The Principles of Economics, with Applications to Practical Problems
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Title: The Principles of Economics, with Applications to Practical Problems
Author: Frank A. Fetter
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*** START OF THE PROJECT GUTENBERG EBOOK THE PRINCIPLES OF ECONOMICS, WITH APPLICATIONS TO PRACTICAL PROBLEMS ***
THE PRINCIPLES OF ECONOMICS
WITH APPLICATIONS TO PRACTICAL PROBLEMS
BY
FRANK A. FETTER, PH.D.
PROFESSOR OF POLITICAL ECONOMY AND FINANCE,
CORNELL UNIVERSITY
NEW YORK
THE CENTURY CO.
1904
Copyright, 1904, by
THE CENTURY CO.
THE DEVINNE PRESS
TO THE STUDENTS
OF THREE UNIVERSITIES
--INDIANA, STANFORD, AND CORNELL--
FOR WHOM, WITH WHOM, AND BY WHOSE AID
THIS BOOK CAME TO BE WRITTEN
CONTENTS
PART I
PAGE
THE VALUE OF MATERIAL THINGS 1-169
DIVISION A--WANTS AND PRESENT GOODS
CHAPTER
1 THE NATURE AND PURPOSE OF POLITICAL ECONOMY: NAME
AND DEFINITION; PLACE OF ECONOMICS AMONG THE
SOCIAL SCIENCES; THE RELATION OF ECONOMICS TO
PRACTICAL AFFAIRS 3
2 ECONOMIC MOTIVES: MATERIAL WANTS, THE PRIMARY
ECONOMIC MOTIVES; DESIRES FOR NON-MATERIAL ENDS,
AS SECONDARY ECONOMIC MOTIVES 9
3 WEALTH AND WELFARE: THE RELATION OF MEN AND
MATERIAL THINGS TO ECONOMIC WELFARE; SOME IMPORTANT
ECONOMIC CONCEPTS CONNECTED WITH WEALTH
AND WELFARE 15
4 THE NATURE OF DEMAND: THE COMPARISON OF GOODS
IN MAN'S THOUGHT; DEMAND FOR GOODS GROWS OUT
OF SUBJECTIVE COMPARISONS 21
5 EXCHANGE IN A MARKET: EXCHANGE OF GOODS RESULTING
FROM DEMAND; BARTER UNDER SIMPLE CONDITIONS;
PRICE IN A MARKET 30
6 PSYCHIC INCOME: INCOME AS A FLOW OF GOODS; INCOME
AS A SERIES OF GRATIFICATIONS 39
DIVISION B--WEALTH AND RENT
7 WEALTH AND ITS DIRECT USES: THE GRADES OF RELATION
OF INDIRECT GOODS TO GRATIFICATION; CONDITIONS OF
ECONOMIC WEALTH 46
8 THE RENTING CONTRACT: NATURE AND DEFINITION OF
RENT; THE HISTORY OF CONTRACT RENT AND CHANGES
IN IT 53
9 THE LAW OF DIMINISHING RETURNS: DEFINITION OF THE
CONCEPT OF (ECONOMIC) DIMINISHING RETURNS; OTHER
MEANINGS OF THE PHRASE "DIMINISHING RETURNS";
DEVELOPMENT OF THE CONCEPT OF DIMINISHING RETURNS 61
10 THE THEORY OF RENT: THE MARKET VALUE OF THE
USUFRUCT: DIFFERENTIAL ADVANTAGES IN CONSUMPTION
GOODS; DIFFERENTIAL ADVANTAGES IN INDIRECT GOODS 73
11 REPAIR, DEPRECIATION, AND DESTRUCTION OF WEALTH:
RELATION TO ITS SALE AND RENT: REPAIR OF RENT-BEARING
AGENTS; DEPRECIATION IN RENT-EARNING
POWER OF AGENTS KEPT IN REPAIR; DESTRUCTION OF
NATURAL STORES OF MATERIAL 81
12 INCREASE OF RENT-BEARERS AND OF RENTS: EFFORTS OF
MEN TO INCREASE PRODUCTS AND RENT-BEARERS;
EFFECTS OF SOCIAL CHANGES IN RAISING THE RENTS
OF INDIRECT AGENTS 90
DIVISION C--CAPITALIZATION AND TIME-VALUE
13 MONEY AS A TOOL IN EXCHANGE: ORIGIN OF THE USE OF
MONEY; NATURE OF THE USE OF MONEY; THE VALUE OF
TYPICAL MONEY 98
14 THE MONEY ECONOMY AND THE CONCEPT OF CAPITAL: THE
BARTER ECONOMY AND ITS DECLINE; THE CONCEPT OF
CAPITAL IN MODERN BUSINESS 108
15 THE CAPITALIZATION OF ALL FORMS OF RENT: THE PURCHASE
OF RENT-CHARGES AS AN EXAMPLE OF CAPITALIZATION;
CAPITALIZATION INVOLVED IN THE EVALUATING
OF INDIRECT AGENTS; THE INCREASING ROLE OF CAPITALIZATION
IN MODERN INDUSTRY 118
16 INTEREST ON MONEY LOANS: VARIOUS FORMS OF CONTRACT
INTEREST; THE MOTIVE FOR PAYING INTEREST 131
17 THE THEORY OF TIME-VALUE: DEFINITION AND SCOPE
OF TIME-VALUE; THE ADJUSTMENT OF THE RATE OF TIME-DISCOUNT 141
18 RELATIVELY FIXED AND RELATIVELY INCREASABLE FORMS
OF CAPITAL: HOW VARIOUS FORMS OF CAPITAL MAY
BE INCREASED; SOCIAL SIGNIFICANCE OF THESE DIFFERENCES 152
19 SAVING AND PRODUCTION AS AFFECTED BY THE RATE OF
INTEREST: SAVING AS AFFECTED BY THE INTEREST RATE;
CONDITIONS FAVORABLE TO SAVING; INFLUENCE OF THE
INTEREST RATE ON METHODS OF PRODUCTION 159
PART II
THE VALUE OF HUMAN SERVICES 171-355
DIVISION A--LABOR AND WAGES
20 LABOR AND CLASSES OF LABORERS: RELATION OF LABOR
TO WEALTH; VARIETIES OF TALENTS AND OF ABILITIES
IN MEN 173
21 THE SUPPLY OF LABOR: WHAT IS A DOCTRINE OF POPULATION?
POPULATION IN HUMAN SOCIETY; CURRENT ASPECT
OF THE POPULATION PROBLEM 184
22 CONDITIONS FOR EFFICIENT LABOR: OBJECTIVE PHYSICAL
CONDITIONS; SOCIAL CONDITIONS FAVORING EFFICIENCY;
DIVISION OF LABOR 195
23 THE LAW OF WAGES: NATURE OF WAGES AND THE WAGES
PROBLEM; THE DIFFERENT MODES OF EARNING WAGES;
WAGES AS EXEMPLIFYING THE GENERAL LAW OF VALUE 205
24 THE RELATION OF LABOR TO VALUE: RELATION OF RENT
TO WAGES, RELATION OF TIME-VALUE TO WAGES; THE
RELATION OF LABOR TO VALUE 215
25 THE WAGE SYSTEM AND ITS RESULTS: SYSTEMS OF LABOR;
THE WAGE SYSTEM AS IT IS; PROGRESS OF THE MASSES
UNDER THE WAGE SYSTEM 226
26 MACHINERY AND LABOR: EXTENT OF THE USE OF MACHINERY;
EFFECT OF MACHINERY ON THE WELFARE AND WAGES
OF THE MASSES 236
27 TRADE-UNIONS: THE OBJECTS OF TRADE-UNIONS; THE
METHODS OF TRADE-UNIONS; COMBINATION AND WAGES 245
DIVISION B--ENTERPRISE AND PROFITS
28 PRODUCTION AND THE COMBINATION OF THE FACTORS: THE
NATURE OF PRODUCTION; COMBINATION OF THE FACTORS 257
29 BUSINESS ORGANIZATION AND THE ENTERPRISER'S FUNCTION:
THE DIRECTION OF INDUSTRY; QUALITIES OF A BUSINESS
ORGANIZER; THE SELECTION OF ABILITY 265
30 COST OF PRODUCTION: COST OF PRODUCTION FROM THE ENTERPRISER'S
POINT OF VIEW; COST OF PRODUCTION FROM
THE ECONOMIST'S STANDPOINT 273
31 THE LAW OF PROFITS: MEANING OF TERMS; THE TYPICAL
ENTERPRISER'S SERVICES REVIEWED; STATEMENT OF THE
LAW OF PROFITS 282
32 PROFIT-SHARING, PRODUCERS' AND CONSUMERS' COÖPERATION:
PROFIT-SHARING; PRODUCERS' COÖPERATION; CONSUMERS'
COÖPERATION 292
33 MONOPOLY PROFITS: NATURE OF MONOPOLY; KINDS OF
MONOPOLY; THE FIXING OF A MONOPOLY PRICE 302
34 GROWTH OF TRUSTS AND COMBINATIONS IN THE UNITED
STATES: GROWTH OF LARGE INDUSTRY IN THE UNITED
STATES; ADVANTAGES OF LARGE PRODUCTION; CAUSES
OF INDUSTRIAL COMBINATIONS 312
35 EFFECT OF TRUSTS ON PRICES: HOW TRUSTS MIGHT
AFFECT PRICES; HOW TRUSTS HAVE AFFECTED PRICES 323
36 GAMBLING, SPECULATION, AND PROMOTERS' PROFITS: GAMBLING
VS. INSURANCE; THE SPECULATOR AS A RISK TAKER;
PROMOTER'S AND TRUSTEE'S PROFITS 333
37 CRISES AND INDUSTRIAL DEPRESSIONS: DEFINITION AND
DESCRIPTION OF CRISES; CRISES IN THE NINETEENTH
CENTURY; VARIOUS EXPLANATIONS OF CRISES 345
PART III
THE SOCIAL ASPECTS OF VALUE 357-563
DIVISION A--RELATION OF PRIVATE INCOME
TO SOCIAL WELFARE
38 PRIVATE PROPERTY AND INHERITANCE: IMPERSONAL AND
PERSONAL SHARES OF INCOME; THE ORIGIN OF PRIVATE
PROPERTY; LIMITATIONS OF THE RIGHT OF PRIVATE
PROPERTY 359
39 INCOME AND SOCIAL SERVICE: INCOME FROM PROPERTY;
INCOME FROM PERSONAL SERVICES 370
40 WASTE AND LUXURY: WASTE OF WEALTH; LUXURY 381
41 REACTION OF CONSUMPTION ON PRODUCTION: REACTION
UPON MATERIAL PRODUCTIVE AGENTS; REACTION UPON
THE EFFICIENCY OF THE WORKERS; EFFECTS ON THE
ABIDING WELFARE OF THE CONSUMER 392
42 DISTRIBUTION OF THE SOCIAL INCOME: THE NATURE OF
PERSONAL DISTRIBUTION; METHODS OF PERSONAL DISTRIBUTION 402
43 SURVEY OF THE THEORY OF VALUE: REVIEW OF THE PLAN
FOLLOWED; RELATION OF VALUE THEORIES TO SOCIAL
REFORMS; INTERRELATION OF ECONOMIC AGENTS 412
DIVISION B--RELATION OF THE STATE TO INDUSTRY
44 FREE COMPETITION AND STATE ACTION: COMPETITION AND
CUSTOM; ECONOMIC HARMONY THROUGH COMPETITION;
SOCIAL LIMITING OF COMPETITION 422
45 USE, COINAGE, AND VALUE OF MONEY: THE PRECIOUS
METALS AS MONEY; THE QUANTITY THEORY OF MONEY 431
46 TOKEN COINAGE AND GOVERNMENT PAPER MONEY: LIGHT-WEIGHT
COINS; PAPER MONEY EXPERIMENTS; THEORIES
OF POLITICAL MONEY 443
47 THE STANDARD OF DEFERRED PAYMENTS: FUNCTION OF THE
STANDARD; INTERNATIONAL BIMETALLISM; THE FREE-SILVER
MOVEMENT IN AMERICA 453
48 BANKING AND CREDIT: FUNCTIONS OF A BANK; TYPICAL
BANK MONEY; BANKS OF THE UNITED STATES TO-DAY 462
49 TAXATION IN ITS RELATION TO VALUE: PURPOSES OF TAXATION;
FORMS OF TAXATION; PRINCIPLES AND PRACTICE 471
50 THE GENERAL THEORY OF INTERNATIONAL TRADE: INTERNATIONAL
TRADE AS A CASE OF EXCHANGE; THEORY OF
FOREIGN EXCHANGES OF MONEY; REAL BENEFITS OF
FOREIGN TRADE 480
51 THE PROTECTIVE TARIFF: THE NATURE AND CLAIMS OF
PROTECTION; THE REASONABLE MEASURE OF JUSTIFICATION
OF PROTECTION; VALUES AS AFFECTED BY PROTECTION 491
52 OTHER PROTECTIVE SOCIAL AND LABOR LEGISLATION:
SOCIAL LEGISLATION; LABOR LEGISLATION 504
53 PUBLIC OWNERSHIP OF INDUSTRY: EXAMPLES OF PUBLIC
OWNERSHIP; ECONOMIC ASPECTS OF PUBLIC OWNERSHIP 514
54 RAILROADS AND INDUSTRY: TRANSPORTATION AS A FORM OF
PRODUCTION; THE RAILROAD AS A CARRIER; DISCRIMINATION
IN RATES ON RAILROADS 525
55 THE PUBLIC NATURE OF RAILROADS: PUBLIC PRIVILEGES
OF RAILROAD CORPORATIONS; POLITICAL AND ECONOMIC
POWER OF RAILROAD MANAGERS; COMMISSIONS TO CONTROL
RAILROADS 534
56 PUBLIC POLICY AS TO CONTROL OF INDUSTRY: STATE
REGULATION OF CORPORATE INDUSTRY; DIFFICULTIES OF
PUBLIC CONTROL OF INDUSTRY; TREND OF POLICY AS TO
PUBLIC INDUSTRIAL ACTIVITY 544
57 FUTURE TREND OF VALUES: PAST AND PRESENT OF ECONOMIC
SOCIETY; THE ECONOMIC FUTURE OF SOCIETY 555
QUESTIONS AND CRITICAL NOTES 565
INDEX 595
PREFACE
This book had its beginning ten years ago in a series of brief
discussions supplementing a text used in the class-room. Their purpose
was to amend certain theoretical views even then generally questioned by
economists, and to present most recent opinions on some other questions.
These critical comments evolved into a course of lectures following an
original outline, and were at length reduced to manuscript in the form
of a stenographic report made from day to day in the class-room. The
propositions printed in italics were dictated to the class, to give the
key-note to the main divisions of the argument. Repeated revisions have
shortened the text, cut out many digressions and illustrations, and
remedied many of the faults both of thought and of expression; but no
effort has been made to conceal or alter the original and essential
character of the simple, informal, class-room talks by teacher to
student. To this origin are traceable many conversational phrases and
local illustrations, and the occasional use of the personal form of
address.
The lectures, at the outset, sought to give merely a summary of widely
accepted economic theory, not to offer any contribution to the subject.
While they were in progress, however, special studies in the evolution
of the economic concepts were pursued, and the manuscript of a book on
that more special subject was carried well toward completion. That work,
which it is hoped some time to complete, was, for several reasons, put
aside while the present text was preparing for publication. The economic
theories of the present transition period show many discordant
elements, yet the author felt that his attempt to unify the statement
of principles, in an elementary text explaining modern problems, and
consistent in its various parts, helped to reveal to him both
difficulties and possible solutions in the more special theoretical
field. The unforeseen outcome of these varied studies is an elementary
text embodying a new conception of the theory of distribution, an
outline of which will be found in Chapter Forty-three. It is, in brief,
a consistently subjective analysis of the relations of goods to wants,
in place of the admixture of objective and subjective distinctions found
in the traditional conceptions of rent, interest, and price.
The beginning of the systematic study of economics, like the first steps
in a language, is difficult because of the entire strangeness of the
thought, and it is not to be hoped that any pedagogic device can do away
with the need of strenuous thinking by the student. The aim, however, in
the development of this theory of distribution, has been to proceed by
gradual steps, as in a series of geometrical propositions, from the
simple and familiar acts and experiences of the individual's every-day
life, through the more complex relations, to the most complex,
practical, economic problems of the day. The hope has long been
entertained by economists that a conception of the whole problem of
value would be attained that would coördinate and unify the various
"laws,"--those of rent, wages, interest, etc. This solution has here
been sought by a development of recent theories, the unit of the complex
problem of value being the simplest, immediate, temporary gratification.
Possibly some teachers will observe and regret the almost entire absence
of critical discussions of controverted points in theory, which make up
so large a part of some of the older texts. The more positive manner of
presentation has been purposely adopted, and only such reference is made
to conflicting views as is needed to guard the student against
misunderstanding in his further reading. The author would not have it
thought that he doubts the disciplinary value of economic theory or its
scientific worth for more advanced students, for, on the contrary, he
believes in it, perhaps to an extreme degree; but, for his own part, he
has become convinced of the unwisdom of carrying on these subtle
controversies in classes of beginners. The inherent difficulties of the
subject are great enough, without the creation of new ones.
The fifty-seven chapters represent the work of the typical college
course in elementary economics, allowing two chapters a week, and a
third meeting weekly for review and for the discussion of questions,
exercises, and reports. The subject is so large that the text is, in
many places, hardly more than a suggestive outline. In class-room work
it should be supplemented by other sources of information, such as
personal observation by the students (many of the questions following
the text serving to stimulate the attention); visits to local
industries; interchange of opinions; examples given by the teacher;
study and discussion, in the light of the principles stated in the text,
of some such problems as are suggested in the appended list of
questions; collateral reading; the preparation of exercises and the use
of statistical material from the census, labor reports, etc.; history
and description of industries; history of the growth of economic ideas.
Suggestions, from teachers, of changes that will make the text more
useful in their classes, will be thankfully received by the author.
Lack of space makes it impossible to mention by name the many sources to
which the writer is indebted. Special acknowledgment, however, is
gratefully made to C. H. Hull, of Cornell University; to E. W. Kemmerer,
now of the Philippine Treasury Department, and to U. G. Weatherly, of
Indiana University, who have read large portions of the manuscript, and
have made many valuable suggestions; to W. M. Daniels, of Princeton
University, who has read every page of the copy, and to whom are due the
greatest obligations for his numerous and able criticisms both of the
argument and of the expression; to R. C. Brooks, now of Swarthmore
College, for a number of the questions in the appended list, and for
helpful comments given while the course was developing; and to R. F.
Hoxie and to A. C. Muhse, whose thoughtful reading of the proof has
eliminated many errors. For the defects remaining, not these friendly
critics, but the author alone, should be held accountable.
No book on economics can to-day satisfy everybody--"Or even anybody,"
adds a friend. But with this book may go the hope that what has been
written with love of truth and of democracy may serve, in its small way,
both to further sound economic reasoning and to extend among American
citizens a better understanding of the economic problems set for this
generation to solve.
FRANK A. FETTER.
Ithaca, N. Y., August, 1904.
THE PRINCIPLES OF ECONOMICS
PART I
DIVISION A--WANTS AND PRESENT GOODS
CHAPTER I
THE NATURE AND PURPOSE OF POLITICAL ECONOMY
§ I. NAME AND DEFINITION
[Sidenote: Verbal definition of economics]
1. _Economics, or political economy, may be defined, briefly, as the
study of men earning a living; or, more fully, as the study of the
material world and of the activities and mutual relations of men, so far
as all these are the objective conditions to gratifying desires._ To
define, means to mark off the limits of a subject, to tell what
questions are or are not included within it. The ideas of most persons
on this subject are vague, yet it would be very desirable if the student
could approach this study with an exact understanding of the nature of
the questions with which it deals. Until a subject has been studied,
however, a definition in mere words cannot greatly aid in marking it off
clearly in our thought. The essential thing for the student is to see
clearly the central purpose of the study, not to decide at once all of
the puzzling cases.
[Sidenote: Natural sciences deal with material things]
2. _A definition that suggests clear and familiar thoughts to the
student seem at first much more difficult to get in any social science
than in the natural sciences._ These deal with concrete, material things
which we are accustomed to see, handle, and measure. If a mere child is
told that botany is a study in which he may learn about flowers, trees,
and plants, the answer is fairly satisfying, for he at once thinks of
many things of that kind. When, in like manner zoölogy is defined as the
study of animals, or geology as the study of rocks and the earth, the
words call up memories of many familiar objects. Even so difficult and
foreign-looking a word as ichthyology seems to be made clear by the
statement that it is the name of the study in which one learns about
fish. It is true that there may be some misunderstanding as to the way
in which these subjects are studied, for botany is not in the main to
teach how to cultivate plants in the garden, nor ichthyology how to
catch fish or to propagate them in a pond. But the main purpose of these
studies is clear at the outset from these simple definitions. Indeed, as
the study is pursued, and knowledge widens to take in the manifold and
various forms of life, the boundaries of the special sciences become not
more but less sharp and definite.
[Sidenote: Economics studies some social acts and relations]
Political economy, on the other hand, as one of the social sciences,
which deal with men and their relations in society, seems to be a very
much more complex thought to get hold of. We are tempted to say that it
deals with less familiar things; but the truth may be, as a thoughtful
friend suggests, that the simple social acts and relations are more
familiar to our thought than are lions, palm-trees, or even horses.
Every hour in the streets or stores, one may witness thousands of acts,
such as bargains, labor, payments, that are the subject-matter of
economic science. Their very familiarity may cause men to overlook their
deeper meaning.
Many other definitions have been given of political economy. It has been
called the science of wealth, or the science of exchanges. Evidently
there are various ways in which wealth may be considered or exchanges
made. The particular aspects that are dealt with in political economy
will be made clear by considering two other questions, the place of
economics among the social sciences and the relation of economics to
practical affairs.
§ II. PLACE OF ECONOMICS AMONG THE SOCIAL SCIENCES
[Sidenote: Economics contrasted with the natural sciences]
1. _Political economy, as one of the social sciences, may be contrasted
with the natural sciences, which deal with material things and their
mutual relations, while it deals with one aspect of men's life in
society, namely, the earning of a living, or the use of wealth._ It is
true that political economy also has to do with plants and animals and
the earth--in fact, with all of those things which are the
subject-matter of the natural sciences; but it has to do with them only
in so far as they are related to man's welfare and affect his estimate
of the value of things; only in so far as they are related to the one
central subject of economic interest, the earning of a living.
[Sidenote: Character of the social sciences]
2. _The social sciences deal with men and their relations with each
other._ The word "social" comes from the Latin socius, meaning a fellow,
comrade, companion, associate. As men living together have to do with
each other in a great many different ways, and enter into a great many
different relations, there arise a great many different social problems.
Each of the social sciences attempts to study man in some one important
aspect--that is, to view these relations from some one standpoint.
Man's acts, his life, and his motives are so complex that it is not
surprising that there has been less definiteness in the thought of the
social sciences, and that they have advanced less rapidly toward
exactness in their conclusions, than have the natural sciences. This
complexity also explains the discouragement of the beginner in the early
lessons in this subject. Usually the greatest difficulties appear in the
first few weeks of its study. The thought is more abstract than in
natural science; it requires a different, I will not say higher, kind of
ability than does mathematics. But little by little the strangeness of
the language and ideas disappears; the bare definitions become clothed
with the facts of observation and recalled experiences; and soon the
"economic" acts and relations of men in society come to be as real and
as interesting to the student as are the materials in the natural world
about him--often, indeed, more interesting.
[Sidenote: Economics, politics, law, and ethics]
3. _Political economy is related to all the other social sciences, it
being the study of certain of men's relations, while politics, law, and
ethics have to do with other relations or with relations under a
different aspect._ Politics treats of the form and working of government
and is mainly concerned with the question of power or control of the
individual's actions and liberty. Law treats of the precepts and
regulations in accordance with which the actions of men are limited by
the state, and the contracts into which they have seen fit to enter are
interpreted. Ethics treats the question of right or wrong, studies the
moral aspects of men's acts and relations. The attempt just made to
distinguish between the fields occupied by the various social sciences
betrays at once the fundamental unity existing among them. The acts of
men are closely related in their lives, but they may be looked at from
different sides. The central thought in economics is the business
relation, the relation of men in exchanging their services or material
wealth. In pursuing economic inquiries we come into contact with
political, legal, and ethical considerations, all of which must be
recognized before a final practical answer can be given to any question.
Nevertheless the province of economics is limited. It is because of the
feebleness of our mental power that we divide and subdivide these
complex questions and try to answer certain parts before we seek to
answer the whole. When we attempt this final and more difficult task, we
should rise to the standpoint of the social philosopher.
§ III. THE RELATION OF ECONOMICS TO PRACTICAL AFFAIRS
[Sidenote: Economics is first a science]
1. _The ideal of political economy here set forth is that it should be a
science, a search for truth, a systematized body of knowledge, arriving
at a statement of the laws to which economic actions conform._ It is not
the advocacy of any particular policy or idea, but if it arrives at any
conclusions, any truths, these cannot fail to affect the practical
action of men.
[Sidenote: But it touches many practical interests]
Political economy, because defined as the science of wealth, has been
described by some as a gospel of Mammon. It is hardly necessary to
refute such a misconception. Political economy is not the science of
wealth-getting for the individual. Its study is not primarily for the
selfish ends and interest of the individual. (Certainly some of its
lessons may be of practical value to men in active business) for many
economic "principles" are but the general statement of those ideas that
have been approved by the experience of business men, of statesmen, and
of the masses of men. Some of its lessons must have educational value in
practical business, for political economy is not dreamed out by the
closet philosopher, but more and more it is the attempt to describe the
interests and the action of the practical world in which men must live.
Many men are working together to develop its study--those who collect
statistics and facts bearing on all kinds of practical affairs, and
those who search through the records of the past for illustrations of
experiments and experiences that may help us in our life to-day.
[Sidenote: Economic study needed in a democracy]
2. _But, in the main, the study of political economy is a social study
for social ends and not a selfish study for individual advantage._ The
name political economy was first suggested in France when the government
was monarchical and despotic in the extreme. As domestic economy
indicates a set of rules or principles to guide wisely the action of
the housekeeper or the owner of an estate, so political economy was
first thought of as a set of rules or principles to guide the king and
his counselors in the control of the state. The term has continued to
bear something of that suggestion in it, though of late the term
"economics," as being broader and less likely to be confused with
politics, has very generally come into use. But in the degree in which
unlimited monarchy has given way to the rule of the people, the
conception of political economy has been modified. In a democracy there
is need for a general diffusion of knowledge. The power now rests not
with the king and a few counselors, but in the last resort with the
people, and therefore the people must be acquainted with the experience
of the past, must have all possible systematic knowledge to enlighten
public policy and to guide legislation.
[Sidenote: Is of growing interest and influence]
Moreover, with the growth of the modern state, with the interest
increasing importance of business, and of industrial and commercial
interests, as compared with changes of dynasty or the personal rivalries
of rulers, economic questions have grown in relative importance. In our
own country, particularly since the subjects of slavery and of States'
rights ceased to absorb the attention of our people, economic questions
have pushed rapidly into the foreground. Indeed, it has of late been
more clearly seen that many of the older political questions, such as
the American Revolution and slavery, formerly discussed almost entirely
in their political and constitutional aspects, were at bottom questions
of economic rivalry and of economic welfare. The remarkable increase in
the attention given to this study in colleges and universities in the
last twenty years is but the index of the greatly increased interest and
attention felt in it by citizens generally.
To sum up, it may be said that in the study of political economy we are
seeking the reason, connection, and relations in the great multitude of
acts arising out of the dependence of desires on the world of things and
men.
CHAPTER 2
ECONOMIC MOTIVES
§ I. MATERIAL WANTS, THE PRIMARY ECONOMIC MOTIVES
[Sidenote: Feeling urges to economic actions]
1. _A logical explanation of industry must begin with a discussion of
the nature of wants, for the purpose of industry is to gratify wants._
An economic want may be defined as a feeling of incompleteness, because
of the lack of a part of the outer world or of some change in it. Often
the question asked when one first sees a moving trolley car or
automobile or bicycle is: What makes it go? The first question to ask in
the part of the study of economic society here undertaken is: What is
its motive force? Without an answer to that question one cannot hope to
understand the ceaseless and varied activities of men occupied in the
making of a living. The question merits long and careful study, but the
general answer is so simple that it seems almost self-evident: The
motive force in economics is found in the feelings of men. It is men's
desire to make use of men and things about them which calls forth all
the manifold phenomena studied in economics.
[Sidenote: Animal species shaped by their environment]
2. _Wants among animals depend on the environment; that is to say, the
utmost that creatures of a lower order than man can do is to take things
as they find them._ The imagination and intelligence of animals are not
developed enough to lead them to desire much beyond that which is
ordinarily to be obtained. And so the environment shapes and affects the
animal. The fish is fitted to live in the water and thrives there, and
we must believe, enjoys living there. The horse and the cow like best
the food of the fields, and so each species of animal, in order to
survive in the severe struggle for existence, has been forced to fit
itself to the conditions in which it lives. After the animal has been
thus fitted, its desire is for those things normally to be found in its
surroundings. So different animals desire or want different things, but
always it is the environment that determines the want, and not the want
that determines the environment.
[Sidenote: Simple wants of primitive men]
3. _In simpler human societies, wants are mostly confined to physical
necessities; that is, in the earlier stages of society, man's wants are
very much like those of the animals._ Man bends his energies to securing
the things necessary to survival. He feels the pangs of hunger and he
strives to secure food. He feels the need of companionship, for it is
only through association and mutual help that men, so weak as compared
with many kinds of animals, are able to resist the enemies which beset
them. He needs clothing to protect him against the harsher climates of
the lands to which he moves. For the same purpose, to protect himself
against the cold and rain, he needs a shelter, a cave, a wigwam, or a
hut; for a house is but a larger dress.
[Sidenote: Manifold wants in civilized society]
4. _In human society, wants develop and transform the world._ In the
rudest societies of which there is any record, savages are found with
wants developed in a great number of directions beyond the wants of any
animals. Man is not a passive victim of circumstances; his wants are not
determined solely by his environment; his desires soar beyond the things
about him. As men become more the masters of circumstances, their
desires anticipate mere physical wants; they seek a more varied food of
finer flavor and more delicately prepared. Dress is not limited by
physical comfort, for one of the earliest of the esthetic wants to
develop is the love of personal ornament. The rude hut or communal lodge
to protect against rain and cold becomes a home. Out of the earlier rude
companionship develop the noblest sentiments of friendship and family
life. Seeking to gratify the senses and the love of action, men develop
esthetic tastes, the love of the beautiful in sound, in form, in taste,
in color, in motion. And finally, as the imagination and intellect
develop, there grow up the various forms of intellectual pleasures--the
love of reading, of study, of travel, and of thought.
The various wants of man are sometimes classified as necessities,
comforts, and luxuries, but all economists take care to emphasize that
these terms have only relative meanings which, in the rapidly changing
conditions of modern life, are changing constantly. The comforts of one
generation, or of one country, become the necessities in another; and
luxuries becoming comforts, are looked upon finally as necessities. And
as the desires grow, they more and more alter the world. Man has changed
the face of the earth; he has affected its climate, its fertility, its
beauty, because, either for better or for worse, his desires have
impressed themselves upon the world about him.
[Sidenote: Wants must precede wealth]
5. _In human society the growth of wants is necessary to progress._ From
the earliest times teachers of morals have argued for simplicity of life
and against the development of refinements. We do not now raise the
moral question, but there is no doubt that the economic effect of
developing wants is in the main to impel to greater effort. They are the
mainspring of economic progress. In recent discussion of the control of
the tropics, the too great contentedness of tropical peoples has been
brought out prominently. Some one has said that if a colony of New
England school-teachers and Presbyterian deacons should settle in the
tropics, their descendants would, in a single generation, be wearing
breech-clouts and going to cock-fights on Sunday. Certain it is that the
energy and ambition of the temperate zone are hard to maintain in warmer
lands. The negro's content with hard conditions, so often counted as a
virtue, is one of the difficulties in the way of solving the race
problem in our South to-day. Booker T. Washington, and others who are
laboring for the elevation of the American negroes, would try first to
make them discontented with the one-room cabins, in which hundreds of
thousands of families live. If only the desire for a two- or three-room
cabin can be aroused, experience shows that family life and industrial
qualities may be improved in many other ways.
[Sidenote: But impossible hopes lessen gratifications]
Not only in America, but in most civilized lands to-day, is seen a rapid
growth of wants in the working-classes. The incomes and the standard of
living have become increasing, but not so fast as have the desires of
the working-classes. Regret has been expressed by some that the workers
of Europe are becoming "declassed." Increasing wages, it is said, bring
not welfare, but unhappiness, to the complaining masses. If discontent
with one's lot goes beyond a moderate degree, if it is more than the
desire to better one's lot by personal efforts, if it becomes an unhappy
longing for the impossible, then indeed it may be a misfortune. But a
moderate ambition to better one's condition is the "divine discontent"
absolutely indispensable if energy and enterprise are to be called into
being.
[Sidenote: Wants grow refined as wealth advances]
It is a suggestive fact that civilized man, equipped with all of the
inventions and the advantages of science, spends more hours of effort in
gaining a livelihood than does the savage with his almost unaided hands.
Activity is dependent not on bare physical necessity, but on developed
wants--in the economic sense of the term. Such social institutions as
property and inheritance owe their origin and their justification to
their average effect on the motives to activity. If society is to
develop, if progress is to continue, human wants--not of the grosser
sort, but ever more refined--must continue to emerge and urge men to
action.
§ II. DESIRES FOR NON-MATERIAL ENDS, AS SECONDARY ECONOMIC MOTIVES
[Sidenote: The real man in economics]
1. _The spiritual nature of man must not be ignored in economic
reasoning._ There has been much and just criticism of the earlier
writers and of their conclusions because so little account was taken by
them of any but the motive of self-interest in economic affairs.
Generally it was assumed that men knew their own interest, and sought in
a very unsympathetic way those things which would gratify their material
wants. Thus man in economic reasoning was made an abstraction, differing
from real men in his lack of manifold spiritual and social elements.
[Sidenote: Desires for the non-material may become economic motives]
2. _The main classes of non-material wants that are secondarily economic
are fear of temporal punishment; sentiments of moral and religious duty;
pride, honor, and fear of disgrace; and pleasure in work for itself, for
social approval, or for a social result._ The first is best illustrated
by slavery, where the slave is not impelled to seek wealth for his own
welfare, but is driven by punishment to perform the task. The object is
to create within the mind of the slave a motive that will take the place
of the ordinary economic motive. The feeling of religious or moral duty
leads men to act often in direct opposition to the usual economic
motive. The taboo is faithfully observed by the members of a savage
tribe who suffer as a result the severest hardships. A religious
injunction prevents the use of food that would save from starvation.
Pride, either of family or of calling; the soldier's honor leading him
to sacrifice not only his future but his life; the love of social
approval, holding men to the most disagreeable tasks--these illustrate
how strongly social sentiments oppose the narrower motive of immediate
self-interest as generally thought of. Pleasure in work for work's sake,
and pride in the result, may act as motives quite as strong in some
cases as desire for the product that can be used. And even where this
does not change the kind of work done, it comes in to influence the
interest and earnestness with which the work is performed.
[Sidenote: Economists must overlook no influence on value]
3. _Whatever motive in man's complex nature makes him desire things more
or less, becomes for the time, and in so far, an economic motive._ These
various social and spiritual motives sometimes work positively, in the
direction of magnifying man's desire for things; sometimes negatively,
to diminish it. If we are to understand economic action, we must take
men as they are. A religious motive that leads men to refrain from the
eating of meat or to eat fish in preference on certain days, is a fact
which the economist has but to accept, for it is sure to affect the
value of meat and fish at that place and time. Moral convictions,
whatever be their origin, whether due to the teaching of parents, to
unconscious influences, or to native temperament, may be quite as
effective as the pangs of hunger in determining what men desire.
Therefore, while these various motives are primarily social or moral or
religious, they may be said to be secondarily economic motives, and they
may become in certain cases the most important influences of which the
economist must take account.
CHAPTER 3
WEALTH AND WELFARE
§ I. THE RELATION OF MEN AND MATERIAL THINGS TO ECONOMIC WELFARE
[Sidenote: Man is the center of economic reasoning]
1. _The gratifying of economic wants depends on things outside of the
man who feels the wants._ Man is to himself the center of the world. He
groups things and estimates things with reference to their bearing on
his desires, be these what are called selfish or unselfish. If we were
discussing the economics of an inferior species of animals, things would
be grouped in a very different way. But economics being the study of
man's welfare, everything must be judged from his standpoint, and things
are or are not of economic importance according as they have relation to
his wants and satisfactions. Things needful for any of the lower animals
are spoken of as "ministering to welfare" in the economic sense only in
case these animals are useful to men. Examples are the mulberry-tree on
which the silkworm feeds, the flower visited by the honey-bee. In the
same view some men are seen to minister to the welfare of other men and
therefore bear the same relation for the moment to the welfare of the
others as do material things. In any case we study man's welfare as
affected by the world which surrounds him.
[Sidenote: Physical nature is an unchangeable fact]
2. _Material things and natural forces differ in kind and nature._ This
is an axiom which we must take as a basis for reasoning in economics.
Things have certain physical qualities quite apart from any action or
influence of man. They are operated on by mechanical laws; the force of
gravitation causes them to fall at a certain rate under given
conditions. They differ in specific gravity, reflect the rays of light,
absorb or transmit heat. All these things are for man ultimate physical
facts, but unless he knows these facts he cannot take full advantage of
the favorable qualities of things or weigh properly their importance to
his welfare. Things differ in a multitude of ways in their chemical
qualities. Niter, charcoal, and saltpeter, combined in certain
proportions, give certain reactions; different combinations give various
results. Solids combine to form gases, and liquids unite to form solids,
and these qualities and reactions of material things are for man
ultimate truths of chemistry. Likewise many things have certain
physiological effects. Sunshine acts on living bodies, whether plant,
animal, or man, in certain ways. Some plants are nourishing to man,
others are poisonous. If man were not on the earth, things would have
the same physical and chemical qualities, mechanical laws would be the
same as at present so far as we can conclude. Man cannot change the
nature of things; but he can acquaint himself with that nature and then
put the things into the relations where a given result will follow.
[Sidenote: But economics has to do with psychological effects]
3. _As a result of these differences, things have different relations to
wants._ These various qualities, physical, chemical, physiological, are
important in an economic sense only as they produce psychological
effects, that is, as they affect the feelings and judgments of men. We
come to some general thoughts which it will be well to define.
[Sidenote: Some definitions]
Gratification is the feeling that results when a want has been met.
Feelings are hard to define in words; the best definition is found in
the experience of each individual. We can only say, therefore, that
gratification is the attainment of desire, the fulfilment of wants. The
word that has usually been employed in this sense in economic discussion
is "satisfaction"; but by its derivation and general usage satisfaction
means "the complete or full gratification" of a desire, and this meaning
is quite inconsistent with the thought in many connections in which the
word is used. We shall therefore prefer here the word gratification, and
its corresponding verb, gratify.
Wealth is the collective term for those things which are felt to be
related to the gratification of wants. The word is applied in economic
discussion to any part of those things, no matter how small. We shall
have occasion later to define and discuss this term more fully.
Welfare, in an immediate or narrow sense, is the same as gratification
of the moment; in a broader sense, it means the abiding condition of
well-being. We have here a distinction very much like that often made
between pleasure and happiness. If we think of only the present moment,
welfare is the absence of pain, and the presence of the pleasureable
feeling; but if we consider a longer period in a man's life or his
entire lifetime, it is seen that many things that afford a momentary
gratification do not minister to his ultimate, or abiding, welfare.
Moralists and philosophers often have dwelt on this contrast. The
difference is illustrated by the thoughtlessness and impulsiveness of a
child or savage as contrasted with the more rational life of those with
foresight and patience.
[Sidenote: Economics first studies wealth]
Wealth, in the general economic sense, is judged with reference to
gratification rather than with reference to abiding welfare. It is the
first duty of the economist not to preach what should be, but to
understand things as they are. He must, in studying the problem of
value, recognize any motive that leads men to attach importance to acts
and things. He will therefore take account of abiding welfare and of
immediate gratification to exactly the degree that men in general do,
and the sad fact is that the present impulse rules a large part of the
acts of men. Whether tobacco or alcohol or morphine minister to the
abiding happiness of those who use them does not alter the immediate
fact that here and now they are sought and an importance is attached to
them because of their power to gratify an immediate desire.
[Sidenote: Then wealth and welfare]
5. _In studying the question of social prosperity, however, we must rise
to the standpoint of the social philosopher and consider the more
abiding effects of wealth._ Wants may be developed and made rational,
and the permanent prosperity of a community depends upon this result.
Any species of animal that continued regularly to enjoy that which
weakens the health and strength would become extinct. Any society or
individual that continues to derive gratification, to seek its pleasure,
in ways that do not, on the average, minister to permanent welfare,
sinks in the struggle of life and gives way to those men or nations that
have a sounder and healthier adjustment of wants and welfare. We touch
here, therefore, on the edge of the great problems of morals, and while
we must recognize the contrast that often exists in the life of any
particular man between his "pleasures" and his health and happiness, we
see that there is a reason why, on the whole, and in the long run, these
two cannot remain far apart. The old proverbs, "Be virtuous and you will
be happy," "Honesty is the best policy," and "Virtue is its own reward,"
have a sound basis in the age-long experience of the world. Cynics or
jesters may easily disprove these truths in a multitude of particular
cases.
[Sidenote: Freemen are not economic wealth]
6. _Wealth does not include such personal qualities as honesty,
integrity, good health._ Some economists speak of these as "internal
goods," but it is far better not to speak of free men or of their
qualities as wealth. Many difficulties arise from such a use of the term
in practical discussion. One of the most important of all distinctions
to maintain in economics is that between material things and men. Only
in the case of human slavery may persons be counted as economic wealth.
It is a different thing, however, to consider human services as wealth
of an ephemeral kind at the moment they are rendered. We are, thus
merely recognizing that men may bear at the given moment the same
relation to our wants as do material things.
§ II. SOME IMPORTANT ECONOMIC CONCEPTS CONNECTED WITH WEALTH AND WELFARE
[Sidenote: Popular meaning of useful]
1. _Utility, in its broadest usage, is the general capability that
things have of ministering to human well being._ The term is evidently
one without any scientific precision. It expresses only a general or
average impression that we have in reference to the relation of a class
of goods to human wants. Every one would agree to the statement that
"water is useful," thinking of the fact that it is indispensable to life
and that it ministers to life in a multitude of ways. But what of water
in one's cellar, water soaking one's clothes on a cold day, water
breaking through the walls of a mountain reservoir and carrying death
and destruction in its path? The poison that is doing what we at the
moment desire, we call useful; that doing what we would prevent, we call
harmful. Noxious weeds become "useful" by the discovery of some new
process by which they can be worked into other forms, though they may
still continue to be noxious in many a farmer's fields. The utility of
anything, therefore, is seen to be of a relative and limited nature. The
term "utility" in popular speech is very inexact. It can be employed in
economic discussion only when carefully modified and defined.
[Sidenote: Kinds of goods]
2. _Goods consist of all those things objective to the user which have a
beneficial relation to human wants._ They fall into several classes. We
may first distinguish between free and economic goods. Free goods are
things that exist in superfluity, that is, in quantities sufficient not
only to gratify, but to satisfy all the wants that may depend on them.
Economic goods are things so limited in quantity that all of the wants
to which they could minister are not satisfied. The whole thought of
economy begins with scarcity; indeed, even the conception of free goods
is hardly possible until some limitation of wants is experienced.
Practical economics is the study of the best way to employ things to
secure the highest amount of gratification. The problem itself arises
out of the fact that many things are used up before all wants dependent
on them are completely satisfied.
A distinction is often made between consumption and production goods, or
it may be better to say immediate and intermediate goods. Consumption
goods are those things which are immediately at the point of gratifying
man's desires. Production goods are those things which are not yet ready
to gratify desires; some of them, being merely means of securing
consumption goods, never will themselves immediately gratify desire.
[Sidenote: Value is utility given precision]
3. _Value, in the narrow personal sense, may be defined as the
importance attributed to a good by a man._ The vagueness and inexactness
of the word "utility," or the word "good," disappears when we reach the
word "value." It is not a usual relation or a vague degree of benefit
sometimes present and sometimes absent, but it refers to a particular
thing, person, time, and condition. Value is in the closest relation
with wants, and in this narrow sense depends on the individual's
estimate. From the meeting and comparison of the estimates of
individuals, arise market values or prices, which are the central object
of study in economics.
CHAPTER 4
THE NATURE OF DEMAND
§ I. THE COMPARISON OF GOODS IN MAN'S THOUGHT
[Sidenote: Wants and goods must be constantly adjusted]
1. _As wants differ in kind and degree, so goods differ in their power
to gratify wants._ This general and simple statement unites the leading
thoughts of the two chapters preceding. Confirmation of its truth may be
found in observation and experience. The purpose of this chapter is to
show how, starting from the general nature of wants and the nature of
goods, we can arrive at an explanation of the exchange of goods.
Recognizing the simple but fundamental fact stated at the opening of
this paragraph, an exchange may be seen to be a rational and a logical
result when men are living together in society.
[Sidenote: Ripe and unripe goods]
2. _Immediately enjoyable goods are the first objective things whose
value is to be explained._ Goods come into relation with wants in a
multitude of ways. Some things will not gratify a want until after the
lapse of a long time, as ice cut in December and stored for summer use.
Other things will never themselves directly gratify a want, but will be
of help in getting things that do; such are the young fruit trees
planted in the orchard, and the hammer that will be used to drive nails
in a house that will shelter men. Still other things are gratifying
wants at this moment, or are ready for use and will be used up in a very
short time; examples of such are the food on the table and in the
pantry, and the cigar in the pocket. All these things are called goods,
because of their beneficial relation to man's desires, but the relation
is very immediate in some cases, very remote in others. The value of all
goods is to be explained, but the explanation will be more or less
complex according to the directness or indirectness of their relation
with wants. As it is the power of goods to gratify wants that alone
causes value to be attributed to them, those goods which are ripest,
which are ready to gratify wants, are nearest to the source of an
explanation. The value of unripe enjoyments must be traced to some
expected gratification as its cause or basis. In order to attack the
difficulties one by one we will, therefore, in the following discussion,
deal first with this class of ripe, consumable goods, as food, personal
services, enjoyments of any sort that are immediately available. The
explanation of these cases of value must precede that of cases in which
the relation to wants is less obvious and direct.
[Sidenote: The law of diminishing utility]
3. _As the amount of any good increases, after a certain point the
gratification that the added portions afford decreases._ This is called
the law of the diminishing utility of goods or of the decreasing
gratification afforded by goods. The reason for the truth of this
proposition is found in the very nature of man and his nervous
organization. Any stimulus to the nerves, however pleasant at first,
becomes painful when long continued or increased unduly. The trumpet too
distant at first for the ear to distinguish its notes, may swell to
pleasing tones as it approaches, until at length its volume and its din
may become absolutely painful. If we were to express the degree of
gratification by a curve, we should see the curve rising gradually to a
maximum, and then falling somewhat suddenly and becoming a negative
quantity, when pain, not pleasure, resulted. The same change could be
illustrated by any sensation or by any of men's activities.
The proposition must be understood as applying to the gratification
resulting from each added portion of the sensation. There is a maximum
point in the gratification afforded by any nerve-stimulus. A man coming
in from the winter's storm and holding out his hands before the fire,
feels an intense pleasure in the grateful warmth; a few moments later,
the same heat becomes unpleasant. In winter we wish for a moderation of
the temperature; on the sultry days of summer, we think of a cool breeze
as the most to be desired of all things. Whether the temperature rises
or falls, there is a point beyond which the change is no longer an
addition to, but a subtraction from, pleasure. A man, however hungry at
first, may be made miserable if forced to eat beyond his capacity. Each
added portion of the good consumed contributes to the gratification up
to a certain point. The sum of these pleasurable sensations may be
called the total gratification, which finally reaches satisfaction or
fullness. Then begins what may be called in algebraic phrase a "negative
gratification" which, if it becomes large enough, will make the total
gratification a negative quantity. Each added portion, dose or increment
beyond a certain point reduces thus the welfare of the user. One may
have too much of a good thing.
[Sidenote: The marginal utility]
4. _Marginal utility is the gratification afforded by the added portion
of the good._ The marginal dose, increment, or portion is that which may
be logically considered as coming last in the case of any good or group
of goods divisible into small parts. In considering the strict theory of
the case, in order to get at the principle involved, the doses may be
spoken of as infinitesimally small. The marginal utility expresses the
importance that men attach to one unit of this kind of goods under the
particular circumstances at the moment existing, and not under certain
conceivable conditions which do not in fact exist or need to be taken
into account by the persons affected. The marginal unit of a homogeneous
supply cannot be considered to have a greater utility than any other
unit at the moment, and therefore the product of the marginal utility by
the number of units, gives the total measure of importance of the supply
then and there, and this is the value.
The value of goods, as has been indicated, is the measure of the
dependence felt by men on a portion of the outer world, as the condition
of gratifying their wants. From the very nature of wants, which reside
in feelings, a dependence that is not felt, a relation between things
and gratification that is not recognized, can have no influence on
value. Now, it is at this margin of supply that dependence is felt. Men
do not concern themselves about that which they have in
superfluity--unless, indeed, the excess causes them some discomfort. It
is well that they do not, for a wise direction of effort can only take
place when men think mainly of their need of things that they want, and
want most, and direct their efforts toward securing them.
[Sidenote: From marginal utility to value]
The diminishing utility of successive portions (doses or increments, as
they are called) may be represented by a curve of utility.
[Illustration: _Scale of Supply_]
The diagram is constructed on the hypothesis that a tenth unit of a
certain good would have a utility expressed as 36; a fifteenth unit of
30, etc., and that the value of the whole supply is estimated according
to these marginal units. Of course if the conditions were that "all or
none" was to be taken, the result would be different.
Unit of Supply Marginal Utility Value of Whole Supply
10 36 360
15 30 450
20 25 500
30 19 570
40 15 600
50 10 500
60 5 300
This diagram is frequently used, and it is important to guard against
some misunderstandings. The marginal unit of any given supply--for
example, ten units--is not any particular unit, it is any one of the ten
units. In the presence of nine units of the good the person or persons
find all the various wants that are dependent on that good gratified to
such a degree that the tenth unit has an importance expressed by 36. But
as this last or marginal unit of supply may be used for any of the
purposes, the importance of each and every unit likewise will be
expressed by 36. Any one of the units, when once present is, in a
logical sense, a marginal unit. When, however, it is a question of
increasing the supply, some one unit may properly be looked upon as
marginal. The dependence felt by men on the whole group is the product
of the units by the marginal utility. As the number of units increases,
the marginal utility decreases, until at length it may reach zero, and
the total value would be nothing. A point of maximum value evidently
will be found somewhere between the two extremes.
[Sidenote: Only one marginal utility at one moment]
Note carefully that on the one diagram are represented a large number of
marginal utilities which never exist at one and the same moment. At any
one moment there is a given number of units and there is but one
marginal utility, and this is the same for each of the units. It is
quite erroneous to say that when there are 30 units the utility of the
tenth unit is 36; of the twentieth, 25; of the thirtieth, 19. It is
equally incorrect to say that when there are 60 units the "total
utility" is equal to the area between the right angle and the curve
a-g, while the value is equal to the rectangle below and to the left of
the point g. The curve from a-g but marks the height of marginal
utilities that have no existence when the supply is 30. The "total
utility," often spoken of in this connection, if it has any existence
certainly cannot be calculated. The diagram must be understood as
representing indicatively at any given moment but one marginal utility,
the same for every unit of like goods. The other perpendicular lines are
expressed in the conditional mood; they are what the marginal utility
would be were the numbers of units different.
[Sidenote: Changing feelings changes utility]
5. _Since goods possess utility only as they gratify wants, it follows
that if wants change, the utility changes._ Utility does not rest
unchanging in the goods as something "intrinsic," but it depends on the
relation of goods to men. This truth, unrecognized for many centuries,
is now seen to be fundamental to the whole problem of value. The
portions of a good added later do not appeal to the same man as the
earlier portions. The man has been changed by what he has enjoyed. In
changing his feelings, goods have also changed his wants. Hence, the
added portions of the good are changed in respect to their utility or
power to gratify a man's wants. Though physically and chemically,
_i.e._, in every material way, they are exactly like the earlier
portions, they cannot have the same want-gratifying power until he again
changes, for they are not in the presence of the same feelings.
Wants are constantly shifting; different kinds of goods are compared in
man's thought and arranged on a scale at every moment according to their
felt utility. An increase in the amount of a good will drop the marginal
utility of the added portions down the scale of usefulness for the next
moment. When we rise in the morning, we want our breakfast; the
breakfast eaten, another breakfast does not appeal to us. Our tasks
done, we take a boat-ride or go golfing; then, appetite returning, we
are tempted to our dinner. And thus from hour to hour wants are
gratified, are altered and are shifted, until, wearied with the day's
labor and pastimes, we go to rest. In a well-ordered life, in an
advanced economic society, the means for gratifying our wants as they
arise are provided in advance. The changing series of desires is met by
a changing series of goods. Life has been defined as a constant
adjustment of inner relations to outer conditions. Economic life is
therefore like physical life, a constant adjustment; and this adjustment
of goods but reflects the shifting and adjustment of feelings.
[Sidenote: Choice is constantly shifting]
6. _The substitution of goods in men's thought is the shifting of the
choice from a good that does not give the highest gratification
economically possible at the time, to another good that does._ The
shifting that takes place on the scale of gratification makes it
necessary for man to shift constantly his choice of goods. This again is
the problem of "economy." Waste results when goods continue to be used
to secure a lower degree of gratification, if they might be used to
secure a higher. The change of choice may be because of a change in the
man, or because of a change in the quality or the quantity of the goods;
or because of a change in the ratio at which the goods can be secured.
§ II. DEMAND FOR GOODS GROWS OUT OF SUBJECTIVE COMPARISONS
[Sidenote: Desire may become demand]
1. _Demand is desire for goods united with the power to give something
in exchange._ An example frequently given to show the difference between
desire and demand is the hungry boy looking longingly at the sweetmeats
in the confectioner's window. He represents desire, but not until the
kind-hearted gentleman gives him a nickel does he represent effective
demand. Desire, therefore, must be united with power to give something
in exchange before it can be called demand. It must be for something
that is attainable; yearning for something beyond reach, sighing for the
moon, is desire that never can become effective demand.
[Sidenote: Demand the Social expression of shifting choice]
2. _Demand is the social aspect of the individual man's comparison of
utilities._ It is the expression of the man's wish to substitute some of
his goods for some one else's goods in order to get a higher
satisfaction. This comparison is often made between two goods owned in
different quantities. When men are constantly comparing things in their
own possession, it is a short step to compare their goods with their
neighbor's.
Demand for consumption goods is thus the manifestation of the man's
desire to redistribute his enjoyments. In demand for goods men virtually
say: "Part of what I have I am ready to give for part of what you have."
The strength of their desire is expressed by the amount of their offer.
When he makes this comparison and this offer, man enters into a social,
economic relation with his fellows.
[Sidenote: The limit of the exchanger's demand]
3. _The law of individual demand is: The trader will reduce his stock of
a particular good to the point where its marginal utility equals that of
the alternative goods._ The greater the divergence in his estimates of
the marginal utilities of two goods, the more ready is he to trade the
lower utility for the higher one. Exchange is but the effort to adjust
goods to wants in the best way. The less useful (marginally viewed) is
traded for the more useful. The greater the difference, in the one
trader's judgment, between the marginal utilities of the two goods, the
greater is the maladjustment, and the greater, therefore, is the motive
to seek readjustment by means of exchange. As the quantity of the good
parted with declines, its marginal utility increases; and as more of the
other good is acquired, its marginal utility declines. The marginal
utility of the two exchangeable units must come to equilibrium in the
individual's judgment. At this point demand ceases, not because an
additional unit of the one good could afford no gratification, but
because it would afford less gratification than the other good in which
demand must be expressed to be effectual.
[Sidenote: The Demand curve]
4. _Demand thus varies at different ratios of exchange between goods,
and may be expressed graphically by a demand curve._ This would show for
any one man the decline of the marginal utility of each added portion of
a good, and these individual demand curves may be united into a demand
curve for a group of men. The demand curve expresses graphically what a
man would be willing to pay at each particular stage in the increase of
goods. We have here come to the very threshold of the subject of markets
and exchange.
[Sidenote: Elasticity of demand]
5. _Elasticity of demand, in the case of any good, expresses the degree
in which a change in its ratio to other goods will increase the demand._
Elasticity varies for different classes of men according to their wealth
and to the cost of the goods. If strawberries are a dollar a box in the
city market, a slight fall in the price, say to seventy-five cents, will
increase the demand but slightly. But if the price is fifteen cents and
falls to ten, the increase in the demand will be marked, for the number
of consumers to whom a difference of five cents is important is then
very great. The demand for the staples is comparatively inelastic. A
certain amount of simple food is necessary to support life; an increase
in its price will not quickly check the demand. On the other hand, if
the price of staple foods falls, no very great increase will take place
in the demand.
CHAPTER 5
EXCHANGE IN A MARKET
§ I. EXCHANGE OF GOODS RESULTING FROM DEMAND
[Sidenote: Reciprocal demand becomes exchange]
1. _Exchange in the usual economic sense is the transfer of two goods by
two owners, each of whom deems the good taken more than a
value-equivalent for the one given._ The comparison of goods that has
been discussed above is a kind of exchange. When a person chooses one
thing rather than another, one form of gratification may be said to be
mentally exchanged for another. This is exchange in that person's mind,
or subjective exchange. But the word "exchange" as usually employed
means an exchange of goods between persons. It is objective exchange,
and when the word is used without modification, it is to be understood
in the objective sense. In the last chapter were analyzed the motives of
the individual man. Robinson Crusoe on his desert island would in very
many ways be acted upon by the same motives in reference to economic
goods that men are in society. Yet, it is exchange in society and the
complicated problems arising from this transfer of goods from person to
person that constitute nearly the whole of the subject-matter of
political economy.
Exchange is seen to arise out of the differences in the situations of
men with reference to goods. The different subjective valuations give
rise to demand, and demand leads to exchange. In early societies
differences in natural products were the most usual causes of exchange.
Salt, though so essential to life, is found in few places. The metals
early became indispensable for weapons of defense or for the chase, and
were sought far and wide. Rare shells, feathers, jewels, and the
precious metals appealed in early times to a universal desire for
ornament. Products like these are the objects of a rude sort of exchange
in the first simple efforts made to adjust possessions to wants. Within
the tribe, differences in the skill and ability of men to produce arrow
heads or weapons or ornaments, bring about the exchange of goods.
[Sidenote: Mutual advantage in exchange]
2. _The advantage of exchange consists in the raising of the
want-gratifying power of goods to both parties._ It generally was
assumed by medieval thinkers that if one party to an exchange gained,
the other must lose. The mistaken idea prevailed that value is something
fixed in the good, and unchangeable. Where the exchange is voluntary
(and only that kind is here being considered), it is mutual advantages
which make the exchange rational. Many false conclusions on practical
questions still result from a failure to grasp this simple truth. It
follows from this that the act of exchange is itself useful, for goods
having a small importance to men are given a higher importance by being
brought into better relations with wants. Merchants, peddlers, traders,
and common carriers of all sorts, therefore, are adding to the utility
of goods. This idea has been only slowly apprehended, but is now one of
the least disputed propositions in economics.
[Sidenote: Demand is supply in another aspect]
3. _Barter is the exchange of goods without the use of money._ Either
one of the goods traded in cases of barter may be considered as sold,
and either one as bought, according as the matter is looked at from the
standpoint of the one or the other party to the exchange. Demand,
therefore, is supply, and supply is demand when the point of view is
shifted from one party to another. The fisherman's demand for venison is
expressed in terms of fish; the hunter's demand for fish is expressed in
terms of venison. But to the fisherman the venison is the supply offered
to him. The term "marginal utility" of a good, therefore, does not
refer merely to the demand of the consumer; for it expresses by a single
phrase the idea both of demand and of supply. The utility of the goods
composing the supply is expressed in terms of the goods that represent
demand and vice versa. The only way in which man can give definite,
concrete, numerical expression to his desire for goods is to state it in
terms of other goods. In expressing numerically, in terms of other
objects, an estimate of the utility of an apple, a horse or a house, one
inevitably gives expression to a ratio of exchange; demand for one good
is the offer of another good.
§ II. BARTER UNDER SIMPLE CONDITIONS
[Sidenote: In isolated exchange the price is not economically fixed]
1. _In isolated exchange, where only two traders engage in barter, their
estimates give respectively the upper and the lower figures of the ratio
at which the trade can take place._ Let us recall the fact that a
difference in the _relative_ estimates that men place on goods is the
first essential of exchange. Those estimates may be expressed in a
ratio; we may say that A will give four apples for one orange, would be
glad to give fewer, but will not give more; while B will give one orange
for three apples, would be glad to get more apples, but will not take
fewer. The outside limits of the ratio at which the exchange must take
place will, therefore, be one orange for three or four apples.
A, seller of apples, offers 4 (or fewer) apples for 1 orange.
B, buyer of apples, demands 3 (or more) apples for 1 orange.
There is, in entirely isolated exchange, therefore, a lack of
definiteness in the price, much depending on what Adam Smith called the
"higgling of the market." In the old-time American horse trade much
depended on "bluff"; in such cases it was as important to be able to
judge character as to judge horses. A thorough analysis of the trade,
however, would probably show that the bargain is concluded at a point
which exactly balances the hopes of gain and fears of loss of one of the
parties.
[Sidenote: Competitive bidding narrows the limits of price]
2. _Where one-sided competition exists, the ratio of the exchange will
be somewhere between the estimates of the two buyers most eager for the
last portion offered_. By competition is here meant the independent
seeking of the same thing at one time by two or more persons. Where
there is one market price paid by a number of buyers, it may be that no
two of the subjective estimates are alike; the exchange value may differ
from all of their estimates, and yet must correspond closely to two.
Auction sales well illustrate the principle. If there is one ax to be
sold and ten possible buyers for an ax, and there is no combination
among them, the bidding will go on until the estimate of the buyer next
to the most eager, has been reached. The most eager buyer can then
secure the ax by bidding just a little above his next competitor. But if
there are ten axes and ten buyers who know that there will be ten axes
offered, the more eager buyers will refuse to bid much above the less
eager ones. A shrewd auctioneer, therefore, often conceals the fact that
there is more than one of an article, and having sold it off, brings out
a second or a third one of the same kind, thus keeping the buyers in
ignorance of the supply and getting somewhere near the estimate of the
most eager buyer in each case. Advertisements of "a limited supply,"
"the last chance," "positively the last appearance," are meant to
stimulate the demand of the patrons, and to lead them to buy at once. In
general, therefore, where competition exists on one side, price is fixed
with greater definiteness than in isolated exchange. Not so much depends
on shrewd bargaining, on bluff, or on the stubbornness of an individual.
Far more depends on forces outside the control of any one man. The
bidders are impelled by self-interest to outbid their competitors, and
thus the limits within which the market price must fall are narrowly
fixed.
[Sidenote: Buyers fix price of perishable goods]
If things already brought to market must be sold at any price that can
be secured, the buyers may be said to fix the price. This does not mean
that they can buy it for any sum that they wish, but it means that when
each one is trying to get it as cheap as possible, their bids finally
determine how much it will sell for. In such cases, therefore, the
competition is for the moment one-sided.
If a part of the supply can be withdrawn and kept without great loss,
this will be done if the price is low. Strawberries, fish, and meat may
be sold Saturday night at any price that will secure purchasers, but
every thing that can be kept with little or no depreciation will be
withheld from sale for a time. It may even be of advantage to the seller
to destroy a part of the supply, when the increased price of the smaller
amount will give a larger total.
[Sidenote: The margin of advantage and the marginal pair]
3. _Where two-sided competition exists, the bidding goes on until a
price is reached where the least eager seller and the least eager buyer
have the narrowest possible motive to exchange_. As the market ratio
varies from those in the minds of the individuals when they come to the
market, there is left a considerable margin to some and a very small one
to others. This difference between the market value and the ratio of
exchange at which any given individual would continue to exchange for
the good may be called the _margin of advantage_. Moreover, the buyers
will have a margin and the sellers a margin, and as that margin narrows
there is less and less motive to continue the exchange until, finally,
the margin disappearing, the buyer or seller, withdrawing from the
market, ceases to be an exchanger, at least for that particular part of
the goods.
The least eager buyer and the least eager seller may be called the
_marginal pair_. They are the buyer and the seller respectively having
the narrowest margin of advantage. Their outside estimates are nearest
to the market ratio. If the market ratio shifts slightly in either
direction, one of them will drop out of the exchange. It is evident that
a buyer who is taking ten units may be on the margin with reference to
the tenth unit, and yet may continue to be one of the most eager buyers
to secure one unit. Thus, the marginal buyer is to be thought of as that
person who, logically considered, is the least eager, or on the margin,
with reference to a particular unit of supply, however eager he may be
with reference to any other unit of supply. It would be well to recall
here the discussion of the nature of wants and the variation in the
intensity of demand.
[Illustration: _Units of Goods_]
[Sidenote: Market values built on individual estimates]
4. _Market values are built up on subjective valuations._ The idea of
market values, therefore, is that of the want-gratifying power of goods
as expressed in terms of other goods, where there are various buyers and
sellers. They are not an average of the subjective valuations, nor are
they made up of the extremes. They correspond closely with the
subjective estimates of two of the exchangers. The other parties to the
exchange are willing to accept the market ratio, for it offers them more
inducements than it does to either one of the marginal pair.
§ III. PRICE IN A MARKET
[Sidenote: One price in a market]
1. _A market is a body of buyers and sellers in such close business
relations that the actual price conforms closely to the valuation of the
marginal pair._ The word "price" which we have used, may be defined as
value expressed in terms of some commonly exchanged commodity. The term
is used more broadly of anything given in exchange. The very terms of
this definition imply that there can be but one price in a market. This
is a somewhat abstract but a useful economic proposition. Very often
within sound of each other's voices traders are paying different prices
for a good. On the occasion of a break in the stock-market, excited
traders within ten feet of each other make bids that differ by thousands
of dollars. Retail and wholesale merchants may be purchasing goods in
the same room at the same time at very different prices. But within a
group of buyers and sellers where competition is approximately complete,
price is fixed with some degree of exactness. The more nearly the actual
conditions approach to the ideal of a market, the less are prices fixed
by higgling, and the more impersonal they become, the buyers and sellers
being compelled to adjust their bids to the needs of the market, and not
being able to vary them greatly one way or the other.
[Sidenote: The earlier markets]
2. _Markets are steadily widening through the improvement of means of
communication and transportation._ The earliest markets were established
on the borders between tribes, villages or nations as a common ground
where strangers met to trade. At such markets were brought together from
sparsely settled districts a comparatively large number of merchants and
customers. Buyers had the opportunity of wide selection both in kind and
quality, and the sellers found a large body of customers gathered at one
point. Throughout the Middle Ages purchases were made by the more
prosperous husbandmen in great quantities once a year at the fairs or
markets. As both the buyers and sellers came from widely separated
places, there was, in most respects, no combination, and the conditions
of a competitive market were present.
[Sidenote: The growth of markets]
The number of buyers and sellers that can constitute a single market is
limited both directly and indirectly by the means of transportation. A
dense population cannot usually be maintained without easy means of
transportation to bring in a large supply of food, and to carry back
manufactured goods great distances. The remarkable growth in the means
of commerce since the application of steam to water traffic, and the
invention of the railroad, have made it possible for goods to be
gathered from most distant points. A market implies a common
understanding among traders. Modern means of communication such as
newspapers, post-offices, telegraph and cable, trade bulletins,
commercial travelers, the consular service, and many forms of special
agencies, are diffusing information widely. As a result of these
changes, there has been a widening of the village-market to the markets
of the province, of the nation, and finally of the world. While a part
of every one's purchases continues to be made in the neighborhood, a
greater and greater portion of the total business is done by traders who
are widely separated and who are indeed members of the world market.
Various articles produced in the same locality may seek different
markets. The market for wheat may be in Liverpool, while that for fruit
and eggs is in the village near the farm-house. If a given product of
any community is sold in different markets, the net prices secured must
be very nearly equal.
[Sidenote: The conceptions normal and market price]
3. _Normal price is spoken of in contrast to market price when the
actual market price results from exceptional circumstances and probably
will not be maintained._ The term "normal price," much used in economic
discussion, is the price which, apart from exceptional conditions, is
expected to prevail, and to which actual prices seem constantly
striving to adjust themselves. As actual prices are nearly always
either more or less than so-called normal price, and only momentarily
ever correspond with it, the term "normal" would appear to be something
of a misnomer. Moreover, as the circumstances of production change, this
normal price itself is altered so that what is normal one day may be
quite abnormal the next. The thought of "normal price" is an abstract
one, but despite the inaptness of the word it is not without some
practical validity. In determining whether he shall continue to produce
certain goods, the business man is practically guided by his view of
normal price. An example of departure from normal price as above
defined, is found in the price of food when an expected ship has failed
to arrive at a port with its cargo of grain. A scarcity amounting almost
to famine might thus exist in a seaboard city, and the market price
would rise; but as this would be due to an accident and would afford a
larger gain than usual to those who happened to have a supply of grain,
men would say that the market price was above the normal price. The
arrival of the expected ship would cause the market price to return to
the normal.
[Sidenote: Review of the argument]
In review, we see that the market value of goods grows out of the
different personal estimates made by men. Market value itself being a
complex and difficult problem, it can be mastered only by dividing it.
First, therefore, must be studied the more general and obvious motives
of men, the nature of wants and their effects on man's subjective
estimates. The same simple motives that influence the subjective
valuations made by individual men, may be traced to the conditions of
the complicated market. It is their workings that are seen in the
obscurest problems of market price.
CHAPTER 6
PSYCHIC INCOME
§ I. INCOME AS A FLOW OF GOODS
[Sidenote: The recurrence of wants]
1. _Satisfaction and gratification being only temporary conditions,
economic wants appear in more or less regularly recurring series._
Impressions are short lived, sensations are temporary, wants that have
been satisfied recur. Wants recur for the same reason that they first
arose. No impression on the nerves or on the senses is lasting. Man's
senses were developed for the purpose of bringing him into relation with
the outer world, of enabling him to survive in his struggle with the
forces of nature. So, when a good has been enjoyed, the utility to that
person of that thing or service for that particular moment, falls, it
may be even to zero. To keep wants satisfied is impossible; we cannot do
next year's reading or next week's eating now; we cannot live the life
of to-morrow. The best results in reading or eating come from taking the
right amount day by day. But it is a need in the life of men that wants
should recur after a time, otherwise there would be no motive for
action.
[Sidenote: Series of wants and series of goods]
2. _The economic ideal is that this series of recurring wants should be
met by a corresponding series of goods._ It is evident that if a series
or succession of goods varies, at different times, moments, and
conditions, in its power to gratify wants, the closer the correspondence
between the two series, that of wants and that of goods, the greater
will be the total of gratification. We may liken man's life to a journey
in which the supplies of food are gotten at the stations. If any one of
these supplies fails, the traveler suffers the pangs of hunger, and if
two or three supplies are at one point, they do not serve the needs of
man so well as if distributed along the way. This constant inflow of
goods is one of the fundamental needs of life. The savage dimly
understands this need. Even the birds and the beasts adjust their lives
to it either by travel or by toil. The spring and autumn migrations to
new feeding grounds are the attempts of the bird to gratify this series
of wants as they arise. The ant, the bee, and the squirrel anticipate,
and work to fill their storehouses against the days of need.
[Sidenote: Social and private incomes]
3. _Objective income consists of the additional sums of goods acquired
by individuals or by society during the income period._ The term
national or social income may be contrasted with individual or private
income in the objective sense. The nature of the acquisition of
objective incomes may, in some cases, be different if viewed from the
social and individual standpoints. Society, as a whole, may be said to
acquire income only when goods are produced; individuals may acquire
income by gift, bequest, theft, or other modes of transfer from other
individuals. In many cases the two kinds of income, however, agree, the
objective income of society being the algebraic sum of the goods
acquired or parted with by all the individuals.
We should not understand that either social or private objective incomes
include only material goods, for many utilities and labor services that
never take on a material or money expression are included in either
case. Indeed, we are close here to the conception of psychic income
which is to be developed more fully.
[Sidenote: Money income]
Income of money is not often the same as income of things. Usually many
of these subtler utilities are overlooked and omitted from the
recognized money income. In this day the use of money is so common that
we are sometimes led to ignore the value of things to which the money
expression is not given. The money income is merely the money
expression of the value of currently acquired goods, and it is the only
medium through which such varied sources of gratification can be
compared.
[Sidenote: Gross and net income]
4. _Income in the logical sense must be a net addition, but the term
gross income is not without popular and practical meaning._ Gross income
is sometimes spoken of in the sense of total receipts, as the total of
goods secured; net income is the remainder after deducting expenditures
and after replacing the goods employed to secure the income. In order to
produce some goods technically, men make use of other goods. While they
are storing up a supply of wood or coal it may be looked upon as the
income, but they may burn it to help grow hothouse plants. While they
gather flowers with one hand, they destroy fuel with the other. Only the
net increase in value can be accounted income in the second period. The
goods that come into a man's possession in any period are of many sorts:
to get some he has destroyed many previously existing goods; while to
get others he has not needed to use up the accumulations of the past or
to mortgage the future. The one kind is gross, the other net income.
[Sidenote: Wealth and income]
5. _An income of consumption goods is a part of wealth, but not the
whole of it._ The consumption goods, the "present goods" at the moment
available, are the essential part of wealth for the moment's enjoyment.
The only essential and immediate conditions of a series of
gratifications is a regular series of consumption goods. But many things
existing which could be used to secure a gratification are not in fact
treated as consumption goods. A crop of corn is not all income. In a
time of famine it could be used, but seed-corn was saved from last year,
and some must be kept for next year. This is a part of wealth, but not
of "present goods" as we understand the term.
[Sidenote: Some goods never can become enjoyable goods]
Further, in the economic world there is much wealth that never can
gratify any want directly; many forms of wealth never can be consumption
goods. It is true that everything called wealth is expected to
contribute sooner or later in some way to the sum of gratifications. It
is for that reason it is called wealth. It is, however, a mere figure of
speech to say indirect want-gratifiers become want-gratifying goods. For
example, the engine transporting a load of coal is indirectly gratifying
wants; if it is transporting a train-load of passengers, the
gratification is direct. A machine making cloth for next year is
gratifying wants only in a metaphorical sense. A field used to produce
food is not a direct want-gratifier until it is transformed into a
residence site, a playground, or a tennis-court.
It is necessary therefore to recognize the distinction between present
and future incomes. The value of the mass of wealth in possession and
yielding income, rests in large part upon its power of contributing to
income in some future period. Thus, any durable good may be looked upon
as embodying a series of incomes ranging from present to future in
varying degrees. This will be fully considered under the subject of
capital.
[Sidenote: Income from wealth and from labor]
6. _Incomes are called funded or unfunded according to the sources from
which they are derived._ Funded income arises from the possession of
wealth or of claims on wealth, such as lands, railroad stocks,
government bonds, etc. The income is "funded" because it corresponds to
an abiding fund of wealth. The income arising from current labor is
unfunded, because there is no permanent fund of accumulated wealth
corresponding to it.
The idea of regularity connected with funded income is not essential to
the idea of income in general, _i.e._, we cannot refuse to call a thing
income because it occurs only this year. If it is part of the sum of
goods that flows in, that is newly available for the man's use, it is
income. But funded income is the more abiding, for income from wages
stops when the man dies or fails to perform his work, while the income
from wealth continues after he ceases to be active. Thus, families with
equal incomes may differ greatly in wealth, the one depending entirely
on salaries, the other on rents.
§ II. INCOME AS A SERIES OF GRATIFICATIONS
[Sidenote: Gratification the test of psychic income]
[Sidenote: All sources of income are productive]
1. _The value of consumption goods is derived from the pleasurable
psychic impressions which they aid to produce, and these psychic effects
constitute the psychic income._ The objective income is sometimes called
the "real" income, but certainly it is not income in the most essential
sense. Things outside of men cannot be feelings, they can only call out
or occasion feeling, and it is the attainment of pleasurable conditions
in mind or soul that is the aim of all economic activity. Material
income and immaterial income are both related to and reducible to
psychic income. Some portions at least of the objective incomes of goods
are continually by use becoming subjective incomes of enjoyment. Men
talk of material income as consisting of bushels of wheat, head of
cattle, etc., and of immaterial income as the uses that durable goods
yield directly or that men perform for each other, _e.g._, those of the
singer, physician, teacher, judge--all services that do not take on
material form. There was a long-standing dispute in economic literature
regarding the difference between productive and unproductive labor.
Productive labor was said to be that which embodied itself in abiding
material form. The distinction led to some peculiar puzzles and
paradoxes. The bartender mixing drinks, adds to the value of those
ingredients; in a minute that value is dissipated. According to the
distinction in question, he is a productive laborer because his services
are embodied in material form, whereas the lecturer is regarded as an
unproductive laborer because the results of his labor are not embodied
in material form. But whether or not the service has for a moment
embodied itself in material form is of no essential economic import. The
presence of the waiter is as essential to the well-served dinner as are
the polished silver and china, or as the well-cooked food. The
distinction in question is not now made by economists, all labor that
contributes to value being regarded as productive. But a similar
distinction is inconsistently preserved by many writers in the case of
material things. A building used as a factory is called productive, but
used by the owner as a dwelling it is called unproductive because the
service it renders does not appear in material form. But the use of the
house, or that of land for a school ground or campus, secures a certain
gratification, an immaterial good. Consistency requires that the
services of men and the use of material things be judged by their
psychic results, the question whether the service takes on a material or
an immaterial form being disregarded.
[Sidenote: All wealth is logically related to psychic income]
2. _Only those things and actions that are in some causal relation to
gratifications can have value to man._ This proposition of theory is
demonstrated every hour in practical life. The business man always is
trying to trace a causal relation between things that do not and cannot
themselves directly satisfy wants, and things that do. The vineyard has
no value to Tantalus, unable to reach its fruit. A captive, chained to a
rock, attaches value only to the things within his reach. Men living in
savagery and ignorance starve amid the possibilities of plenty. Chained
by their ignorance and improvidence to a little spot of earth, they do
not see clearly, either in time or space, the economic relations about
them.
[Sidenote: Values of things distant in time]
3. _Man's foresight and knowledge enable him to think of many periods at
once, and thus his felt dependence on goods extends over a series of
future productive agents._ In order to simplify the problem, we have
spoken of the economic man as living only in and for the moment. If he
had no more knowledge, memory, or imagination than is necessary to
compare goods here, only present goods could have value to him. Even the
higher animals, and much more the savages, rise above that level of
improvidence. With increased intelligence the economic life of man
expands, and he attaches importance to things which at the present
moment have not, and cannot have, the slightest influence on his
immediate gratification. The extension of man's view works a momentous
change in his economic estimates. Of the thousands of forms of matter in
the world, only a comparatively few ever will make an immediate
gratifying impression on man's senses. But many of them are so connected
in his thought by chains of association with pleasures or uses, that
almost instinctively and most intensely he attaches an importance to
them. In most cases it would require close thought to see that the
service attributed directly to them was but a reflection of that
performed by some other good. Thus, more and more, the estimates placed
by men on goods come to depend on knowledge and foresight, and not on
immediate impressions and feelings.
[Sidenote: Goods related in varying degrees to psychic income]
4. _Things are causally related in varying degrees to the psychic
income, and have value only as their relation is known and felt._ The
explanation of value is not complete till value has been traced back to
its source in gratification. Often the complex nature of the problem is
ignored. If one discusses the trading of a bushel of grain, to be used
by a hungry man for food, for a sheep to be kept for breeding, or for
wool to be made into cloth next year, he may overlook the difference in
the grade of wants compared. In this case, a gratification of the
present moment is compared with a gratification of a very different kind
at a future time. The problem involved is complex because of differences
in time, in place, and in the nature of the want-gratifiers. The student
should endeavor to reduce the problem of value to its simplest form by
considering first the exchange, at the present moment, of immediately
enjoyable goods. The logical starting-point in the theory of value is in
those goods that are in closest touch with feeling, and on this basis
may be built up an explanation of values in which reason and forethought
have a greater part. Starting from the proposition that psychic income
is the foundation of all values, we shall go on, however, to trace
causes that give value to all the physical agents, and to the most
indirect of want-gratifiers.
DIVISION B--WEALTH AND RENT
CHAPTER 7
WEALTH AND ITS INDIRECT USES
§ I. THE GRADES OF RELATION OF INDIRECT GOODS TO GRATIFICATION
[Sidenote: Technical rank of agents]
1. _Goods may be ranked according to their technical relation to wants._
The technical rank of goods (sometimes spoken of as the degree of
roundaboutness of the process) signifies the number of steps or
processes that intervene between the agent used and the desired form. If
one wishing the hickory-nut hanging above his head must first pick up a
stick to throw at it, the nut is removed one step from desire. But even
among savages the processes are much more complicated. The Indian with a
crude knife fashions his bow and arrow, fastens the flint and cord which
represent still other processes of industry, and shoots the bird which
satisfies his hunger. In modern conditions the relations are vastly more
complicated; only at the end of a long series do men arrive at the thing
which gratifies their wants.
[Sidenote: Time relations of goods to wants]
2. _Goods may be ranked by their relation to wants in time._ The
relation in respect to time is measured by the period that must elapse
before the utility of an agent results in, is converted into,
gratification. No agent or influence intervening, a thing may yet be
removed a long way from gratification. A tree may not be fitted to bear
fruit for ten years to come. Meantime, there are many other possible
uses for the tree: it may be used for fuel, or to make a canoe with
which to catch fish, or to follow some other indirect method of
production. Evidently the technical and time relations of goods are very
different. The number of steps has no necessary relation to the time. A
number of technical steps may be taken in half an hour, or a process of
a single technical step may last a year. In the mechanic arts the
technical relations are of primary significance, but in economics the
time relations are mainly to be considered.
3. _Economic goods may be classified as immediately enjoyable goods and
durable agents._ Enjoyable goods are goods in a final form, producing
gratification or just ready to give gratification the next moment, as
the cool draft of air made by a fan on a hot day, the cup of coffee
steaming on the table.
[Sidenote: Enjoyable goods and durable agents]
Many goods of just the same form as the foregoing may not be affording
current gratification (except that afforded by thrift and forethought),
but are kept because later they will gratify a more intense want or
gratify a want better. Apples and potatoes are kept in a cellar so that
their use is distributed throughout the winter; cider and wine are kept
till they get a quality that appeals more to the palate. Coal, wood, and
stocks of goods, are thus kept in the form of enjoyable goods, destined
to be physically destroyed when at length they yield a gratification.
Evidently they must be storing up meantime a certain additional utility,
for otherwise there would be no reason why they should be kept for the
future. Such goods as these are sometimes called unripened consumption
goods, but until ripened they bear in part the character of durable
agents.
Abiding sources of economic enjoyments are called durable agents. The
inhabited house is a source of continued gratification in each moment's
shelter it affords; but, further, it is the durable source of a series
of future uses, as yet unripened. The hammer, the hoe, the tree, the
field may all be considered as agents to secure consumption goods. Some
of these are but one step removed from direct gratification, as the hoe
helping the gardener to get food for his own use. Other agents are bound
by many technical links to the ultimate gratification.
[Sidenote: Degrees of durableness]
4. _This classification of goods is abstract, in that it is a
classification, not of concrete goods, but of qualities shared in some
degree by nearly all goods._ Most goods unite in some degree both
characters, but in varying measure. This is, therefore, a continuity
classification, the varying classes of goods grading from those whose
durableness is zero (just at the moment of consumption) to those most
durable, which yield an endless series of uses or products. Yet the
classification is practical, corresponding as it does with thoughts
which men have in the use of goods. By repairs and other methods goods
become, and are looked upon as, durable sources of a series of uses.
It is to be noted further that the enjoyable goods pass over into
psychic income, that is, they are the stream of objective utilities that
is each moment detaching itself as income from the great mass of wealth.
The durable goods are those utilities which for the time remain, not yet
ripened or ready to be converted into psychic income.
§ II. CONDITIONS OF ECONOMIC WEALTH
[Sidenote: Income as affected by climatic conditions]
1. _The bounty and variety of the natural supply of indirect goods in
the material world are the prime conditions of a bountiful income to
society._ The effect of climate on the supply of goods available for man
is complex. Climate is itself a direct source of gratification. As
temperature must be adjusted to man's need, climate satisfies wants
directly. Health, energy, the beauty of noonday woods and of sunlit
clouds are conditioned on the favor of nature. Climate affects, further,
the supply of material economic goods. All the earlier civilizations
arose in warmer countries. But, after man had gained a certain mastery
over the obstacles of nature, he was able to soften the harsher features
of climate, and with better shelter and clothing, with better stocks of
winter food and fuel, the more favorable features of the temperate zone
could be utilized. So civilization moved northward from Egypt and India
to Greece and Rome, to northern Europe and America.
[Sidenote: By natural resources]
Soil conditions for vegetable life determine first the amount and kind
of animal life. Animal life from one point of view is a parasite, living
on the vegetable; it is only the vegetable that has power to assimilate
most inorganic compounds. Water being a need of plant life, the amount
of rainfall is one of the most important conditions of industry. Man,
therefore, depends on the resources of the soil directly or indirectly;
a fertile soil furnishes him either directly a supply of vegetable food,
or indirectly a supply of animal food.
Natural supplies of metals, of coal, and of timber are important
consumption goods, but they are also indirectly the condition for a vast
variety of other goods. The industry that could exist without iron,
copper, and coal would be of a very low grade.
[Sidenote: By flora and fauna]
The variety of flora and fauna, and their fitness for man's needs,
largely condition the possible production. If, in the course of
evolution, it had chanced that wheat and corn, the horse and the cow,
had been crowded out in the struggle for existence, we should have had a
very different civilization. The possibilities of civilization in Peru,
and those of all the Indians on the American continent, were limited for
lack of domestic animals. Animals that are fit for domestication are a
necessary intermediate agent by aid of which man can appropriate and
turn to his use the fertile qualities of the soil.
Not content with the material world about him, even when it is at its
best, man alters it in many ways. He enriches the soil, improves the
varieties of animals, he even in some slight degree affects the
climate, and by the use of a multitude of artificial bits of matter
called tools, works profound changes in the world in which he lives.
[Sidenote: By motion and energy]
2. _A large part of the utility of goods is conditioned on motion and
energy._ It has been said that man's power in production is limited to
moving things. The outer world is to man the sole source of motive
forces. He can bring things together and they produce the result.
Further, it may be said that nearly every kind of utility is conditioned
on motion. It is man's aim to secure a constant inflow of goods. To
secure this either he must move to get the goods, or he must cause goods
to move toward him.
The law of "conservation of energy" helps to explain economic action;
the supply of energy in the universe cannot be increased or diminished,
but may take on new forms. So a limited supply in man's control may take
on various forms and so have different effects on gratifications. One
and the same source of energy may be converted into the different forms
of heat, light, motion, electricity, etc. But there must be some source.
Man's desire is directed to getting force at the right place and in the
right degree. If light or heat is too intense, it causes pain; the glare
of the sun blinds instead of giving keener vision. A moderate force
applied to any of the senses gives the maximum clearness or pleasure.
Man is constantly endeavoring to secure forces from the outer world and
to adjust motion so that it will directly or indirectly best serve his
purposes.
[Sidenote: By food, animals, and fuel]
3. _Among the main sources of power used by men are food, domestic
animals, and fuel._ In eating food man stores up force in his own body.
When he draws the bow he puts force into it to lie latent until
liberated at the right moment. There must be a source of energy likewise
that mental action may go on, and the power of sunbeams, stored for a
time in food, is liberated in the processes of thought.
This first natural mode of liberating energy within their own bodies
does not satisfy the growing needs and aims of men. Such a mode is
"labor," which becomes at times painful and distasteful. In the earliest
societies known, some sorts of domestic animals are found supplementing
man's efforts and acting upon the material world to alter it for man.
The dog joining in the chase guards his master's safety, and helps to
bear his burdens. The draft-beast in the field turns the heavy soil, and
aids in the final harvest. The trained elephant does the work of twenty
men piling logs, loading ships, or carrying burdens.
Man further increases his control over the material world by making
other men do his bidding. Domestic slavery, where wife or child serves
the father of the family, or chattel slavery, where the vanquished toils
for the victor, are all but universal in early communities. Such a
method of increasing one's control over the forces of the world requires
only superior strength, no special intelligence in mechanics, and is
thus one of the first crude devices in a primitive civilization.
Fuel has been, up to the present time, perhaps the most important source
of energy. Fire in the hands of savage man gave him dominion over the
forests and over the metals. In this age of steam the liberation of the
energy of the sun, stored up in coal in ages past, is still the
indispensable condition of our developed industry.
[Sidenote: By the energy in wind and flowing water]
4. _The greatest and most exhaustless reservoirs of power for man's use
are in wind and water._ While the supply of fuel is being used at a
progressive rate and will soon approach exhaustion, there are elsewhere
exhaustless stores of energy awaiting man's command. To make use of the
wind for sailing a boat, only the simplest arrangements are needed; a
windmill fixed at one place requires more ingenuity and machinery. The
energy of the wind is derived from the sun and will last until the sun
loses its heat. If some means can be found for equalizing the flow and
for storing the power of the wind, it may yet become a great agency of
industry. The force of falling water, long used in a petty way by the
old water-mills, is just beginning to be employed on a large scale at
such points as Niagara. Where fuel is high, as on the Pacific coast,
wave motors have been successfully used in a small way, but wave motion
is too irregular to serve well the needs for power. But the constant
motion of the tides offers, at some favored points, a source of power
that will remain as long as the earth revolves upon its axis.
[Sidenote: By the intelligent utilization of all these agencies]
5. _Man studies and compares the durable goods that give him command
over enjoyable goods, and attaches value to them._ Thus energy is found
dissipating itself throughout the world in ways useless to man, and in
places where it cannot serve his purposes. As man grows in power of
control over nature, he seeks to apply these forces in forms and at
places he has selected. If he can arm himself with the energies of mine
and torrent, he can react with giant strength on the material world. He
ceases to accept passively its conditions, and to live on its grudging
gifts; he becomes its fashioner, in a sense its creator. His
intelligence and his wants are most important factors determining what
the form of the physical world about him shall be.
But all the efforts of men in the most developed economy cannot make to
disappear the differences in the quality of goods and agents. Desirable
goods to consume are limited in quantity, and they vary in quality;
hence they have value and some higher than others. Likewise, durable
material agents and sources of power are limited in number and vary in
convenience of location and efficiency. As men seek to gratify their
desires, they attach importance to these agents of power. Each is valued
for its service or its series of services. When anything is seen to
contain a series of uses, it becomes a rent-bearer, and the economic
problem of rent arises, one step more complex than the problem of
valuing simple consumption goods.
CHAPTER 8
THE RENTING CONTRACT
§ I. NATURE AND DEFINITION OF RENT
[Sidenote: Temporary use and permanent possession of agents]
1. _The temporary use of materials and power and their sources is
necessary to bring most enjoyable goods into being._ Indirect goods have
value solely because they help to get direct goods. The apple-tree is
valued because it bears fruit, and the orchard because the trees give
promise of yielding a succession of crops for years to come. There are
thus two problems of value in connection with durable goods: that of the
value of a temporary use for a brief period, as for a year; and that of
the value of a thing itself, the use-bearer, for a long series of years
or in perpetuity. To explain what fixes the value of the temporary use
is the problem of rent; to explain what determines the value of
long-continued use or of permanent control and ownership of a use-bearer
is the problem of capitalization.
[Sidenote: Origin of the term rent]
2. _The term rent is used in a number of senses, which must be carefully
distinguished._ The original meaning of rent was any regular income or
revenue arising from wealth. The word comes from the low Latin _renta_
from _renda_, in turn from _redditus_, that which is given, yielded or
given back, or _rendita_, that which is given or returned. The French
_rendre_ (English render), to give or return that which belongs to one,
is used very early. Chaucer used "rente" as an income. "Cattle had he
enough and rente," cattle probably meaning property (chattels), and
rente income. Rental is a collective term for a number of rents. The
total yield of an estate was called its rental or rent-roll, and a list
of the various sources of income, including all payments from tenants in
money, produce or services, constituted its rental.
[Sidenote: Popular and special meaning of rent]
3. _The popular meaning of rent is the amount paid for the use of
material things which must be returned to the owners after the time of
use agreed upon._ We speak of the rent of a house, boat, etc., using the
word as a synonym for hire. In the European languages the word is used
more frequently in that sense. In the French _la rente_ means the income
from any kind of property; but corporate securities and national bonds
came particularly to be called _les rentes_, because they are a form of
investment yielding a permanent income. The one who has a perpetual
income from bonds or rents is called a _rentier_. In German the term
_Rente_ is used more broadly than in English, as an income of any sort,
_Grundrente_ meaning the rent of land, and _Capitalrente_ the income
usually in England called interest.
A restricted meaning has long been applied by economists to the word:
the income yielded by lands, etc. This was put in contrast with interest
for money and capital, and with wages of labor. This meaning is now
being abandoned by economic students.
A wider meaning recently given to the word by many economists turns on
the supposed relation of some portions of price to cost of production.
Thus, frequent use is made of the expressions: consumer's rent,
producer's rent, buyer's rent, seller's rent, etc. In the well-founded
opinion of some recent critics this usage rests on a mistaken reasoning.
However, in the midst of this wide variety of usage the student must be
forewarned and alert. Doubtless agreement will at length be arrived at.
Meantime, no economist can dictate what meaning is to be attached to the
term, but one may suggest the definition that seems to him most
expedient. Throughout this work we shall endeavor to use the term rent
uniformly and consistently as it is now to be defined.
[Sidenote: The essence of rent]
4. _The essential thought in rent, as we shall use it, is that it is the
value of the usufruct as distinguished from the value of the use-bearer
or thing itself._ The meaning of usufruct is the use of the fruits, or
in legal phrase: "the right of using and enjoying the income of an
estate or other thing belonging to another, without impairing the
substance." The obvious fact is that fruits can be eaten without
destroying the tree, the harvest gathered without destroying the field.
By a metaphor the word in legal discussion is applied to the use of any
product, and we shall employ it, as in common speech, in reference to
one's own goods as well as to the goods of another.
[Sidenote: Rented agents are looked upon as durable]
The qualities whose use gives value are not usually indestructible, but
they are treated as undestroyed. There is a famous phrase used by
Ricardo, "rent is paid for the original and indestructible qualities of
the soil." He said "indestructible," but the word is not apt. There are
many qualities in the fertile field that _must_ be destroyed when it is
used. Every economist since Ricardo's time has recognized this, and many
excuses for the inaccuracy have been given. After every harvest, the
field is less serviceable than before, and if it is to be of the same
grade of efficiency, the fertile elements must be restored. We cannot
assert that Ricardo meant _undestroyed_, for he was not quite clear on
the question. But it is evident that one can count as true income only
that part of the value of product that remains after full repairs have
been made. It is only by a fiction that most indirect agents can be
regarded as indestructible. Things yielding rent are not indestructible,
but generally they are preserved undestroyed.
[Sidenote: True rent a net income]
5. _A distinction must be made between gross and net, or true and false
rent._ Before the usufruct is estimated, allowance must be made for
repairs, depreciation, and for various expenses which absorb a good
portion of the gross product. When this allowance has been made, the
income may be considered as a net sum not due to the sale, or to the
using up of any part of the thing rented. This is the essential thought
in typical rent--that it is the value of the surplus, or net product, of
an economic agent leaving the agent itself unimpaired in efficiency. The
total product is sometimes called the "gross rent," but economic rent is
"net rent." This thought is made clearer by the following discussion.
§ II. THE HISTORY OF CONTRACT RENT AND CHANGES IN IT
[Sidenote: Economic and contract rent distinguished]
1. _Economic rent (likewise called natural, competitive, and sometimes
rack rent) is to be distinguished from contract rent._ Economic rent is
the market value of the usufruct, and contract rent is the amount a man
pays for the use of wealth by virtue of an existing agreement. The one
is impersonal or economic; the other is personal or legal, being fixed
by agreements between persons. The rents usually spoken of are contract
rents.
The two diverge more or less. If the contract has been lately made the
two will be nearly the same. Contracts of long standing often bind the
tenant or borrower to pay either more or less than the present
competitive price. If, after a time, the value of the use is greater
than the contract rent, the tenant is fortunate in having his lease. But
he is the loser if he is bound by lease or agreement to pay rent in a
locality where land has become less valuable.
Economic and contract rent usually diverge also because of the agreement
that the owner, or lender, keep up the repairs and pay the taxes. Here
it is simply the difference between gross and net rent.
Custom may prevent the owner from charging all the usufruct of the agent
is worth. If the contract rent is less than the economic rent, evidently
the borrower enjoys a part of the usufruct, without charge, and to that
degree is in the position of an owner. The usufruct in this case is
divided between the two parties. Such instances were numerous in the
Middle Ages in the renting of land, and still are found in many
countries.
Contract rent is based on economic rent and tends to conform to it
whenever there is competition. The existence of economic rent is the
basis of the agreement to pay contract rent. Prospective hirers of
agents forecast what the use will be worth to them and make their bids
accordingly.
[Sidenote: The renting contract for the use of wealth]
2. _The renting contract is the agreement of a borrower to pay for the
use of a thing and, at the end of the time, to restore it in good
condition or pay for its complete repair._ In practical business it is
necessary to have definite agreements to prevent disputes. Some provide
that one party, some that the other party, shall keep up repairs. The
form of the renting contract is observed by men in estimating the uses
of their own wealth where no contract exists. If they count the gross
product of an agent as rent, it is bad bookkeeping. In many cases it is
necessary, therefore, to follow the form of the renting contract in
order to determine the net yield of indirect goods.
[Sidenote: The renting contract in the middle Ages]
3. _In early stages of industry the use of nearly all wealth is
estimated under the renting contract._ In the lower stages of culture,
in hunting, fishing, or nomadic pastoral tribes, land is not recognized
as wealth to be exchanged or owned. But at a later stage, as in the
Middle Ages in Europe, land and the things pertaining to it, as ditches,
houses, mills, cattle, stock, and the few simple implements, constituted
the larger portion of the wealth. Land was granted to the tenant or serf
in return for services. The contract was pretty strictly drawn and all
items were specified. It was not hard to hold the tenant to his contract
to keep the land in about the same condition. There was a certain
rotation of crops; the tenant was obliged to keep his stock up to
standard; and, moreover, he had a certain interest in the land because
his contract rent (as explained above) was less than the economic rent.
The landlord, therefore, could count pretty surely on the undiminished
power of his land and stock from one year to another.
At that time, truck and barter were the common modes of exchange, and
rents were paid in products and services, not in money. The fruits of
the soil were consumed on the spot instead of being sold as now. Land
was rarely, if ever, sold outright, so that there was no occasion to
estimate its total selling value. It was thought of as a place on which
to live and as a source of livelihood. Its yearly use was all that was
subject to contract, sale, and exchange. Not the land itself but a _rent
charge_ on the land was sold, the term rent charge meaning an annual sum
payable out of the yield of an estate. Many medieval estates were so
tied up by legal conditions that they could not be sold outright; all
that the owner could do was to sell or mortgage the annual rental. Thus,
in the Middle Ages, it was all but universal to look upon most indirect
agents as exchangeable only under the renting contract, as subject to
renting but not to complete transfer and sale.
[Sidenote: The renting contract not convenient in commerce]
4. _As industry developed, the renting contract remained almost wholly
confined to cases of renting lands and houses._ The materials and
appliances needed for manufacture and commerce are so manifold and
varying in quality that the rent-form of contract is very cumbersome and
difficult for exchangers to enforce. If a merchant about to embark on a
trading journey wished to rent a ship and a stock of goods, the renting
contract became most difficult to interpret. He must agree to repay the
loan in goods of the same kind and quality as those received, a contract
most difficult to execute, and giving occasion to costly tests and
countless disagreements. It was much easier for the merchant to get his
loan under the interest contract, _i.e._, a money loan, with which to
buy the goods. With the growth of industry and commerce, wealth
increased in towns, taking many forms, as those of ships, wagons, tools,
and stocks of goods, that could not conveniently be rented.
[Sidenote: The thought of it remains associated with a rural economy]
In England, the country which developed its industrial system earliest,
the idea of rent, therefore, gradually became disassociated almost
entirely from the use or hire of any wealth but land and real property.
Because in the Middle Ages rent was associated almost entirely with
natural resources, they being the only important forms of wealth which
men rented from others, there was fostered the idea that the essential
mark of rent is the connection with natural resources. It is a simple
example of the association of ideas. In the transfer or loan of movable
goods, the rent contract was quite overshadowed by the other form of
contract, that of a money loan. According to this explanation the
essential and primary difference between renting wealth and borrowing
money at interest is not in the kind of wealth whose use is thus
temporarily transferred, but in the nature of the contract. But as forms
of wealth differ in their fitness for transfer under the two forms of
contract, there goes on a competition between them, as a result of which
each becomes associated with certain groups of goods. In the Middle Ages
the renting contract was the dominant form, but it has been
progressively displaced by loans in the money form, and its importance
is still declining.
[Sidenote: Renting contracts most used with land]
5. _The main forms of wealth whose usufruct is still sold under long
renting contracts are land and its more durable improvements._ In
England farms are let under long leases, a very common form being the
thirty-year lease. Under the old, almost fixed, conditions in
agriculture such a lease was equitable, but when prices are rapidly
changing and when new methods are being introduced, it gives rise to
great hardships. About twenty-five years ago, the great fall in the
price of agricultural products brought ruin to many of the tenant
farmers. The land troubles in Ireland have been largely about tenants'
improvements. When the lease expired, the landlord could appropriate all
the improvements that the tenant had made. In America farms are let
usually on shares, and from year to year, but the plan of a money rent
is increasingly followed. The difficulty of getting an equitable
arrangement between landlord and tenant is recognized by all. The
landlord must make the proper repairs or see that they are made; he must
specify in the contract whether the products can be taken away or are to
be fed on the place so that the soil may not be impoverished, and he
must provide for the purchase of other fertilizers. On the other hand,
the tenant under the renting contract has little motive for improvement,
and many occasions for discontent. So in America, far more than in the
older countries, land changes hands by sale, the purchaser going into
debt for it, giving his note and paying interest on the loan rather than
rent for the farm.
[Sidenote: But many other goods are rented]
Many less durable goods are rented for brief periods. Carriages are
rented for the day, bicycles by the week or month. Sewing-machines,
boats, guns, tents, and even diamond engagement rings, yield their joys
under the renting contract. People frequently hesitate between the
renting and the purchase of a piano, and in some cases renting is the
more convenient and desirable way of securing its use. The purchase of a
dress-coat or of a masquerade-suit to be worn but once, involves for
some an excessive and needless sacrifice. For a moderate sum its
temporary use may be had, and it is then returned, little the worse for
wear, to the accommodating clothier.
[Sidenote: Economic rent much wider than the renting contract]
A final word of caution may be given. Economic rent is not confined to
the cases of contract rent. It exists in every case where a more or less
durable agent yields a use that is scarce and desirable. The owner who
uses a thing himself gets the advantage in the product as clearly as if
he collected rent from a borrower. Houses lived in by the owners, house
furnishings, clothing, books, all scarce and durable agents, are
yielding rents in this logical sense. To the economist, therefore, the
problem of economic rent, as one of the grand divisions of the problem
of value, remains of undiminished importance, for in these unceasing
streams of uses emanating from our environment, is found the basis for
the value of all durable wealth.
CHAPTER 9
THE LAW OF DIMINISHING RETURNS
§ I. DEFINITION OF THE CONCEPT OF (ECONOMIC) DIMINISHING RETURNS
[Sidenote: Economic agents contain uses to be obtained only with
progressive difficulty]
1. _The phrase "diminishing returns of industrial agents" is the
expression of the fact that there is an elastic limit to the utility any
indirect good can afford within a given time._ Successive attempts to
get additional services from a thing are usually in part successful, but
each additional service is gained with more difficulty, or a smaller
added service is gained for an equal expenditure of materials or effort.
A book stands many hours untouched on the shelves of the library; but
if, as often happens, two or more persons wish to use it at the same
hour, time and energy are wasted. The book has a potential use during
the twenty-four hours, but all this can be secured only at the cost of
the greatest inconvenience. The greatest net uses, therefore, are seen
to be to the first user and in the first hour, for these uses cost the
least time and trouble. If the members of a family will take turns, one
chair will serve for all of them; but if all are to be able to sit down
together, a chair must be provided for each. Often it will happen that
only one chair is in use, the other nine chairs being valued only for
their potential uses. I knew two young men who owned a dress-coat in
partnership, and as they had different evenings free from business all
went well until both were invited to a reception which both were very
eager to attend.
[Sidenote: This is true of all classes of agents]
Illustrations of this principle may be drawn from every class of durable
goods. The example generally given is that of a field used for
agriculture. It was long ago seen that a larger crop could usually be
obtained on the same area, only with greater effort or expenditure; but
this fact has been thought to be peculiar to the use of land. The
examples given above have been purposely chosen from very different
fields, to show that the truth is a general one: a good that affords a
given service can be made to increase that service, ordinarily, only on
condition that men put forth greater effort, or sacrifice more goods.
The decreased utility is most clearly seen in the diminished effect
which other agents produce when used in connection with the thing. When
several are trying to use the same book, and are wasting time trying to
get it, we often say their study hours are less fruitful because of the
poor library facilities. Again, we speak either of the diminished
returns of the field, or of the labor applied to the field. Either the
particular thing is said to show diminished returns or the other
coöperating agents are said to show them.
[Sidenote: Decreasing technical effectiveness of material things]
2. _As the agents used in connection with a fixed amount of any other
agent (for mechanical, chemical, physiological, psychological, and other
purposes) increase, their objective effectiveness after a given point
decreases._ Objective or technical effectiveness means effectiveness
independent of the thought or estimate of men. It is not the
effectiveness to produce a feeling in men, but to produce results on the
material world. In a mechanism, if one part is increased without
increasing the other parts, a point is reached where it does not add to
the result. If in the building of a bridge the weight of the floor is
increased beyond a certain point, the rest of the bridge being left
unchanged, the bridge is weakened instead of strengthened. If the weight
of the iron in the framework is increased beyond a certain point without
strengthening the piers, the structure is weakened. If the pier is
greatly enlarged, the bridge may not be weakened, but there is an utter
waste of material and effort, and perhaps the main purpose of the
bridge is defeated by the damming up of the stream. A bicycle frame,
like a chain, is no stronger than its weakest part. If the strength of
all parts of the wheel and frame is in equal proportion to the strain
they must bear, added weight to any single part weakens the whole
machine. The development of the modern type of bicycle, by many
experiments, is a good example of the adjustment of materials according
to the principle of technical efficiency.
A variation of the same principle is seen in chemical combinations.
Exact proportions of materials must be used to get a certain result.
Increase of one ingredient will not increase the desired product. Either
the added part is rejected, does not enter at all into the compound, or
it unites to form another and different product.
That the same principle holds good of the psychological effects of
things, we have already fully recognized in discussing wants and
marginal utility. A given amount of a good will affect the senses in a
pleasurable way, but an increase in the amount will not cause a
proportional addition to pleasure of sight, sound, or smell. On the
contrary, such an increase may defeat the object entirely. Here we are
at the threshold of the economic problem, for we have touched on
"feeling."
[Sidenote: Economic diminishing returns relate to value]
3. _The idea of economic diminishing returns arises when man recognizes
these technical facts and their relation to gratification, in his use of
a limited supply of indirect agents._ All economy begins with scarcity.
The varying effects produced by different agents therefore require to be
studied or the sum or direct goods of enjoyment will not be as great as
is possible. Waste will take place. A bridge will have its maximum use
with a minimum outlay when the parts are in a certain proportion. Beyond
that point, the increase of any part may add something to the usefulness
of the bridge, but the agents must be taken from some other and greater
use.
The thought of economic diminishing returns always has reference to
value. If a particular kind and amount of a certain material is used in
varying combinations with other agents, the value of the added product
will not always be in the same proportion to the value of the added
agent. The bridge-builder must consider not only what the added material
will add to strength, but what it will cost, and whether the result will
justify this expense. So the economic problem of diminishing returns is
more complicated than the mechanical one, for it contains not only the
technical but other factors.
[Sidenote: The marginal utility in goods]
If the value of the product increases less rapidly than the cost of the
agents successively added to secure it, a point must at length be
reached where the value of the added agents and of the additional
product just balance; this is called the point of marginal utility.
If a certain value in labor, fertilizer, or material, be applied to an
acre of land, it may be more than recovered in the value of the product.
Further applications give a product increased not in equal proportion to
the former yield, and so on till the value of the last-added agent just
balances that of the added product. This is the best adjustment
possible, and beyond this point there will be a deficit in value. Just
where the equilibrium is found at any time is the margin of cultivation.
The term "cultivation" is taken from agriculture but must be understood
in the broader sense of utilization, as the principle is not confined to
the case of land or agriculture, but applies as well to the use of
furniture, books, clothing, horses, or any other indirect agents.
[Sidenote: Meaning of intensive margin of utilization]
[Sidenote: The extensive margin of utilization]
4. _There are two margins, the intensive and the extensive._ The margin
of utilization in the case of a single piece of wealth is called the
intensive margin. Any form of indirect wealth, anything kept to use, may
be considered as containing a series of uses. Using one thing more and
more while uniting other things with it, is using it more intensively.
Getting more use out of the book by effort, out of the farm by applying
more fertilizer, out of the house by putting more people into it, is
intensive utilization. The earlier uses come easily, naturally; the
later ones are gotten with increasing difficulty.
When a number of agents are of different qualities, the point between
the one last used and the next unused is the extensive margin of
utilization. The best agents that are available are naturally used
first, but as they are more intensively used there is increasing
inconvenience. Then recourse must be made to the inferior agents, whose
first uses, however, are greater than the later, intensive uses, of the
better grades. When the step is made to the use of agents that were
before unused because inferior, it is extending the margin of
utilization. The intensive margin of use is in the particular thing; the
extensive margin of use lies outside of this.
[Illustration: _Extensive Grades of Uses_]
The relation of the two margins may be shown in a simple diagram. Let
the better grades of indirect agents be represented by longer
rectangles, the upper parts of which represent the more accessible, more
easily secured utilities. Each agent consists of many strata of uses.
The best uses are grades a, b, and c, in M; but after M has been
utilized intensively down to d, N will begin to be utilized at its
highest point. When utilization goes down to f, O comes into use, and so
on. Therefore it will be seen that until the intensive margin takes in
d, M is on the extreme margin of utilization, and N is just outside it;
when the intensive margin falls to g and h, P is inside the extensive
margin, and Q is just outside.
[Sidenote: Equilibrium of the two margins]
The marginal utility or effectiveness of added agents tends to be equal
on the intensive and the extensive margins. This is simply a case of the
substitution of goods in the use of indirect agents. If the value of the
added product in the use of a particular good decreases, a point finally
is reached where it is better to transfer the outlay to another agent,
to change from intensive to extensive utilization, to go over to the use
of another field or of another machine not so good. The effectiveness of
the labor or capital that men have to apply is being compared constantly
in the two cases, and to the extent that this comparison is perfect the
effectiveness of the agents tends to be equal on the margin in the two
applications.
§ II. OTHER MEANINGS OF THE PHRASE "DIMINISHING RETURNS"
[Sidenote: Does not mean declining prosperity]
1. _The phrase diminishing returns is sometimes taken as meaning merely
a decrease in prosperity._ Many ideas are connected with this phrase. It
is not self-explanatory. It suggests various thoughts according to
context and these have not failed to give rise to different uses. The
student must be cautious if he is to think clearly about it. If
population declines, or industry changes from one place to another, or
from one kind of goods to another, it is sometimes said that returns are
diminishing in the deserted district.
[Sidenote: Nor exhaustion of the soil]
2. _A more common misuse of the term is to apply it to the exhaustion of
the soil._ If the soil of a district has been robbed of its fertile
qualities and smaller crops are raised than was the case fifty years
before, it is said to be a case of of the increased difficulty in the
extraction of natural stores in mining. The veins near the surface being
mined first, later the galleries must be cut deeper and greater expense
incurred to get the stores. But the conditions here are very different
from those we have considered under diminishing returns. Mines are used
not under the renting contract, but under the royalty contract, which
permits and contemplates a progressive using up of the limited stores of
natural resources.
[Sidenote: Fallacious contract between manufacture and agriculture]
[Sidenote: All industries if limited as to one factor, as area, show
diminishing returns]
3. _Manufactures are often said to show increasing returns in contrast
with agriculture as an industry of decreasing returns._ There is here an
inconsistent shifting of thought. Agriculture is thought of as limited
to a certain area of ground, whereon evidently diminishing returns will
take place. But the fixed limit of ground-space is not thought of in
connection with manufactures. Taking the same view of manufactures,
commerce, education, etc., that is, assuming each industry to be
confined to limited area of ground, each is seen to be subject to
diminishing returns. Some ground-space is one of the essentials to carry
on any business. If the attempt is made to accumulate a large library in
one small room, a point is reached where much energy is wasted in trying
to find the books. In a university the psychical product, education, may
be limited by the need of space. The school-room, laboratory, or college
class-room could be used at midnight, it is true, but not conveniently;
and as students increase, buildings must be added. The same is true of
any industry. We cannot conveniently increase the business of a
lumber-yard without a larger yard-space, or of a factory without a
larger floor-space. But the added space may be gotten by spreading
horizontally or piling up perpendicularly. A ten-story building on an
acre lot represents ten acres of floor-space. Putting up higher
buildings is an expansion in area by the more intensive utilization of
the land. Devices like elevators, and more compact appliances, make
possible an increasing business in manufacture, trade, or commerce upon
the same area of land. All industries, if looked at consistently from
this standpoint, are subject to the same condition, though it is true
this will make itself felt in varying degrees in different lines of
industry. In agriculture some similar devices are possible by the use of
greenhouses, but it is true that in it, on account of the need of sun,
light, and air, the limits of space are more quickly felt, and are less
elastic than in most other industries. The difference, however, is one
of degree, and not of kind. Higher factories, larger stores, enable
manufacturers to adapt themselves to the law as applied to the surface
of land, but not to escape its operations. Neither the law of
gravitation nor the law of diminishing returns is violated or broken
when materials are lifted to build the upper stories. Both "laws" are at
work, even when the building is rising from the ground. Men are merely
adapting their conduct to the conditions imposed by gravitation and
diminishing returns.
[Sidenote: Confused with the question of large production]
Manufactures usually are thought of as enlarging by increase of the
amount of capital employed, without limitation as to the area covered.
But even here a limit is reached in the amount of capital that can be
employed at any one location because of the difficulty of widening the
market. The question, however, is one of the advantages of large
production with large capital, not of the increasing use of a limited
area of land. If manufactures and agriculture are to be compared with
reference to their economic nature, it is essential to clear thinking
that both be looked at with reference to the same conditions, and from
the same point of view.
[Sidenote: Technical confused with historical diminishing returns]
4. _Technical diminishing returns are often confused with historical
diminishing returns._ The principle of technical diminishing returns is
that at any given moment the uses obtainable from any indirect agent
cannot be indefinitely increased without increasing difficulty.
Historical diminishing returns occur when, in fact, human effort is less
bountifully rewarded in a later period than in an earlier one. If
to-day a day's labor in agriculture produced less than fifty years ago,
historical diminishing returns would have occurred. In fact, labor is
more bountifully rewarded in agriculture than fifty years ago, yet it is
true to-day that there are few fields or appliances which, if used more
intensively with the prevailing prices of labor and material, would not
show a diminishing return to the additional capital applied. Therefore,
in the historical sense, increasing returns have prevailed, yet at every
moment it has been necessary to apply resources under the guidance of
the principle of diminishing returns.
§ III. DEVELOPMENT OF THE CONCEPT OF DIMINISHING RETURNS
[Sidenote: Recognition of diminishing returns to land]
1. _The law of "diminishing returns" was first recognized and expressed
with reference to the use of land in agriculture._ There are several
evident reasons why this occurred. It is obvious to every farmer and
gardener that he cannot indefinitely increase his crop, that two men
cannot always produce twice as much as one man, and that in general the
product does not always vary in proportion to the labor and materials
applied. Moreover, the food supply is a fundamental factor in industry
and in the welfare of states. The limit to the supply of food on a given
area, cultivated by a given method, early appeared and became a serious
practical problem.
The circumstances in Europe in the eighteenth century drew attention to
the subject. Population was increasing, and the pressure for food was
strong. While all the forms of industry most common in cities were
increasing, and the wealth of the cities was growing, poverty was
increasing among the peasantry. Especially was this true in England
during the Napoleonic wars, 1793-1815, owing to exceptional conditions.
The food-supply from abroad was cut off, and when the English farmers,
tempted by the high prices, took poorer land into cultivation, and
sought to get larger crops from their older fields, a great
object-lesson was presented on the principle of diminishing returns in
agriculture.
[Sidenote: This confused with historical diminishing returns]
2. _This truth of diminishing returns in agriculture was confused with
the thought of historical diminishing returns._ Circumstances of the
time led to the belief that because of lack of food misery must continue
among the masses of men. It was thought inevitable that the population
would continue to increase and food become more scarce. The idea of
diminishing returns became thus a prophecy of what would happen, a
social philosophy, that affected the thought of men on every practical
social question.
[Sidenote: The principle applies to land in all of its uses]
3. _The application of the principle of diminishing returns was soon
broadened to include land in other than agricultural uses._ This was a
natural and inevitable extension of the thought. It was evident that an
unlimited use could not be made of a limited area of land, in any
industry whatever. There is no explanation of rent of business sites,
residences, lots, wharves, waterfalls, etc., unless account is taken of
diminishing returns. If it were possible to do an unlimited amount of
business upon a limited area of land, it would never get more scarce and
could never rise in value. The idea of diminishing returns came
properly, therefore, to be applied to land in all its uses. It is true,
however, that the relatively large areas needed in agriculture make the
phenomenon of diminishing returns much more striking in it than in most
other industries.
[Sidenote: And to all indirect agents]
4. "Diminishing returns" should be broadly applied to all wealth having
indirect uses. The argument for this view may take both a negative and a
positive form. Why should we say that the principle applies to land and
not to cases of other industrial agents? Why in the case of a waterfall
and not in the case of the water-wheel? Why in the case of the field and
not in the case of the trees in the field? Are they not all scarce and
desirable goods yielding a limited supply of uses?
Positively it can be argued that the concept of diminishing returns is
indispensable to a reasonable explanation of the value of any indirect
agents. Anything that could afford an infinite series of uses at once
would be an infinite supply. If an infinite number of uses could be
gotten out of one hammer in all places at once, it would pound all the
nails in the world. One wagon, one acre of land, one ax, one book of
each kind, would serve for all men, and duplicates would be valueless.
But in the case of every material thing there is a limit of convenient
and economic use.
[Sidenote: Diminishing returns related to diminishing gratification]
5. _Diminishing returns of indirect agents is a special case of the
universal law of the diminishing utility of goods._ Diminishing returns
have to do with indirect goods, while diminishing gratification has to
do with direct or consumption goods. They are two species or aspects of
the same general principle. If the supply of certain indirect agents is
increased, thereby increasing consumption goods, the utility of the
indirect agents per unit diminishes. In such a case a diminishing return
is the reflection, back to the indirect good, of the diminishing utility
of the direct goods it helps to secure. Any indirect agent, added to a
fixed amount of other agents with which it is technically used, is
credited with a diminished utility, just as an additional supply of
enjoyable goods, coming to meet a fixed demand, falls in value.
The concept of technical diminishing returns has reference to a limited
period of time. Though a definite agent may have bound up in it a long
series of uses, these cannot be secured at the moment. If a rent-bearer,
such as a fruit-tree, were permanent, and men could wait through
eternity for its yield, they would get an infinite yield of fruit. But
in any finite period, there can be only a limited yield.
[Sidenote: The basal law of economics]
The concept of diminishing returns is one aspect of the great economic
law of proportionality, that is, it is one expression of the
fundamental, axiomatic truth, that there is a best or proper adjustment
of means and ends. It is, therefore, the central and essential thought
in political economy. On it depend all important conclusions with
reference to the value of indirect goods. Out of it grow the important
economic theories of rent and capitalization.
CHAPTER 10
THE THEORY OF RENT: THE MARKET VALUE OF THE USUFRUCT
§ I. DIFFERENTIAL ADVANTAGES IN CONSUMPTION GOODS
[Sidenote: Connection between gratification, rents, and value of wealth]
1. _Both rent and the value of durable wealth are based on the value of
the fruits or products yielded by the wealth._ Gratification, afforded
directly or indirectly, is the basis of all values. The relation of most
kinds of wealth to wants is indirect; but gratification thus afforded
indirectly is none the less the basis on which the usufruct of wealth is
estimated. Men find the logical or causal connection between direct
goods, or final product, and indirect goods, or agents.
To explain the value of the durable wealth, or rent-bearer, a still
farther step in thought must be taken. The value of the rent-bearer is
based on the series of rents which it affords. To explain how these
rents are added to give the value of the indirect agents is the task of
a theory of capitalization. This being the relation, a change in the
value of the product changes the rent, and this in turn changes the
value of the rent-bearer. The theory of rent, therefore, has to begin
with a review of the valuation of enjoyable goods.
[Sidenote: Effect of scarcity on utility of uniform goods]
2. _In a group of consumption goods, all of the same quality, the
marginal utility declines as the quantity increases._ If the quantity of
an article capable of ministering to man's wants is very limited, its
value is high. If the supply of something of uniform quality, for which
there is no substitute, is scanty, the value is estimated without
reference to any other grade. If a fishing tribe caught very few fish,
but these were all equally good, and if no other food were to be had,
fish would have a high ratio of exchange with every other kind of goods.
If the quantity increases, the value of each unit of the whole supply
falls, as the importance attributed to its parts declines. If an Indian
hunting-party met with unusual success, the value of buffalo meat
declined. If there is a remarkable potato crop, potatoes fall in value.
[Sidenote: Relation of different grades of consumption goods]
3. _In a series of consumption goods of different qualities, the lower
grades acquire value only as scarcity increases in the higher grades._
If difference in quality between two grades of apples is marked and
there is a superabundant supply of the best grade, no importance is
attached to the poorer. But if the better grade becomes scarce, the
appetite for the poorer grade increases, and finally it, too, will be
consumed. In some years the small, knotty apples are allowed to rot on
the ground; in other years they are gathered and are sold at good
prices. But if there is an abrupt difference in quality, and hence in
the marginal utility of the two grades, the value of the better goods
may rise considerably before there is any recourse to the poorer. If the
differences in quality are very slight, the presence of the lower grades
has the effect of limiting the increase of value of the higher grades.
Practically in almost all kinds of goods there are gradations in
quality. Complete uniformity is of the rarest occurrence. When did one
ever see a basket of peaches that were all of the same size, ripeness,
color, flavor, and perfection? If the step from the higher to the lower
grade is very slight, resort is immediately made to the next lower
grade, some of which is substituted for the higher.
There is an independent reason for the value of each grade of goods;
each grade would have value if there were none of the other, but they
mutually affect each other's value when they exist, side by side, in the
same market. The marginal utility of each is lessened by the presence of
the other. And thus, two or ten grades constitute for many purposes a
single supply as they shade into each other or are merged by
substitution.
[Illustration: _Grades of Consumption Goods by Quality_]
[Sidenote: Free goods are on the margin of utilization]
4. _Goods of the lowest grades, having no marginal utility, are free
goods._ This is a simple truth, but it has important bearings. There may
be said to be an "extensive margin of utilization" of many consumption
goods. The poorer grades of apples, rotting on the ground, the
multitudes of waste things not valued, are on the margin of utilization.
When a lower grade is used, the margin is extended. The value of goods
is measured upward from the margin of utilization, but this is simply to
say that their value is measured from zero upward.
Likewise, there is an intensive marginal utility in consumption goods.
As the better grade of apples becomes more scarce, they will be used
more sparingly and kept to satisfy only the intenser wants. The
superiority of some consumption goods, either in quantity or quality,
often is exactly analogous to the "differential advantage" spoken of by
economists in the case of productive agents. The differential advantage
of the highest grade over the grade of free goods, whose value is zero,
evidently is the whole value of the highest grade.
§ II. DIFFERENTIAL ADVANTAGES IN INDIRECT GOODS
[Sidenote: Differential advantage of agents in the quality of their
products]
1. _Rent varies with the quality of the products yielded by agents,
other things being equal._ Let us take first a simple case where the
agent is the sole condition of the product. If there is but one tree
bearing a certain luscious fruit, or but one spring yielding a mineral
water, the rent of the tree or spring being equal to the value of the
products must vary as the quality of the products varies. If two or more
trees are standing side by side, they will be compared with regard to
the difference in the quality of their fruits. If two fields differ in
quality, greater importance will be attached to the field capable of
producing the better grade or variety of fruit or product. A peculiar
mineral quality in the soil may impart to wine a choice flavor that can
at once be recognized by experts; while other fields, distant but a few
rods, cannot by any effort be made to produce wine of the same rare
quality. There is said to be a marked difference in the success of
vineyards lying only a short distance apart on the shores of the larger
lakes of New York. Nearness to the water moderates the temperature,
often prevents frosts, and hence insures the ripening and quality of the
fruit. In the Santa Clara valley, as in other parts of California, there
is a frostless belt, sharply marked off from the lands where it is
unsafe to attempt to cultivate the delicate orange-tree and other
semi-tropical plants. In manifold ways differences in geological
formation affect the use of land and the success of many industries. On
one side of a little creek is limestone land, on the other shale, the
limestone producing a crop larger and of better quality. When the
peculiar nature of the one field is found to be the cause of the
exceptional quality of its fruits, the difference in value is attributed
to it.
[Sidenote: The lower grade limits the value of the higher grade]
If there is but one grade of agent, it is, of course, valued without
reference to any lower grade. The effect of the presence of lower grades
of agents is to lower the value of the higher, inasmuch as the lower
grades are substituted for the higher. There may be at first enough of
the higher grade of agents to produce all the fruit wanted of the better
quality. If, then, there is an increasing demand, and the additional
yield can be secured only with greater effort, the value of the product
will rise. The presence of poorer grades, however, checks that rise,
because use can be shifted to them. The value of grade one is not high
because grades two, three, and four, which are worse than it, are
available, but because they are not of better quality than they are.
Poor as they are, their presence reduces somewhat the intensity of
demand for the best grade. Indirect agents, therefore, are seen to be
subject to just the same comparisons, substitutions, and estimates, when
their value is considered, as are direct consumption goods.
[Sidenote: Differential advantage of agents in the amount of their
products]
2. _The rents of two agents differ as do the quantities of goods yielded
by them, other things being equal._ In the case just considered, the
quantity remained the same while the quality differed; now is to be
considered the case where the quantity differs while the quality remains
the same. It is possible that one grade of agents is "poorer" because it
produces less fruit, not fruit of poorer quality. Consider first the
static problem. If both agents yield fruits exactly alike, the value of
equal units at the same place and time must be equal, and the usufructs
would vary in just proportion with the quantity of product. Now consider
the dynamic problem. If the desire for that fruit increases, rent would
grow as scarcity became more felt. The agents yielding, under the
prevailing conditions, the largest product, would first be used; later,
the poorer agents. The possibility of resorting to the poorer agents
would keep the better from rising so high.
[Illustration: _Grades of Agents by amount of Product of Uniform
Quality_]
[Sidenote: Complementary agents unite to form a product]
3. _When two agents are necessary to secure a product, the value
attributed to each is influenced by competing uses._ The thought of one
agent independently producing a certain product is far too simple to
correspond with reality. Two or more agents unite to produce a single
product, and each agent at the same time can be used for acquiring other
products. Complex as the problem appears, it is solved according to the
principle of marginal utility at every moment in every market. The
different uses, figuratively speaking, bid for an agent, and thus its
marginal utility is determined just as is the price of a good by the
bidding of buyers. Indeed, it is the bidding of buyers, indirectly. The
more urgent the use, the higher the bid. The felt importance is
reflected from the consumption goods that are sought, to the agent that
will aid to get them. Two or more agents that are mutually needed for
the acquiring of a product are complementary goods. A complementary
agent may be either other material agents or labor.
[Sidenote: Complementary agents used intensively show diminishing
returns]
When labor is applied to an agent, either to improve the Quality or to
increase the quantity, it is subject to the law of diminishing returns.
In the effort to increase the quantity of products, labor is applied
first more intensively to the better agents. If it meets with
resistance, if returns diminish, it is transferred to any of the poorer
agents that have in them uses of as high grade as those still in the
better agent. The superior effectiveness of the earlier over the later
units of the added agent is called the "differential advantage" of the
two fixed agents. The result of a day's labor applied to a field may be
represented by 100, a second day's labor by 90 (it being only ninety per
cent, as effectual), a third day's labor by 75; but it is more usual to
say that the first field produces 10 more than the second and 25 more
than the third, the second 15 more than the third. To the agent fixed in
supply is attributed the difference in the effectiveness of the agent
that is applied.
[Sidenote: The relentless extensive margin of agents]
4. _The marginal uses of indirect goods are free uses._ Here again is
noted the close parallelism in the process of evaluating direct and
indirect goods. There is an extensive margin in the use of an indirect
agent, a point in the gradation from the better to the poorer agents
where the materials and forces are left unused and have no value. Land
beyond that point is free. Outworn goods in manifold forms, old
pictures, old machines, having no longer charms even for a rummage sale,
form a no-rent margin of wealth. On every hand a great multitude of
things unused and worthless differ by only a shade from things that
still are used and valued. Every rubbish-heap, rag-bag, junk-shop, and
garret contains things once prized, now lingering on the margin of
utilization.
There is also in agents an intensive margin, beyond which are certain
unexploited uses in the things that we already have. This is a more
subtle thought, but it has been already discussed in connection with
diminishing returns. These potential uses in agents, uses which in the
existing conditions lie outside the margin of utilization, of course
have no value. We have noted that there is an equilibrium between these
two margins. Rent is measured from a zero point of utility either in a
good, or in other poorer grades of goods.
A corollary of this proposition is that there is a limit to the rental
that anything can yield under any given condition. Below the present
margin of utility of any goods there exist great quantities of free
goods, unused goods, or unexploited uses. It is only uses above this
margin that yield rent. Rent is the difference between the value of the
better grades and the value of the free goods. It is therefore due to
the limitation in the supply of indirect agents of the better quality,
or to the scarcity of the more effective uses in those agents.
[Sidenote: Restatement of rent, economic and contract]
[Sidenote: Economic rent is primary]
5. _Rent may be redefined as the value of the scarce uses of wealth
within a given period._ Rent is the felt importance of the usufructs of
agents in securing gratification. It is measured by the marginal utility
of any particular grade of agents in securing products. These
definitions and the discussion throughout this chapter applies to
economic rather than to contract rent. In fixing and agreeing on
contract rent, men are seeking to estimate the importance of indirect
goods, the importance that an agent will have in getting a product. They
are bidding for the use of things, and what they bid is contract rent.
Contract rent is based on the existence of economic rent. Economic rent
does not depend on contract rent, but on the differences in the
effectiveness of agents to secure a given product. If there were not
differences in the product, and no limits to the supply of indirect
agents, rent could not exist; it would be inconceivable. But these
differences existing, economic rent inevitably arises, for men cannot
keep from attaching value to the things that affect their desires.
Contract rent in turn appears wherever the use of wealth becomes an
object of exchange and agreement between men in a free society.
CHAPTER 11
REPAIR, DEPRECIATION, AND DESTRUCTION OF WEALTH: RELATION TO ITS SALE
AND RENT
§ I. REPAIR OF RENT-BEARING AGENTS
[Sidenote: The necessity of repairing nearly all economic agents]
1. _The continued rent of indirect agents is dependent on the continual
repair of certain parts necessary for their efficiency._ All earthly
things wear out or decay. Whenever man's hand is withheld, nature takes
possession of his work, regardless of his purposes. Dust gathers on
unused clothes, and moths burrow in them. Shut up a house, and windows
are shattered, roofs leak, and vermin swarm. To close a factory is to
hasten the time when buildings and machinery will be piled upon the
rubbish heap. The most magnificent and solid works of man have crumbled
under the finger of time. The earth is strewn with ruins of gigantic
engineering works, aqueducts, canals, temples, and monuments, whose
restoration would be no less a task than was their first building.
Everywhere vigilance and repairs are the conditions of continued uses of
wealth. Some works of nature, such as waterfalls, may appear to have a
continued use without repair, but they bear rent only when used with
other things that must be constantly mended. A certain amount of labor
on the banks of the mill-stream, and certain repairs on the dam, the
water-wheel, and the gates are necessary. By a fiction in business
contracts the waterfall may be dealt with apart from those conditions to
its use, and may be rented, as a field is, with the agreement that the
tenant keep up the repairs.
The efficiency of land as mere standing-room usually does not seem to be
dependent on repairs. But here again the land yields rent in connection
with other rent-bearing agents (such as houses and other agents above
ground), which must be repaired. Standing-room on land is not a complete
indirect agent; it is but one of the conditions for carrying on an
industry, and even it often requires repairs to make it usable. Ranging
from these extreme cases of stableness and durability, indirect agents
vary to the extremes of fragility and ephemeralness.
[Sidenote: The fertile lands of large regions have lost their
usefulness]
2. _Most of the qualities that contribute to make land fertile in
agriculture being destructible, the constant repair of tilled land is
necessary to its continued fertility._ If any things could be said to be
indestructible, they would be some of the works of nature. In a sense,
all matter is indestructible. Man cannot annihilate it, he can simply
change its condition. But in economic discussion it is the value of
things that is being considered, and from this point of view everything
is in some degree destructible. The effects of bad husbandry are
everywhere apparent, and in many regions fertile fields have been
physically and economically destroyed. In Asia, lands that once
supported millions, perhaps hundreds of millions, of population are now
deserts. Egypt, for a time reduced to a semi-desert condition, has only
in the past century been restored to a certain extent by the use of new
methods and a return to the old ones. Many of the areas that were the
granaries of Rome can now hardly support a sparse, half-starving
population. The lands, or at any rate, the elements that gave them
value, have been destroyed.
[Sidenote: Wearing out of some American lands]
Even in young America may be seen the effect of a failure to keep land
in repair. As the new rich lands of the West were opened up, the old
lands in the East were allowed to wear out, and many of them were
abandoned. On the new lands in turn the same methods were followed,
using up the first rich store of fertility with no attempt to keep up
the quality of the soil. This may have been the best policy for the
time; it would not have been economical to employ Old World methods of
intensive husbandry when such rich extensive areas were being opened up.
But the process was one destructive of natural resources. As settlement
moved westward, great forests fell in ashes, and the soil was robbed of
the fertile elements which it had taken centuries for nature to store
up.
[Sidenote: Wearing out of the parts the railroad]
3. _The machinery and appliances used in transportation and
manufacturing are all perishable in varying degrees._ Take as an example
the great agency for transportation, the railway. The roadbed, which is
but the natural soil excavated or filled to a better grade, is the most
permanent part; yet every frost weakens, every rain undermines, a
portion of it. Earthquake, landslide, and flood fill up the ditches, or
tear down the embankments. Constant work is needed to keep it fit and
safe for use. Above this is the track, slightly less permanent, more
frequently changed. The ties rot, and even the rails of steel must be at
times replaced. The rolling-stock is still less durable, and the
different parts vary in length of life. It is said that the wheel-tires
are renewed four times, the boiler three times, and the paint seven
times, before a locomotive is entirely worn out. The oil used in the
wheel, which is a necessary part of the running machine, has to be
applied every day.
[Sidenote: Depreciation of manufacturing appliances]
There is a great difference in the length of life of manufacturing
appliances. The building is fairly durable; yet an average
depreciation-rate of one and one half per cent. a year must be allowed
to offset a reduction in its value of over fifty per cent, in thirty
years. Machinery differs greatly in durability; well-made, substantial
machinery depreciates about five per cent. yearly. The engines and
boilers depreciate more rapidly than the running gear; the loose tools
have to be replaced every second to fourth year; while the materials
consumed in the industry must be repaired and replaced at every
repetition of the process of manufacture. If a factory is to be
maintained in its efficiency in accordance with the terms of the
renting contract, and is to continue its renting power, everything about
it must be from time to time repaired and replaced.
[Sidenote: Neglect of repairs often has evil effects]
4. _Neglect or postponement of repairs must cause a falling off of the
rent-earning power._ The neglect of repairs may have different results
in the factory. The neglect of one kind simply reduces present rental
while not preventing the future restoration of the plant to its full
efficiency. If certain necessary tools wear out and are not replaced,
the factory as a whole will be less efficient. Each part of the entire
outfit being needed in due proportion, the loss in rental will
correspond not merely to the lost efficiency of the missing tools, but
to the crippled efficiency of the remaining appliances. Failure to apply
seed to the land causes the land as a whole to be useless for that
year's crop. In other cases, neglect of repairs increases the expenses
of repairs and cuts off future rental. The adages, "A stitch in time
saves nine," and "An ounce of prevention is worth a pound of cure," must
be acted upon in every industry. The neglect to repair a roof causes
damage to an amount many times the cost of a new roof. Failure to
replace a bolt costing five cents may result in the rack and ruin of a
machine worth many dollars. A handful of earth on a dike may save a
whole country from destruction.
[Sidenote: But sometimes is economical]
Neglect of repairs may be economical, however, when outer conditions
have first reduced the demand for the agent and consequently the rental.
When the line of travel changes, it does not pay to keep an old hotel up
to the same state of repair as when it had a great patronage. Old
factories sometimes may better be allowed to depreciate while the price
of repairs is invested in more prosperous industries. In a declining
neighborhood the houses fall into decay, the owners seeing that "it
would not pay" to keep them up.
§ II. DEPRECIATION IN RENT-EARNING POWER OF AGENTS KEPT IN REPAIR
[Sidenote: Repairs can not always prevent ultimate decay of agents]
1. _Even where repairs are thoroughly kept up and present rent is
undiminished, future rents may be decreasing because of natural decay._
Changes go on in the substance of things which cannot be prevented by
any attention to repairs. The wood in a framework will decay, the metals
crystallize. There is also an unpreventable wear of parts that cannot be
replaced without replacing the whole machine. It is the aim of the
modern manufacturers to make machines like the wonderful one-horse shay,
every part of equal durability. The development in America of the system
of "interchangable parts" has greatly simplified and cheapened repairs,
and has lengthened the working life of machines; nevertheless their lot
is the scrap-heap at last. This general depreciation appears to be
nearly avoided in large factories where there is serial replacement of
the parts, but occasionally some invention or some improvement of
process necessitates an almost completely new equipment. An old man once
said to me: "I have lived in this house forty years: it was well built,
has been repainted regularly, has never been allowed to leak a drop, and
it is as good as it ever was. I see no reason why it could not be kept
to eternity if always kept in repair." But the same could not be said of
the house now. In general, there is finally a termination of the
rent-earning power of wealth, and the whole has to be replaced.
[Sidenote: Technical changes destroy the uses of agents]
2. _A change in inventions and processes may reduce the rent of agents,
independently of their material condition._ Rent is dependent on the
indirect relation of things to wants; that relation may be changed if
some other agent is found fitted to serve these wants more directly. Not
only do the materials of houses change, but fashion and engineering
skill change, making the old mansions cheerless and inconvenient, and
affecting their rent-earning power. At every moment, in a progressive
society, many rent-earning agents are being thrown out of use. The
machinery in flour-mills has been almost completely changed, parts of it
repeatedly, while the roller process has been substituted for the old
millstones. Water-power, because of its uncertainty, has been replaced
in many places by steam-power, and in many places steam-power in turn,
has been rivaled by water-power since the improvements in the generation
and transmission of electricity. A change in the process of making paper
threw out of use much machinery that was only in part saved by its
removal and adaptation to the making of coarser grades of paper. Many
minor inventions in the iron industry, still more the invention of the
Bessemer process, threw out of use great numbers of the old appliances.
[Sidenote: Industrial circumstances affect the uses of agents]
3. _A change in the outer conditions that give occasion to the use of
agents may cause depreciation._ The exhaustion of materials on which
machinery is employed may reduce its usefulness. A sawmill located in
the midst of a forest has a high-earning power while the forest lasts,
but when the forest is cut off the mill itself declines in value. Unless
it can be removed to another forest and thus have its earning power
renewed, it will have the value only of scrap-iron; it has become an
indirect agent in the wrong place. Oil-boring machinery where a rich
supply of oil is found has a high rental for a time, but when the
oil-fields give out the machinery falls in value, being worth more or
less than the cost of transporting it according as the next oil-field is
near or far. Changes in fashions, calling for different kinds of
products, cause a depreciation in the value of the old agents. Coarse
salt, evaporated by the sun, was used by our fathers, but the finer
product of the steam process is driving out the product of the old solar
plants. As homespun went out of use, much machinery still in good
physical condition was cast aside. Changes in transportation work
revolutions in industrial methods. Many prosperous small forges on the
country roads of Pennsylvania became valueless after the building of
the railroads. New forges were built at favored points where materials
and products could be shipped by rail.
[Sidenote: Various grades of efficiency in rent-bearers]
4. _The agents employed in any industry range from the more efficient,
high rent, down to the less efficient, low rent, grades in a more or
less regular series._ It follows that as these changes are going on, the
place of agents on the scale of efficiency is constantly shifting. The
various agents represent all grades of efficiency. One depreciates,
possibly is restored later and takes a high place, and again depreciates
until finally it is thrown out of use. One loom embodies the latest
improvements and corresponds to the most fertile field; another can
still be made to yield a little rent; the use of a third results in
certain loss. A great mass of no-rent agents lie just below the margin
of utilization in every industry. Some of these are permanently
abandoned; some will be taken back into use when business conditions
improve. When the iron industry is dull, many forges are out of blast;
but when iron is again in demand, there is a gradual taking up of the
abandoned forges, factories, and machines as they are brought within the
margin of profitable utilization. Many agents not actually earning a
rent, may become rent-earning through a change in business conditions.
§ III. DESTRUCTION OF NATURAL STORES OF MATERIALS
[Sidenote: Destruction of the American forests]
1. _A large part of industry is now conducted without regard to the
preservation of the source of income._ A striking example of this is the
use, or rather the destruction, of the American forests. In the last
century the demand for lumber grew rapidly both on account of domestic
needs and of the needs of the older countries. Great quantities of wood
have been used and still greater quantities wasted, trees being girdled,
the ground burned over, the timber destroyed in any way that would clear
the soil--timber which to-day would be of far more value than is the
cleared land on which it stood. Considering present needs and
conditions, the labor seems to have been worse than wasted.
[Sidenote: Effects on value of timber]
The direct effect of this destruction of the supply has been the
increase in the value of timber. To the settlers much of the timber was
worse than useless; they paid and labored to get rid of it; now the
supplies of lumber must be sought on the very margins of our territory:
Florida, Maine, northern Michigan and Wisconsin, Washington, and Oregon.
The supplies in Washington and Oregon are almost unavailable in the
Eastern states on account of the cost of transportation. Professor
Marsh, thirty years ago, strikingly characterized the policy that has
been pursued: "We are breaking up the foundation timbers and the
wainscoting of the house in which we live in order to boil our mess of
pottage."
[Sidenote: Physical effects]
The indirect effects of these changes are fully as great as the direct
ones. Forests greatly affect climate, temperature, and soil; they
influence the humidity. They equalize the flow of streams, moderate
floods, and by preventing the washing down of the rich soil, keep the
mountain sides from becoming bare and sterile rocks. So, within the last
two decades, the people in America have begun to think of forestry. Its
purpose is to restore the forests to the condition of permanent
rent-earners, to make the mountains yield not a temporary supply, but a
perpetual crop of timber.
[Sidenote: Possible exhaustion of the coal-supply]
2. _The extraction of coal and other mineral deposits reduces for future
generations a supply already limited._ The coal deposits in the earth
have only recently been drawn upon. A small city like Ithaca probably
uses to-day a greater quantity of coal than was used in all Europe two
centuries ago. The large deposits of coal and their early development in
England long gave a great advantage to English industry over that of
other countries. In England, however, has first been felt the fear of
the exhaustion of the coal-supply. Professor Jevons, in 1861, sounded
the note of alarm; he prophesied that because the coal deposits of
America were many times as great as those of England, industrial
supremacy must inevitably pass to America. Already the supremacy in coal
and iron production has passed to America, and that in textiles soon
will come. In England the accessible supply of coal is limited, deeper
shafts must be sunk, and the coal gotten with greater difficulty and at
greater expense. Coal has risen in price in England within the last few
years, and will continue to rise in the future. The coal deposits of
America are thirty-seven times as great as those of England, but even
these will soon be exhausted. And yet on the part of all except the coal
trust, there appears in America a thoughtless disregard for the future.
Supplies of copper, iron, and lead in favored positions are likewise
limited, and are being rapidly centered in the hands of great companies.
The increasing demand for these products insures a steadily rising
income from their annual use. The value of the mines, being based on the
series of incomes they will yield, may increase while their unused
treasures dwindle in quantity.
[Sidenote: Many natural resources are being rapidly exhausted]
3. _The exhaustion of natural stores of material is due to civilization,
but it threatens to put an end to industrial progress._ The savage does
not go deep enough to use up permanently the world in which he lives. He
uses the fruits that he finds, and those fruits are, almost without
exception, renewed the next year. The only mines that were worked out in
ancient times were gold and silver mines, while the mines of useful
metals were touched but lightly. Within the last century the earth's
crust has been exploited with startling rapidity. Scientific knowledge
and mechanical improvement have combined to unlock the storehouses of
the geologic ages. At the ever-increasing rate of their use, many
important materials must be exhausted in the not far distant future.
While it is probable that substitutes will be discovered for many of
them, the outlook in some directions has little promise. To treat
terminable incomes, exhaustible sources of supply, as permanent sources
of income, leads alike to unsound theory and to reckless practice.
CHAPTER 12
INCREASE OF RENT-BEARERS AND OF RENTS
§ I. EFFORTS OF MEN TO INCREASE PRODUCTS AND RENT-BEARERS
[Sidenote: Desire for better agents impels men to improvements]
1. _While man destroys some agents of production he multiplies many
others._ We have noted many kinds of depreciation, destruction, and
wearing out of wealth; but the normal thing in a healthy society is an
increase, on the whole, of rent-bearers. The increase of rents is due to
two causes: changes in the agents by which they become more efficient
technically, or more numerous; and changes taking place outside of the
agents, affecting the utility of the products. The first of these will
be considered in this section.
The increase of the efficiency of agents is usually the aim of the
individual producer, and thus is brought about an increase of the stock
of wealth. In some cases, however, improvements such as the dredging of
harbors or as the protecting of forests, are made by men collectively
through the agency of governments. Somewhere, however, the desire for
these changes must arise in the minds of individuals. Increase of most
things involves "cost" or sacrifice, in the psychological sense; that
is, man must strive, perhaps suffer, to get a certain result. This end,
therefore, must be in itself desirable, and social organization must be
such as to present a motive to the men to make the needed effort.
[Sidenote: Improvements by adaptation of natural resources]
2. _Rent-bearers may be increased in quantity and improved in quality by
the adaptation of natural resources to man's purposes._ To get food, men
use the tracts of land that under the conditions give the largest
product. Other tracts less fertile, or for some reason less available,
are ditched, tiled, and diked, and fertilizers are carried up steep
hillsides to make a soil upon the very crags. In commerce and
transportation, new ways are opened by canals, railroads, and tunnels.
An isthmian canal will raise the efficiency of ships plying between New
York and San Francisco, enabling them to carry a greater amount of
freight within a year. The tolls will represent to the users an
expenditure only partially offsetting the increased efficiency of the
agents of transportation. By the building of wharves, the dredging of
harbors, and by many other methods, indirect agents are constantly
growing in number and efficiency.
[Sidenote: Machinery is an adaptation of natural resources]
3. _Rent-bearers may be increased by inventions and improvements that
make machines stronger, quicker, and better._ This proposition is not
logically different from the preceding. A machine is an arrangement of
material things through which force may be indirectly applied to move
matter. No fast line divides machinery as regards form, purpose, or
cause of value, from the artificially improved natural agents that we
have been discussing. Just as a field is drained, plowed, and cultivated
to fit it better to yield a crop, so is the iron ore shaped into a form
called a machine, better fitted to cut, carve, and weave as man wills.
Machines are merely adaptations of natural resources.
[Sidenote: Bettering quality of agents]
Increase in machinery may be either in quality or quantity. The two
causes have in most cases the same result. If the quality or efficiency
of looms is doubled, it is as if their number had grown in like
proportion. In its economic function the beast of burden may not
illogically be classed with inanimate machines. The horses in America
have been remarkably improved of recent years by the importation of
thoroughbred stock from Europe. Ten or fifteen years ago the number of
horses in the United States was found to have decreased, and there was
much comment on this evidence of a declining industry. It was not at
once recognized that there was embodied in horse-flesh more horse-power
than ever before, as a single Norman horse has the strength of several
Mexican mustangs. Numbers alone are not the measure of efficiency.
[Sidenote: Increasing number and better grouping of agents]
4. _The increase of wealth and the betterment of environment go on as
well through the increase in the number of appliances and through their
improved arrangement, as through changes in their kind._ A machine is an
adjustment of various natural agents to each other so as to make a more
efficient agent, and machines in turn may be adjusted as parts of a
larger system of production. The ideal of the modern factory system is
so to arrange the machinery that no bit of material will make an
unnecessary motion. The log, once started through the mill, is carried
automatically from one machine to another until it emerges as a roll of
paper or as a box of tooth-picks, ready for use. In an American
watch-factory one man tends twelve or fifteen automatic machines. A
small brass rod is fed automatically to the machine; a piece is cut off,
is picked up by a human-like metal hand; is put into a lathe, and
shifted or held firmly while it goes through fifteen or twenty
processes; and then is dropped into a box where it is ready for the
"assembling" of the watch. As the machinery improves, factories making
allied products are grouped to make a system still more efficient.
As the number of agents increases they are distributed so as to be where
most useful to the owner. A man having two umbrellas keeps one at his
office and the other at home; a student having two books of the same
kind keeps one at his room and the other at the university; a farmer
having two hoes keeps one at the barn and the other in a distant field,
and by this distribution the agents are increased in efficiency.
[Sidenote: A larger and better environment]
The aim of a progressive society is to enlarge the environment, and
constantly to adapt it better to the service of wants. This is done
largely by mechanical agents, which capture the natural forces of the
world, put them into the right place at the right time, and make them do
the right thing, or which group and relate the materials of the world
in the right ways. Some of the groupings in the chemical and physical
world that do not fit man's purposes may be made to do so. The world in
this way becomes more and more a great workshop, better and better
adjusted to man's wants.
[Sidenote: Increasing some rent-bearers reduces the rents of others]
5. _The betterment of the environment of society in some directions
reduces the rent of other parts._ The wish of the individual is to raise
his own rent-bearers in efficiency, but in doing that he affects the
agents owned and controlled by others. The ideal from a social
standpoint is to increase not rent but the welfare of society, and this
is not always the ideal of individuals seeking their own interest.
However, as the efficiency of some agents rises, it becomes unnecessary
and unprofitable to use the less fertile fields; they cease to be
rent-bearers, and the rent of the richer fields falls under the
influence of the new supply of products. Some inventions suddenly
increase the efficiency of free goods to such a degree that the less
efficient rented agents are thrown out of use, and the margin of
utilization is moved to a higher plane than it was on before. Improved
types of machinery more or less rapidly displace the older, less
efficient types, which, therefore, more or less completely lose their
rent-bearing power long before they are physically worn out. When
improvements in agriculture that are applicable to a considerable area
of land take place, and the product thus is increased and cheapened, the
poorer land is abandoned. Inventions and improvements thus gradually
becoming common property, increase the free goods and free uses not
bearing rent and open to every one. One who improves the quality of a
machine or the economy of a process may thus unintentionally injure some
of the owners of low-rent agents, while unintentionally increasing the
welfare of the mass of men for whom the margin of utilization is thus
lifted.
§ II. EFFECTS OF SOCIAL CHANGES IN RAISING THE RENTS OF INDIRECT AGENTS
[Sidenote: Effect of decrease of the competing agents]
1. _Changes in the number and kind of competing resources may raise the
rents of particular agents._ Rents may increase without increase in the
quantity or number of a particular group of agents or without change in
their technical efficiency. As changes in the conditions of society may
reduce rents, so other changes may increase them. Agents of the same
kind may diminish in number, either absolutely or relatively. If some of
the competing machines are destroyed, the rents of the machines that
remain rise, while if new supplies are found, either in nature or by
improved industrial processes, the rents of the older agents fall.
[Sidenote: Effect of new uses for agents]
2. _The discovery of new uses for agents or for their products raises
their rents._ Farm land of the poorest kind often is found to contain
valuable mineral deposits. Such a lucky find has lifted the mortgage
from a farm in eastern Pennsylvania, from which, in two or three years,
has been taken feldspar exceeding in value the agricultural products of
the same land in the last fifty years. The discovery of building stone,
coal, natural gas, or oil land may make the annual rent (or royalty) of
land tenfold its former total value. Fitness to produce nettles is not
ordinarily a virtue in land, but the discovery that certain fields
produce a superior quality of the nettle used for heckling cloth, causes
them to take on a new value. A mineral spring, because of the supposed
or proved healing properties of its waters, may be as good as a mine to
the owner. Peculiar fitness for the cultivation of celery may convert
marsh land into a substantial source of income.
Social changes are constantly causing agents to shift from lower to
higher uses. As population grows and groups about new industries, farm
land is used for residence lots, and in turn for business purposes.
Rents therefore rise, and this rise is reflected in the higher selling
value of the land. If a new demand arises for the product of any
machine, its rent rises, although it may continue to turn out the same
product as measured by number or quantity. For, if consumers increase, a
given supply of agents becomes relatively smaller than before.
[Sidenote: Sudden variations in demand]
3. _A rise in rents due to social changes may be relatively permanent or
temporary._ Business conditions sometimes change quickly. An urgent
demand for special machinery raises quickly its rent and value. It is
said that lace machinery is sometimes thrown out of use for several
years, until a sudden renewal of the demand for lace causes the rental
to equal, in two years, more than the original cost. At such times the
value of factories increases greatly, but after a few years of
prosperity business again collapses. Such prosperous periods are the
opportunity of the business man and of the promoter to sell the factory
at its highest price. Machinery adapted only for a special product will
not sell as readily when less needed for its special use, as that which,
like a turning-lathe, can be used for many purposes; but the more
special the appliances needed for a certain product, the higher, more
abnormal will be their temporary value when they are suddenly needed.
Land near the site of an exposition takes on a very great value and
again falls after the exposition is over. During the Boer War horses and
mules rose in price in the United States on account of British
purchases.
[Sidenote: Cause efforts to increase the supply of agents]
A rise in the value of any agent at once causes an attempt to duplicate
it or to find a substitute for it; this attempt, if successful, puts a
check or sets a limit to the rise. In this search for new devices the
man who can see most quickly and clearly has a key to wealth. Some kinds
of agents, as rare minerals or tools that can be produced only by highly
skilled labor, cannot be increased rapidly in number and remain high in
price for a long period; and favorably located building sites illustrate
the same principle. In some cases, it is true, the demand may be due to
some temporary cause, as in a period of unsound land speculation, but
usually the growing value of location is due to a steady and abiding
change in population or business.
[Sidenote: Franchises guard the growing rents from the influence of
substitution]
4. _Such public utilities as are guarded from competition by franchises,
often rise in rental with increase in population._ The leading classes
of public utilities referred to are waterworks, gas-works,
street-railways, ferries, and wharves. This evidently is only a special
illustration of the principle just stated, where it is not easy to find
a substitute for certain agents. Public franchises entitle the owners to
special, sometimes exclusive, privileges, and protect them legally from
competition. Not all franchises are valuable; many street-railways are
unfortunate ventures, the earnings being insufficient to pay expenses,
to say nothing of interest on the investment. But when they pay greatly,
their high value is due to the impossibility of competition. The cars,
mules, dynamos, steam-engines, and other agents combined to furnish
transportation, have a special earning power because other similar
agents are forbidden to be used in that market.
[Sidenote: Various kinds of "unearned increment
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