj- nisation, Government agency, and the laws of contract, PROLOGUE. property, and partnership, all belonging also to political science ; while poUtical science takes note of public finance, international trade, and the sanitary or moral regulation of consumption (of alcohol, for example), all belonging also to economic science. The foregoing description of economics will be more fully explained in the Epilogue, and defended against those economists who declare their science to be non-ethical. It resembles Professor Marshall's, which makes Economics "a study of mankind in the ordinary business of life ; it examines that part of individual and social action which is most closely connected with the attainment and with the use of the material requisites of well-being." {Principles of Economics, p. I.) For the family is the prime agency connected with the attainment and use of the material requisites of well-bemg. § 2. The Word Economic. — This adjective clearly depends on the substantive economics or pohtical economy, and is used in this Manual of whatever regards the support, enjoy- ment, or continuance of man's hfe on earth ; and thus frequently has a direct moral reference, and if not, at least an indirect moral reference. Those writers, indeed, who look on economics as the science of man's action in the pursuit of wealth without any regard to morality, naturally make the word economic refer simply to getting or preserving the maximum amount of wealth, much as "economical" is used in ordinary discourse. Thus we meet phrases Uke " the economic point of view," or " on purely economic grounds," used in contradistinction to the poUtical or ethical point of view ; and may hear said, for example, that for Holland to buy all her ironclads and naval stores abroad is best for her from the purely economic point of view, but dangerous politically ; or that to allow the slave trade or women's work in mines cannot be condemned on purely economic grounds, but is reprehensible ethically. But as we shall see in the Epilogue, the separation of economics from ethics cannot be carried out consistently; and therefore this use of the term economic is inevitably misleading, and also quite unnecessary. For the point of view of mere wealth can be expressed quite plainly by the v/ovd pecuniary. § 3. Economic Laws. — This term, or its equi- valent, the Laws of Political Economy, was much misused by the classical economists, who thought such laws were as universal and rigid as laws of PROLOGUE. physical science ; who imagined such laws to exist where they were non-existent (such as the " Law of Population," in Mill, I. x. 2) ; and who opposed much good legislation (such as the protection of factory workers and the suppression of usury and adulteration) on the ground that it was against the laws of political economy. But the abuse of the term economic law does not destroy its use, which is to indicate first of all certain physical laws which are important in economics (such as the law of diminishing returns, infra, Bk. I. ch. i.), and secondly to indicate certain probabiHties of human action in economic matters, namely, that under certain circum- stances most men will probably act in a certain way (such as the probability called Gresham's law, ijifva, Bk. II. ch. vi.). Normal is the adjective corresponding to law in the sense given above, just as "legal" is the adjec- tive corresponding to law in the legislative sense ; and we may accept Marshall's definition, " that the course of action which may be expected under certain conditions from the members of an indus- trial group is the normal action of the members of that group." {Principles of Economics, p. 106.) Thus within the hmits of a market it is iKninal for each buyer to seek to buy at the lowest price, and for each seller to sell at the highest. Thus within the Umits of a family it is normal for the stronger members to take care of the weaker, and for the parents to seek the welfare of their children. Thus wherever there is a monopoly it is normal for the monopolist to charp,'e the price that he judges will bring him the maximum profit, not the price that will allow the maximum (juantity of the monopolised goods to be sold. Thus wherever there are many persons with many interests in common, it is normal for them to unite in associations. PROLOGUE. § 4, Meaning of Economic Goods : Distinction of Positive from Negative Goods. — A good is whatever is suitable to man's nature, whether to the whole or to a part, and is so far desirable. Goods which relate to the support, continuance, and enjoy- ment of man's life on earth can be called economic goods ; and to avoid confusion we must make regarding them certain distinctions. Every action of ours and every choice is directed towards some good, and we must therefore call every object of our desires by the name of a good ; but yet, as our condition is fallen, such goods may in fact only satisfy disordered affections, morbid cravings, and the desires of our lower nature ; they may be destructive of our true welfare, and opposed to the desire of our better self or of our higher nature. Such, for example, are raw whisky, adul- terated beer, opium (other than medicinal), bad books, indecent prints, explosive bullets, the tools of house-breakers. A name, then, is needed to dis- tinguish the goods which an upright man may reasonably desire, and on the other side the goods which minister to folly, to pride, to hatred, to drunkenness, and to debauchery : goods which like those others will fetch their price, often a high one, in the market ; but unlike them will issue in degra- dation and death. The first kind can be called positive goods, and the second negative goods. It is true that most of such negative gooJs can be used under special circumstances for a good purpose, as thieves' tools in the hands of the police, or bad printed matter to light the fires, or bad spirits to neutralise snake poison or revive from a swoon ; but the business of science is not with PROLOGUE. the peculiar and abnormal, but with the general and normal ■ — respicit id quod in pluribus accidit. Observe that between positive goods, which cause life to be better, and negative, which cause life to be worse, are goods which are wasted unavailingly. Thus Marshall says of England that perhaps a hundred million pounds annually are spent by the working classes, and four hundred million by the rest of the population, in ways that do Httle or nothing towards making life nobler or truly happier. {Principles, p. 786.) And thirty years earlier Ruskin had said : " A great part . . . of the most earnest and ingenious industry in the world is spent in producing munitions of war, . . . filling its stores with all power of the instruments of pain, and all affluence of the ministries of death." [Miinera Pulveris, § 48, Edit. 1886.) There is no necessity indeed to follow Ruskin so far as to confine the terms wealth or goods to " the things which the nature of humanity has rendered in all ages the objects of legitimate desire." {Ibid. § 34.) All that is necessary is to emphasise with the Scholastics the distinction between morbid and healthy desires, and the difference between bonum homiuis simpliciler and bonum secundum quid. (St. Thomas, Summa Theol. la 2ae, q. 114, a. 10.) § 5. Distinction ot Personal Goods from Material Goods or Wealth.— Goods which cannot exist apart from definite and particular persons can be called personal goods. Such, for example, are {a) skill, knowledge, diligence, honesty, docility ; (6) honour, praise, affection, filial piety, maternal love ; (c) per- sonal rights and claims, trade-marks, copyright, the good-will of a business, the credit of a merchant; {d) personal services of attendants, nurses, doctors, musicians, teachers, lawyers, soldiers, clergy. Material goods or wealth are terms best confined to goods which are external to man and at the same time are corporeal ; for example, the air and sun- light, the streams and the forests, pastures and meadows, arable land and garden ground, mines, fisheries, factories, shops, roads, railways, and PROLOGUE. ships ; domestic animals and farm buildings, tools and implements ; bread and wine, garments and jewels, houses and furniture, churches and schools, books and works of art : all these are wealth. But slaves are not wealth, for they are persons ; nor skill, for it is not external to man ; nor personal services, for they cannot exist apart from a parti- cular person ; nor rights and good-will, for they are immaterial. § 6. Meaning of Property. — This term can be applied to goods which have been appropriated, namely, over which a person or several persons claim rights of exclusive use. It is thus both a wider and a narrower term than wealth : wider, because it includes some personal goods, such as rights, good-will, and slaves, none of which goods are wealth ; and narrower, because some goods which are wealth, such as air, light, and trade winds, cannot be appropriated. The distinction of property from wealth seems desirable, i[i order to get a proper estimate of public or national wealth. If with Professor Marshall (among other writers) we make a man's wealth synonymous with his property, it is hard to escape the paradox that the enslavement of one half the nation by the other would be a vast increase of wealth, their emancipation avast decrease. And Mr. Macleod's contention, that wealth consists in legal rights, would make an estimate of national wealth still more difficult ; and we should be in danger of the error diipli (or counting the same thing twice over), and of making each fresh loan or each fresh charge upon an estate an increase of wealth. § 7. Distinction of Objects of Enjoyment from Means of Production. — If goods are used for some immediate personal satisfaction they are objects of enjoyment (or of consumption) ; for example, food. PROLOGUE. clothing, dwelling-houses, furniture, pleasure-gar- dens, theatres ; and also medical service, personal attendance, beautiful music, domestic virtues. The act of using such goods can be called enjoyment or cojisumption. Neither of these terms is perfect, for we do not usually speak of consuming music or of enjoying the services of tne dentist. But a term is needed ; and enjoyment or con- sumption are the least misguiding, especially the first ; the second, however, has been so commonly used by economists that we must take it as an alternative. Only if once used in this sense it must never, without emphatic notice, be used in any other. For it is restricted to a particular kind of human action, and we must no longer speak of an engine consuming coal and oil, or even of an ox consuming hay, but of the expenditure of coal and oil to make the engine work, and of hay to feed the ox. On the other hand, if goods are used, not directly in present personal satisfaction, but indirectly for the sake of some enjoyment in the future, they are means of production ; for example, farms, farm-stock, live and dead, fisheries, mines, quarries, workshops and factories, offices and warehouses, machinery and tools ; and also technical capacity and habits of industry. The act of using such goods can be called production. The distinction of objects of enjoyment and means of production, long ago expressed by St. Augustine as frui and uti,\s expressed by Dr. Sidgwick, as far as confined to material goods, by the terms consumer's wealth and producer's wealth. Other phrases are consumption goods and production goods, final and intermediate goods, direct and indirect goods. The line between production and consumption or between ' the goods used for these two very different purposes, is not clearly marked nor to be drawn with precision, any more than the line between day and night, between summer and winter, or Ijetween riches and poverty. But this is no good reason for refusing to make the distinction, which in truth is fundamental; production being only for the sake of con- 8 PROLOGUE. sumption, and the triumph of art being to reach a maximum of the one with a minimum of the otlier. And if we are asked whether an oven in a private house is to be called consumer's wealth while a similar oven in a bake-shop is producer's wealth ; or what is the precise moment when coal ceases to be a means of production and becomes an object of enjoyment, whether when it reaches the retailer, or leaves his premises, or reaches the premises of the final consumer, or passes from the coal-cellar to the coal-scuttle, or is put on the fire — we can answer that such questions are of no con- sequence ; that some kinds of carrying and repairing may conveniently be regarded as part of the preparatory use of goods, and other kinds as part of the enjoyment of goods ; and that our business is to point out the plain fact of the great difference between preparation and enjoyment, or between production and consumption, not to trouble about the obscure point where the one is transformed into the other. (Cf. infra, on " The continuity of economic phenomena," at the end of this Prologue.) § 8. Meaning of Value.— This most important term may be taken to mean the capacity of any good to be valued, that is, to be estimated as desirable, to have importance attached to it as a good. Hence the greater or less importance that can be attributed to a good at any time or place, the greater or less at that time or place is the value of the good. Value in this sense is not the same as utility, which is the capacity of any good to serve its purpose. Thus medicine is useful to a sick child, but not valuable to him ; for if he can he will throw it out of the window ; but his toys are valuable to him. Thus again, those goods which are sometimes called free goods, such as air, water and light, so far as obtainable with no trouble, in any quantity we require, though most useful are not valuable to us, being taken for granted, and not made objects of PROLOGUE, valuation. Value, therefore, presupposes not merely recognised utility, but also difficulty of attainment. A further analysis of the grounds of valuation, and the meaning of viargiual value as well as the theory of marginal utility will be found in the chapter on the theory of consumption. § g. Distinction of Individual from Social Value. — Value as defined above exists wherever men and goods exist. But in the social state, where goods are not simply made and used by separate families, but are exchanged, that is, are given up to others for goods in return, we get, as distinct from individual value, the notion of social value, namely, the capacity of any good to have importance attached to it, not merely by an in- dividual or a family, but by a larger social group. Observe that the two features of recognised utility and difficulty of attainment which belong to individual value, belong also to social value ; only the estimate is social or common {communis cestimatio) instead of being individual or particular. And the larger the body whose joint estimate is taken, the less will be the influence of individual peculiarities, fancies, and caprices. Also the very fact of there being a social valuation has a great reflex influence on individual valuation (as Dr. Smart points out, Introd. to the Theory of Value, pp. 49, 50). The individual is apt to look on other people's valuation as his own, and usually wishes to avoid being whimsical or eccentric in his estimates. Observe also that the estimate by even a large body of men may rate objects very differently from their intrinsic dignity, or national importance, or moral excellence. Generally we pay, says St. Augustine, more dearly for a horse than for a bondsman, and for a gem than for a bondswoman {De civitate Dei, xi. 16) ; and to use Shakespeare's words {Troilus and Cressida, iii. 3) : What things there are Most abject in regard and dear [important] in use W'liat things again most dear in the esteem. And poor in worth I TO PROLOGUE. From what has been said ou goods and value, we can answer affirmatively such questions as whether the mild and dry climate of Egypt, requiring so little use of clothing, food, and shelter, is to be reckoned as wealth. It is no less wealth than the furs, stoves, stocks of fuel, and watertight roofs in Norway. But there is less wealth valued in Egypt. The climate not being made the object of an estimate, like the furs, the stoves, the fuel, and the roofs. And there is less .property, the climate njjt being capable of appropriation like those other goods. § 10. Meaning of Exchange. — It is most con- venient to use exchange in the wide sense of a transfer of goods to another person in consideration of some return, and to place it in contrast with a gift. Exchange in this wide sense is applicable not merely to dealings with wealth, but to dealings with personal goods ; and is applicable not merely to an outright transfer of goods, as in a sale, but also to contracts that keep the two parties still bound to each other in special relations. Such transactions are the contract of hiring services for wages or salary, the contract of letting and hiring material goods such as a farm or house, and the contract of lending and borrowing where there is interest to pay. But to give your services gratis, to allow your premises to be occupied rent-free, and to lend without interest like Antonio, the merchant of Venice, are acts of kindness not exchanges. It seems clearest to confine the word merchandise (or wares) to what is bought and sold, and not to extend it to what is hired, lest we mix up contracts of a very different character and legal aspect. Thus we can speak of the exchange of labour for wages ; but had best avoid speaking of the buying and selling of labour. Men indeed can be made merchandise by law, and then we can speak of buying and seUing slaves ; for there is a genuine contract of sale. We do not indeed alter facts by the names we call them ; PROLOGUE. XI and if a lecturer said tlie Queen bought her prime minister with his salary, and that he sold his services for that price, our Government would not be impaired ; but the due appre- hension of the facts might be impaired. It is going to tlie other extreme, and is certainly inconvenient, to limit the word exchange to material goods, and make it stand for the German Tausch rather than for Verkehr. Only when the word is thus narrowly limited is Thornton's dictum true: '• No service whatever can possibly be exchanged." § II. Meaning of Price. — This follows from the notions of value and of exchange. Assuming those already adopted, price is 'the expression of value by a measure. This measure must be a definite quantity of some exchangeable good ; and this exchangeable good is generally one used as a medium of exchange, and is thus, as we shall see in the next Book, to be called money. In civilised societies, moreover, money is so pre- eminently the measure of value that we can use the word price as synonymous with price in money. Observe that price sometimes may not properly express value, and then we say the price is too high or too low, above or below the value. But according to the definition adopted here, we must not say, and in fact rarely do say, that the value of a thing is too high or too low. What we may rightly say is that the estimates on which value depends, are often sadly mistaken ; that not merely individuals, but whole societies are blind to what truly ministers to their peace, and attach absurd importance to trifles and calamitous importance to negative goods. i:5 12. Difficulties Surrounding- the Definition of Value: Adam Smith and the Modern Austrian School.— In defining value the econoniisl has a diUHiill task. Vov (lie ICnglisli word — and the same may be said of foreign equivaluuts such 12 PROLOGUE. as valeiir or Werth — has many current meanings. We habitually speak of the value of money, of getting good value for our money, of a lost note-book being of no value to any one but the owner, of a thing valueless in itself, or of inestimable value ; we speak of things at a sale fetching loss than their value, and yet of the value of thin;^'S being what they will fetch ; we repeat the Scriptural phrase that men arc of more value than many sparrows ; and of a foolish man we say that his opinion is of no value. In general tiie won! seems to imply some estimate of some good ; but whether the estimate be of a single person or of many ; whether the object estimated be simply desired or be ethically desirable ; whether the value resides in the good, or in the estimate, or some other good used as a measure, all depends on the particular circumstances of each case. Adam. Smith distinguished value-in-use from value-in- exchange. By the first he meant the utility of an object from the moral or philosophical point of view ; by the second he meant the power of purchasing other goods which the possession of the object conveys. Thus value-in-use he applies to the utility of goods which conduce to the real welfare of man ; value-in-exchange he applies to what coincides with price (as defined above). The fortuue of the two phrases has been different. He himself concentrated his attention on value-in-exchange {i.e., price), and then amoug the economists who followed him, with the neglect of the problems of consumption and with the neglect of ethical considerations, naturally enough value-in-use dropped out of account, and was curtly dismissed by Mill with the remark : " Political economy has nothing to do with the comparative estimation of different uses in the judgment of a philosopher or of a moralist. The use of a thing, in political economy, means its capacity to satisfy a desire or serve a purpose." (Bk. Ill.ch.i. § 2.) But Adam Smith's employment of the term value-in -exchange was accepted by Mill, and to this day in the writings of many English economists, such as Professor Marshall and Professor Nicholson, the term remains the equivalent of price, while they confine the term price to money-price. This is unfortunate ; for then we must either be superficial, like Mill, and ignore many grave questions relating to individual and social estimates of the importance of goods ; or, if we recognise them, we must strain and force some other word, such as " utility," to express what could be much better expressed by the word value. The modern Austrian School run to the other extreme and apply value to what had better be expressed by some other word. For while defining " subjective value " much as PROLOGUE. 13 individual value has been defined above, they give the name of " objective exchange value " to price, and the name of " objective use value " to powers that have no relation to any estimate, for example, the heating power of coal or the fattening power of oil-cake. Still it is a great merit of Jevons and the Austrian School to have renewed the study of the problems indicated by Adam Smith in the phrase value-in-use ; to have shown the difference of the two notions value and price ; the importance of consumption, the difhculties in the measurement of wsalth ; and to have brought us back to the truth well stated by Professor Hadley (Economics, p. 92), that value is essentially an ethical term. But to keep it an ethical term we are by no means bound to follow Ruskin's use of terms, whereby value means " the strength of ' availing ' of anything towards the sustaining of life, and is always two-fold; that is to say, primarily, INTRINSIC, and secondarily, effectual." {Munera Pulvtris, § 12.) The intrinsic value of Ruskin is thus like the objective use value of the Austrians, with the difference that the power must be for a good purpose — to support life. And this intrinsic value combined with " acceptant capacity" makes effective value, or wealth, e.g., the intrinsic value of a riding horse combined with capacity to ride, make a riding horse into wealth'. The term real value sometimes means intrinsic value in Ruskin's sense; sometimes social as opposed to individual value, as when a rustic is said not to know the real value of old china or an old picture, meaning by value the price the goods would fetch in London at a sale ; sometimes again real value has been applied, notably by Ricardo, to the cost of production as distinct from actual market value {i.e., price). Advanced students may consult on the term value the discussion in Dr. Sidgwick's Political Economy, Bk. I. ch. ii. § 13. Meanings of Cost and of Labour. — Cost may be defined as the surrender of some good by some person — a personal sacrifice. There can be as many kinds therefore of cost as there are kinds of goods that can be sacrificed : rest, leisure, recreation, health, personal appearance, social position, domestic order, and comfort ; and also material goods used up, or worn, or damaged, or withdrawn from other uses. 14 PROLOGUE. Labour is not the same as cost, for much cost, like the using up of fuel by an engine, is not labour; nor the same as human exertion, else many of our sports and games would have to be called labour, and play become work ; nor the same as unpleasant- ness, for then many social duties would be labour, and many contented and happy workers at the loom or in the fields would be told at the close of day that they had done no work. Labour should rather be defined as human action of which the proper and natural purpose (finis operis) is some good which the operator does not receive then and there. Now, whether the husbandman takes joy in his ploughing and the craftsman in his weaving, or not, the end of ploughing is to provide food and of weaving to provide garments. The action may be healthful and pleasant, and the motives of the operator (finis operantis) may turn it into a labour of love ; but it is still labour. I Mark three points: (i) The line between exertion that is ' labour and not labour, between work and play, is often hard to draw ; but so are many lines. (2) The aim of the operator may determine the finis operis in some cases ; thus the operation itself is the reward of the " amateur," but not of the "professional." Professor Marshall's definition of labour makes all depend on the aim of the operator. Labour, he says, is " 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." (p. 134.) But then a person with constant high motives and pious intentions would be labouring all the time he was not asleep : his conversation, his meals, his play would all be work. (3) Joy i" labour, though not removing its character of labour, removes a great part of the cost of labour, A merry heart goes all the day, Your sad tires in a mile-a. PROLOGUE. 15 This point in all comparisons of national welfare is of great importance. Thus in Europe and America during the last hundred years, unsuitable education and the revolt against religion may have doubled among great populations the real cost at which they get their living. Compare, for example, the dislike of country life among the present generation of English farm-labourers (noticed by many observers, such as P.A.GTahd.m,Tie Rural Exodus), with the happy labour of many of the peasantry in Southern Europe, where frequently for particular work the neighbours collect now at one farm, now at another, and carry out the work amid singing and merriment, as in Portugal, for unsheathing the maize before threshing. (Crawfurd, Round the Calendar in Portugal, p. 198.) § 14. Industrial and Non-Industrial Labour. — There have been immense discussions among econo- mists on the classification of labour, in particular on the distinction of productive and unproductive labour. This is not surprising, because labour can be looked on from so many points of view, namely, as aiding in preparation or aiding in enjoyment ; as producing necessaries or producing luxuries ; as producing wealth or producing personal good ; as producing permanent or ephemeral goods ; as pro- ducing positive or negative goods. Since then the word unproductive is invidious, and the word pro- ductive misleading ("a slippery term," Marshall, p. ig6), it seems best to express what is a necessary distinction by other words, and to divide labour into industrial and non-industrial according as its end is or is not the preparation of material goods (or the production of wealth). To draw an exact line indeed where preparation ends and enjoyment begins is a hard task, but not necessary. It is quite easy and profitable to place in the one division or the other the vast majority of those who labour ; to i6 PROLOGUE. place in the one all engaged in agriculture, mining, manufactures, commerce, and the building trades; in the other the labours of clergy and statesmen, of the military and civil services, of lawyers and doctors, workers in science and literature, actors and musicians. The terms industrial and non-industrial seem the best available, and are used by Dr. Sidgwick. {PoIit.Econ. p. 26^.) Tliey correspond substantially with Professor Nicholson's material production and immaterial production. {Polit. Econ. pp. 44 — 46.) The chief difficulties lie in three departments of labour, namely, transport, teaching, and the work us?ially done among ourselves by domestic servants. But all three can be dealt with accurately enough for the purpose. Thus all engaged on the railways, roads, rivers, in the post-office and telegraph service, can be reckoned industrial, if to any considerable degree they conduct business traffic as distinct from pleasure traffic ; all teachers can be reckoned as non- industrial, unless they are mainly employed in giving technical education ; and all domestics are to be reckoned as non- industrial unless their main work is not to help their master in the process of enjoyment, and he employs them not for his pleasure but for his profit. For a defence of the distinction of industrial and non- industrial, see Note at the end of this chapter. § 15. Meaning of Income or Revenue. — This term has a wide and a narrow sense. The wide sense known as gross or nominal income is the total wealth added to the property of a given person in a given time from whatever source ; in other words, the sum of his receipts, whether in the shape of produce of his own or his workmen's labour in field or workshop, or in the shape of proceeds of the sale of his goods, or in the shape of wages for work done, or in the shape of rent or interest from pro- perty which others hire from him. The narrow sense known as net or real income is PROi^OGUE. 17 the nominal income minus the following items : {a) Destruction, damage, or loss by fire or other accident, by violence, by thieves, by bad debtors. {h\ Using up of materials in production, and wear and tear of machinery and industrial buildings, such as factories or shops, (c) All sums spent on pur- chases of goods that are to serve the purchaser not as objects of enjoyment, but as means of getting an income, {d) All sums spent on hire of goods that in like manner are to serve as means of getting an income, {e) All payments for labour that in like manner are to serve as means of getting an income. These five items for short can be called damage, industrial wear, industrial purchases, industrial hire of goods, industrial hire of labour. But we must in no way include among these items the wages of servants whom a man employs for his pleasure ; for this is a mode of spending net income, not a deduction before the net income can be reckoned up. Nor again must we include pay- ments for the purchase or hire of goods that are to serve a man as objects of enjoyment ; for this also is a mode of spending income and not a deduc- tion before it can be reckoned up. § 16. Complications. — Although in the main the foregoing distinction of gross and net income corresponds with the ordinary practice in private life, it is not so in some parti- culars. Thus taxes are often with great convenience treated as one of the deductions to be made before net income is reckoned, and not as a mode of spending that income. Sometimes legal charges are deducted in the same way. On the other hand, expenditure on technical education is often treated like that on general education and not deducted before reckoning up net income. Again, the rent of a small home farm attached to a dwelling-house, and the wages of X8 PROLOGUE. the man who does the work on it, are not distinguished from the rent of the dwehing-house and the wages of the domestic servants, and all alike treated as a way of enjoying net income, not a deduction before reckoning it up. Another complication is with durable objects of enjoyment, such as a house. Thus if a man, with ;f i,ooo income from four per cent, stock, spent previously ;/^ioo a year on a repairing lease of his house, and now sells ;^2,50o worth of stock, so that his income is only ;^900, and with the proceeds of the sale buys his house, he has nominally ;£ioo a year less income, but yet is practically in the same financial position as before. In fact the Income Tax Commissioners in England add to his income what he would presumably have had to pay as house rent. Again, as Professor Hadley observes {Economics, p. 5) : " If a man for a series of years earns ten thousand dollars a year and spends it all, he is always rich in one sense and never in another. He has much income and no capital.'' A different difficulty is to know how much is to be deducted when the same material object serves both as a means of getting an income and of enjoying it, for example, how much of what a medical man spends on house and carriage, a post- man on boots, an attendant at a fashionable shop on tidy clothes, is to be deducted in order to reckon their net income. Tlie moral of these complications is not to abandon the simple view that income i'.i an addition to a man's property witliin a certain time, but, while holding that view, ever to bear in mind that income is not a sure and exact, but only an uncertain and rough and ready test of a man's financial position, and of his command over the necessaries and con- veniences of life. § 17. Meaning and Varieties of Capital. — It seems best to take this much-disputed term in Adam Smith's sense, namely, that part of a person's property which he employs for the sake of income ; the other part of his property being what is used or reserved for enjoyment or not used at all. The essence then of capital in this sense is to serve as a source of income to the owner or holder cf it, and thus it is far from being the same as the means of production, though often confused with them. All PROLOGUE. igf means of production indeed, as far as they are appropriated, are capital, for example, farm land, farm stock, factories, materials of manufactures ; but there is besides much capital composed of objects of enjoyment, such as the wages of work- men, these wages being generally objects of enjoy- ment or money to buy them with ; or again, objects of enjoyment let on hire, dwelling-houses, furniture, pleasure-gardens, horses, carriages, all of which serve as capital, not indeed to those who hire them, but to those who let them. And all stocks of finished goods ready to be sold for enjoyment, are undoubtedly to be called part of the capital of the tradesman, and all property used by hotel keepers and theatrical managers in their business. Notice that even railways and steam-ships and the appa- ratus of the telegraph and postal system, although capital to the owners, are not simply means of production like a ploughed field or a spinning-wheel, but are used for pleasure traffic as well as business traffic, and thus in part are objects of enjoyment. Many varieties of capital can be distinguished : (i) According as it fulfils the same function more than once or only once, we distinguish fixed from circulating capital. Thus machinery, arable land, a building, a milch cow, are all iixed capital; while the material and fuel used in manufactures, and finished goods ready for sale, are circulating. (2) According as it is composed of goods that can or cannot be shifted from one place to another, we distinguish movable from immovable capital. Though this is often the same as the distinction of fixed and circulating capital, it is not so always. Thus a trades- man's horse and cart are part of his fixed capital, l)uf arc movables. (3) According as it can or cannot be easily changed from 20 PROLOGUE. one purpose to another, we distinguish non-specialised from specialised capital. Thus wages, most materials, and some tools are capable of being easily diverted from one purpose to another ; but railways, docks, most buildings, and much machinery cannot be easily diverted. (4) According as it is composed of means of production or of objects of enjoyment, we distinguish productive (or auxiliary) from consumptive capital. This is not quite the same as Dr. Sidgwick's distinction of the terms producer's and consumer's capital. He takes capital to mean, not the source of revenue to a particular person, but a particular aspect of property as intermediate between labour and enjoyment, and then gives the title of consumer's capital to durable objects of enjoyment, like houses, furniture, and works of art. But if we adopt the view of capital being a source of revenue, then " consumer's capital " is a contradic- tion in terms, and objects of enjoyment can only be capital to those who transfer them to others to enjoy, not to those who enjoy them. Observe that there is a certain analogy between capital and the faculties of a skilled worker, whether professional or manual, for both are sources of revenue. But then the skill of a doctor or an artisan is not in any ordinary sense his property, and to speak of it as personal, immaterial, or living capital (Nicholson, Polit. Econ. I. pp. 47, 433) seems more mis- leading than instructive, because blurring the line between persons and things. Only so far as the possessors of such capacities are themselves the property of any one, as in the case of slaves, can the capacities be called capital in the simple sense. But the goods employed by a man or his family in acquiring technical aptitudes are to be called capital, being employed not for enjoyment, but for income, although a remote and uncertain income. Many writers exclude land from capital; but it is difficult to do this without giving a strained and unprofitable defini- tion of capital ; and, as we shall see (Bk. II. ch. iv), this separa- tion of land and capital is likely to lead us into mistakes. It should be observed that the inclusion of land in the capital of an individual or company is in accord with the ordinary practice of mercantile accounts. And land is included as a matter of course in estimates of national capital such as those of Sir R. Giffen. For the many uses of the word capital see the excellent note in Marshall, pp. 152 — 157, also Hobson's Evolution of Modern Capitalism, pp. 209 — 215, and Cannan's Theories oj Production and Distribution, ch. iv. § 4. PROLOGUE. 21 § i8. Meaning of Expenditure. — This will depend on the previous use of the words income and capital. Taking; these in the sense given above, we may define expenditure as all voluntary outgoings from the property of a given person in a given time. Expenditure in this sense may be conveniently divided into industrial and non-industrial according as it is, or is not, outlay for the purpose of securing income. Such a division is made by Professor Bastable in regard to the expenditure of the State {Public Finance, p. 129) ; only he uses, to express it, the words economic and non-economic. Expendi- ture on Government railways and municipal electric works would be industrial, while expenditure 'on the Houses of Parliament and public gardens non- industrial. Similarly, to buy raw cotton and machinery for a mill, and to pay the wages of the workmen are cases of industrial expenditure ; while to buy meat and bread for home use, and to pay servant's wages, doctor's fees, and school bills, are cases of non-industrial expenditure. Dr. Smart, in his Studies in Economics (pp. 269 — 272), lays great stress on ttie danger of mistake if we make no distinc- tion between spending income and consuming wealth ; the former being prehminary to the latter, and not necessarily followed by it. For example, what is spent in gambling or in paying the wages of domestics may be used by the receivers for production. Again, the spender may not be the consumer. The family indeed being taken as the economic unit, what one member consumes may be considered as consumed by all ; but outside the family vast sums are spent on charitable provision of food and clothing for the poor; and here the spender is visibly not the consumer. But it is not necessary to adopt Dr. Smart's narrow use of the term consumption in order to avoid the mistake of which he gives warning. For we can avoid it, even if we use "consumption" in u broad PROLOGUE. sense, covering much the same ground as non-industrial expenditure, provided only that we lay stress on the very different effects on individual and social welfare resulting from different kinds of consumption. § 19. Cautions on the Use of Economic Terms. — First it is a mistake to use important terms without defining them, as though their meaning was obvious, clear, and undisputed. An opposite mistake is to attach undue import- ance to particular definitions, as though a new definition was a new discovery, or as though a particular word must perforce be used in that particular sense. Indeed, as Dr. Sidgwick has pointed out {Polit. Econ. Bk. I. ch. ii.), following Plato, the search after terms suitable to express real distinctions of fact may be more important, by clarifying our ideas, than the particular formula we ultimately adopt. It is of great moment whether or not we take the ethical view of economics ; but of little moment what definition we take of wealth, value, or capital. Had this been borne in mind, the political economy of the nineteenth century would not have been discredited by so many sterile discussions about words. Thirdly, we must be consistent in the use of terms. It may occasionally be convenient, due notice being given, for a writer to use a word in a sense different from one he has already adopted. But the procedure is lax and unsafe, in spite of the authority of Professor Marshall. Taking as his motto natiira nunfacit saltiim, he emphasises the continuity of economic phenomena and problems, that is, the absence of hard and fast lines of division, and the continuous transition from one set of actions to another ; and thus he sees a fundamental unity between the various agencies and appliances for pro- duction, material and human. (Bk. II. ch. i. ; Bk. VI. ch. xi.) But in this etibrt to avoid what is narrow, formal, and precise. PROLOGUE. 23 and to take a broad view of things, there are difficulties. Although, for example, there are many analogies in the complex causes that issue respectively in the production of British beef and the rearing of British subjects, this does not enable us to establish a fundamental unity between tlie two phenomena, unless we obscure the fundamental distinction between persons and things, paying attention to what is less, rather than to what is more important. And although the qualities of human actions shade insensibly into one another, like a summer evening into darkness, and between the good man and the bad are innumerable gradations, and men shift backwards and forwards by short steps at a time {nemo repente fit iurpissimus), this is no reason for refusing to draw a line between goodness or badness, or for using a terminology as slippery as the men we are observing. I cannot see, for example, any advantage in Professor Marshall's change in the meaning'of the term " normal." Having defined it (Bk. I. ch. vi.) as already cited in this Prologue, he confines it later (Bk. V. ch. iii.) to what happens under certain assumed conditions, and thus draws a contrast between " market value " and " normal value." But market value, as he de- scribes it, quite conforms to his earlier definition of normal ; and there seems incoherence in depriving it of the title, or at least great likelihood to confuse his readers, especially as a little later (Bk. V. ch. v. p. 440), he speaks of short-period normal value as contrasted with long-period normal value; though soon afterwards (p. 443) again using normal as apply- ing only to long periods. Nor can this language be justified by saying that the term normal is elastic. No doubt in ordinary life it is used in senses that expand or contract according to the circumstances ; and the same can be said of wealth, money, value, cost, and other terms employed by economists. But the business of science is precisely to lead us out of this confusion, a business hard to accomplish without a fixed vocabular}'. Then again Professor Marshall's use of the term " supply-price," applied to such incommensurable objects as mutton, a carpenter, and business organisation, is open to the same criticism ; and also the terms utility and wants applied, p. 167, to the want of alcohol by a drunkard, and p. 211, to what the drunkard's good angel would want for him. A somewhat analogous question, that of the relativity of economic doctrines, will be discussed in the Epiln-^'ue. § 20. Note on the Distinction of Industrial and Non-Indus- trial. — The foreg