The Intellectual Foundations of Political Economy | Pepperdine University | School of Public Policy

The Intellectual Foundations of Political Economy

19th Century Classical Economists


Principles of Economics: An Introductory Volume

Book 2:  Some Fundamental Notions

Alfred Marshall

Chapter I Chapter III
Chapter II Chapter IV

Chapter 1, Introductory

1. We have seen that economics is, on the one side, a Science of Wealth; and, on the other, that part of the Social Science of man's action in society, which deals with his Efforts to satisfy his Wants, in so far as the efforts and wants are capable of being measured in terms of wealth, or its general representative, i.e. money. We shall be occupied during the greater part of this volume with these wants and efforts; and with the causes by which the prices that measure the wants are brought into equilibrium with those that measure the efforts. For this purpose we shall have to study in Book III wealth in relation to the diversity of man's wants, which it has to satisfy; and in Book IV wealth in relation to the diversity of man's efforts by which it is produced.

But in the present Book, we have to inquire which of all the things that are the result of man's efforts, and are capable of satisfying man's wants, are to be counted as Wealth; and into what groups or classes these are to be divided. For there is a compact group of terms connected with Wealth itself, and with Capital, the study of each of which throws light on the others; while the study of the whole together is a direct continuation, and in some respects a completion, of that inquiry as to the scope and methods of economics on which we have just been engaged. And, therefore, instead of taking what may seem the more natural course of starting with an analysis of wants, and of wealth in direct relation to them, it seems on the whole best to deal with this group of terms at once.

In doing this we shall of course have to take some account of the variety of wants and efforts; but we shall not want to assume anything that is not obvious and a matter of common knowledge. The real difficulty of our task lies in another direction; being the result of the need under which economics, alone among sciences, lies of making shift with a few terms in common use to express a great number of subtle distinctions.

2. As Mill says: (1) - "The ends of scientific classification are best answered when the obj ects are formed into groups respecting which a greater number of general propositions can be made, and those propositions more important, than those which could be made respecting any other groups into which the same things could be distributed." But we meet at starting with the difficulty that those propositions which are the most important in one stage of economic development, are not unlikely to be among the least important in another, if indeed they apply at all.

In this matter economists have much to learn from the recent experiences of biology: and Darwin's profound discussion of the question (2) throws a strong light on the difficulties before us. He points out that those parts of the structure which determine the habits of life and the general place of each being in the economy of nature, are as a rule not those which throw most light on its origin, but those which throw least. The qualities which a breeder or a gardener notices as eminently adapted to enable an animal or a plant to thrive in its environment, are for that very reason likely to have been developed in comparatively recent times. And in like manner those properties of an economic institution which play the most important part in fitting it for the work which it has to do now, are for that very reason likely to be in a great measure of recent growth.

Instances are found in many of the relations between employer and employed, between middleman and producer, between bankers and their two classes of clients, those from whom they borrow and those to whom they lend. The substitution of the term "interest" for "usury" corresponds to a general change in the character of loans, which has given an entirely new key-note to our analysis and classification of the different elements into which the cost of production of a commodity may be resolved. Again, the general scheme of division of labour into skilled and unskilled is undergoing a gradual change; the scope of the term "rent" is being broadened in some directions and narrowed in others; and so on.

But on the other hand we must keep constantly in mind the history of the terms which we use. For, to begin with, this history is important for its own sake; and because it throws side lights on the history of the economic development of society. And further, even if the sole purpose of our study of economics were to obtain knowledge that would guide us in the attainment of immediate practical ends, we should yet be bound to keep our use of terms as much as possible in harmony with the traditions of the past; in order that we might be quick to perceive the indirect hints and the subtle and subdued warnings, which the experiences of our ancestors offer for our instruction.

3. Our task is difficult. In physical sciences indeed, whenever it is seen that a group of things have a certain set of qualities in common, and will often be spoken of together, they are formed into a class with a special name; and as soon as a new notion emerges, a new technical term is invented to represent it. But economics cannot venture to follow this example. Its reasonings must be expressed in language that is intelligible to the general public; it must therefore endeavour to conform itself to the familiar terms of everyday life, and so far as possible must use them as they are commonly used.

In common use almost every word has many shades of meaning, and therefore needs to be interpreted by the context. And, as Bagehot has pointed out, even the most formal writers on economic science are compelled to follow this course; for otherwise they would not have enough words at their disposal. But unfortunately they do not always avow that they are taking this freedom; sometimes perhaps they are scarcely even aware of the fact themselves. The bold and rigid definitions, with which their expositions of the science begin, lull the reader into a false security. Not being warned that he must often look to the context for a special interpretation clause, he ascribes to what he reads a meaning different from that which the writers had in their own minds; and perhaps misinterprets them and accuses them of folly of which they had not been guilty. (3)

Again, most of the chief distinctions marked by economic terms are differences not of kind but of degree. At first sight they appear to be differences of kind, and to have sharp outlines which can be clearly marked out; but a more careful study has shown that there is no real breach of continuity. It is a remarkable fact that the progress of economics has discovered hardly any new real differences in kind, while it is continually resolving apparent differences in kind into differences in degree. We shall meet with many instances of the evil that may be done by attempting to draw broad, hard and fast lines of division, and to formulate definite propositions with regard to differences between things which nature has not separated by any such lines.

4. We must then analyze carefully the real characteristics of the various things with which we have to deal; and we shall thus generally find that there is some use of each term which has distinctly greater claims than any other to be called its leading use, on the ground that it represents a distinction that is more important for the purposes of modern science than any other that is in harmony with ordinary usage. This may be laid down as the meaning to be given to the term whenever nothing to the contrary is stated or implied by the context. When the term is wanted to be used in any other sense, whether broader or narrower, the change must be indicated.

Even among the most careful thinkers there will always remain differences of opinion as to the exact places in which some at least of the lines of definition should be drawn. The questions at issue must in general be solved by judgments as to the practical convenience of different courses; and such judgments cannot always be established or overthrown by scientific reasoning: there must remain a margin of debatable ground. But there is no such margin in the analysis itself: if two people differ with regard to that, they cannot both be right. And the progress of the science may be expected gradually to establish this analysis on an impregnable basis. (4)

NOTES

1. Logic, Bk. IV, ch. VII, Par. 2.

2. Origin of Species, ch. XIV.

3. We ought "to write more as we do in common life, where the context is a sort of unexpressed 'interpretation clause'; only as in Political Economy we have more difficult things to speak of than in ordinary conversation, we must take more care, give more warning of any change; and at times write out 'the interpretation clause' for that page or discussion lest there should be any mistake. I know that this is difficult and delicate work; and all that I have to say in defence of it is that in practice it is safer than the competing plan of inflexible definitions. Any one who tries to express various meanings on complex things with a scanty vocabulary of fastened senses, will find that his style grows cumbrous without being accurate, that he has to Use long periphrases for common thoughts, and that after all he does not come out right, for he is half the time falling back into the senses which fit the case in hand best, and these are sometimes one, sometimes another, and almost always different from his 'hard and fast' sense. In such discussions we should learn to vary our definitions as we want, just as we say 'let x, y, z, mean' now this, and now that, in different problems; and this, though they do not always avow it, is really the practice of the clearest and most effective writers." (Bagehot's Postulates of English Political Economy, pp. 78-9.) Cairnes also (Logical Method of Political Economy, Lect. VI) combats "the assumption that the attribute on which a definition turns ought to be one which does not admit of degrees"; and argues that "to admit of degrees is the character of all natural facts."

4. When it is wanted to narrow the meaning of a term (that is, in logical language, to diminish its extension by increasing its intension), a qualifying adjective will generally suffice, but a change in the opposite direction cannot as a rule be so simply made. Contests as to definitions are often of this kind: - A and B are qualities common to a great number of things, many of these things have in addition the quality C, and again many the quality D, whilst some have both C and D. It may then be argued that on the whole it will be best to define a term so as to include all things which have the qualities A and B, or only those which have the qualities A, B, C, or only those which have the qualities A, B, D; or only those which have A, B, C, D. The decision between these various courses must rest on considerations of practical convenience, and is a matter of far less importance than a careful study of the qualities A, B, C, D, and of their mutual relations. But unfortunately this study has occupied a much smaller space in English economics than controversies as to definitions; which have indeed occasionally led indirectly to the discovery of scientific truth, but always by roundabout routes, and with much waste of time and labour.

Back to Top

 

Chapter 2, Wealth

1. All wealth consists of desirable things; that is, things which satisfy human wants directly or indirectly: but not all desirable things are reckoned as wealth. The affection of friends, for instance, is an important element of wellbeing, but it is not reckoned as wealth, except by a poetic licence. Let us then begin by classifying desirable things, and then consider which of them should be accounted as elements of wealth.

In the absence of any short term in common use to represent all desirable things, or things that satisfy human wants, we may use the term Goods for that purpose.

Desirable things or goods are Material, or Personal and Immaterial. Material goods consist of useful material things, and of all rights to hold, or use, or derive benefits from material things, or to receive them at a future time. Thus they include the physical gifts of nature, land and water, air and climate; the products of agriculture, mining, fishing, and manufacture; buildings, machinery, and implements; mortgages and other bonds; shares in public and private companies, all kinds of monopolies, patent-rights, copyrights; also rights of way and other rights of usage. Lastly, opportunities of travel, access to good scenery, museums, etc. are the embodiment of material facilities, external to a man; though the faculty of appreciating them is internal and personal.

A man's non-material goods fall into two classes. One consists of his own qualities and faculties for action and for enjoyment; such for instance as business ability, professional skill, or the faculty of deriving recreation from reading or music. All these lie within himself and are called internal. The second class are called external because they consist of relations beneficial to him with other people. Such, for instance, were the labour dues and personal services of various kinds which the ruling classes used to require from their serfs and other dependents. But these have passed away; and the chief instances of such relations beneficial to their owner now-a-days are to be found in the good will and business connection of traders and professional men. (1)

Again, goods may be transferable or non-transferable. Among the latter are to be classed a person's qualities and faculties for action and enjoyment (i.e. his internal goods); also such part of his business connection as depends on personal trust in him and cannot be transferred, as part of his vendible good will; also the advantages of climate, light, air, and his privileges of citizenship and rights and opportunities of making use of public property.(2*)

Those goods are free, which are not appropriated and are afforded by Nature without requiring the effort of man. The land in its original state was a free gift of nature. But in settled countries it is not a free good from the point of view of the individual. Wood is still free in some Brazilian forests. The fish of the sea are free generally: but some sea fisheries are jealously guarded for the exclusive use of members of a certain nation, and may be classed as national property. Oyster beds that have been planted by man are not free in any sense; those that have grown naturally are free in every sense if they are not appropriated; if they are private property they are still free gifts from the point of view of the nation. But, since the nation has allowed its rights in them to become vested in private persons, they are not free from the point of view of the individual; and the same is true of private rights of fishing in rivers. But wheat grown on free land and the fish that have been landed from free fisheries are not free: for they have been acquired by labour.

2. We may now pass to the question which classes of a man's goods are to be reckoned as part of his wealth. The question is one as to which there is some difference of opinion, but the balance of argument as well as of authority seems clearly to incline in favour of the following answer.

When a man's wealth is spoken of simply, and without any interpretation clause in the context, it is to be taken to be his stock of two classes of goods.

In the first class are those material goods to which he has (by law or custom) private rights of property, and which are therefore transferable and exchangeable. These it will be remembered include not only such things as land and houses, furniture and machinery, and other material things which may be in his single private ownership, but also any shares in public companies, debenture bonds, mortgages and other obligations which he may hold requiring others to pay money or goods to him. On the other hand, the debts which he owes to others may be regarded as negative wealth; and they must be subtracted from his gross possessions before his true net wealth can be found.

Services and other goods, which pass out of existence in the same instant that they come into it, are, of course, not part of the stock of wealth.(3*)

In the second class are those immaterial goods which belong to him, are external to him, and serve directly as the means of enabling him to acquire material goods. Thus it excludes all his own personal qualities and faculties, even those which enable him to earn his living; because they are internal. And it excludes his personal friendships, in so far as they have no direct business value. But it includes his business and professional connections, the organization of his business, and - where such things exist - his property in slaves, in labour dues, etc.

This use of the term Wealth is in harmony with the usage of ordinary life: and, at the same time, it includes those goods, and only those, which come clearly within the scope of economic science, as defined in Book I; and which may therefore be called economic goods. For it includes all those things, external to a man, which (i) belong to him, and do not belong equally to his neighbours, and therefore are distinctly his; and which (ii) are directly capable of a money measure, - a measure that represents on the one side the efforts and sacrifices by which they have been called into existence, and, on the other, the wants which they satisfy.(4*)

3. A broader view of wealth may indeed be taken for some purposes; but then recourse must be had to a special interpretation clause, to prevent confusion. Thus, for instance, the carpenter's skill is as direct a means of enabling him to satisfy other people's material wants, and therefore indirectly his own, as are the tools in his work-basket; and perhaps it may be convenient to have a term which will include it as part of wealth in a broader use. Pursuing the lines indicated by Adam Smith,(5*) and followed by most continental economists, we may define personal wealth so as to include all those energies, faculties, and habits which directly contribute to making people industrially efficient; together with those business connections and associations of any kind, which we have already reckoned as part of wealth in the narrower use of the term. Industrial faculties have a further claim to be regarded as economic in the fact that their value is as a rule capable of some sort of indirect measurement.(6*)

The question whether it is ever worth while to speak of them as wealth is merely one of convenience, though it has been much discussed as if it were one of principle.

Confusion would certainly be caused by using the term "wealth" by itself when we desire to include a person's industrial qualities. "Wealth" simply should always mean external wealth only. But little harm, and some good seems likely to arise from the occasional use of the phrase " material and personal wealth."

4. But we still have to take account of those material goods which are common to him with his neighbours; and which therefore it would be a needless trouble to mention when comparing his wealth with theirs; though they may be important for some purposes, and especially for comparisons between the economic conditions of distant places or distant times.

These goods consist of the benefits which he derives from living in a certain place at a certain time, and being a member of a certain state or community; they include civil and military security, and the right and opportunity to make use of public property and institutions of all kinds, such as roads, gaslight, etc., and rights to justice or to a free education. The townsman and the countryman have each of them for nothing many advantages which the other either cannot get at all, or can get only at great expense. Other things being equal, one person has more real wealth in its broadest sense than another, if the place in which the former lives has a better climate, better roads, better water, more wholesome drainage; and again better newspapers, books, and places of amusement and instruction. House-room, food and clothing, which would be insufficient in a cold climate, may be abundant in a warm climate: on the other hand, that warmth which lessens men's physical needs, and makes them rich with but a slight provision of material wealth, makes them poor in the energy that procures wealth.

Many of these things are collective goods. i.e. goods, which are not in private ownership. And this brings us to consider wealth from the social, as opposed to the individual point of view.

5. Let us then look at those elements of the wealth of a nation which are commonly ignored when estimating the wealth of the individuals composing it. The most obvious forms of such wealth are public material property of all kinds, such as roads and canals, buildings and parks, gasworks and waterworks; though unfortunately many of them have been secured not by public savings, but by public borrowings, and there is the heavy "negative" wealth of a large debt to be set against them.

But the Thames has added more to the wealth of England than all its canals, and perhaps even than all its railroads. And though the Thames is a free gift of nature (except in so far as its navigation has been improved), while the canal is the work of man, yet we ought for many purposes to reckon the Thames a part of England's wealth.

German economists often lay stress on the non-material elements of national wealth; and it is right to do this in some problems relating to national wealth, but not in all. Scientific knowledge indeed, wherever discovered, soon becomes the property of the whole civilized world, and may be considered as cosmopolitan rather than as specially national wealth. The same is true of mechanical inventions and of many other improvements in the arts of production; and it is true of music. But those kinds of literature which lose their force by translation, may be regarded as in a special sense the wealth of those nations in whose language they are written. And the organization of a free and well-ordered State is to be regarded for some purposes as an important element of national wealth.

But national wealth includes the individual as well as the collective property of its members. And in estimating the aggregate sum of their individual wealth, we may save some trouble by omitting all debts and other obligations due to one member of a nation from another. For instance, so far as the English national debt and the bonds of an English railway are owned within the nation, we can adopt the simple plan of counting the railway itself as part of the national wealth, and neglecting railway and government bonds altogether. But we still have to deduct for those bonds etc. issued by the English Government or by private Englishmen, and held by foreigners; and to add for those foreign bonds etc. held by Englishmen.(7*)

Cosmopolitan wealth differs from national wealth much as that differs from individual wealth. In reckoning it, debts due from members of one nation to those of another may conveniently be omitted from both sides of the account. Again, just as rivers are important elements of national wealth, the ocean is one of the most valuable properties of the world. The notion of cosmopolitan wealth is indeed nothing more than that of national wealth extended over the whole area of the globe.

Individual and national rights to wealth rest on the basis of civil and international law, or at least of custom that has the force of law. An exhaustive investigation of the economic conditions of any time and place requires therefore an inquiry into law and custom; and economics owes much to those who have worked in this direction. But its boundaries are already wide; and the historical and juridical bases of the conceptions of property are vast subj ects which may best be discussed in separate treatises.

6. The notion of Value is intimately connected with that of Wealth; and a little may be said about it here. "The word value" says Adam Smith "has two different meanings, and sometimes expresses the utility of some particular object and sometimes the power of purchasing other goods which the possession of that object conveys." But experience has shown that it is not well to use the word in the former sense.

The value, that is the exchange value, of one thing in terms of another at any place and time, is the amount of that second thing which can be got there and then in exchange for the first. Thus the term value is relative, and expresses the relation between two things at a particular place and time.

Civilized countries generally adopt gold or silver or both as money. Instead of expressing the values of lead and tin, and wood, and corn and other things in terms of one another, we express them in terms of money in the first instance; and call the value of each thing thus expressed its price. If we know that a ton of lead will exchange for fifteen sovereigns at any place and time, while a ton of tin will exchange for ninety sovereigns, we say that their prices then and there are £15 and £90 respectively, and we know that the value of a ton of tin in terms of lead is six tons then and there.

The price of every thing rises and falls from time to time and place to place; and with every such change the purchasing power of money changes so far as that thing goes. If the purchasing power of money rises with regard to some things, and at the same time falls equally with regard to equally important things, its general purchasing power (or its power of purchasing things in general) has remained stationary. This phrase conceals some difficulties, which we must study later on. But meanwhile we may take it in its popular sense, which is sufficiently clear and we may throughout this volume neglect possible changes in the general purchasing power of money. Thus the price of anything will be taken as representative of its exchange value relatively to things in general, or in other words as representative of its general purchasing power.(8*)

But if inventions have increased man's power over nature very much, then the real value of money is better measured for some purposes in labour than in commodities. This difficulty however will not much affect our work in the present volume, which is only a study of the "Foundations" of economics.

NOTES

1. For, in the words in which Hermann begins his masterly analysis of wealth, "Some Goods are internal, others external, to the individual. An internal good is that which he finds in himself given to him by nature, or which he educates in himself by his own free action, such as muscular strength, health, mental attainments. Everything that the outer world offers for the satisfaction of his wants is an external good to him."

2. The above classification of goods may be expressed thus:

Goods are: 1. external a. material i. transferable

ii. non-transferable

b. personal i. transferable

ii. non-transferable

2. internal-personal-non-transferable

Another arrangement is more convenient for some purposes:

Goods are: 1. material-external i. transferable

ii. non-transferable

2. personal a. external i. transferable

ii. non-transferable

b. internal-non-transferable

3. That part of the value of the share in a trading company which is due to the personal reputation and connection of those who conduct its affairs ought properly to come under the next head as external personal goods. But this point is not of much practical importance.

4. It is not implied that the owner of transferable goods, if he transferred them, could always realize the whole money value, which they have for him. A well-fitting coat, for instance, may be worth the price charged for it by an expensive tailor to its owner, because he wants it and cannot get it made for less: but he could not sell it for half that sum. The successful financier who has spent £50,000 on having a house and grounds made to suit his own special fancy, is from one point of view right in reckoning them in the inventory of his property at their cost price: but, should he fail, they will not form an asset to his creditors of anything like that value.

And in the same way from one point of view we may count the business connection of the solicitor or physician, the merchant or the manufacturer, at the full equivalent of the income he would lose if he were deprived of it; while yet we must recognize that its exchange value, i.e. the value which he could get for it by selling it, is much less than that.

5. Comp. Wealth of Nations, Bk. II, ch. II.

6. "The bodies of men are without doubt the most valuable treasure of a country," said Davenant in the seventeenth century; and similar phrases hve been common whenever the trend of political developments has made men anxious that the populations should increase fast.

7. The value of a business may be to some extent due to its having a monopoly, either a complete monopoly, secured perhaps by a patent; or a partial monopoly, owing to its wares being better known than others which are really equally good; and in so far as this is the case the business does not add to the real wealth of the nation. If the monopoly were broken down, the diminution of national wealth due to the disappearance of its value would generally be more than made up, partly by the increased value of rival businesses, and partly by the increased purchasing power of the money representing the Wealth of other members of the community. (It should, however, be added that in some exceptional cases, the price of a commodity may be lowered in consequence of its production being monopolized: but such cases are very rare, and may be neglected for the present.)

Again, business connections and trade reputations add to the national wealth, only in so far as they bring purchasers into relation with those producers who will meet their real wants most fully for a given price; or in other words, only in so far as they increase the extent to which the efforts of the community as a whole meet the wants of the community as a whole. Nevertheless when we are estimating national wealth, not directly but indirectly as the aggregate of individual wealth, we must allow for these businesses at their full value, even though this partly consists of a monopoly which is not used for the public benefit. For the injury they do to rival producers was allowed for in counting up the values of the businesses of those rivals; and the injury done to consumers by raising the price of the produce, which they buy, was allowed for in reckoning the purchasing power of their means, so far as this particular commodity is concerned.

A special case of this is the organization of credit. It increases the efficiency of production in the country, and thus adds to national wealth. And the power of obtaining credit is a valuable asset to any individual trader. If, however, any accident should drive him out of business, the injury to national wealth is something less than the whole value of that asset; because some part at least of the business, which he would have done, will now be done by others with the aid of some part at least of the capital which he would have borrowed.

There are similar difficulties as to how far money is to be reckoned as part of national wealth; but to treat them thoroughly would require us to anticipate a good deal of the theory of money. 8. As Cournot points out (Principes Mathematiques de la Theorie des Richesses, ch. II), we get the same sort of convenience from assuming the existence of a standard of uniform purchasing power by which to measure value, that astronomers do by assuming that there is a "mean sun" which crosses the meridian at uniform intervals, so that the clock can keep pace with it; whereas the actual sun crosses the meridian sometimes before and sometimes after noon as shown by the clock.

Back to Top

Chapter 3, Production, Consumption, Labour, Necessaries

1. Man cannot create material things. In the mental and moral world indeed he may produce new ideas; but when he is said to produce material things, he really only produces utilities; or in other words, his efforts and sacrifices result in changing the form or arrangement of matter to adapt it better for the satisfaction of wants. All that he can do in the physical world is either to readjust matter so as to make it more useful, as when he makes a log of wood into a table; or to put it in the way of being made more useful by nature, as when he puts seed where the forces of nature will make it burst out into life. (1)

It is sometimes said that traders do not produce: that while the cabinet-maker produces furniture, the furnituredealer merely sells what is already produced. But there is no scientific foundation for this distinction. They both produce utilities, and neither of them can do more: the furniture-dealer moves and rearranges matter so as to make it more serviceable than it was before, and the carpenter does nothing more. The sailor or the railway-man who carries coal above ground produces it, just as much as the miner who carries it underground; the dealer in fish helps to move on fish from where it is of comparatively little use to where it is of greater use, and the fisherman does no more. It is true that there are often more traders than are necessary; and that, whenever that is the case, there is a waste. But there is also waste if there are two men to a plough which can be well worked by one man; in both cases all those who are at work produce, though they may produce but little. Some writers have revived the medieval attacks on trade on the ground that it does not produce. But they have not aimed at the right mark. They should have attacked the imperfect organization of trade, particularly of retail trade.(2)

Consumption may be regarded as negative production. Just as man can produce only utilities, so he can consume nothing more. He can produce services and other immaterial products, and he can consume them. But as his production of material products is really nothing more than a rearrangement of matter which gives it new utilities; so his consumption of them is nothing more than a disarrangement of matter, which diminishes or destroys its utilities. Often indeed when he is said to consume things, he does nothing more than to hold them for his use, while, as Senior says, they "are destroyed by those numerous gradual agents which we call collectively time".(3) As the "producer" of wheat is he who puts seed where nature will make it grow, so the "consumer" of pictures, of curtains, and even of a house or a yacht does little to wear them out himself; but he uses them while time wastes them.

Another distinction to which some prominence has been given, but which is vague and perhaps not of much practical use, is that between consumers' goods (called also consumption goods, or again goods of the first order), such as food, clothes, etc., which satisfy wants directly on the one hand; and, on the other hand, producers' goods (called also production goods, or again instrumental, or again intermediate goods), such as ploughs and looms and raw cotton, which satisfy wants indirectly by contributing towards the production of the first class of goods.(4)

2. All labour is directed towards producing some effect. For though some exertions are taken merely for their own sake, as when a game is played for amusement, they are not counted as labour. We may define labour as any exertion of mind or body undergone partly or wholly with a view to some good other than the pleasure derived directly from the work.(5) And if we had to make a fresh start it would be best to regard all labour as productive except that which failed to promote the aim towards which it was directed, and so produced no utility. But in all the many changes which the meaning of the word " productive,, has undergone, it has had special reference to stored-up wealth, to the comparative neglect and sometimes even to the exclusion of immediate and transitory enjoyment;(6) and an almost unbroken tradition compels us to regard the central notion of the word as relating to the provision for the wants of the future rather than those of the present. It is true that all wholesome enjoyments, whether luxurious or not, are legitimate ends of action both public and private; and it is true that the enjoyment of luxuries affords an incentive to exertion, and promotes progress in many ways. But if the efficiency and energy of industry are the same, the true interest of a country is generally advanced by the subordination of the desire for transient luxuries to the attainment of those more solid and lasting resources which will assist industry in its future work, and will in various ways tend to make life larger. This general idea has been in solution, as it were, in all stages of economic theory; and has been precipitated by different writers into various hard and fast distinctions by which certain trades have been marked off as productive and certain others as unproductive.

For instance, many writers even of recent times have adhered to Adam Smith's plan of classing domestic servants as unproductive. There is doubtless in many large houses a superabundance of servants, some of whose energies might with advantage to the community be transferred to other. uses. but the same is true of the greater part of those who earn their livelihood by distilling whisky; and yet no economist has proposed to call them unproductive. There is no distinction in character between the work of the baker who provides bread for a family, and that of the cook who boils potatoes. If the baker should be a confectioner, or fancy baker, it is probable that he spends at least as much of his time as the domestic cook does, on labour that is unproductive in the popular sense of providing unnecessary enj oyments.

Whenever we use the word Productive by itself, it is to be understood to mean productive of the means of production, and of durable sources of enjoyment. But it is a slippery term, and should not be used where precision is needed.(7)

If ever we want to use it in a different sense, we must say so: for instance we may speak of labour as productive of necessaries, etc.

Productive consumption, when employed as a technical term, is commonly defined as the use of wealth in the production of further wealth; and it should properly include not all the consumption of productive workers, but only that which is necessary for their efficiency. The term may perhaps be useful in studies of the accumulation of material wealth. But it is apt to mislead. For consumption is the end of production; and all wholesome consumption is productive of benefits, many of the most worthy of which do not directly contribute to the production of material wealth.(8)

3. This brings us to consider the term Necessaries. It is common to distinguish necessaries, comforts, and luxuries; the first class including all things required to meet wants which must be satisfied, while the latter consist of things that meet wants of a less urgent character. But here again there is a troublesome ambiguity. When we say that a want must be satisfied, what are the consequences which we have in view if it is not satisfied? Do they include death? Or do they extend only to the loss of strength and vigour? In other words, are necessaries the things which are necessary for life, or those which are necessary for efficiency?

The term Necessaries, like the term Productive, has been used elliptically, the subject to which it refers being left to be supplied by the reader; and since the implied subject has varied, the reader has often supplied one which the writer did not intend, and thus misunderstood his drift. In this, as in the preceding case, the chief source of confusion can be removed by supplying explicitly in every critical place that which the reader is intended to undsertand.

The older use of the term Necessaries was limited to those things which were sufficient to enable the labourers, taken one with another, to support themselves and their families. Adam Smith and the more careful of his followers observed indeed variations in the standard of comfort and "decency"; and they recognized that differences of climate and differences of custom make things necessary in some cases, which are superfluous in others.(9) But Adam Smith was influenced by reasonings of the Physiocrats: they were based on the condition ofthe French people in the eighteenth century, most of whom had no notion of any necessaries beyond those which were required for mere existence. In happier times, however, a more careful analysis has made it evident that there is for each rank of industry, at any time and place, a more or less clearly defined income which is necessary for merely sustaining its members; while there is another and larger income which is necessary for keeping it in full efficiency.(10)

It may be true that the wages of any industrial class might have sufficed to maintain a higher efficiency, if they had been spent with perfect wisdom. But every estimate of necessaries must be relative to a given place and time; and unless there be a special interpretation clause to the contrary, it may be assumed that the wages will be spent with just that amount of wisdom, forethought, and unselfishness, which prevails in fact among the industrial class under discussion. With this understanding we may say that the income of any class in the ranks of industry is below its necessary level, when any increase in their income would in the course of time produce a more than proportionate increase in their efficiency. Consumption may be economized by a change of habits, but any stinting of necessaries is wasteful.(11)

4. Some detailed study of the necessaries for efficiency of different classes of workers will have to be made, when we come to inquire into the causes that determine the supply of efficient labour. But it will serve to give some definiteness to our ideas, if we consider here what are the necessaries for the efficiency of an ordinary agricultural or of an unskilled town labourer and his family, in England, in this generation. They may be said to consist of a well-drained dwelling with several rooms, warm clothing, with some changes of underclothing, pure water, a plentiful supply of cereal food, with a moderate allowance of meat and milk, and a little tea, etc., some education and some recreation, and lastly, sufficient freedom for his wife from other work to enable her to perform properly her maternal and her household duties. If in any district unskilled labour is deprived of any of these things, its efficiency will suffer in the same way as that of a horse that is not properly tended, or a steam-engine that has an inadequate supply of coals. All consumption up to this limit is strictly productive consumption: any stinting of this consumption is not economical, but wasteful.

In addition, perhaps, some consumption of alcohol and tobacco, and some indulgence in fashionable dress are in many places so habitual, that they may be said to be conventionally necessary, since in order to obtain them the average man and woman will sacrifice some things which are necessary for efficiency. Their wages are therefore less than are practically necessary for efficiency, unless they provide not only for what is strictly necessary consumption, but include also a certain amount of conventional necessaries.(12)

The consumption of conventional necessaries by productive workers is commonly classed as productive consumption; but strictly speaking it ought not to be; and in critical passages a special interpretation clause should be added to say whether or not they are included.

It should however be noticed that many things which are rightly described as superfluous luxuries, do yet, to some extent, take the place of necessaries; and to that extent their consumption is productive when they are consumed by producers.(13)

NOTES

1. Bacon, Novum Organon IV, says "Ad opera nil aliud potest homo quam ut corpora naturalia admoveat et amoveat, reliqua natura intus agit" (quoted by Bonar, Philosophy and Political Economy, p. 249).

2. Production, in the narrow sense, changes the form and nature of products. Trade and transport change their external relations.

3. Political Economy, p. 54. Senior would like to substitute the verb "to use" for the verb "to consume."

4. Thus flour to be made into a cake when already in the house of the consumer, is treated by some as a consumers' good; while not only the flour, but the cake itself is treated as a producers' good when in the hand of the confectioner. Carl Menger (Volkswirtschaftslehre, ch. I, 2) says bread belongs to the first order, flour to the second, a flour mill to the third order and so on. It appears that if a railway train carries people on a pleasure excursion, also some tins of biscuits, and milling machinery and some machinery that is used for making milling machinery; then the train is at one and the same time a good of the first, second, third and fourth orders.

5. This is Jevons' definition (Theory of Political Economy, ch. v), except that he includes only painful exertions. But he himself points out how painful idleness often is. Most people work more than they would if they considered only the direct pleasure resulting from the work; but in a healthy state, pleasure predominates over pain in a great part even of the work that is done for hire. Of course the definition is elastic; an agricultural labourer working in his garden in the evening thinks chiefly of the fruit of his labours; a mechanic returning home after a day of sedentary toil finds positive pleasure in his garden work, but he too cares a good deal about the fruit of his labour; while a rich man working in like manner, though he may take a pride in doing it well, will probably care little for any pecuniary saving that he effects by it.

6. Thus the Mercantilists who regarded the precious metals; partly because they were imperishable, as wealth in a fuller sense than anything else, regarded as unproductive or "sterile" all labour that was not directed to producing goods for exportation in exchange for gold and silver. The Physiocrats thought all labour sterile which consumed an equal value to that which it produced; and regarded the agriculturist as the only productive worker, because his labour alone (as they thought) left behind it a net surplus of stored-up wealth. Adam Smith softened down the Physiocratic definition; but still he considered that agricultural labour was more productive than any other. His followers discarded this distinction; but they have generally adhered, though with many differences in points of detail, to the notion that productive labour is that which tends to increase accumulated wealth; a notion which is implied rather than stated in the celebrated chapter of The Wealth of Nations which bears the title, "On the Accumulation of Capital, or on Productive and Unproductive Labour." (Comp. Travers Twiss, Progress of Political Economy, Sect. vi, and the discussions on the word Productive in J.S. Mill's Essays, and in his Principles of Political Economy.)

7. Among the means of production are included the necessaries of labour but not ephemeral luxuries; and the maker of ices is thus classed as unproductive whether he is working for a pastry cook, or as a private servant in a country house. But a bricklayer engaged in building a theatre is classed as productive. No doubt the division between permanent and ephemeral sources of enjoyment is vague and unsubstantial. But this difficulty exists in the nature of things and cannot be completely evaded by any device of words. We can speak of an increase of tall men relatively to short, without deciding whether all those above five feet nine inches are to be classed as tall, or only those above five feet ten. And we can speak of the increase of productive labour at the expense of unproductive without fixing on any rigid, and therefore arbitrary line of division between them. If such an artificial line is required for any particular purpose, it must be drawn explicitly for the occasion. But in fact such occasions seldom or never occur.

8. All the distinctions in which the word Productive is used are very thin and have a certain air of unreality. It would hardly be worth while to introduce them now: but they have a long history; and it is probably better that they should dwindle gradually out of use, rather than be suddenly discarded.

The attempt to draw a hard and fast line of distinction where there is no real discontinuity in nature has often done more mischief, but has perhaps never led to more quaint results, than in the rigid definitions which have been sometimes given of this term Productive. Some of them for instance lead to the conclusion that a singer in an opera is unproductive, that the printer of the tickets of admission to the opera is productive; while the usher who shows people to their places is unproductive, unless he happens to sell programmes, and then he is productive. Senior points out that "a cook is not said to make roast meat but to dress it; but he is said to make a pudding.... A tailor is said to make cloth into a coat, a dyer is not said to make undyed cloth into dyed cloth. The change produced by the dyer is perhaps greater than that produced by the tailor, but the cloth in passing through the tailor's hands changes its name; in passing through the dyer's it does not: the dyer has not produced a new name, nor consequently a new thing." Pol. Econ. pp. 51-2.

9. Compare Carver, Principles of Political Economy, p. 474; which called my attention to Adam Smith's observation that customary decencies are in effect necessaries.

10. Thus in the South of England population has increased during the last hundred years at a fair rate, allowance being made for migration. But the efficiency of labour, which in earlier times was as high as that in the North of England, has sunk relatively to the North; so that the low-waged labour of the South is often dearer than the more highly-paid labour of the North. We cannot thus say whether the labourers in the South have been supplied with necessaries, unless we know in which of these two senses the word is used. They have had the bare necessaries for existence and the increase of numbers, but apparently they have not had the necessaries for efficiency. It must however be remembered that the strongest labourers in the South have constantly migrated to the North; and that the energies of those in the North have been raised by their larger share of economic freedom and of the hope of rising to a higher position. See Mackay in Charity Organization Journal, Feb. 1891.

11. If we considered an individual of exceptional abilities we should have to take account of the fact that there is not likely to be the same close correspondence between the real value of his work for the community and the income which he earns by it, that there is in the case of an ordinary member of any industrial class. And we should have to say that all his consumption is strictly productive and necessary, so long as by cutting off any part of it he would diminish his efficiency by an amount that is of more real value to him or the rest of the world than he saved from his consumption. If a Newton or a Watt could have added a hundredth part to his efficiency by doubling his personal expenditure, the increase in his consumption would have been truly productive. As we shall see later on, such a case is analogous to additional cultivation of rich land that bears a high rent: it may be profitable though the return to it is less than in proportion to the previous outlay.

12. Compare the distinction between "Physical and Political Necessaries" in James Steuart's Inquiry, A.D. 1767, II, xxi.

13. Thus a dish of green peas in March, costing perhaps ten shillings, is a superfluous luxury: but yet it is wholesome food, and does the work perhaps of three pennyworth of cabbage; or even, since variety undoubtedly conduces to health, a little more than that. So it may be entered perhaps at the value of fourpence under the head of necessaries, and at that of nine shillings and eightpence under that of superfluities; and its consumption may be regarded as strictly productive to the extent of one fortieth. In exceptional cases, as for instance when the peas are given to an invalid, the whole ten shillings may be well spent, and reproduce their own value.

For the sake of giving definiteness to the ideas it may be well to venture on estimates of necessaries, rough and random as they must be. Perhaps at present prices the strict necessaries for an average agricultural family are covered by fifteen or eighteen shillings a week, the conventional necessaries by about five shillings more. For the unskilled labourer in the town a few shillings must be added to the strict necessaries. For the family of the skilled workman living in a town we may take twenty-five or thirty shillings for strict necessaries, and ten shillings for conventional necessaries. For a man whose brain has to undergo great continuous strain the strict necessaries are perhaps two hundred or two hundred and fifty pounds a year if he is a bachelor: but more than twice as much if he has an expensive family to educate. His conventional necessaries depend on the nature of his calling.

Back to Top

Chapter 4, Income, Capital

1. In a primitive community each family is nearly self-sufficing, and provides most of its own food and clothing and even household furniture. Only a very small part of the income, or comings in, of the family is in the form of money; when one thinks of their income at all, one reckons in the benefits which they get from their cooking utensils, just as much as those which they get from their plough: one draws no distinction between their capital and the rest of their accumulated stock, to which the cooking utensils and the plough alike belong. (1)

But with the growth of a money economy there has been a strong tendency to confine the notion of income to those incomings which are in the form of money; including "payments in kind" (such as the free use of a house, free coals, gas, water), which are given as part of an employee's remuneration, and in lieu of money payments.

In harmony with this meaning of Income, the language of the market-place commonly regards a man's capital as that part of his wealth which he devotes to acquiring an income in the form of money; or, more generally, to acquisition (Erwerbung) by means of trade. It may be convenient sometimes to speak of this as his trade capital; which may be defined to consist of those external goods which a person uses in his trade, either holding them to be sold for money or applying them to produce things that are to be sold for money. Among its conspicuous elements are such things as the factory and the business plant of a manufacturer; that is, his machinery, his raw material, any food, clothing, and house-room that he may hold for the use of his employees, and the goodwill of his business.

To the things in his possession must be added those to which he has a right and from which he is drawing income: including loans which he has made on mortgage or in other ways, and all the command over capital which he may hold under the complex forms of the modern "money market." On the other hand debts owed by him must be deducted from his capital.

This definition of capital from the individual or business point of view is firmly established in ordinary usage; and it will be assumed throughout the present treatise whenever we are discussing problems relating to business in general, and in particular to the supply of any particular group of commodities for sale in open market. Income and capital will be discussed from the point of view of private business in the first half of the chapter; and afterwards the social point of view will be considered.

2. If a person is engaged in business, he is sure to have to incur certain outgoings for raw material, the hire of labour, etc. And, in that case, his true or net income is found by deducting from his gross income "the outgoings that belong to its production." (2)

Anything which a person does for which he is paid directly or indirectly in money, swells his nominal income; while no services that he performs for himself are commonly reckoned as adding to his nominal income. But, though it is best generally to neglect them when they are trivial, account should for consistency be taken of them, when they are of a kind which people commonly pay for having done for them. Thus a woman who makes her own clothes or a man who digs in his own garden or repairs his own house, is earning income; just as would the dressmaker, gardener or carpenter who might be hired to do the work.

In this connection we may introduce a term of which we shall have to make frequent use hereafter. The need for it arises from the fact that every occupation involves other disadvantages besides the fatigue of the work required in it, and every occupation offers other advantages besides the receipt of money wages. The true reward which an occupation offers to labour has to be calculated by deducting the money value of all its disadvantages from that of all its advantages; and we may describe this true reward as the net advantages of the occupation.

The payment made by a borrower for the use of a loan for, say, a year is expressed as the ratio which that payment bears to the loan, and is called interest. And this term is also used more broadly to represent the money equivalent of the whole income which is derived from capital. It is commonly expressed as a certain percentage on the "capital" sum of the loan. Whenever this is done the capital must not be regarded as a stock of things in general. It must be regarded as a stock of one particular thing, money, which is taken to represent them. Thus £100 may be lent at four per cent., that is for an interest of £4 yearly. And, if a man employs in business a capital stock of goods of various kinds which are estimated as worth £10,000 in all; then £400 a year may be said to represent interest at the rate of four per cent. on that capital, on the supposition that the aggregate money value of the things which constitute it has remained unchanged. He would not, however, be willing to continue the business unless he expected his total net gains from it to exceed interest on his capital at the current rate. These gains are called profits.

The command over goods to a given money value, which can be applied to any purpose, is often described as "free" or "floating" capital. (3)

When a man is engaged in business, his profits for the year are the excess of his receipts from his business during the year over his outlay for his business. The difference between the value of his stock of plant, material, etc. at the end and at the beginning of the year is taken as part of his receipts or as part of his outlay, according as there has been an increase or decrease of value. What remains of his profits after deducting interest on his capital at the current rate (allowing, where necessary, for insurance) is generally called his earnings of undertaking or management. The ratio in which his profits for the year stand to his capital is spoken of as his rate of profits. But this phrase, like the corresponding phrase with regard to interest, assumes that the money value of the things which constitute his capital has been estimated: and such an estimate is often found to involve great difficulties.

When any particular thing, as a house, a piano, or a sewing machine is lent out, the payment for it is often called Rent. And economists may follow this practice without inconvenience when they are regarding the income from the point of view of the individual trader. But, as will be argued presently, the balance of advantage seems to lie in favour of reserving the term Rent for the income derived from the free gifts of nature, whenever the discussion of business affairs passes from the point of view of the individual to that of society at large. And for that reason, the term Quasirent will be used in the present volume for the income derived from machines and other appliances for production made by man. That is to say, any particular machine may yield an income which is of the nature of a rent, and which is sometimes called a Rent; though on the whole, there seems to be some advantage in calling it a Quasi-rent. But we cannot properly speak of the interest yielded by a machine. If we use the term "interest" at all, it must be in relation not to the machine itself, but to its money value. For instance if the work done by a machine which cost £100 is wortb £4 a year net, that machine is yielding a quasi-rent of £4 which is equivalent to interest at four per cent. on its original cost: but if the machine is worth only £80 now, it is yielding five per cent. on its present value. This however raises some difficult questions of principle, which will be discussed in Book V.

3. Next to consider some details relating to capital. It has been classed as Consumption capital, and Auxiliary or Instrumental capital: and though no clear distinction can be drawn between the two classes, it may sometimes be convenient to use the terms, with the understanding that they are vague. Where definiteness is necessary, the terms should be avoided; and explicit enumerations should be given. The general notion of the distinction which the terms are designed to suggest, can be gathered from the following approximate definitions.

Consumption capital consists of goods in a form to satisfy wants directly; that is, goods which afford a direct sustenance to the workers, such as food, clothes, house-room, etc.

Auxiliary, or instrumental, capital is so called because it consists of all the goods that aid labour in production. Under this head come tools, machines, factories, railways, docks, ships, etc.; and raw materials of all kinds.

But of course a man's clothes assist him in his work and are instrumental in keeping him warm; and he derives a direct benefit from the shelter of his factory as he does from the shelter of his house. (4)

We may follow Mill in distinguishing circulating capital "which fulfils the whole of its office in the production in which it is engaged, by a single use," from fixed capital "which exists in a durable shape and the return to which is spread over a period of corresponding duration." (5)

4. The customary point of view of the business man is that which is most convenient for the economist to adopt when discussing the production of goods for a market, and the causes which govern their exchange value. But there is a broader point of view which the business man, no less than the economist, must adopt when he studies the causes which govern the material wellbeing of the community as a whole. Ordinary conversation may pass from one point of view to another without any formal note of the change: for if a misunderstanding arises it soon becomes manifest; and confusion is cut short by a question or by a volunteered explanation. But the economist may take no risks of that sort: he must make prominent any change in his point of view or in his uses of terms. His path might have seemed smoother for the time, if he had passed silently from one use to another: but in the long run better progress is made by a clear indication of the meaning attached to each term in every doubtful case. (6)

Let us then during the remainder of this chapter deliberately adopt the social, in contrast with the individual point of view: let us look at the production of the community as a whole, and at its total net income available for all purposes. That is, let us revert nearly to the point of view of a primitive people, who are chiefly concerned with the production of desirable things, and with their direct uses; and who are little concerned with exchange and marketing.

From this point of view income is regarded as including all the benefits which mankind derive at any time from their efforts, in the present and in the past, to turn nature's resources to their best account. The pleasure derived from the beauties of the rainbow, or the sweet taste of the fresh morning air, are left out of the reckoning, not because they are unimportant, nor because the estimate would in any way be vitiated by including them; but solely because reckoning them in would serve no good purpose, while it would add greatly to the length of our sentences and the prolixity of our discussions. For a similar reason it is not worth while to take separate account of the simple services which nearly every one renders to himself, such as putting on his clothes; though there are a few persons who choose to pay others to do such things for them. Their exclusion involves no principle; and time spent by some controversial writers on discussing it has been wasted. It simply follows the maxim De minimis non curat lex. A driver who, not noticing a pool in his way, splashes a passer by is not held to have done him legal injury; though there is no distinction in principle between his act and that of another, who by a similar lack of attention, did serious harm to someone else.

A man's present labour yields him income directly, when devoted to his own use; and he looks to be paid for it in some form or another if he devotes it as a matter of business to the service of others. Similarly any useful thing which he has made or acquired in the past, or which has been handed down to him, under the existing institutions of property, by others who have so made or acquired it, is generally a source of material benefit to him directly or indirectly. If he applies it in business, this income generally appears in the form of money. But a broader use of this term is occasionally needed, which embraces the whole income of benefits of every sort which a person derives from the ownership of property however applied: it includes for instance the benefits which he gets from the use of his own piano, equally with those which a piano dealer would win by letting out a piano on hire. The language of common life while averse to so broad a use of the term Income as this even when discussing social problems, yet habitually includes a certain number of forms of income, other than money income.

The Income Tax Commissioners count a dwelling-house inhabited by its owner as a source of taxable income, though it yields its income of comfort directly. They do this, not on any abstract principle; but partly because of the practical importance of house-room, partly because the ownership of a house is commonly treated in a business fashion, and partly because the real income accruing from it can easily be separated off and estimated. They do not claim to establish any absolute distinction in kind between the things which their rule includes, and those which it excludes.

Jevons, regarding the problem from a purely mathematical point of view, was justified in classing all commodities in the hands of consumers as capital. But some writers, while developing this suggestion with great ingenuity, have treated it as a great principle; and that appears to be an error in judgment. A true sense of proportion requires us not to burden our work with the incessant enumeration of details of secondary importance, of which no account is taken in customary discourse, and which cannot even be described without offending against popular conventions.

5. This brings us to consider the use of the term capital from the point of view of inquiries into the material wellbeing of society as a whole. Adam Smith said that a person's capital is that part of his stock from which he expects to derive an income. And almost every use of the term capital, which is known to history, has corresponded more or less closely to a parallel use of the term Income: in almost every use, capital has been that part of a man's stock from which he expects to derive an income.

By far the most important use of the term Capital in general, i.e. from the social point of view, is in the inquiry how the three agents of production, land (that is, natural agents), labour and capital, contribute to producing the national income (or the national dividend, as it will be called later on); and how that income is distributed among the three agents. And this is an additional reason for making the terms Capital and Income correlative from the social, as we did from the individual point of view.

Accordingly it is proposed in this treatise to count as part of capital from the social point of view all things other than land, which yield income that is generally reckoned as such in common discourse; together with similar things in public ownership, such as government factories: the term Land being taken to include all free gifts of nature, such as mines, fisheries, etc., which yield income.

Thus it will include all things held for trade purposes, whether machinery, raw material or finished goods; theatres and hotels; home farms and houses: but not furniture or clothes owned by those who use them. For the former are and the latter are not commonly regarded as yielding income by the world at large, as is shown by the practice of the income tax commissioners.

This usage of the term is in harmony with the common practice of economists of treating social problems in broad outline to start with, and reserving minor details for later consideration: it is in harmony also with their common practice of taking Labour to include those activities, and those only, which are regarded as the source of income in this broader use of the term. Labour together with capital and land thus defined are the sources of all that income of which account is commonly taken in reckoning up the National Income. (7)

6. Social income may be estimated by adding together the incomes of the individuals in the society in question, whether it be a nation or any other group of persons.

We must however not count the same thing twice. If we have counted a carpet at its full value, we have already counted the values of the yarn and the labour that were used in making it; and these must not be counted again. And further, if the carpet was made of wool that was in stock at the beginning of the year, the value of that wool must be deducted from the value of the carpet before the net income of the year is reached; while similar deduction must be made for the wear and tear of machinery and other plant used in making it. This is required by the general rule, with which we started, that true or net income is found by deducting from gross income the outgoings that belong to its production.

But if the carpet is cleaned by domestic servants or at steam scouring works, the value of the labour spent in cleaning it must be counted in separately; for otherwise the results of this labour would be altogether omitted from the inventory of those newly-produced commodities and conveniences which constitute the real income of the country. The work of domestic servants is always classed as "labour" in the technical sense; and since it can be assessed en bloc at the value of their remuneration in money and in kind without being enumerated in detail, its inclusion raises no great statistical difficulty. There is however some inconsistency in omitting the heavy domestic work which is done by women and other members of the household, where no servants are kept.

Again, suppose a landowner with an annual income of £10,000 hires a private secretary at a salary of £500, who hires a servant at wages of £50. It may seem that if the incomes of all these three persons are counted in as part of the net income of the country, some of it will be counted twice over, and some three times. But this is not the case. The landlord transfers to his secretary, in return for his assistance, part of the purchasing power derived from the produce of land; and the secretary again transfers part of this to his servant in return for his assistance. The farm produce the value of which goes as rent to the landlord, the assistance which the landlord derives from the work of the secretary, and that which the secretary derives from the work of the servant are independent parts of the real net income of the country; and therefore the £10,000 and the £500 and the £50 which are their money measures, must all be counted in when we are estimating the income of the country. But if the landlord makes an allowance of £500 a year to his son, that must not be counted as an independent income; because no services are rendered for it. And it would not be assessed to the Income tax.

As the net payments on account of interest etc. due to an individual-net, i.e. after deducting those due from him to others are part of his income, so the money and other things received net by a nation from other countries are part of its income.

7. The money income, or inflow, of wealth gives a measure of a nation's prosperity, which, untrustworthy as it is, is yet in some respects better than that afforded by the money value of its stock of wealth.

For income consists chiefly of commodities in a form to give pleasure directly; while the greater part of national wealth consists of the means of production, which are of service to the nation only in so far as they contribute to producing commodities ready for consumption. And further, though this is a minor point, consumable commodities, being more portable, have more nearly uniform prices all the world over than the things used in producing them: the prices of an acre of good land in Manitoba and Kent differ more tban those of a bushel of wheat in the two places.

But if we look chiefly at the income of a country we must allow for the depreciation of the sources from which it is derived. More must be deducted from the income derived from a house if it is made of wood, than if it is made of stone; a stone house counts for more towards the real richness of a country than a wooden house which gives equally good accommodation. Again, a mine may yield for a time a large income, but be exhausted in a few years: in that case, it must be counted as equivalent to a field, or a fishery, which yields a much smaller annual income, but will yield that income permanently.

8. In purely abstract, and especially in mathematical, reasoning the terms Capital and Wealth are used as synonymous almost perforce, except that "land" proper may for some purposes be omitted from Capital. But there is a clear tradition that we should speak of Capital when considering things as agents of production; and that we should speak of Wealth when considering them as results of production, as subjects of consumption and as yielding pleasures of possession. Thus the chief demand for capital arises from its productiveness, from the services which it renders, for instance, in enabling wool to be spun and woven more easily than by the unaided hand, or in causing water to flow freely wherever it is wanted instead of being carried laboriously in pails; (though there are other uses of capital, as for instance when it is lent to a spendthrift, which cannot easily be brought under this head). On the other hand the supply of capital is controlled by the fact that, in order to accumulate it, men must act prospectively: they must "wait" and "save," they must sacrifice the present to the future.

At the beginning of this Book it was argued that the economist must forego the aid of a complete set of technical terms. He must make the terms in common use serve his purpose in the expression of precise thought, by the aid of qualifying adjectives or other indications in the context. If he arbitrarily assigns a rigid exact use to a word which has several more or less vague uses in the market place, he confuses business men, and he is in some danger of committing himself to untenable positions. The selection of a normal use for such terms as Income and Capital must therefore be tested by actually working with it. (8)

NOTES

1. This and similar facts have led some people to suppose not only that some parts of the modern analysis of distribution and exchange are inapplicable to a primitive community; which is true: but also that there are no important parts of it that are applicable; which is not true. This is a striking instance of the dangers that arise from allowing ourselves to become the servants of words, avoiding the hard work that is required for discovering unity of substance under lying variety of form.

2. See a report of a Committee of the British Association, 1878, on the Income Tax.

3. Professor Clark has made the suggestion to distinguish between Pure Capital and Capital Goods: the former is to correspond to a waterfall which remains stationary; while Capital Goods are the particular things which enter and leave the business, as particular drops pass through the waterfall. He would of course connect interest with pure capital, not with capital goods.

4. See above II, iii, sec. 1.

5. Adam Smith's distinction between fixed and circulating capital turned on the question whether the goods "yield a profit without changing masters" or not. Ricardo made it turn on whether they are "of slow consumption or require to be frequently reproduced"; but he truly remarks that this is "a division not essential, and in which the line of demarcation cannot be accurately drawn." Mill's modification is generally accepted by modern economists.

6. Compare above II. i, sec. 3.

7. Just as for practical purposes it is better not to encumber ourselves with specifying the "income" of benefit which a man derives from the labour of brushing his hat in the morning, so it is better to ignore the element of capital vested in his brush. But no such consideration arises in a merely abstract discussion: and therefore the logical simplicity of Jevons' dictum that commodities in the hands of consumers are capital has some advantages and no disadvantages for mathematical versions of economic doctrines.

8. A short forecast of some of this work may be given here. It will be seen how Capital needs to be considered in regard both to the embodied aggregate of the benefits derivable from its use, and to the embodied aggregate of the costs of the efforts and of the saving needed for its production: and it will be shown how these two aggregates tend to balance. Thus in V, IV, which may be taken as in some sense a continuation of the present chapter, they will be seen balancing directly in the forecasts of an individual Robinson Crusoe; and for the greater part at least in terms of money in the forecasts of a modern business man. In either case both sides of the account must be referred to the same date of time; those that come after that date being "discounted" back to it; and those that come before being "accumulated" up to it.

A similar balancing in regard to the benefits and the costs of capital at large will be found to be a chief corner stone of social economy: although it is true that in consequence of the unequal distribution of wealth, accounts cannot be made up from the social point of view with that clearness of outline that is attainable in the case of an individual, whether a Robinson Crusoe, or a modern business man. In every part of our discussion of the causes that govern the accumulation and the application of productive resources, it will appear that there is no universal rule that the use of roundabout methods of production is more efficient than direct methods; that there are some conditions under which the investment of effort in obtaining machinery and in making costly provision against future wants is economical in the long run, and others in which it is not: and that capital is accumulated in proportion to the prospectiveness of man on the one hand, and on the other to the absorption of capital by those roundabout methods, which are sufficiently productive to remunerate their adoption. See especially IV, VII, sec, 8; V, IV, VI, I, sec. 8; and VI, VI, sec. 1.

The broader forces, that govern the production of capital in general and its contribution to the national income, are discussed in IV, VII, IX XI: the imperfect adjustments of the money measures of benefits and costs to their real volume are discussed chieJy in III, III-V; IV, VII; and VI, III VIII; the resulting share in the total product of labour and capital, aided by natural resources, which goes to capital, is discussed chieJy in VI, I, II, VI-VII, XI, XII.

Some of the chief incidents in the history of the definitions of Capital are given in Appendix E.

 

Back to Top