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Title: Economics for Helen
Author: Hilaire Belloc
Release date: March 16, 2025 [eBook #75629]
Language: English
Original publication: London: J. W. Arrowsmith, 1924
Credits: Tim Lindell and the Online Distributed Proofreading Team at https://www.pgdp.net (This book was produced from images made available by the HathiTrust Digital Library.)
*** START OF THE PROJECT GUTENBERG EBOOK ECONOMICS FOR HELEN ***
Transcriber’s Note: Italics are enclosed in _underscores_; boldface
text is enclosed in =equals signs= (but there is an actual equals sign
in Footnote 1). Additional notes will be found near the end of this
ebook.
ECONOMICS FOR HELEN
ECONOMICS FOR
HELEN
BY
HILAIRE BELLOC
[Illustration]
J. W. ARROWSMITH (LONDON) LTD.
6 Upper Bedford Place, Russell Square, London
THE FIRST EDITION _of this book was printed on
Hand-made Paper (Medium 8vo) and consisted of 265
numbered copies, of which 250 were for sale. It was
published in March, 1924._
_This_, THE SECOND EDITION _(Crown 8vo), was also
published in March, 1924_.
Printed in Great Britain by
J. W. ARROWSMITH LTD., 11 Quay Street, Bristol
Contents
PART I
THE ELEMENTS
PAGE
I WHAT IS WEALTH? 10
II THE THREE THINGS NECESSARY TO THE PRODUCTION OF WEALTH--
LAND, LABOUR AND CAPITAL 15
III THE PROCESS OF PRODUCTION 27
IV THE THREE PARTS INTO WHICH THE WEALTH PRODUCED NATURALLY
DIVIDES ITSELF--RENT, INTEREST, SUBSISTENCE 33
V EXCHANGE 52
VI FREE TRADE AND PROTECTION 61
VII MONEY 66
PART II
POLITICAL APPLICATIONS
INTRODUCTION 87
PROPERTY--THE CONTROL OF WEALTH 95
THE SERVILE STATE 109
THE CAPITALIST STATE 115
THE DISTRIBUTIVE STATE 124
SOCIALISM 132
INTERNATIONAL EXCHANGE 141
FREE TRADE AND PROTECTION AS POLITICAL ISSUES 150
BANKING 167
NATIONAL LOANS AND TAXATION 189
THE SOCIAL (OR HISTORICAL) VALUE OF MONEY 201
USURY 217
ECONOMIC IMAGINARIES 230
INDEX 243
Part I
THE ELEMENTS
THE ELEMENTS
Economics is the name which people have come to give to the study of
Wealth. It is the study by which we learn how Wealth is produced, how
it is consumed, how it is distributed among people, and so on. It is a
very important kind of study, because it often depends upon our being
right or wrong in Economics whether we make the whole State poorer or
richer, and whether we make the people living in the State happier or
not.
Now as Economics is the study of Wealth, the first thing we have to
make certain of is, _What Wealth is_.
I
WHAT IS WEALTH?
The Economic definition of Wealth is subtle and difficult to
appreciate, but it is absolutely essential to our study to get it clear
at the outset and keep it firmly in mind. It is through some muddlement
in this original definition of wealth that nearly all mistakes in
Economics are made.
First, we must be clear as to what Wealth is _not_.
Wealth is never properly defined, for the purposes of economic study,
by any one of the answers a person would naturally give off-hand. For
instance, most people would say that a man’s wealth was the money he
was worth. But that, of course, is nonsense; for even if there were no
money used his possessions would still be there, and if he had a house
and cattle and horses the mere fact that money was not being used where
he lived would not make him any worse off.
Another and better, but still a wrong, answer is: “Wealth is what a man
possesses.”
For instance, in the case of this farmer, his house and his stock and
his furniture and implements are what we call his “wealth.” In ordinary
talk that answer will do well enough. But it will not do for the
strict science of Economics, for it is not accurate.
For consider a particular case. Part of this man’s wealth is, you
say, a certain grey horse. But if you look closely at your definition
and make it rigidly accurate, you will find that _it is not the horse
itself which constitutes his wealth, but something attaching to the
horse_, some quality or circumstance which affects the horse and gives
the horse what is called its _value_. It is this _Value_ which is
wealth, not the horse. To see how true this is consider how the value
changes while the horse remains the same.
On such and such a date any neighbour would have given the owner of
the horse from 20 to 25 sacks of wheat for it, or, say, 10 sheep, or
50 loads of cut wood. But suppose there comes a great mortality among
horses, so that very few are left. There is an eager desire to get hold
of those that survive in order that the work may be done on the farms.
Then the neighbours will be willing to give the owner of the horse much
more than 20 or 25 sacks of wheat for it. They may offer as much as
50 sacks, or 20 sheep, or 100 loads of wood. Yet the horse is exactly
the same horse it was before. The wealth of the master has increased.
His horse, as we say, is “worth more.” _It is this_ WORTH, _that is,
this ability to get other wealth in exchange, which constitutes true
Economic Wealth_.
I have told you that the idea is very difficult to seize, and that you
will find the hardest part of the study here, at the beginning. There
is no way of making it plainer. One has no choice but to master the
idea and make oneself familiar with it, difficult as it is. _Wealth
does not reside in the objects we possess, but in the economic values
attaching to those objects._
We talk of a man’s wealth or a nation’s wealth, or the wealth of the
whole world, and we think at once, of course, of a lot of material
things: houses and ships, and pictures and furniture, and food and all
the rest of it. But the economic wealth which it is our business to
study is not identical with those _things_. Wealth is the sum total of
the _values_ attaching to those things.
That is the first and most important point.
Here is the second: Wealth, for the purposes of economic study, _is
confined to those values attaching to material objects through the
action of man, which values can be exchanged for other values_.
I will explain what that sentence means.
Here is a mountain country where there are few people and plenty
of water everywhere. That water does not form part of the Economic
_wealth_ of anyone living there. Everyone is the better off for the
water, but no one has _wealth_ in it. The water they have is absolutely
necessary to life, but no man will give anything for it because any man
can get it for himself. It has no _value in exchange_. But in a town to
which water has to be brought at great expense of effort, and where
the amount is limited, it acquires a value in exchange, that is, people
cannot get it without offering something for it. That is why we say
that in a modern town water forms part of _Economic Wealth_, while in
the country it usually does not.
We must carefully note that wealth thus defined is NOT the same thing
as well-being. The mixing up of these two separate things--well-being
and economic wealth--has given rise to half the errors in economic
science. People confuse the word “wealth” with the idea of well-being.
They say: “Surely a man is better off with plenty of water than with
little, and therefore conditions under which he can get plenty of water
for nothing are conditions under which he has _more wealth_ than when
he has to pay for it. He has more _wealth_ when he gets the water free
than he has when he has to pay for it.”
It is not so. Economic wealth is a separate thing from well-being.
Economic wealth may well be increasing though the general well-being of
the people is going down. It may increase though the general well-being
of the people around it is stationary.
The Science of Economics does not deal with true happiness nor even
with well-being in material things. It deals with a strictly limited
field of what is called “Economic Wealth,” and if it goes outside its
own boundaries it goes wrong. Making people as happy as possible is
much more than Economics can pretend to. Economics cannot even tell
you how to make people well-to-do in material things. But it can tell
you how exchangeable Wealth is produced and what happens to it; and as
it can tell you this, it is a useful servant.
That is the second difficult point at the very beginning of our study.
_Economic Wealth consists in_ EXCHANGEABLE _values, and nothing else_.
We must be as clear on this second point as we have made ourselves upon
the first, or we shall not make any progress in Economics. They are
both of them unfamiliar ideas, and one has to go over them many times
before one really grasps them. But they are absolutely essential to
this science.
Let us sum up this first, elementary, part of our subject, and put it
in the shortest terms we can find--what are called “Formulæ,” which
means short and exact definitions, such as can be learnt by heart and
retained permanently.
We write down, then, two Formulæ:
1. =Wealth is made up, not of things, but of economic values attaching
to things.=
2. =Wealth, for the purposes of economic study, means ONLY exchange
values: that is, values against which other values will be given in
exchange.=
II
THE THREE THINGS NECESSARY TO THE PRODUCTION OF WEALTH--LAND, LABOUR
AND CAPITAL
You will notice that all about you living beings are occupied in
changing the things around them from a condition where they are _less_
to a condition where they are _more_ useful to themselves.
Man is a living being, and he is doing this kind of thing all the time.
If he were not he could not live.
He draws air into his lungs, taking it from a condition where it does
him no good to a condition where it keeps him alive. He sows seed;
he brings food from a distance; he cooks it for his eating. To give
himself shelter from the weather he moulds bricks out of clay and puts
them together into houses. To get himself warmth he cuts down wood and
brings it to his hearth, or he sinks a shaft and gets coal out of the
earth, and so on.
Man is perpetually changing the things around him from a condition in
which they are _less_ useful to him into a condition where they are
_more_ useful to him.
_Whenever a man does that he is said to be creating, and adding to,
Human Wealth_: part of which is Economic Wealth, that is Wealth
suitable for study under the science of Economics.
Wealth, therefore, that thing the nature and growth of which we are
about to study, is, so far as man is concerned, the result of this
process of changing things to man’s use, and it is through looking
closely at the nature of this process that we get to understand what
is necessary to it, and what impedes it, and how its results are
distributed among mankind.
We must next go on to think out _how_ wealth is so produced. We have
already seen what the general statement on this is: Wealth is produced
by man’s consciously transforming things around him to his own uses;
and though not everything so transformed has true _Economic Wealth_
attaching to it (for instance, breathing in air does not produce
Economic Wealth), yet all Economic Wealth is produced as _part_ of this
general process.
Now when we come to examine the Production of Wealth, we shall find
that _three_ great separate forces come into it; and these we shall
find to be called conveniently “Land,” “Labour” and “Capital.”
Let us take a particular case of the production of Economic Wealth and
see how it goes forward. Let us take the case of the production of,
say, 100 sacks of wheat.
1. LAND.
A man finds himself possessed of so much land, and when he sets out to
produce the 100 sacks of wheat, the following are the conditions before
him.
There are natural forces of which he takes advantage and without which
he could not grow wheat. The soil he has to do with has a certain
fertility, there is enough rainfall to make the seeds sprout, and so on.
All these natural forces are obviously necessary to him. Though we talk
of man “creating” wealth he does not really create anything. What he
does is to use and combine certain natural forces of which he is aware.
He has found out that wheat will sprout if it is put into the ground at
a particular season, and that he will get his best result by preparing
the ground in a particular manner, etc. These natural forces are the
foundation of the whole affair.
For the sake of shortness we call all this bundle of natural forces
(which are the very first essential to the making of wealth) “LAND.”
This word “Land” is only a conventional term in Economics, meant to
include a vast number of things beside the soil: things which are not
Land at all; for instance, water power and wind power, the fertility
of seed, the force of electricity, and thousands of other natural
energies. But we must have some short convenient term for this set of
things, and the term “Land” having become the conventional term in
Economic Science for all natural forces, it is now the useful and short
word always used for them as a whole: the reason being, I suppose,
that land, or soil, is the first natural requisite for food--the most
important of man’s requirements, and the _place_ from which he uses all
other natural forces.
We say, then, that for the production of wealth the first thing you
need is the natural forces of the world, or “Land.”
2. LABOUR.
But we next note that this possession of natural forces, our knowledge
of how they will work, and our power of combining them, _is not enough
to produce wealth_.
If the farmer were to stand still, satisfied with his knowledge of the
fertility of the soil, the quality of seed, and all the rest of it, he
would have no harvest. He must, as we have said, prepare the land and
sow the seed: only so will he get a harvest at the end of his work.
These operations of human energy which end in his getting his harvest
are called “LABOUR”: that is, _the application of human energy to
natural forces_. There are no conditions whatsoever under which wealth
can be produced without natural forces or “land;” but there are also no
conditions whatsoever under which it can be produced without “labour,”
that is, the use of human energy. Even if a man were in such a position
that he could get his food by picking it off the trees, there would
still be the effort required of picking it. We say, therefore, _that
all wealth comes from the combination of LAND and LABOUR: That is_, of
_natural forces_ and _human energy_.
3. CAPITAL.
At first sight it looks as though these two elements, Land and Labour,
were all that was needed; and a very great deal of trouble has been
caused in the world by people jumping to this conclusion without
further examination.
But if we look closely into the matter we shall see that Land and
Labour alone are _not_ sufficient to the production of wealth in any
appreciable amount. The moment man begins to produce wealth in any
special fashion and to any appreciable extent, a third element comes
in which is as rigorously necessary as the two others; and that third
element is called CAPITAL.
Let us see what this word “CAPITAL” means.
Here is your farmer with all the requisite knowledge and the natural
forces at his disposal. He has enough good land provided him to produce
a harvest of 100 sacks of wheat if he is able and willing to apply his
manual labour and intelligence to this land. But he must be kept alive
during the many months required for the growth of the wheat. It is no
use his beginning operations, therefore, unless he has a stock of food;
for if he had not such a stock he would die before the harvest was
gathered. Again, he must have seed. He must have enough seed to produce
at the end of those months one hundred sacks of wheat. So we see that
at the very least, for this particular case of production, the natural
forces about him and his own energies would not be of the least use to
the production of the harvest unless there were this third thing, a
stock of wheat both for sowing and for eating.
But that is not all. He must be sheltered from the weather; he must be
clothed and he must have a house, otherwise he would die before the
harvest was gathered. Again, though he might grow a very little wheat
by putting in what seed he could with his hands into a few suitable
places in the soil, he could not get anything like the harvest he was
working for unless he had special implements. He must prepare the land
with a plough; so he must have a plough; and he must have horses to
draw the plough; and those horses must be kept alive while they are
working, until the next harvest comes in; so he must have a stock of
oats to feed them with.
All this means quite a large accumulation of wealth before he can
expect a good harvest: the wealth attaching to clothes, houses, food,
ploughs, horses for a year.
In general, we find that man, when he is setting out on a particular
piece of production of wealth, is absolutely compelled to add to his
energies, and to the natural forces at his disposal, a third element
consisting of _certain accumulations of wealth made in the past_--an
accumulation of food, clothing, implements, etc.--without which the
process of production could not be undertaken. _This accumulation
of_ ALREADY-MADE WEALTH, _which is thus absolutely necessary to
production_, we call _CAPITAL_.
It includes _all kinds of wealth whatsoever which man uses_ WITH THE
OBJECT OF PRODUCING FURTHER WEALTH, _and without which the further
wealth could not be produced_. It is a reserve without which the
process of production is impossible. Later on we shall see how very
important this fact is: for every healthy man has energy, and natural
forces are open to all, but _capital_ can sometimes be controlled by
very few men. If they will not allow their capital to be used, wealth
cannot be produced by the rest; therefore those who, by their labour,
produce wealth may be driven to very hard conditions by the few owners
of Capital, whose leave is necessary for any wealth to be produced at
all.
But all this we must leave to a later part of our study. For the moment
what we have to get clearly into our heads are these three things: (1)
_Natural Forces_, (2) _Human Energy_, and (3) _Accumulated stores and
implements_, which are called, generally, for the sake of shortness:
_LAND_, _LABOUR_ and _CAPITAL_. In the absence of any one of these
three, production of Wealth is impossible. All three must be present;
and it is only the combination of all three which makes the process of
producing economic values possible.
POINTS ABOUT CAPITAL.
There are _three_ important things to remember about Capital.
1. The first is that what makes a particular piece of wealth into
capital is not the kind of object to which the economic value
attaches, but the _intention_ of using it as capital on the part of
the person who controls that object; that is, the intention to use
it for the _production of future wealth_. Almost any object can be
used as capital, but no object is capital, however suitable it be for
that purpose, _unless there is the intention present of using it as
capital_. For instance: One might think that a factory power engine
was always Capital. The economic values attaching to it, which make
an engine worth what it is are nearly always used for the production
of future wealth, and so we come to think of the engine as being
necessarily capital simply because it is an engine, and the same is
true of factory buildings and all other machinery and all tools, such
as hammers and saws and so on.
But these things are not capital _in themselves_; for if we do not use
them for the production of future wealth they cease to be capital. For
instance, if you were to put the engine into a museum, or to keep a
hammer in remembrance of someone and not use it, then it would not be
capital.
And this truth works the other way about. At first sight you would say,
for instance, that a diamond ring could not be capital: it is only a
luxurious ornament. But if you use it to cut glass for mending a window
it is capital for that purpose.
2. The second important thing to remember about Capital is that, being
Wealth, _it is at last consumed, as all other Wealth is_. Capital is
consumed in the process of using it to make more Wealth, and as it is
consumed it has to be replaced, or the process of production will break
down. Take the case of the farmer we gave just now. He had to start, as
we saw, with so much Capital--horses and a plough and a stock of wheat
and a stock of oats, etc.; and only by the use of this capital could
he procure his harvest of 100 sacks of wheat at the end of the year;
but if he is going on producing wheat year after year he must replace
the wastage in his capital year after year. His stock of wheat for food
and for seed will have disappeared in the year; so will his stock of
hay and oats for keeping his horses. His plough will be somewhat worn
and will need mending; and his horses, after a certain time, will grow
old and will have to be replaced. Therefore, if production is to be
continuous, that is, if there are to be harvests year after year, each
harvest must be at least enough to replace all the wastage of capital
which goes on during the process of production.
3. The third thing to remember about Capital is that Capital is
_always the result of saving_: That is, the only way in which people
can get Capital is by doing without some immediate enjoyment of
goods, and putting them by to use them up in creating wealth for the
future. This ought to be self-evident; but people often forget it,
because the person who _controls_ the capital is very often quite a
different person from the person who _really accumulated_ it. The owner
of the capital is very often a person who never thinks of saving.
Nevertheless, the saving has been done by _someone_ in the past, and
saving must go on the whole time, for if it did not the Capital could
not come into existence, and could not be maintained once it was in
existence.
Suppose, for instance, a man inherits £10,000 worth of Capital invested
in a Steamship Company.
This means that he has a share in a number of hulls, engines, stocks of
coal and food, and clothing for the crews, and other things which have
to be provided before the steamships can go to sea and create wealth by
so doing.
All this capital has been saved by someone. Not by the man himself; he
has merely inherited the wealth--but by someone.
Someone at some time, his father or whoever first got the capital
together, must have forgone immediate enjoyment and put by wealth for
future production, or the capital could not have come into existence.
Thus, if the first accumulator of the capital had used his wealth for
the purchase of a yacht in which to travel for his amusement, the
labour and natural forces used in the production of that yacht would
have made wealth consumed in immediate enjoyment, and it would not have
been used for future production as is a cargo ship.
In the same way this capital, once it has come into existence in the
shape of cargo ships and stocks of coal and the rest, would soon
disappear if it were not perpetually replenished by further saving. The
man who owns the shares in the Steamship Company does not consciously
save year after year enough money to keep the capital at its original
level.
Nevertheless, the saving is done for him. The Directors of the Company
keep back out of the total receipts enough to repair the ships and
to replenish the stocks of coal, etc., and they are thus perpetually
accumulating fresh capital to replace the consumption of the old. How
true it is that all Capital is the result of saving by _someone_,
_somewhere_, we see in the difference between countries that do a
lot of saving and countries that do little. Savages and people of
a low civilisation differ in this very much from people of a high
civilisation. They want to enjoy what they have the moment they have
it, and they lay by as little as possible for the future; only just as
much as will keep them going. But in a high civilisation people save
capital more and more, and so are able to produce more and more wealth.
Now let us sum up in some more Formulæ what we have learnt so far.--
1. =All production of Wealth needs three things: (_a_) Natural forces,
(_b_) Human energy, and (_c_) an Accumulation of wealth made in the
past and used up in future production.=
2. =These three are called, for shortness: (_a_) Land, (_b_) Labour,
(_c_) Capital.=
3. =The last, Capital, (_a_) depends for its character on the intention
of the user, (_b_) is consumed in production, (_c_) is always the
result of saving.=
III
THE PROCESS OF PRODUCTION
You have seen how the production of wealth takes place through the
combination of these three things, LAND, LABOUR AND CAPITAL, and you
have also seen how the wealth so produced consists not in the objects
themselves, but in the economic values attached to the objects.
Now we will take a particular instance of wealth and show how this
works out in practice and what various forms the production of wealth
takes.
Wealth, as we have seen, arises from the transposing of things around
us from a condition where they are less to a condition where they are
more useful to our needs.
Let us take a ton of coal lying a thousand feet down under the earth
and no way provided of getting at it. A man possessing that ton of
coal would not possess any wealth. The coal lying in the earth has no
economic value attaching to it whatsoever. It has not yet entered the
process whereby it ultimately satisfies a human need.
A shaft is sunk to get at that coal, and once the coal is reached a
first economic value begins to attach to it. Next, further labour,
capital and natural forces are applied to the task of hewing the coal
out and raising it to the surface. This means that yet more economic
values are attached to the ton of coal. These we express by saying that
the ton of coal at the bottom of the mine, just hewed out, is worth so
much--say 15/-; and later at the pit head is worth so much more--say
£1. But the process of production of wealth is not yet completed. The
coal is needed to warm you in your house, and your house is a long way
from the pit head. It must be taken from the pit head to your house,
and for this transport further labour, natural forces and capital must
be used, and these add yet another economic value to the coal.
We express this by saying that the ton of coal _delivered_ (that is, at
your house) is worth not £1, which it was at the pit head, but £1 10s.;
and in this example we see that transport is as much a part of the
production of wealth as other work. We also see a further example of
the truth originally stated that wealth does not consist in the object
itself but in the values attached to it. The ton of coal is there in
your cellar exactly the same (except that it is broken up) as it was
when it lay a thousand feet under the earth with no way of getting
to it. In your cellar it represents wealth. In possessing it you are
possessing wealth to the amount of 30s. You could exchange it against
30s. worth of some other thing, such as wheat. But the wealth you thus
possess is not the actual coal, but the values attaching to the coal.
These economic values are being piled up from the very beginning of the
process of production until the process of consumption begins.
Here is another case which shows how the process of production will add
values to a thing without necessarily changing the thing itself.
Suppose an island where there is a lot of salt in mines near the
surface, but with very poor pasture and very little of it; most of the
soil barren and the climate bad. On the main-land, a day’s journey from
the island, there is good soil and pasture and a good climate, but
there is no salt. Salt is a prime necessity of life, and it comes into
a lot of things besides necessaries. To the people of the main land,
therefore, salt, which they lack, is of high value. To the people of
the island it is of low value, for they can get as much of it as they
want, with very little trouble. Meanwhile, meat is of very high value
to the people of the island, who can grow little of it on their own
soil, while it is of much less value to the people of the main-land,
who have plenty of it through their good pastures and climate. Here we
have, let us say, 100 tons of salt in the island and 100 tons of meat
on the main-land. A boat takes the 100 tons of salt from the island
to the main-land and brings back the meat from the main-land to the
island. Here wealth has been created on both sides, although no change
has taken place in the articles themselves except a change in position.
Both parties, the islanders and the main-land people, are wealthier
through the transaction, and this is a case where _exchange_ is a
direct creator of wealth, and the transport effecting the exchange is a
creator of wealth.
Strictly speaking, everything done to increase the usefulness of an
object right up to the moment when consumption begins is part of the
production of wealth. For instance, wealth is being produced from the
moment that wheat is sowed in the ground to the moment when the baked
loaf is ready for eating, and the wealth expressed by the loaf, that
is, the values attaching to it, are made up by all the processes of
adding values from the first moment the seed was sown. When you eat a
sixpenny loaf you are beginning to consume values created by the sowing
of the wheat and its culture and its harvesting and grinding, and the
working of the flour into dough, and the baking, and created by every
piece of transport in the process, the carting of the sheaf into the
rick, the carting thrashed wheat to the mill, the taking of the flour
to the baker, the taking of the baked loaf to your house, and even the
bringing of the loaf from the larder to your table. Every one of these
actions is part of the production of wealth.
There is attaching to the process of the production of wealth a certain
character which we appreciate easily in some cases, but with much more
difficulty in others. We have already come across it in discussing
Capital. It is this:
_All wealth is consumed._
This is universally true of all wealth whatsoever, though the rate of
consumption is very different in different cases.
The purpose of nature is not the purpose of man. Man only creates
wealth by a perpetual effort against the purpose of nature, and the
moment his effort ceases nature tends to drag back man’s creation from
a condition where it is more to a condition where it is less useful to
himself.
For some sorts of wealth the process is very rapid, as, for instance,
in the consumption of fuel, or in the wasting of ice on a hot day.
Man with an expenditure of his energy and brains applied to natural
forces, and by the use of capital, has caused ice to be present under
conditions where nature meant there to be no ice--a hot summer’s day.
He has brought it from a high, cold place far away; or he has kept it
from the winter onwards stored in an ice house which he had to make and
to which he had to transport it; or he has made it with engine power.
But the force of nature is always ready to melt the ice when man’s
effort ceases.
The moment man’s effort ceases, deterioration, that is, _the
consumption of the wealth present_, at once begins. And this truth
applies at the other end of the scale. You may make a building of
granite, but it will not last for ever. The consumption is exceedingly
slow, but it is there all the same. And whether the consumption takes
place in the service of man (as when fuel is burnt on a hearth) or
by neglect (as when a derelict house decays) it is always _economic
consumption_.
We may sum up in the following Formulæ:--
1. =Transport and Exchange, quite as much as actual work on the
original material, form part of the Production of Wealth.=
2. =All Wealth is ultimately consumed: that is, matter having been
transposed by man from a condition where it is less to a condition
where it is more useful to himself, is dragged back from a condition
where it is more to a condition where it is less useful to himself.=
IV
THE THREE PARTS INTO WHICH THE WEALTH PRODUCED NATURALLY DIVIDES
ITSELF--RENT, INTEREST, SUBSISTENCE
We now come to that part of Economics which has most effect upon
human society, and the understanding of which is most essential to
sound politics. It is not a difficult point to understand. The only
difficulty is to keep in our minds a clear distinction between what
is called economic law, that is, the necessary results of producing
wealth, and the moral law, that is the matter of right and wrong in the
distribution and use of wealth.
Some people are so shocked by the fact that economic law is different
from moral law that they try to deny economic law. Others are so
annoyed by this lack of logic that they fall into the other error of
thinking that economic law can override moral law.
You have to be warned against both these errors before you begin to
approach the subject of Rent, Profit and Subsistence. Only when we
have worked out the principles of these three things can we come back
again to the apparent clash between economic law and moral law, the
understanding of which is so very important in England to-day.
The motive of production is to satisfy human needs, and the simplest
case of production is that of a man working for himself and his family
as a settler in a new country. He cuts down wood and brings it where
it is wanted; he builds a hut and a bridge with it; he stacks it ready
to burn for fuel. The wealth he thus produces by his labour goes to
him and his, and because the labour he has to expend is what impresses
him most about the process, he calls the wealth produced at the end of
it: “Wealth produced by his labour.” He thinks of his labour as the
one agent of the whole affair, and so it is the one immediate _human_
agent; but, as we have seen, there are two other agents as well. His
mere labour (that is, the use of his brain and his muscles) would not
have produced a pennyworth of wealth, but for two other agents: Natural
Forces (or Land) and Capital. And we shall find when we look into it
that the wealth he thus produces and regards as one thing is also
really divided into three divisions: one corresponding to each of the
three agents which produce wealth.
Being a settler living by himself and possessing his own land and his
own implements, he controls all he produces and does not notice the
three divisions. But three divisions there are none the less present
in all wealth produced anywhere, =and these three divisions do not
correspond to the moral claim man has to the result of his labour=.
They are divisions produced by the working of economic law, which is as
blind and indifferent to right and wrong as are the ordinary forces of
nature about us.
These three divisions are called =RENT=, =INTEREST= (or =Profit=) and
=SUBSISTENCE=. In order to see how these three divisions come about we
must take them in the order of _Subsistence_ first, then _Interest_,
then _Rent_.
1. SUBSISTENCE.
In any civilisation you will find a certain amount of things which
are regarded as necessaries. In any civilisation it is thought that
human beings must not be allowed to sink below a certain level, and a
certain amount of clothes of a certain pattern, a certain amount of
housing room and fuel, and a certain amount of food of a certain kind
are thought the very least upon which life can be conducted. Even the
poorest are not allowed to fall below that standard. This does not
mean that no one is allowed to starve or die of insufficient warmth.
It means that any particular civilisation (our own, for instance, or
the Chinese) has its regulation minimum and lets men die rather than
fall below it. This “certain amount,” below which even the poorest
people’s livelihood is not allowed to fall, is called =THE STANDARD OF
SUBSISTENCE=.
Most people when they first think of these things imagine that there is
some very small amount of necessaries which, all over the world, and
at all times, would be thought absolutely essential to man. But it is
not so. The standard set is always higher than the mere necessity of
keeping alive would demand.
For instance, we in this country put into our standard of necessity
clothes of a rather complicated pattern. We should not tolerate the
poorest people going about in blankets. They must have boots on their
feet, which take a lot of labour and material. We should not tolerate
the poorest people going about barefooted, as they do in many other
countries, nor even with sandals. It is not our custom. They may die
of wet feet through bad leather boots and bad, thin clothing of our
complicated pattern, but they must not wear wooden shoes or walk
barefoot or go about in blankets.
Again, we do not live on anything at random, but upon cooked meat and a
certain special kind of grain called wheat. There are some grains much
cheaper than wheat; but our custom demands wheat even for the poorest,
if there is not enough wheat there is a famine, and famine is preferred
by society to the giving up of the wheat standard. Again, we insist
upon even the poorest having a certain amount of protection against the
weather in the way of houses, which must be up to a certain standard.
We do not tolerate their living in holes in the ground or mud huts.
One way and another we have set up a certain _standard of subsistence_
even for the poorest; _and every community in history has, at all
times, lived under this idea of a_ MINIMUM STANDARD OF SUBSISTENCE.
This is so true that people will suffer great inconvenience, even
to famine, as I have said, rather than give up the standard of
subsistence. When people are too poor to afford this least amount of
what we think necessaries effort is made to supply them by doles or a
poor rate, or something of that kind; but the standard is not abandoned.
Well, this _Minimum Standard of Subsistence_ is the first division
in the Wealth produced. The prosperous man, tilling his own land and
possessed of his own capital, consumes, of course, much more than the
bare standard of subsistence would allow. He eats more food and better
food, and has more and better clothes and house room and fuel and the
rest than the mere standard of subsistence of his civilisation demands.
Nevertheless, even in his case the standard of subsistence is there. It
is a minimum below which, if things went wrong, he would not fall. Ask
him to fall below it and he would simply fail to do so. He would try to
produce that minimum amount of wealth in some other way, or if he could
not do that he would die.
This “Standard of Subsistence,” which is to be found in its various
shapes in every civilisation, may be called “_The Worth While of
Labour_.” Human energy would not be forthcoming, the work would not
get done, unless at the very least the person doing the work got this
Standard of Subsistence. In England to-day it is =set= for a man and
his family at something like 35s. to 40s. a week. One way and another,
counting for allowance in rent and overtime and so on, even the poorest
labourer gets that, and if he did not get it labour would stop. Our
civilisation would run to famine and plague rather than go below this
minimum.
Another way of putting it is this: Under the standard of subsistence
in our civilisation in England a man must, on the average, produce
something like £2 worth of economic values a week, otherwise it is not
worth while living, not worth while going on.
I say “on the average.” A great many people, of course, produce
nothing. But there must be an average production of that amount to keep
society going at all, merely in labour, that is, in human energy and
brains. As a fact, of course, the average production is much higher.
But it could not fall to _less_ than this without the production of
wealth gradually coming to an end.
It is very important to recognise this principle in Economics, for it
is nearly always misunderstood, and it makes a great difference in our
judgment of social problems. You often hear people speaking as though
the subsistence of their fellows might fall to any level so long as
they had so much weight of food and amount of warmth as would keep them
alive. But it is not so. Every society has its own standard, and will
rather have men emigrate or die than fall below it: and that standard
is the basis of all production. _It must be satisfied or production
ceases._
2. INTEREST.
Now, if this “Worth While of Labour” was all that had to be considered,
things would be a great deal simpler than they are. Unfortunately,
there is another “worth while” from which one cannot get away, and
which makes the second division in the produce of wealth. This is the
“Worth While of Capital”: called “Profit” or “Interest.”
We must be careful not to mix up “Interest on Money,” that is, the
word “interest” in its ordinary conversational use, with true economic
interest. Interest on money does not really exist. It is either
interest on _Real Capital_ (machines, stores, etc.) for which the
money is only a symbol, or else it is usury, that is, the claiming of
a profit which is not really there; and what usury is exactly we shall
see later on. The thing to remember here is that there is no such thing
in Economic Science as Interest on Money.
We have seen that Capital cannot come into existence unless somebody
saves. We have also seen that since it is always being consumed and
must be replaced, the saving has got to go on all the time, if the
production of wealth (to which capital is necessary) is to continue.
Now, as you will see in a minute, capital cannot be accumulated without
some motive. You only accumulate capital by doing without a pleasure
which you might have at a certain moment, and putting it off to a
future time. You go without the immediate enjoyment of your wealth in
order to use it for producing further wealth. That means restraint and
sacrifice.
But restraint and sacrifice require some motive. Why should a man, or a
society, do without a present enjoyment if the sacrifice is not to be
productive of future good?
What happens is this: A man says: “On my present capital I can produce
so much wealth. If I accumulate more capital I shall, in the long run,
have a larger income. I will therefore forgo my present pleasure. I
will add to my capital and have more income in the future through my
present self-restraint.” Or again: “If I don’t _keep up_ my capital
by continual saving to replace what is consumed in production I shall
gradually get _less_ income.”
But here comes in a very important law of Economics called “_The
Law of Diminishing Returns_.” After a certain point, capital as it
accumulates, does not produce a _corresponding_ amount of extra wealth.
It produces _some_ more, but not as much in proportion. For instance,
if you till a field thoroughly with the use of so many ploughs and
horses and so on, you will get such and such a return. If you add a
great deal more capital in the shape of food for more labourers and
more tillage till you treat the land as a sort of garden, you produce
more wealth from that field; but though you may have doubled your
capital you will not have doubled your income. You will only have added
to it, say, half as much again. If you were to double your capital
again, making four times your original amount, using a lot more food
for labourers and a lot more implements, you would again have a larger
produce, probably, but perhaps only double your original amount: _Four_
times the original amount of capital, and only _twice_, say, the old
income.
So the process goes on; and in all forms of the production of wealth
this formula applies, and is true: “_The returns of increasing capital,
so long as the method of production is not changed, get greater in
amount, but less in proportion to the total capital employed._”
Men developing a certain section of natural forces get 10 per cent. on
a small capital, perhaps 5 per cent. on a larger one; on a still larger
one only 2½ per cent., and so on, if they apply that capital to the
_same section_ of natural forces and in the _same manner_.
Well, this advantage which a man gets by adding to his capital at the
expense of present enjoyment can be measured.
For instance, a man owning a farm and tilling it himself gets a
harvest of 1,000 sacks of wheat. In order to get this result he must
have capital at the beginning of every year--ploughs and horses, and
sacks of grain and what not--worth altogether 10,000 sacks of wheat.
His income, in wheat, is one-tenth of his capital. Every ten sacks of
capital produces him an income of one sack a year. He says to himself:
“If I were to plough the land more thoroughly and put on a lot more
phosphates and slag and get new, improved machinery I might get another
fifty sacks a year out of the land, but this new capital will have to
be saved.”
He carefully saves on every harvest, exchanging the wheat for the
things he needs in the way of new capital, until, after a few years,
the implements and the phosphates and slag and the rest on his land,
and all his other capital is worth much more than it used to be.
Instead of being worth only _one_ thousand sacks, his capital is now
worth _two_ thousand sacks, and he gets the reward for his putting by
and doing without immediate enjoyment in the shape of a larger harvest.
But though he has doubled his capital he has not doubled his income.
Instead of the old income of 100 sacks of wheat he is now getting 150
sacks of wheat. Thus though his income is larger, the _proportion_ of
that income to the total capital is less. For 1,000 sacks of capital he
got 100 sacks of wheat at harvest; but now for 2,000 sacks of capital
he only gets 150 sacks at the harvest. Or (as we put it in modern
language), his income is no longer 10 per cent. on his capital, but 7½
per cent. only. He has a larger income, but it is smaller in proportion
to the capital invested.
Now, although the 2,000 of capital invested is thus bringing him in
a smaller _proportion_ of income than the old 1,000 did, he thinks
it worth while: because he is at any rate getting more _income_; 150
sacks instead of only 100. But there must come a time when he will no
longer think it worth while to go on saving. Supposing he finds, for
instance, that after taking all the trouble to accumulate and apply to
his land capital to the value of 10,000 sacks of wheat, he gets only
200 sacks, that is 2 per cent. annual reward for all this saving, he
will not think it good enough, and he will stop saving. The point where
he stops, the return below which he does not think it worth while to
save, marks the _minimum profits of capital_. A man is delighted, of
course, to have _more_ profit than this if he can. But the point is, he
will not take _less_. Rather than make less than a certain proportion
of income to his capital he will stop saving, and spend all he has in
immediate enjoyment.
It is this obvious truth which makes the second great division in the
produce of wealth. You must, as we have seen, produce enough to keep
labour going. That is, you must produce enough to satisfy the standard
of subsistence in your society; _but you must also produce enough
more to keep capital accumulating_. You must produce, over and above
subsistence, whatever happens to be the amount of _profits_ for which
capital will accumulate in any particular society (with us, to-day, it
is about 5 per cent.).
It is very important to observe that this second division, Profit, or
Interest, must always be present, no matter how the capital is owned
and controlled, no matter who gets the profit.
Some people have thought that if you were to take capital away from the
rich men who now own most of it and to give it to the politicians to
manage for everybody, this division, Profit, would disappear. But it
is not so. The people who were managing the capital for the benefit of
everybody would have to tell the electors that they could not have all
the wealth produced to consume as they chose: a certain amount would
have to be kept back, and people would only consent to have a certain
amount kept back on condition that they got an advantage in the future
as a reward of their immediate sacrifice. Even if you had a Despot at
the head of the State who cared nothing for people’s opinions, this
division of profit would still be there; for it would be mere waste to
accumulate capital at a heavy sacrifice to himself and his subjects,
unless it produced a future reward.
If the Despot said, “This year you must do without _half_ your usual
amount of leisure and without _half_ your usual amounts, pay _double_
for your cinemas and for your beer, and all that in order to earn one
hundredth more leisure and amusements next year,” it would be found
intolerable.
So it comes to this: There are always present in the process of
production two agents, Capital and Labour, and each of these must
have in one form or another its “Worth While,” otherwise it won’t go
on. You must satisfy the “Worth While of Labour” and you must satisfy
the “Worth While of Capital.” If you do not, labour stops working and
capital stops accumulating, and the whole business of production breaks
down.
(Of course, we must be careful to distinguish between the case of
a private man increasing his investments and the general increase
of capital as applied to an unchanging area of natural forces. John
Smith having £1,000 invested at 5 per cent. can save another £1,000
and another and many more, and still get 5 per cent. But that is
because he is saving and makes up for others wasting, or because
his saving is so small a proportion of the total Capital of Society
that it has no appreciable effect. But if the total Capital of
Society be thus increased the Law of Diminishing Returns eventually
comes into play.)
3. RENT.
We arrive through this at the third division, _Rent_.
Under some circumstances the “Worth While of Labour” and the “Worth
While of Capital” can just barely be earned, and no more. Under those
circumstances production will take place, but under worse circumstances
it will not.
For instance, where there is very light, sandy soil near a heath a man
finds that by putting a thousand pounds of capital on to a hundred
acres of land he can get his bare subsistence and £50 worth of produce
over: 5 per cent. on his capital. It is worth his while to cultivate
that land, just barely worth his while. He also possesses land on
a still more sandy part over the boundary of the heath itself. He
calculates that if he were laboriously to save another £1,000 and take
in 100 acres of the new, worse land, he would make the bare subsistence
of the labour employed upon it, but only £10 extra, that is, only 1 per
cent. on his new capital. He would say: “This is not worth while,” and
the too-sandy bit of land would go uncultivated.
When the conditions are such that the capital and labour applied to
them _just_ get their worth while and no more, those conditions are
said to be “_on the margin of production_,” which means that they are
the worst conditions under which men in a particular society will
consent to produce wealth at all. Put them on conditions still worse,
and they will not produce.
Now the existence of this Margin of Production creates the third
division in Wealth, which is called =RENT=.
_Rent is the surplus over and above the minimum required by labour and
capital out of the total produce._ (We must be careful, as we saw in
the case of “Interest” not to confuse true economic Rent with “Rent”
in the conversational sense. Thus what is called “the rent” of a house
is part of it true economic rent, but part of it interest on the
accumulated or saved wealth, the _Capital_ of its bricks and mortar and
building.)
Take the case of a seam of coal, which at one end of its run crops
out on the surface, a couple of miles on is only 1,000 feet below the
surface, but dips down gradually until, within twenty miles, it is
10,000 feet below the surface.
Under the conditions of the society in which the coal is being mined,
and in the state which the science of mining has reached, it is found
that, at a depth of 5,000 feet, this seam is _just_ worth while mining:
that is, the capital which has to be accumulated for sinking the shafts
and bringing the miners up and down from their work, and raising the
coal to the surface, and providing subsistence for the miners at their
work, _just barely_ gets the profit below which it would not be worth
while to use it.
A shaft sunk at this depth, for instance, and the machinery and stores
cost £10,000, and when you get the coal to the surface that coal will
pay the standard of subsistence of the labourers and leave £500 profit
for capital; that is, 5 per cent. Capital will not accumulate if it
gets less than 5 per cent. Labour will not be exercised if it gets less
than its standard subsistence; therefore, the coal which lies farther
along the seam, deeper than 5,000 feet, will be left untouched. It is
not “worth while” to sink a shaft to try and get it. It is “below the
Margin of Production.”
[Illustration]
What happens to the coal in the places where it gets nearer and nearer
to the surface? Obviously, it is better worth while to sink shafts
there than it is at 5,000 feet. You only want the same amount of labour
for cutting the coal out, whether it is 5,000 feet below the surface
or 2,000, and you want much less capital and labour in sinking the
shafts and bringing the coal to the surface and getting the miners up
and down. There is, therefore, a surplus. Thus with a shaft only 2,000
feet deep you need, say, only £5,000 worth of capital to get £500
worth of coal over and above the subsistence of the labourers. 5 per
cent. on £5,000 is £250--so in that case there is a benefit of an extra
£250 _after_ the “worth while” of Capital and Labour are satisfied.
Over and above what is just the “worth while” of capital and labour for
getting the coal you have in the shallower mines extra value, and that
extra value gets larger and larger as the distance of the coal from the
surface gets less and less. The deepest mine is on what we call “the
margin of production.” It is just worth while to work it. The surplus
values in all the shallower mines are called RENT. If a landlord owned
the coal in quite a shallow part where it was within a thousand feet of
the surface, he could say to the labourers and the owners of capital
who were coming to dig it out: “The mine which is working at 5,000 feet
is just worth your while. If you work here at 1,000 feet you will have
a great deal more than 5 per cent. on your capital, and the subsistence
of labour is just the same. All this extra amount of values, however, I
must have, otherwise you shall not work my coal.”
Since the Capitalists are content to accumulate capital for a return
of 5 per cent. and the labourers to work for their subsistence, the
extra amount is paid to the landlord. If one set of people refuse to
pay it, there will always be another set of people who will be content
to pay it and this extra amount or surplus is called “Economic _Rent_,”
which is something, of course, much more strictly defined than, and
different from, what we call Rent in ordinary conversation.
Or again, take three farms of equal area but varying fertility. Each
requires £1,000 capital to stock it and five labourers to work it.
The £1,000 capital demands £50 a year profit. The five labourers need
£500 in a year to meet their standard of subsistence. The poorest farm
raises just £550 worth of produce a year. The next best raises £750,
and the best one £950 worth. Then there is _no_ economic rent on the
first; it lies on the “margin of production.” There is £200 economic
rent a year on the second, and £400 on the third.
* * * * *
We can sum the whole thing up and say that on the mass of all
production there are three charges:
1. =First, the charge for the subsistence of labour.=
2. =Next, the charge of profits, or interest, for the reward of
capital, that is, of saving, and lastly=
3. =In varying amounts, rising from nothing at the margin of
production, to larger and larger amounts under more favourable
circumstances, the surplus value called Economic Rent.=
These three divisions are always present whenever wealth is produced.
The same man may get all three at once, as happens when a farmer works
good land which is his own. Or again, when one man owns the fertile
land and another man provides the capital, and yet another man provides
the labour, the three divisions appear as three incomes of Labourer,
Farmer and Landlord receiving separately Wages, Profit and Rent.
Whether these divisions appear openly, paid to different classes of
men, or whether they are concealed by all coming into the same hands,
they are present everywhere and always. That is a fixed economic law
from which there is no getting away.
Always remember that these economic laws are in no way binding in a
social sense. They are not laws like moral laws, which men are bound
to obey. They are certain mathematical consequences of the very nature
of wealth and its production, which men must take into account when
they make their social arrangements. It does not follow because Rent or
Interest are present that such and such rich men, or the State, or the
labourers, have a right to them. That is for the moralist to decide;
and men can in such matters make what arrangements they will. All
economic science can tell us is how to distinguish between the three
divisions, and to remember that they are inevitable and necessary.
But we must wait until a little later on to discuss social rights and
wrongs under Applied Economics and continue here for the present to
confine ourselves to the Elements of economic law alone.
V
EXCHANGE
=EXCHANGE= is really only a form of production, as we saw in the
illustration of the island with salt and the main-land with meat. When
the exchange of the things is of advantage to both parties it creates
wealth for both, and profitable exchange is, therefore, when it takes
place, only the last step in a general chain of production.
But Exchange is so separate an action that students of Economics have
agreed to treat it as a sort of chapter by itself, and we will do so
here.
The characteristic of Exchange is that you take a thing from a place
where it has less value to a place where it has more value, thus adding
an economic value to the thing moved and so creating wealth. In the
same transaction you bring back something else against it, which has
more value in your own place than it had in the place from which you
took it, that is again adding an economic value and therefore creating
wealth. We saw how this was in the case of the salt and the meat, and
so it is with thousands upon thousands of exchanges going on all over
the world.
For instance, we in England have grown fond of drinking tea in the last
200 years. But our climate will not allow us to grow tea. Tea can only
grow in a very hot country.
Now in very hot countries specially heavy labour upon metal work is not
to be expected. Men are not fit for it. But in this cool climate men
are fit for it, and also men here have through long practice become
very skilful at working metal: smelting iron, for instance, and making
it up into machines.
Therefore, there is a double advantage to us and to the people who live
in the hot countries where tea is grown if we _exchange_. We send them
metal things that we have made and which are useful to them, and which
they could hardly make themselves, or only with very great difficulty
(and, therefore, at a great expense of energy), and we get from them
tea, which we could not grow here except in hot houses: that is, at
much more expense of energy than is needed in the countries where tea
grows naturally out of doors.
When there are present two or more objects of this kind, such that the
exchange of them between two places will benefit both parties, we may
speak of “_a potential of exchange_,” stronger or weaker according to
the amount of mutual advantage derived.
This word “potential” you will not find yet in many books, but it is
coming in, for it is a very useful word. It is taken by way of metaphor
from Physical Science. When there is a head of water over a dam, or a
current of electricity of such and such an intensity, we talk of the
“_potential_” and measure it. For instance, we say this electrical
current is double the potential of that, or the head of water working
such and such turbines is at double the potential of another head of
water in the neighbourhood. In the same way we talk of a “potential” of
exchange, meaning a tendency for exchange to arise between two places
or people because it is of mutual benefit to both.
Potentials of exchange come into existence not only through difference
of climate or differences of habit, but also through what is called
the _Differentiation of Employment_, which is also called Division of
Labour.
Thus two countries may be both equally able to produce, say, metal work
and silk fabrics, and yet if one of them concentrates on getting better
and better at metal work and the other on getting better and better
at silk fabrics, it may well be that both will benefit by separating
their jobs and exchanging the results. And this is true not only of two
countries, but of individuals and groups.
The cobbler does not make his own clothes. He makes boots, and by
learning his trade and getting used to it makes them much better and in
a much shorter time than other men could, and therefore makes a pair
of boots with less expense of energy, that is, _cheaper_, than another
man would. The tailor can say the same thing about making clothes.
So it is to the advantage of the cobbler to exchange his extra boots
against the extra clothes the tailor has made.
In general: intelligent societies always tend to build up a very
wide-spread system of exchange, because intelligent people tend to
concentrate each on the job that suits him best, and also because
intelligent people discover differences of climate and soil and the
rest which may make exchange between two places a mutual advantage for
both.
It is indeed a great mistake to do as some modern people do, and put
Exchange in front of Production. Thus you hear people talking as
though the trade a country does, the total amount of its exports and
imports, were the test of its prosperity, whereas the real test of its
prosperity is what it has the power to consume, not what it manages to
exchange.
But still, though it comes at the end of Production and must never be
made more important than the whole process of Production, Exchange is
present universally wherever there is active production of Wealth. Thus
the group of people who build ships are really exchanging what they
make against the produce of other people who make clothes and grow food
and build houses, and the rest of it; and in a highly-civilised country
like ours much the greater part of the wealth you see consumed around
you has gone through many processes of exchange.
There are a few elementary Formulæ concerning Exchange which it is
important to remember.
1. =There is a Potential of Exchange, that is, exchange tends to take
place, when of two objects the proportionate values are different in
two different communities.=
It is not very easy to understand the meaning of this until one is
given an example. Supposing a ton of coal from England to be worth £2
by the time it is delivered in Cadiz, and supposing that making a dozen
bottles of wine in England, with all the apparatus of hot-house grapes
and the rest of it, came to £5 of expense. Supposing that in Cadiz,
from the small coal mines near by, they can produce coal at only £1 a
ton, but on account of their climate they can produce a dozen of wine
for a shilling. Then you get this curious situation:
It pays the exporting country, England, to sell coal in Cadiz _at less
than its English economic value_, and to import the wine from Cadiz.
It pays your English owner of coal, although the values attaching to
it by the time it has got to Cadiz are £2 a ton, to sell a ton of coal
there for only £1, and to exchange that against the wine of Cadiz, and
bring that back to England. At first sight it sounds absurd to say that
selling thus at a lower value than the cost of production and transport
can possibly be profitable. But if you will look at it closely you
will see that it is so.
If the Englishman had tried to make his wine at home it would have cost
him £100 to make twenty dozen bottles, but when he has sold his coal
at Cadiz for £1 he can with that £1 buy twenty dozen of wine and bring
it back to England. He is much the wealthier by the transaction, and
so is the man at Cadiz. The Cadiz man could have spent his energies in
digging out a ton of coal near Cadiz instead of importing it, but the
same energies used in making wine produce enough wine to get him rather
more coal from England.
2. The second Formula to remember about Exchange is this: =Goods do not
directly exchange always one against the other, but usually in a much
more complicated way, by what may be called= _Multiple Exchange_.
Of course, the vehicle by which this is done is a currency, or _money_,
which I will explain in a moment; but the point to seize here is that
exchange is just as truly taking place when there is no direct barter
of two things but a much longer and complicated process.
For instance, a group of people called a Railway Company in the
Argentine want a locomotive. A locomotive can be produced cheaper and
better, that is, with less expenditure of energy for the result, in
England than in the Argentine. But on the other hand, England wants
to import tea. Now the Argentine grows no tea. What happens? How does
England get the tea? That locomotive goes out to the Argentine. An
amount of wheat sufficient to exchange against the locomotive goes
against it, _not_ to England, but to Holland, a country which, like us,
has to import a lot of wheat. As against the wheat sent to Holland,
the people in Holland send, say, the cheeses which they make so well,
on account of their special conditions, and the consignment goes to
Germany. The Germans send out a number of rails equivalent to the
number of cheeses and of the wheat and of the locomotive, as they are
very good at making rails, and have specialised on it. But they do not
send the rails to Holland. They send them to some Railway Company which
has asked for them in Egypt. The Egyptian people send out an equivalent
amount of cotton, which they can grow easily in their climate, and this
cotton goes to mills in India, and against it there comes an equivalent
amount of tea, but the tea does not go back to Egypt. It goes to
England.
There you have a circle of Multiple Exchange in which everybody profits
by the exchange going on, although it is indirect. In the same way,
of course, it is true that all of our domestic exchanges at home are
multiple. If I write a book which people want to read, whereas I want
not books but several other things, boots and fuel and furniture, I
do not take my books round to the man who provides boots and to the
one who provides fuel and to the one who provides furniture. I go
through the process of selling my book to a publisher, and through an
instrument he gives me, called a cheque (I will explain this when we
come to the point of money), I can obtain boots and fuel and furniture
to the amount of the value of the books of mine which my publisher will
sell. Yet when exchange is thus highly indirect and multiple it is just
as much exchange as though I went and bartered one book for one pair of
boots with the cobbler.
3. The third thing to remember about Exchange is of the utmost
importance, because it has given rise to one of the biggest discussions
of our English politics. The Formula runs thus:--
=Other things being equal, the greatest freedom of exchange in any
given area makes for the greatest amount of wealth in that area.=
It ought to be self evident, but it is astonishing how muddled people
get about it, when they become confused over details and cannot see
the wood for the trees. It ought, I say, to be self-evident that if
you leave Exchange quite free, anybody being at liberty to produce
what he can produce best, and exchange it for things which other men
can produce better than he, both parties will tend to be the richer by
such freedom and the wealth of the whole country will be greatest when
all exchanges in it are thus left free to be worked by the sense of
advantage.
If there were a law, for instance, preventing me from buying etchings,
or preventing Jones, the etcher, from buying books, Jones would have to
write his own books (or do without them, which is what he would do),
and I should have to etch my own etchings, which would be exceedingly
poor compared with the wonderful etchings of Jones. We are obviously
both of us better off if we are left free to exchange what we can each
make best. And so it is with all the countless things made in a State.
This principle applies not only to a particular nation but to the whole
world. If you left the whole world free to exchange the whole world
would be the richer for it. And any interference with exchange between
one nation and another lessens the total possible amount of wealth
there might be in the world.
So far so good; and, as I have said, such a truth ought to be
self-evident. But here there comes in a misunderstanding of its
application, and that misunderstanding has made any amount of trouble.
It is so important that I must give it a separate division to itself.
VI
FREE TRADE AND PROTECTION
Nations, as we know, put up tariffs against goods which come from
abroad: That is, their Governments tax imports of certain goods and
thereby interfere with the freedom of exchange. For instance, the
French have a tax of this kind upon wheat. Wheat grown in France will
cost, let us say, £1 a sack, but the Argentine can send wheat to France
at an expense of only 10s. a sack, because the land there is new, and
for various other causes. If the wheat from the Argentine were allowed
to come in freely, and the French to export against it things which
they can make more easily than wheat they would have more wheat at a
less total expense; but they prefer to put a tax of ten shillings upon
every sack, that is, to put up a barrier against the import of wheat
from abroad, and so keep up the price artificially at home.
When a nation does this with regard to any object that may be imported,
if the object can also be produced within the nation (which it nearly
always can) it is said to _protect_ that object, and the system of so
doing is called =Protection=. The word arose from the demand of certain
trades to be “protected” by their Governments without considering
whether it was for the good of the whole nation or not. It obviously
would be a very nice thing for people who breed sheep, for instance, in
this country, if all mutton coming from the Colonies were taxed at the
Ports, while the mutton grown inside the country were not taxed; for in
this way the value of the mutton would rise in England, and the rise
would benefit the sheep owners. But it would be at the expense of all
the other people who did not grow sheep, and who would have to pay more
for their mutton.
As opposed to this system of _Protection_, and interfering with
international exchange by a tariff, intelligent people a long lifetime
ago began to agitate for what they called “=FREE TRADE=,” that is the
putting of no tariff on to an import, or at least no tariff high enough
to give an artificial price to the producer of the same thing at home.
Thus, when England was completely Free Trading (which it was until the
war) there was a tariff on tea; but that was not Protection, for those
who would try to grow tea here would have to grow it in hot houses and
at an enormous expense, and the tax on tea, though heavy, did not make
it anything like so dear as to make it worth while to produce tea here.
Another principle of Free Trade was that if it was thought advisable
to put a tariff on to anything coming into the country which could be
produced in the country, then you would have to put what was called
“_an equivalent excise_” on the thing produced at home. For instance,
in order to get revenue, one might put a tax of a 1d. on the pound
on sugar coming from Germany, but, according to the doctrine of Free
Trade, you must put a similar excise (that is, a home tax of 1d. on the
pound) upon any sugar produced in England. If you did not do that you
would be benefiting the sugar manufacturer in England at the expense
of all other Englishmen, which would be unjust and also make England
less wealthy because it would be inducing Englishmen to make sugar by
offering them a reward and so take them away from some production for
which they were better fitted.
This idea, that Free Trade must necessarily be of advantage to
everybody, and that it was only stupidity or private avarice which
supported Protection, was very strong in England, and, in the form you
have just read, it seems beyond contradiction.
But if you will look closely at Formula No. 3 written in the last
division on page 59 you will see that there is a fallacy hidden in this
universal Free Trade theory. It is perfectly true that free exchange
over any area tends to make the wealth of all that area greater, and
if the area include the whole world, then free exchange all over the
whole world, that is, complete Free Trade, would make the world as a
whole richer.
_But it does not follow that_ EACH PART _of the area thus made richer
is itself enriched_. That is the important point which the Free Trade
people missed, and it is this which supports, in some cases, the
argument for Protection.
If we allow free exchange everywhere throughout England, England as a
whole will, of course, be the richer for it; but it is quite possible
that Essex will be the poorer. If we allow Free Trade throughout all
Europe, Europe will be the richer for it; but it is quite possible that
some particular part of Europe, Italy or Spain, may be made poorer by
the general process, and as they don’t want to be poorer they will
by Protection and tariffs cut themselves off from the area of free
exchange.
=There are conditions where an interference with free exchange over
the boundaries of a particular area make that area richer: when those
conditions exist, there is what is called an Economic Reason for
Protection.=
So we may sum up and say that the theory of universal Free Trade being
of benefit to the world as a whole is perfectly true. If we are only
considering the world, and do not mind what happens to some particular
area of the world, then the case for Free Trade is absolute. But if
we mind a hurt being done to some particular area, such as our own
country, more than we mind the hurt done to the world as a whole,
then we should look at our particular conditions and see whether our
country may not be one of those parts which will be drained of wealth
by Free Trade and will be benefited by artificially fostering internal
exchanges.
In the second part of this book I will go into this again, and show
how the discussion arose in England and what the arguments are for and
against Universal Free Trade, and how true it is that a sound economic
argument for Protection exists.
VII
MONEY
When people begin exchanging by bartering goods one against another
they at once find that there is an awkward obstruction to this kind of
commerce; at least, they find it the moment there are more than two of
them. It is this: That the person they are nearest to for the striking
of a bargain may not want, at the moment, the particular thing they
have to offer, but something else which a third party has who is _not_
present.
For instance: John is a hunter who has a surplus of skins to offer. He
can get skins easier than other people. William, farming good soil, has
surplus wheat to offer, and Robert, living near a wood and skilled as a
woodman, has extra wood to offer. John wants wood. He takes one of his
furs to Robert and says: “I will give you this fur for a cartload of
wood.” But Robert may answer, “I don’t happen to want a fur just now.
What I do want is a sack of wheat.”
Either no transaction will take place on account of this hitch, or one
of these two things will happen: Robert will take the fur from John
and give him his cartload of wood, and will then take the fur over
to William, and see whether William wants a fur in exchange for some
wheat. Or John, very much wanting the wood, will go to William, and if
William wants a fur, will exchange it for wheat; then John will take
the wheat back to Robert, and exchange it for the wood that he wants.
That is the sort of complicated and clumsy come-and-go that will be
continually happening even with quite a few exchangers, and with
quite a small number of articles. When it came to a great number of
exchangers and a great number of articles the trouble would grow
impossible and exchange would break down.
But things arrange themselves thus: It is soon found that one of the
things which are being exchanged is easier to carry than the rest, and
perhaps lasts longer and also can be easily used in small or large
amounts. For instance, in the case of our three producers, John,
William and Robert, _wheat_ might easily appear in this character.
People always want wheat sooner or later. It keeps well. It is not very
difficult to transport, and you can divide it into quite small amounts,
or lump it up in large amounts.
So the chances are that when any of the three wanted to benefit by
getting rid of some of his surplus produce he would get into the habit
of taking _wheat_ in exchange, even if he did not want it for the
moment. For he would say to himself: “I can always keep it by me and
then exchange it against somebody else’s produce when that somebody
else happens to want wheat”. Soon you would find each one of the three
would be keeping a little wheat by him for the purpose of saving
tiresome journeys to effect complicated double exchanges, and the wheat
so used by all three of them would be in effect =MONEY=. It would be
used as a common medium of exchange to facilitate the disposal of goods
one against the other, without the elaborate business of making special
barters, after long search.
Mankind has found, in most cases, that where a very large number of
articles were being exchanged _two_ in particular naturally lent
themselves to this particular use, and those two were GOLD and SILVER.
They have also used bronze, and even iron and in some places rare
shells, and all sorts of other things. But gold and silver came to be
for nearly all mankind, and are now for all civilised mankind, the
objects which most naturally are used as money.
The reason for this is as follows:
The thing which naturally becomes money out of all the things that
are exchanged will be that which best combines a certain number of
qualities, some of which we have already mentioned, and of which here
is a list.
1. It must be portable, that is, a large weight of it must take up
little room, so that quite considerable values can be taken easily from
place to place--for money has to be always moving from one to another
to effect purchases and sales.
2. It must be easily divisible, for one is always wanting to use it in
all sorts of amounts, very little and very large.
3. It must keep. That is, it must not deteriorate quickly, or it would
have very little use as Money.
4. It must be of an even quality, so that, wherever you come across it,
you may count on its being pretty well always the same, and therefore
weight for weight of the same value.
5. It must be more or less stable in value. It would be difficult to
use as money some object which was very plentiful at one moment and
suddenly scarce at another; very cheap this year, and very dear next
year--such as are, for instance, agricultural products depending upon
the season.
Now of all objects Gold and Silver best fulfil all these requirements.
Precious stones are more portable, value for value. A £1,000 worth of
diamonds takes up less space and is less heavy than a £1,000 worth of
gold. And precious stones are fairly stable in value and also keep
very well; but they are not easily divisible. Again, they are not of
the same standard value in all cases. They vary in purity. But gold
and silver have all the qualities required. Gold hardly decays at all
through the passage of time, and silver very little; and each, but
especially gold, is valuable for its bulk, and its value is fairly
stable, and each is easily divisible and can therefore be presented in
any amount, from a tenth of an ounce to a hundred pounds weight.
So, by the mere force of things, Gold and Silver became the Money
of mankind. People kept gold and silver by them in order to effect
their exchanges, and very soon a producer did not feel himself to be
exchanging at all (in the sense of exchanging goods against goods), but
thought of the affair as _Buying and Selling_. That is, of exchanging
his produce, not against other produce, but against gold and silver,
with the object of _later_ re-exchanging that gold and silver for other
things that he needed.
Money, once thus established, is called =A MEDIUM OF EXCHANGE= and
also =CURRENCY= or =THE CIRCULATING MEDIUM=. It is called “currency”
and “circulating” because it goes its round through society, effecting
the exchanges, and this running around or circulating gives it its
name: “That which is current” from the Latin for “running.” That which
“circulates” from the late Latin word for “going the rounds.”
When gold and silver become the money of mankind it is important to
be able to tell at once the exact amounts you are dealing with. This,
under simple conditions, is done by weighing; but it is more convenient
to stamp on separate bits of metal what weight there is in each, and
that is called “coining the metal.” All that a Government does when it
makes a sovereign is to guarantee that there is so much weight of gold
in the round disc of metal which it stamps.
Money does not only fill this main function of being a medium of
exchange, that is, of making a vast quantity of complicated exchanges
possible, it also has great social value as a measurer or standard,
and soon after money comes into use men begin to think of the economic
values of things in terms of money: that is, in what we call “=Prices=.”
All things which men produce are fluctuating the whole time in value.
There is now rather more of one article, and now rather less. A sack
of barley at one moment will exchange exactly against a sack of wheat,
and then in a few weeks against rather less than a sack of wheat.
Meanwhile, where it used to fetch a lamb in exchange it may, in a
few months, need two sacks for a lamb; and so with all the hundreds
and thousands of other objects. When we have money the whole mass of
transactions is referred to the current medium, and that is of immense
social value. For no one could keep in his head all the changing
exchange values of a multitude of articles one against the other,
but it is easy to remember the exchange values against one standard
commodity, such as gold. And whatever the exchange value is in gold we
call the =price= of the article.
For instance, when you say that a house is worth £500, that that is the
“_price_” of the house, you mean that the amount of gold you would
have to exchange to get it is about Ten Pounds weight of the metal.
And when you say that the price of a ticket to Edinburgh is £4, you
mean that the service of taking you to Edinburgh in the train will be
exchanged against about an ounce of the metal gold.
* * * * *
I now come to a most difficult point about money and prices which is
rather beyond the elements of Economics, but which it is important to
have some idea of, though it is very difficult.
There is a very interesting study in Economics called “_The Theory
of Prices_,” showing why _all prices on the average_ (what is called
“General Prices,” that is the value of all goods _in general_ as
measured against gold) sometimes begin to go up and at other times
go down: Why goods as a whole begin to get dearer and dearer in gold
money, or cheaper and cheaper. It is a complicated piece of study,
and people dispute about it. But the general rules would seem to be
something like this: The exchange value of things against gold, or
the value of gold, against the things for which it exchanges (that is
prices) is made up of two things: _First_, the amount of gold present
to do the work of exchange; _Secondly_, the amount of work you can make
it do in exchange: The pace at which you can get it to circulate. It is
obvious that one piece of gold moving rapidly from hand to hand will
do as much work in helping exchanges to be carried out as ten pieces
moving ten times more slowly.
If, for any reason, the total amount of gold becomes suddenly smaller
or suddenly larger, or if the pace at which it is used changes very
quickly, then prices fluctuate violently.
Supposing you could, in a night, take away half the gold in
circulation. Then, of course, the remaining gold would become much more
valuable. In other words, prices would fall. For if an ounce of gold is
rarer and more difficult to get than it was, it will exchange against,
that is, “buy” more than it did; this means that “the price of things
has fallen.” We used to say, for instance, that a quarter of wheat was
worth an ounce of gold. But if we suddenly change the amount of gold
so that gold becomes much rarer and more valuable, perhaps an ounce of
gold will buy not one quarter but two. The price of one quarter used to
be an ounce of gold. Now the price is only half an ounce of gold. Wheat
has become cheaper in proportion to gold, and “prices,” that is, values
measured in gold, in money, have fallen.
The same thing would happen if you did not lessen the amount of gold in
circulation but made the circulation much more sluggish. The amount of
gold in circulation would be the same, but as it went its rounds more
slowly it would be more difficult to get a certain amount of gold in
any one place at any one time.
Prices, then, depend upon the actual amount of money that is present to
do the work, _and_ the pace at which it is made to go the rounds: or
(to put it in technical terms), on the amount of the currency _and_ its
“_efficiency in circulation_.”
Now, there is in the human mind a very strong tendency to keep prices
stable. We think of them by a sort of natural illusion as though they
were absolute fixed things. We think of a pound, and a shilling, and
five pounds as real, permanent, unchanging values. If we find that
quite suddenly five pounds will buy a great deal more than it used
to, or quite suddenly a great deal less, if we are met by a sudden
and violent fluctuation in prices of this kind, our minds tend,
unconsciously, to bring things back, as much as possible, to the old
position; and I will show you how this tendency works in practice.
Supposing a very great deal of gold, for some cause, were to disappear.
People suddenly find prices falling very rapidly. A man with a £1,000 a
year can buy twice as many things, perhaps, as he used to buy. On the
other hand, a man with anything to sell can only get half the amount he
used to get. For gold has become rarer, and therefore more valuable as
against other things.
What is the result? _The result is a very rapid increase in the pace at
which the gold circulates._ Every purchaser feels himself richer. The
gold is tendered for a much larger number of bargains, and though the
mind, by this illusion it has of gold value as a fixed thing, cannot
bring the actual gold back, what it can do is so to increase the second
factor, =Efficiency in Circulation=, as largely as to make up for the
lack of gold; and under the effect of this prices will gradually rise
again. In the same way, if the mass of current medium by some accident
becomes suddenly increased that should lead to an equally sudden rise
in prices; but the unconscious tendency of the human mind to keep
prices stable sets to work at once. Efficiency in Circulation slows
down, the new large amount of currency works more sluggishly, and,
though prices rise, they do not rise nearly as much as the influx of
money might warrant.
We see, therefore, that the factor in the making of prices called
“Efficiency in Circulation” works like a sort of automatic governor,
tending to keep prices fairly stable; but of course it cannot prevent
the gradual changes, and sometimes it cannot prevent quite sharp
changes, as we shall see a little later on. For the moment, the
interesting thing to note about Efficiency in Circulation is that we
owe to this factor in prices the creation of _paper money_.
If, with only a certain stock of gold to work on, business rapidly and
largely increases, if a great many more things are made and exchanged,
then, as the gold will have a lot more work to do--and so become more
difficult to obtain in any one time or place--that should have the
effect, of course, of making it more valuable, that is, of lowering
prices.
Now with the beginnings of modern industry, about a hundred and fifty
years ago, a vastly greater number of things began to be made than had
ever been made before, and the number of exchanges effected multiplied
ten, twenty and a hundredfold. The stock of gold, though it was
increased in the nineteenth century by discoveries in Australia and
California, and later in South Africa, would have been quite unable to
cope with this flood of new work, and prices would have fallen very
much indeed, had it not been for the creation of _Paper Money_. Paper
money was a method of immensely increasing Efficiency in Circulation.
This is how it worked.
A Bank or a Government (but especially the Bank of England, with the
guarantee of the Government) would print pieces of paper with the
words: “I promise to pay to the bearer of this Five Pounds.” Anyone
who took one of these pieces of paper to the Bank of England could get
Five Golden Sovereigns. But since this was publicly known, people were
willing to take the piece of paper _instead of_ the five sovereigns.
If you sold a man a horse for fifty pounds, you were just as willing to
take ten five pound notes for him as fifty sovereigns. They were more
convenient to carry, and you knew that whenever you wanted the actual
gold you had only to go to the bank and get it.
Because people were thus willing to be paid in paper instead of in
the actual gold, a large number of notes could be kept in circulation
at any one time, and only a small amount of gold had to be kept in
readiness at the Bank to redeem them. In practice it was found that
very much less gold than the notes stood for was quite enough to meet
the notes as they were brought in for payment. Much the most of the
note circulation went on going the rounds, and in normal times it took
a long time for a note on the average to be brought back to the Bank.
You can see that this dodge of paper money had the effect of increasing
the total _amount_ of the current medium in practice, and of greatly
increasing its Efficiency in Circulation. Moreover, it made the
Efficiency in Circulation very elastic, because in times of quiet
business, more notes would go out of circulation and be paid into
the bank, while in time of active business more notes would go on
circulating.
_So long as every note was redeemed in gold every time it was brought
to the bank, so long as the promise to pay was promptly kept, the money
still remained good; the paper currency did not interfere with the
reality of the gold values, there was no upsetting of prices, and all
went well._
Unfortunately, Governments are under a great temptation, when they
have exceptionally heavy expenses, to falsify the Currency. People get
so much in the habit of trusting the Government stamp on paper or metal
that they take it as part of nature. What the Government is really
doing when it coins a sovereign is giving a guarantee that this little
disc of yellow metal contains 123 grains of gold with a certain known
(and small) amount of alloy to make the gold hard. When the Government
has to pay a large amount in wages, or for its Army and Navy, or what
not, it is tempted to put in less gold and more alloy and keep the old
stamp unchanged, and that is called “Debasing the Currency.”
For instance, the Government wants a hundred tons of wheat to feed
soldiers with, and the price of wheat in gold at that moment is Ten
Sovereigns a ton. It says to a merchant, “If you will give me a
hundred tons of wheat, I will give you a thousand sovereigns.” But
when it comes to paying the thousand sovereigns, instead of giving a
thousand coins with 123 grains of gold in each, it strikes a baser
coin with only a hundred or less than a hundred grains in each, and
pays the merchant with these. It is a simple form of cheating and
always effective, because the merchant thinks the sovereign is genuine.
Only when these bad sovereigns get into circulation they naturally
find their level in gold; for people begin to test them, and find
that they have not got as much gold in them as they pretend to have.
Then, of course, prices as measured in this new base coin rise. If the
Government wants to buy another hundred tons of wheat it must offer
more than a thousand of the base coins; it must offer, say, thirteen
hundred of them. But again it is tempted to put even less gold into
the coins with which it pays for the second lot of wheat, and so the
coin gets baser and baser, until at last, perhaps, a sovereign will not
really be worth half what it pretends to be. Governments in the past
have done this over and over again, but it was not until our time that
the worst form of debasing the coinage came in.
It came in as a result of the Great War, and we are all suffering from
it to-day. This last and worst form of debasing coinage worked, not
through cheating about the metal, but through a trick played with paper
money.
Before the war, if you got a Five Pound note saying “I promise to pay
Five Pounds” the promise was kept and the five golden sovereigns were
there for you whenever you went with your note to the bank and asked
for them; but when the Government had these very heavy expenses to
meet on account of the war, they first began making difficulties about
paying when people brought their paper to the bank, and at last stopped
paying altogether. At the same time, they did everything they could to
get the gold out of private people’s hands and to make them use paper
money instead. The consequence was that, people being so accustomed
to think of a paper guarantee of the Government exactly as though it
were real money, readily took to the new notes and used them as money,
thinking of these wretched bits of paper exactly as though they were
so many golden sovereigns. The Government could go on printing as many
bits of paper as it liked, and they would still be used as though they
were real money. So long as the amount of paper printed was not more
than _would have been printed_ when the notes were redeemable, and when
the currency was on a true “_Gold Basis_,” no harm was done; but of
course it paid the Government to go on printing a great many more notes
than that, because, when it could make money thus cheaply, it could pay
for anything, however great the expense; but at the cost, of course, of
debasing the currency more and more.
This kind of money, forced upon people, pretending to be the same as
real money but actually without a Gold Basis, is called _Fiat_[1]
money, and that is the kind of money the whole world has to-day, except
those countries which did not take part in the Great War, and the
United States which did not ever give up its gold basis.
Of the different European fighting countries, however, ours did best in
this matter. We are still living on Fiat money, and we have much more
of it than we ought to have. But the French have more in proportion, so
that prices measured in _their_ money are now (1923) more than three
times what they would be in gold. The Italians are worse off still.
With them it is four times. With the Germans it is millions of times,
and their currency has quite gone to pieces; a paper coin in Germany
is worth (at the time I write, October, 1923) _ten million_ times less
than the real metal coin which it is supposed to represent.
This is one of the very worst things that has happened on account of
the war, for as the money now being used all over Europe is not real
money, no one feels certain whether he can get his debts really paid,
or whether his savings are safe, or whether a contract made for a
certain payment a few months hence will be really fulfilled or not. A
man may lend a thousand francs or marks or pounds for a year, and then
at the end of the year, when he is to be paid back, he may be paid in
coin which has got so much worse that he is really receiving only half
or a tenth or a thousandth of the real value he lent. A man in Germany
sells a hundred sheep for so many marks, to be paid for in a month; and
at the end of the month the marks will only buy ten sheep!
This piece of swindling, which has been the note of the last five
years, is the first point we have touched on so far where a problem in
Economics and the study of economic law brings one up against questions
of right and wrong.
It is morally wrong for the Government to swindle people out of their
property by making false money. What is the way out, allowing for
Economic Law? It is morally wrong that some men should starve while
other men have too much: allowing for Economic Law, what is the way out
of such evils?
As you go on in the study of Economics you find quantities of questions
where you have to decide whether economic laws render possible
political actions which you would very much like to undertake, and
which seem right and just. Many such actions, though one would like to
undertake them, cannot be undertaken because our study of Economics
has shown us that the consequences will be very different from what we
hoped.
On the other hand, a great many people try to get out of what it is
their duty to do politically by pleading that Economic Law prevents it.
Before ending these notes, then, we must go into the main questions
of this kind, and see what there is to be said, in the light of
economic knowledge, for our present system of society, which is called
=Capitalism=; for other systems in the past such as =Slavery=; for
=Private Property=; for the various theories of =Socialism=; for and
against =Usury=, and so on.
It is necessary to go into these points even in the most elementary
book on Economics, because the moment one begins the practical
application of one’s economic science these questions at once arise; to
answer them rightly is the most important use we can make of economic
knowledge.
Part II
POLITICAL APPLICATIONS
INTRODUCTION
So far I have been putting down the elements of Economics just as one
might put down the elements of Arithmetic. But Economics have, just
like Arithmetic, a _practical application_: if it were not for this,
there would be no real use in studying Economics at all.
For instance: we find out, when we do the elements of Arithmetic, that
solid bodies vary with the cube of their linear measurements. That is
the general abstract principle; but the _use_ of it is in real life
when we come (for instance) to measuring boats. We learn there from
Arithmetic that, with boats of similar shape, a boat twice as long as
another will be eight times as big; it is also by using the elements of
Arithmetic that we can keep household accounts and do all the rest of
our work.
It is precisely the same with Economics. We are perpetually coming upon
political problems which Economics illustrate and to which economic
science furnishes the answer--or part of the answer--and that is where
the theoretical elements of Economics have practical importance.
For instance: once we know the elementary economic principle that
rent is a surplus, we appreciate that it does not enter into cost
of production. We do not try to make things cheaper by compulsorily
lowering rent. Or, again, when we have learned the nature of money we
can appreciate the dangers that come from using false money.
In these political applications of Economics we also come upon what
is much more important than mere politics, and that is the question
of right and wrong. We see that such and such a thing ought to be so
as a matter of justice; but we may blunder, as many great reformers
have blundered, in trying to do the right thing and failing to do it,
because we have not made a proper application of our economic science.
And the opposite is also true: that is, a knowledge of Economics
prevents their being wrongly applied by those who desire evil. Many
men take refuge in the excuse that, with the best will in the world,
they cannot work such and such a social reform because economic science
prevents their doing what they know to be right. If we know our
Economics properly we can refute these false arguments, to the great
advantage of our own souls and of our fellow-men.
For instance: it is clearly our duty to-day to alleviate the fearful
poverty in which most Englishmen live. A great many people who ought to
know better say, or pretend, that economic laws prevent our doing this
act of justice. Economic laws have no such effect; and an understanding
of Economics clears us in this matter, as we shall see later on.
We have hitherto been following the statement and examination of
economic laws: that is, the _theoretical_ part of our study and its
necessary foundation. Now we go on to the _practical_ part, or “Applied
Economics,” which is the effect of those laws on the lives of men.
Before leaving this Introduction I think it is important to get quite
clear the difference between what is called “theoretical” study
and the practical application of such study. People are very often
muddle-headed about this, and the more clearly we think about it the
better.
A theoretical statement is a statement following necessarily and
logically from some one or more known first principles. Thus, we know
that two sides of a triangle are longer than the third, so we say it
follows _theoretically_ that a straight road from London to Brighton
is quicker motoring than going round by Lewes. But the number of first
principles at work in the actual world is indefinitely large. Therefore
one must test any one theoretical conclusion by practice: by seeing how
it works. Because, side by side with the one or two first principles
upon which our theory is built, there are an indefinitely large number
of other first principles which come into play in the real world.
Thus there is, in motoring, the principle that speed varies with road
surface. So the way round by Lewes may be quicker than the straight
road if it has a better surface. There is yet another principle that
speed is checked by turnings in the road, and it may prove that on
trial the two ways are about equal.
Or again: we know that the tidal wave is raised on either side of the
earth, and that there is, therefore, about twelve hours of even ebb and
flow, six hours each on the average and taking the world as a whole:
because the earth takes twenty-four hours to go round.
But if you were to act upon that first principle _only_ in any one
part of the world, and to say without testing the thing in practice,
“I can calculate the tide theoretically,” you would very often wreck
your ship. For many other principles come into play in the matter of
the tide besides this twelve-hour period. In one case the tide will be
delayed by shoals or by the current of a river. In another there may be
two or three tides meeting. In a third the sea will be so locked that
there will be hardly any tide for many hours, and then a rush at the
end--and so on.
Now it is just the same with Economics. Your economic first principle
makes you come to such and such a _theoretical_ conclusion. But there
are a lot of other first principles at work, and they may modify the
effect _in practice_ to any extent. When people object to “theoretical
dreaming,” as they call it, they mean the bad habit of thinking
that one conclusion from one particular set of first principles is
sufficient and will apply to any set of circumstances. It never does.
One has always to watch the thing in practice, and see what other
forces come in.
In the political applications of economic science we have to deal with
the effect of human society upon economic law. For instance: economic
law tells us that, given a certain standard of living for labour--the
“worth while” of labour--and a certain minimum profit without which
capital will not accumulate--the “worth while” of capital--there is, as
we have seen, a lowest limit of production; a set of conditions below
which production will not take place. Land which is below a certain
standard of fertility will not be farmed; a vein of metal below a
certain standard of yield will not be mined under such and such social
conditions. But all circumstances in which production has greater
advantages than this lowest limit produce a surplus value called
“Rent.” That is an economic law, and it is always true.
But it does not follow that the owner of the land, for instance,
will get the full economic rent of the land. There may be customs in
society, or laws, by which he is compelled to share with the tenant.
The theoretical economic rent is there all right, but one cannot deduce
from this truth that the landlord will necessarily and always get the
whole of it. And so it is with every other political application.
* * * * *
Having said so much by way of Preface, let us turn to the particular
problems, and first of all consider the idea which underlies all
practical economic conclusions, the idea of =Property=.
The very first governing condition of economic production and
distribution in the real world is the condition of _control_. Who
_controls_ the process of production in any particular Society? Who
in it owns (that is, has the right and power to use or leave idle, to
distribute or withhold) the means of production, the stores of food
and clothing, and houses and machinery? On the answer to that question
depends the economic structure of a society. This control is called
_Property_, and as the first thing we have to study in practical
Economics is the character of _Property_, we will make that the first
division of our political applications.
PROPERTY
THE CONTROL OF WEALTH
All the political application of Economics--that is, all the
application of Economic Science to the conduct of families in the
State--turns on The Control of Wealth, and of the things necessary to
make wealth.
The first thing to grasp is that _someone_ must control every piece of
wealth if it is to be used to any purpose. Every bundle of economic
values in the community must be under the control of some human
will; otherwise those pieces of wealth “run to waste,” that is, are
consumed without use to mankind. For instance, a ton of threshed wheat
represents a bundle of economic values. It represents a piece of wealth
equivalent, in currency measure, to say £16. If no one has the right
to decide upon its preservation and use, when and how it is to be kept
dry and free from vermin, when and how it is to be ground and the flour
made into bread, then it will rot or be eaten by rats, and in a short
time its economic values will have disappeared. It will be worthless.
The £16 worth of wealth will have been “consumed without use”; in plain
language, wasted. But if wealth were all wasted humanity would die
out. So men must, of necessity, arrange for a _control_ of all wealth,
and this they do by laws which fix the control of one parcel of wealth
by one authority, of another by another; men make laws allowing such
control by some people and preventing attempted control by other people
not authorised. This lawful control over a piece of wealth we call
_Property_ in it.
* * * * *
Thus, the coal in your cellar which you have bought is by our laws your
property. It is for you to burn it as you want it and when you choose.
If another person comes in and takes some of it without your leave, to
burn it as _he_ chooses, he is called a thief and punished as such. The
coal in the Admiralty Stores is State property. The State has the right
to decide into what ships it is to be put and how and when it is to
be burnt, and so on. But whether the control is in private hands such
as yours, or in the naval authorities who are officers of the State,
control there must always be.
When people say that they want to “abolish property,” or that “There
ought to be no property,” they mean _Private_ property: the right of
individuals, or families, or corporations to control wealth. Property
in the full sense, meaning the control of wealth by _someone_, whether
the State, or private individuals, or what not, is inevitable, and
is necessary in every human society. So, granting that property must
exist, we will first examine the various forms it may take.
At the beginning of our examination we noticed that wealth, owned
and controlled by whoever it may be--the State, or an individual,
or a corporation--is of two kinds. There is the wealth which will
be consumed in enjoyment and the wealth which will be consumed in
producing future wealth.
The wealth which will be consumed in producing future wealth is, as we
have seen, called _Capital_. For instance: if a man has a ton of wheat
and eats half of it while he is doing nothing but taking a holiday, or
doing work which has some moral but no material effect--that is not
Capital. But if he uses the other half to keep himself alive while he
is ploughing and sowing for a future harvest, and keeps a little of it
for the seed of that harvest, all that he so uses is _Capital_. Since
control of wealth is necessary, no matter of what kind the wealth be,
it is clear that there must be property not only in what is about to
be consumed in enjoyment but also in Capital. Someone, then, must own
Capital.
But here comes in a very important addition. The fertility of land,
space upon which to build, mines of metal, water power, natural
opportunities of any kind and natural forces, _though they are not
wealth_,[2] are the necessary conditions for producing wealth. Someone,
therefore, must control these also: someone must have the power of
saying, “This field shall be ploughed and sown thus and thus. This
waterfall must be made to turn this turbine in such and such a spot,
and the power developed must be applied thus and thus.” For if no one
had such power the fertility of the land, the force of the stream,
would be wasted.
Property, therefore, extends over two fields, one of which is itself
divided into two parts. A.--It extends over natural forces. B.--It
extends over wealth, and, in the case of B, wealth, it extends over B.1
wealth to be used for future production (which kind of wealth, when it
is so used, is called Capital), and also B.2 wealth which is going to
be consumed without the attempt to produce anything else: consumed,
as the phrase goes, “in enjoyment.”[3] Natural forces may be grouped,
as we have grouped them in the first part of this book, under the
conventional term “Land.” So Property covers Land and Capital, as well
as Wealth to be consumed without the attempt to produce other wealth.
You may put the whole thing in a diagram thus:--
[Illustration]
In studying the social effects of Property it is convenient to group
together _Land_ and that part of wealth which is used for further
production and is called _Capital_, and to call the two “_the means of
production_”: because, in a great many social problems the important
point is not who owns the Capital separately or the land separately,
but who owns the whole bundle of things which constitute the “Means of
Production,” without which no production can take place.
For instance: Supposing a man owns a hundred acres of fertile land,
that is his property, and though we call it wealth in ordinary
conversation it is not real wealth at all. It is only the opportunity
for producing wealth. If no one worked on that land, if no one even
worked so little as to take the trouble of picking fruit off the trees
or cutting the grass or looking after animals on it, it would be worth
nothing. Supposing another man to own the stores of food and the houses
and the clothing necessary for the livelihood of the labourers on the
land, and also the horses and the ploughs and the stores of seeds
necessary for farming, then that man owns the Capital only. But to the
_labourers_ the important thing is that someone else owns the “Means
of Production,” _without which they cannot live_, and they are equally
dependent whether one or many control or own the _Means of Production_
in any particular case. _Their_ condition has for its main character
_the fact that they do not own the “Means of Production.”_
Labour must be kept going. That is, human energy, for producing wealth
from land, while it is at work, waiting between one harvest and
another, will consume part of the stores of food and some proportion
of the housing (which is a perishable thing, though it only perishes
slowly) and of the clothing, and of the seed, etc. So we have to
examine the various ways in which labour (which is not wealth) and land
(which is not wealth) and capital (which _is_ wealth) may be controlled.
There are three main types of human society which differ according
to the way in which control is exercised over these three factors of
Labour, Capital and Land. These three types are:--
1. =The Servile State=: that is, the state in which the material Means
of Production are the property of men who also own the human agents of
Production.
2. =The Capitalist State=: that is, the state in which the material
Means of Production are the property of a few, and the numerous human
agents of Production are free, but without property.
3. =The Distributive State=: that is, the state in which the material
means of Production are owned by the free human agents of Production.
There is also a fourth imaginary kind of state which has never come
into being, called the Socialist or Communist State. We will examine
this in its right place, but the only three _actual_ states of which we
know anything in history and can deal with as real human experiences,
are these three just described: the _Servile_ State, the _Capitalist_
State, and the _Distributive_ State.
But, before going farther, we must get hold of a very important
principle, which is this:--
=The nature of an economic society is not determined by its
arrangements being universal, that is, applying without exception to
all the families of the State, but only by their applying to what is
called= _The Determining Number_ =of the families of the State: that
is, in so great a proportion as to colour and give its form to the
whole society.=
No one can exactly define the amount of this “determining number,”
but we all know in practice what it means. For instance: we say the
English are a tall race, from 5½ to 6 feet high. But that does not mean
necessarily that the majority of the people are over 5½ feet. You have,
of course, to exclude the children, and there are a great number of
very short people and a few very tall people. It means that the general
impression conveyed when you mix with English people--the size of the
doors and the implements with which men work, and the clothes that are
produced, and the rest of it--turn upon the general experience that you
are dealing with a race of about that size--5½ to 6 feet. Or again, you
say that the _determining_ number or proportion of our society speaks
English. That does not mean that they all speak English. Some are dumb;
some speak Welsh or Gaelic. Many speak with such an accent that others
with a different accent find it difficult to understand them. Yet it is
true to say that the society in which we live speaks English.
Now it is exactly the same with the economic conditions of society. You
may have a society in which there is a certain number of slaves, and
yet it is not a slave-owning society, because the number of free men
is so great as to give a general tone of freedom. Or you have, as we
have in England, a great deal of property owned by the State--barracks
and battleships and arsenals, some of the forests, and so on--but we do
not say that England is economically a State-owned society, because the
_determining_ proportion of property is not owned by the State but by
private people. The general effect produced is one of private ownership
and not of State ownership.
One more principle must be set down before we go farther, and that is
that almost any society is mixed. A society of which the determining
proportion is slave-owning will yet certainly have a proportion of free
men; for if it did not there would be no one to own the slaves. In the
same way what is called a Capitalist Society, which I will describe in
a moment (and which is the society in which we now live in England) has
a great number of people not living under purely capitalist conditions.
It is mixed.
But, though only a _determining number_ is required to mark the
character of a particular society, and though every society is _mixed_
in its character, it remains true that all societies we know of, in the
past or the present, fall into one of these three groups--the Servile
(that is, slave-owning), the Capitalist, and the Distributive.
The definition of these three systems is as follows:--
1. In the Slave-owning Society, or SERVILE STATE, a certain minority
owns a determining amount of the wealth and also of land--that is,
the means of production (land and capital) and the wealth ready for
consumption in enjoyment. The rest of the community is compelled by
positive law to give its labour for the advantage of these few owners;
and this rest of the community are, by economic definition, (whether
they call themselves by the actual name or not) slaves: that is, they
can be compelled to work for the owners, and can be punished by law if
they do not work for the owners.
2. In the CAPITALIST STATE a determining number of the families or
individuals are free; that is, they cannot be compelled by positive law
to work for anybody. They are at liberty to make a contract. Each can
say to an owner of land or capital: “I will work for you for so much
reward, such and such a proportion of the wealth I produce. If you will
not give me that I will not work at all,” and no one can punish him for
the refusal.
But the mark of the Capitalist State is that a determining amount of
land and capital is owned by a small number of people, and that the
rest of the people--much the greater number--though free, cannot get
food or housing or clothing except in so far as the owners of these
things (that is, of the means of production) choose to give it them. In
such a state of society the people who own nothing, or next to nothing,
are free to make a contract and to say: “I will work on your farm” (for
instance) “if you will give me half or three-quarters of the harvest.
If you will not, I will not work for you.” But this contract is bound
by a very hard condition, for if they push their refusal to the limit
and continue not to work they will starve, and they will not be able
to get housing against the weather or clothes to wear.
We are living to-day, in England especially, in such a Capitalist
State. In such a state the free men who contract to sell their labour
often have a certain very small proportion of things on which they can
live for a short time. They have a suit of clothes and perhaps a little
money with which they can purchase a few days’ livelihood--some of them
more, some of them less. But the tone or colour of the society is given
by the fact that _the great majority, though free, are dispossessed of
the means of production, and therefore of livelihood, and that a small
minority controls these things_.
The word “Capitalism” does not mean that there exists capital in such
a society. Capital exists in all societies. It is a necessary part of
human society and of the production of wealth, without which no society
can live at all. The word “Capitalism” is only “shorthand” for the
condition we have just described: a condition where capital and land
are in few hands though all men are free.
3. The DISTRIBUTIVE STATE is a state in which a determining number
of the citizens, a number sufficient to colour the habits, laws
and conditions of the whole society, is possessed of the means of
production, as private property, divided among the various families.
The word “distributive” is an ugly, long word, only used for want of a
better; but the reason that we have to use such a tiresome word is an
odd and paradoxical reason well worth grasping. The Distributive State
is the natural state of mankind. Men are happiest in such conditions;
they can fulfil their being best and are most perfectly themselves
when they are owners and free. Now whenever you have natural and good
conditions, not only in Economics but in any other aspect of life, it
is very difficult to find a word for it. There is always a word ready
for odd, unnatural conditions: but it is often difficult to find a word
for conditions normal to our human nature. For instance: we have the
words “dwarf” and “giant,” but we have no similar common, short word
to describe people of ordinary stature. So it is with the Distributive
State. We have to use an ugly new word, because men more or less take
for granted this state of affairs in their minds, and have never
thought out a special word for it.
However, a name it must have; so let us agree to call that kind of
society in which most men are _really_ free and dignified and full
citizens, not only possessing rights before the law, but _owning_, so
that they are at no other man’s orders but can live independently, “The
Distributive State.”
Then we have these three main types of Society within human experience:
the Servile, the Capitalist, the Distributive.
To put these three estates clearly before our minds, let us describe
the kind of thing you would see in any one of the three.
In the _Servile State_, as you travelled through the country, you would
most ordinarily see working on the fields men who were the slaves of a
master. That master would own the land and the seed, and the food and
the houses, and the horses and ploughs and everything, and these men
you would see working would be compelled to work for their master, and
he would have the right by law to punish them if they did not.
If you were in a _Capitalist State_ (as we are in England) the men you
would see working would, as a rule, be earning what are called “wages,”
that is, an allowance (actually of money but immediately translated
into food and clothes and house-room and the rest), which allowance
would be paid to them at fairly short intervals, and without which
they could not live. The ploughs and horses with which they would be
working, the seed they would be sowing, the houses they lived in would
be the property of another man owning this _capital_, and therefore
called _The Capitalist_. If you asked any one of these men who were
working whether he were _compelled_ to work by law he would indignantly
tell you that he was not. For he is a free man; his wages are paid
him as a result of a contract; he has said: “I will work for you for
so much,” and no one could compel him to work if he did not choose to
work. But in this state of society a man without capital must make a
contract of this sort in order to live at all. He is not compelled
by law to work for another, but he is compelled by the necessity of
living to work for another.
Lastly, if you were travelling through a _Distributive State_ (Denmark
is the best example of such a state in modern Europe) you would find
that the man working on the land was himself the owner of the land, and
also of the seed and of the horses and the houses, and all the rest of
it. He would be a free man working for his own advantage and for nobody
else’s. He would also have a share in the factories of the country
and be a part owner in the local dairies, sharing the profit of those
dairies where the milk of many farms is gathered together, turned into
butter and cheese, and sold.
This is what we mean by the three types of State. In each you would
find many exceptions, but each has its _determining number_--of slaves
in the one case, wage earners in the other, and independent men in the
third.
* * * * *
We will now take each of these three kinds of State separately and see
the good and evil of them and what the consequences of them are.
THE SERVILE STATE
The Servile State is that which was found among our forefathers
everywhere. It is the Servile State in which we Europeans all lived
when we were pagan two thousand years ago. For instance: In old pagan
Italy before it became Christian, or in old pagan Greece--both of them
the best countries in the world of their time and both of them, as you
know, the origins of our own civilisation--most of the people you would
have seen working at anything were slaves, and above the slaves were
the owners: the free men.
Since we are talking of the political applications of political
economy, we have to consider _human happiness_, which is the object of
all human living; and when we talk of “advantage” or “disadvantage” in
any particular economic state we mean its greater or less effect on
human happiness.
The great disadvantage of the slave-owning state is clearly apparent:
in it the mass of men are degraded: they are not citizens: they cannot
exercise their own wills. This is so evident and great an evil that it
must be set against all the advantages we are about to notice. Slavery
is a most unhappy condition in so far as it wounds human honour and
offends human dignity; and that is why the Christian religion gradually
dissolved slavery in the process of many centuries: slavery is not
sufficiently consistent with the idea of man’s being made in the image
of God. Slavery can also be materially unhappy, if the masters are
cruel or negligent. The great mass of slaves in such a society might
be, at the caprice of their masters, very unhappy; and under bad phases
of those societies they _were_ very unhappy.
But we must not be misled by the ideas that have grown up around the
word “slave” in the modern mind. Because we have no one in England
to-day who is called a slave and bought or sold as a slave, and no
one is yet compelled by law to work for another man, therefore we
regard slavery as something odd and alien; and because it is natural
to dislike things which are odd and alien, unaccustomed, we think of
slavery as something simply bad.
That is a great mistake. The Servile State had--and, if it comes back,
will have again--two great advantages: which were _personal security_
and _general stability_.
_Personal security_ means a condition in which everybody, master and
man, is free from grave anxiety upon the future: can expect regular
food and lodging and a continuance of his regular way of life.
_General stability_ means the continuance of all society in one
fashion, without the violent ups and downs of competition and without
the friction of unwilling, constantly interrupted labour--as in strikes
and lock-outs.
In the Servile State work always got done and was done regularly. The
owners knew “where they were.” With so much land and so many slaves
they were sure of a certain average annual produce. On the whole it was
to the advantage of a man to keep his slaves alive and fairly well fed
and housed. Also, the human relation came in, and a man and his slave,
in the better and simpler forms of the Servile State, would often be
friends and were usually in the same relation as people are to-day with
their dependents. For instance: in well-to-do houses of the Servile
State we know from history that certain slaves were often the tutors of
the children, and thus had a very important and respectable position,
and there were other slaves who acted as good musicians and architects
and artists. There was always the feeling of a fixed social difference
between slave and free, but this did not necessarily nor perhaps
usually lead to great unhappiness.
This stability and security which slave-owning gave to all society (to
the owned to some extent, and to the owners altogether) also produced
a very valuable effect, which is, the presence of _leisure_. Because
revenue was fairly certain, because this kind of arrangement prevented
violent fluctuation of fortune, competition in excess, and the rest
of it, therefore was there a considerable proportion of people at any
time who had ample opportunity for study, for cultivating good tastes,
for writing and building well, and judging well, and--what is very
important--for conducting the affairs of the State without haste or the
panic and folly of haste.
One alleged _economic_ disadvantage of slave-owning must be looked at
narrowly before we leave this description of the Servile State.
One often hears it said that slave labour is less productive than
free labour, that is, labour working at a wage under Capitalism.
People sometimes point to modern examples of this contrast, saying
that places like the Southern States of America, where slave labour
was used a lifetime ago, were less productive than the Northern
States, where labour was free. But though this is true of particular
moments in history, it is not generally true. Free labour working at
a wage under the first institution of capitalism--when, for instance,
a body of capitalists are beginning to develop a new country with
hired free men to work for them--will be full of energy and highly
productive. But when what is called “free labour”--that is, men
without property working by contract for a wage--gets into routine
and habit, it is doubtful whether it is more productive than slave
labour. It is accompanied by a great deal of ill-will. There is
perpetual interruption by strikes, and lock-outs,[4] and the process of
production cannot be as minutely and absolutely directed by the small
and leisured class as can slave labour. _There is no reason why a free
man working for another’s profit should do his best._ On the contrary,
he has every reason to work as little as possible, while a slave can be
compelled to work hard.
But whether slave labour be more or less productive is not so important
as the two points mentioned above, of advantage and disadvantage. The
_disadvantages_, as we have seen, are (1) that it offends our human
love of honour and independence, degrading the mass of men, and (2)
that it is so terribly liable to abuse in the hands of cruel or stupid
owners, or in conditions where great gangs of slaves grow up under
one owner who can know nothing about them personally and is therefore
indifferent to their fate. The _advantages_ are security and stability,
running as a note throughout society and showing themselves especially
in the leisure of the owning classes, with all the good fruits of
leisure in taste, literary and artistic. It was a society based on
slavery which produced what is perhaps the best fruit of leisure, and
that is the profound and fruitful thinking out of the great human
problems. All the great philosophy and art of the ancients was worked
out by the free owners in the slave-owning states, and so was the best
literature ever made.
THE CAPITALIST STATE
The Capitalist State is that one in which though all men are free (that
is, though no one is compelled to work for another by law, nor anyone
compelled to support another), yet a few owners of the land and capital
have working for them the great mass of the people who own little or
nothing and receive a _wage_ to keep them alive: that is, a part only
of the wealth they produce, the rest going as rent and profit to the
owners.
The Capitalist State is a recent phenomenon compared with the great
length of known recorded history. It is a modern phenomenon produced by
our white race alone, by no means covering the whole of that race, nor
the most of it, but of great interest to us in England because we alone
are, of all nations, an almost purely capitalist society.
Here again we can tabulate the advantages and disadvantages.
The chief moral advantage of Capitalism as compared with the
Slave-owning State is that _every man, however poor, feels himself to
be free and to that extent saves his honour_. He may be compelled by
poverty to suffer a very hard bargain; he may see himself producing
wealth for other men, of which wealth he is only allowed to keep a
portion for himself. To that extent he is “exploited,” as the phrase
goes. He feels himself the victim of a certain injustice. He remains
poor in spite of all his labour, and the man for whom he works grows
rich. But, after all, it is a contract which the free workman has made,
and he has made it as a citizen. If those who own nothing, or next to
nothing, in a capitalist state (this great majority is technically
called in economic language “the _proletariat_”) organise, they can
bargain, as our great Trade Unions do, with the few owners of their
means of livelihood and of production, and be fairly certain, for some
little time ahead, of a reasonable livelihood.
Another advantage of Capitalism, purely economic, is the _effectiveness
of human energy_ under this system, at least, _in the first part of its
development_. We spoke of this in the last section.
But the disadvantages are very grave indeed.
Under Capitalism the capitalist himself acts competitively and for a
profit. He does not, like the slave-owner, direct a regular, simple
machine which works evenly year in and year out. He is perpetually
struggling to rise; or suffering, through the rise of others, a fall
of fortune. He is always on the look-out to buy labour as cheaply as
he can and then to sell the product as dearly as he can. There is thus
a perpetual gamble going on, the owners of Capital rapidly growing
rich and poor by turns and a general insecurity gradually poisoning
all the owning part of society. A far worse insecurity affects the
propertyless majority. The Proletariat--that is, the mass of the
State--lives perpetually under the fear of falling into unemployment
and starvation. The lash urging the workman to his fullest effort is
this dread of misery. At first that lash urges men to intense effort,
but later it destroys their energy. Capitalism was marked by nothing
more striking when it first arose than by the immense expansion of
wealth and population which followed it. In every district which fell
under the capitalist system this expansion of total wealth and of total
population could be observed; and England, which has become completely
capitalist, had in the hey-day of its Capitalism--up to the present
generation--a more rapid rate of expansion in wealth and population
than any other ancient people. But already the tide has turned, and the
inhumanity of such a life is beginning to breed everywhere an ill-ease
and revolt which threaten our civilisation.
The disadvantages of Capitalism are, in the long run, so great that
now, after not more than a lifetime of complete Capitalism, and that
in only one State--the English State--nearly everybody is profoundly
discontented with it and many people are in violent rebellion against
it. This grinding and increasing insecurity which attaches to the
Capitalist system is killing it. No one is safe for the morrow.
Perpetual competition, increasing with every increase of energy, has
led to a chaos in human society such as there never was before. The
mass of the people, not being slaves, cannot be certain that they will
be kept alive. They live in a state of perpetual anxiety as to whether
their employment will continue; while among the owners themselves the
same anxiety exists in another form. The competition among them gets
more and more severe. The number of owners gets less, and even the
richest of them is more insecure than were the moderately rich of a
generation ago. All society is like a boiling pot, with individuals
suddenly coming into great wealth from below and then dropping out
again; the whole State suffers from an increasing absence of leisure
and an increasing turmoil.
There is, then, this very grave disadvantage of insecurity everywhere,
and particularly for the mass of the people, who live under permanent
conditions of insecurity; nearly all the wage-earners have had
experience at some time, longer or shorter, of insufficiency through
unemployment. Capitalism leaves free men under a sense of acute
grievance (which they would _not_ feel if they were slaves, accustomed
to a regular and fixed status in society), and, what is worse,
Capitalism _in its later stages_ need not provide for the livelihood of
the mass of citizens, and, in effect, _does not_ so provide.
The magnitude of these evils is obvious. A man who is a free man, a
citizen, able in theory to take part in the life of the State, equal
with the richest man before the law, yet finds himself living on a
precarious amount of necessaries of life doled out as wages week
after week; he sees his labour exploited by others and suffers from a
sense of injustice and oppression. The wealth of the small, owning,
class does not seem a natural adjunct to its social position, as it
does in the slave-owning state; for there is no tradition behind that
class; it has no “status,” that is, no general respect paid to it as
something naturally--or, at any rate, traditionally--superior to the
rest of men. Many a modern millionaire capitalist, exploiting the
labour of thousands of his fellows, is of a lower culture than most of
his labourers; and, what is more, he may in a few years have lost all
his economic position and have been succeeded by another, even baser
than himself. How can the masses feel respect for such a man in such a
position of chance advantage?
It is inevitable that a moral evil of this sort should make the whole
State unstable. You cannot make of great differences in wealth between
citizens a stable state of affairs, save by breeding respect for
the owners of great wealth. But the more the turmoil of Capitalism
increases the less respect these owners of great wealth either deserve
or obtain: the less do they form a class, and the less do they preserve
traditions of any kind. And yet it is under these very conditions of
Capitalism that there is a greater disparity of wealth than ever the
world knew before! It is clear that society in such a condition must be
as unstable as an explosive.
So much for the first great disadvantage of Capitalism, chaos. But
the second main disadvantage--the fact that Capitalism in its later
stages ceases to guarantee the livelihood of the people--is a little
less easy to understand. Indeed, most people who discuss Capitalism,
even when they strongly oppose it, seem unable to grasp this second
disadvantage--so let us examine it closely.
I have said that Capitalism, in its later stages, _does not provide for
the maintenance of the mass of the people_.
To see how true this is, consider an extreme case.
Supposing one man were to own all the means of production, and
supposing he were to have in his possession one machine which could
produce in an indefinite amount all that human beings need in order to
live. Then there would be no economic reason why this one man should
provide wealth for anyone except himself and his family. He might turn
out enough things to support a few others whom he wanted for private
servants or to amuse him, but there would be no reason why he should
support the masses around him.
Now it is true that we have not yet come, under Capitalism, to so
extreme a case. But the moral applies, though modified, to Capitalism
in its last stages, when very few men control the means of production,
when machinery has become very efficient, and when the great mass
of people are dependent upon employment by the capitalist for their
existence.
Consider that it is of the essence of Capitalism to keep wages down,
that is, to buy labour cheap. Therefore, the labourer who actually
produces, say, boots cannot afford to buy a sufficient amount of
the boots which he himself has made. The capitalist controlling the
boot-making machinery, when he has provided himself with a dozen pair
of boots, and the working classes of the community with such boots as
their wages permit them to buy, must either try to sell the extra boots
abroad (and that outlet can’t last long) or stop making them. He has
restricted the home market by the necessity of cheap labour, and you
have the absurd position of men making more goods than they need, and
yet having less of those goods available for themselves than they need:
the labourer producing, or able to produce, every year enough clothing
for ten years, and yet not being able to afford sufficient for one: the
labourer producing or able to produce ten good overcoats, yet not able
to buy one.
So under Capitalism in its last stages you have the abnormal position
of millions of men ready to make the necessaries of life, of machinery
ready to produce those necessaries, of raw material standing ready to
be worked up by the machinery if only labourers could be put on, and
yet all the machinery standing idle, the wealth not being produced,
and the mass who could produce it going hungry and ill-shod and badly
clothed. And the more Capitalism develops the more that state of things
will develop with it.
Now this gradual lessening of purchasing power on the part of the
working masses under Capitalism is _the destruction of the home
market_. Low wages make great masses of English bootmakers unable
to buy all the boots they would. Therefore the capitalist who owns
the boot-making machinery must try to sell his surplus abroad. But
the foreign countries, as they grow capitalist, suffer from the same
trouble: property being badly distributed and the wage-earners kept
as low as possible, their power to buy foreign goods also diminishes.
Thus you have _gradual destruction of the foreign market_. You get in
the long run the full working of what we will call the “_Capitalist
Paradox_,” which is that Capitalism is a way of producing wealth which,
in the long run, prevents people from obtaining the wealth produced and
prevents the owner of the wealth from finding a market.
There is no doubt that, on the balance, the disadvantages of Capitalism
have proved, even after its short trial, overwhelmingly greater than
the advantages.
Capitalism arose in small beginnings rather more than 250 years ago. It
grew strong and covered the greater part of the community (in England,
at least) about 100 years ago. It came to its highest development in
our own time; and it is already doomed. People cannot bear it any
longer. Future historians looking back upon our time will be astonished
at the immense productivity of Capitalism, the enormous addition to
wealth which it made, and to population, in its early phases; but
perhaps they will be still more astonished at the pace at which it
ran down at its end. Urged by the extreme human suffering, moral and
material, which capitalism now produces, remedies have been proposed,
the chief of which is generally called Socialism, or, in its fully
developed form, Communism.
But before we talk of this supposed remedy, which has never been put
into practice (it is an imaginary state of things) we must describe the
third form of state--the Distributive State.
THE DISTRIBUTIVE STATE
A state of society in which the families composing it are, in a
determining number, owners of the land and the means of production
as well as themselves the human agents of production (that is, the
people who by their human energy produce wealth with those means of
production), is probably the oldest, and certainly the most commonly
found of all states of society. It is a state of society which you
get all through the East, all through Asia, and in all the primitive
states we know. It is the state to which men try to return, as a rule,
after they have blundered into any other, though the first state we
described--the Servile State--runs it very close as a thing suitable
to human nature; for we know that the Servile State did also last for
centuries quite normally and stably in the Pagan past.
The reason men commonly adopt the Distributive form of society, and
tend to return to it if they can, is that the advantages it presents
seem greater in most men’s eyes than its disadvantages.
The advantages are these:--
It gives freedom: that is, the exercise of one’s will. A family
possessed of the means of production--the simplest form of which is
the possession of land and of the implements and capital for working
the land--cannot be controlled by others. Of course, various producers
specialise, and through exchange one with the other they become more or
less interdependent, but still, each one can live “on his own”: each
one can stand out, if necessary, from pressure exercised against him by
another. He can say: “If you will not take my surplus as against your
surplus I shall be the poorer; but at least I can live.”
Societies of this kind are not only free, but also, what goes with
freedom, elastic--that is, they mould themselves easily to changed
conditions. The individual, or the family, controlling his or its own
means of production, can choose what he will do best, and can exercise
his faculties, if he has sufficient knowledge, to the best advantage.
This arrangement also gives security, though not as much security
as the Servile State. Men in this position of ownership are not in
dread of the immediate future. They can carry on. They may, if they
choose, make a reserve of their produce to carry them over moments
of difficulty. For instance, they will probably have each a reserve
of food to carry them over a bad harvest or some natural disaster.
Further, it is found in practice that societies of this kind continue
for centuries without much change. They go on for generations with a
property well divided among them and everybody free, so far as economic
situation is concerned. No such society has ever been destroyed except
by some great shock; and so long as every shock can be warded off,
this system of having the land and the means of production controlled
by the mass of the citizens as private owners is enduring. There are
districts of Europe to-day where the system has continued from beyond
the memory of man. Such a little state as Andorra is an example,
and many of the Swiss valleys. Further, when the system has been
laboriously reconstructed, when the mass of families who used to be
dispossessed have been again put into possession of land and the means
of production, we find that the state arrived at is stable.
The best example of that sort of reconstruction to-day is to be found
in Denmark, but you have it also in a less marked fashion in most
parts of France and in most of the Valley of the Rhine, in Belgium and
Holland, in Norway, and in many other places. Wherever it has been
settled it has taken root firmly.
The disadvantages of such a system are, first, that though in practice
it is found usually stable, yet in theory it is not necessarily stable,
and in practice also there are some communities the social character of
which is such that the system cannot be established permanently.
It is obvious that, with land and the means of production well
distributed among the various families, a few may by luck or special
perseverance and cunning, tend to buy up the land and implements of
their less fortunate neighbours, and nothing will prevent this but a
set of laws backed up by strong public opinion. In other words, people
must desire this state of society, and desire it strongly in order to
maintain it; and if the desire for ownership and freedom is weak this
distributive arrangement will not last.
In the absence of special laws, and a public opinion to back them,
the idler or the least competent or least lucky of the owners will
gradually lose their ownership to the more industrious or the more
cunning or more fortunate.
Another disadvantage which has often been pointed out is that a state
of society of this sort, though usually stable and enduring, falls
into a routine (that is, into a traditional way of doing things),
which it is very difficult to change. The small owner will not have
the same opportunities for travel and for wide experience as the rich
man has, and he will tend to go on as his fathers did, and therefore
when some new invention arises outside his society he will be slow to
adopt it. In this way his society becomes less able to defend itself
from predatory neighbours and goes under in war. For a society of this
kind is unfitted to the discovery of new things. Contented men feel no
special spur to discover or to act on such discovery. That is why we
find societies in which land and all the other means of production are
well distributed among the greater part of the families of the State
becoming too conservative--that is, unwilling to change even for their
own advantage.
This, of course, is not universally true. For instance: no society in
Europe has made more progress in agriculture than the Danish society
of small owners. But, take the world all over, this kind of state is
usually backward, that is, slow to take up improvements in production
and to avail itself of new discoveries in physical science.
There is also another disadvantage which the Distributive State has
when it is in competition with a Capitalist State, or even a Servile
State, and that is _the difficulty of getting a very large number of
small owners to put their money together for any great purpose_. The
small owner will probably have less opportunities for instruction and
judgment than the few directing rich men of a Capitalist or Servile
State, and even if he is, on the average, as well educated as these
rich men in neighbouring states, it will be more difficult to get a
great number of small owners to act together than to persuade a few
large owners to act together. Therefore highly Capitalist States, such
as England, will be found more enterprising than less Capitalist States
in their investments and commerce. They will open up new countries
more rapidly, and will get possession of the best markets.
Lastly, this disadvantage attaches to the Distributive State--that it
is not so easy in it to collect great funds for war or for national
defence, or for any other purpose, as it is in a Capitalist or Servile
State. You cannot tax a Distributive State as highly as you can tax a
Capitalist State. The reason is obvious enough. A family with, say,
£400 a year finds it terribly difficult--almost impossible--to pay out
£100 a year in taxation. They live on a certain modest scale to which
all their lives are fitted, and which does not leave very much margin
for taxation. If you have a million such families with a total income
of £400 millions you may collect from them, say, a tenth of their
wealth in a year--£40 millions--but you will hardly be able to collect
a quarter--£100 millions.
But another society with exactly the same amount of total wealth, £400
millions a year, only divided into very rich and very poor, a society
in which there are, say, 1,000 very rich families with £300,000 a year
each, and a million families with rather less than £100 a year each,
is in quite a different situation. You need not tax at all the million
people with a hundred a year each, but the rich people, who between
them have £300,000,000 a year, can easily be taxed a quarter of their
whole wealth; for a rich man always has a much larger margin, the loss
of which he does not really feel.
By a very curious paradox, which it would take much too long to go
into in detail, but which it is amusing to notice, this power of
taxing a very highly capitalist community is one of the things which
is beginning to handicap our Capitalist societies to-day against the
Distributive societies. It used to be all the other way, and it seemed
common sense that countries where you could levy large sums for State
purposes of war or peace would win against countries where you could
not levy such sums for public purposes. But the fact that you can tax
so very highly a society of a few rich and many poor has been shown in
the last few years to have most unexpected results. The very rich men
pay all right; but the drain on the total resources of the wealth of
the State weakens it.
The money raised by taxation is spent on State servants--many of them
inefficient and idle.
Since it is so easy to raise large sums, there is a temptation to
indulge in all sorts of expensive State schemes, many of which come to
nothing. And this power of easy taxation, which was a strength, becomes
a weakness.
No one suspected this until taxation rose to its present height, but
now it is clearly apparent; and we in England might perhaps be in
a better way later on if there had been as much resistance to high
taxation here as there has been in countries where property is better
distributed.
SOCIALISM
It remains to deal with a certain remedy which some people have
imagined would get rid of all the disadvantages of Capitalism once and
for all. This remedy is called _Socialism_, and Socialism, as we shall
see in a moment, must mean ultimately _Communism_.
No one has ever succeeded in putting this remedy for the evils of
Capitalism into practice, and (though the matter is still very much
disputed) it looks more and more as though no one would ever be able to
put it into practice.
We have seen what the evils of Capitalism were and how they have
exasperated nearly everyone who has become subject to a capitalist
state of society. There is the increasing insecurity which everybody
feels--all the Proletariat and many of the Capitalists as well--whilst
there is the necessary tendency of Capitalism to leave a larger and
larger proportion of people unproductive, not making the wealth which
is necessary for their support, and therefore either kept in idleness
by Doles out of the wealth which is still produced (a process which
cannot go on for ever) or starving. Pretty well everyone wants to get
rid of these evils and to get out of the Capitalist system, and this
idea of Socialism which we are going to examine seemed, when it was
first put forward, an easy and obvious shortcut out of the Capitalist
muddle. When we have looked into it, we shall see how and why Socialism
does not, in practice, turn out to be a shortcut at all, but a blind
alley.
* * * * *
Ever since men began to live in societies and to leave records, you
will find the poorer people, when their poverty became intolerable,
clamouring for a division of the wealth which the more fortunate enjoy.
That is the main, obvious remedy to inequality of wealth; to divide it
up again. But such a scheme has nothing to do with Socialism, and must
not be mistaken for Socialism.
The Socialist theory was invented, or at any rate was first put
clearly, by a man of genius, Louis Blanc, who was Scotch on his
father’s side and French on his mother’s. He lived rather less than a
hundred years ago and the scheme which he and those around him started
was this:--
The Officers of the State were to own all the Means of
Production--machinery and land and stores of food, etc.--and they alone
should be allowed to own it. Individuals and families and corporations
might consume that portion of produced wealth allotted them by the
State after it had been produced, _but they might not use it for making
future wealth_. ANY WEALTH USED FOR THE MAKING OF FUTURE WEALTH, THAT
IS, CAPITAL IN ANY FORM, WAS TO BE HANDED OVER TO THE OFFICERS OF THE
STATE; AND ALL LAND AND NATURAL FORCES WERE TO BE OWNED FOR EVER BY THE
STATE. That scheme is Socialism, and from that principle all Socialist
ideas flow.
In this way, it was claimed, there would be no division of society
into Capitalists and Proletarians, no chaos of competition with its
alternating riches and ruin; insecurity would be done away with, and
insufficiency as well. Everyone in the country would be a worker, the
State itself would be the Universal Capitalist. So there would be no
struggle of capitalists going up and down one against the other, and no
unemployment or lack of necessaries for anyone.
Among the energetic and keen set of men who surrounded Blanc in Paris
was a certain Mordecai, who wrote under the name his father had
assumed, that of “Marx.” He wrote (in German) a very long and detailed
book describing the whole scheme, as well as describing the evils of
Capitalism, and showing how this scheme would remedy those evils. His
book was pushed forward by the people who were converted to the idea,
and that is why the theory of Socialism is now often called “Marxism.”
For instance: the coal-mines and all the machinery of the coal-mines
and the houses in which the miners live and the stores of food and
the clothing, etc., which keep the miners alive while the coal is
being mined, that is during the process of production--all these,
which now belong to capitalists who make a profit out of the miners’
labour, would then belong to the State, which would allot the coal
produced to all who needed it. So it would be with all farms, farming
implements, and cattle and horses and the stores of food and clothing
and houses necessary to the labourers on the land during the process of
production. So it would be with all stone-quarrying and timber-felling,
and carpentry and brick-making for the continued production of the
houses necessary to the producers during production. So it would be
with all corresponding material for making cloth for clothing. So it
would be with everything which was made in the whole country. The
officers of the State would share out the wealth produced, so that it
would be consumed by all the citizens, and there would be an end to the
exploitation of one man by another and to the uncertainty of living.
Communism is simply that form of Socialism in which all that is thus
shared out by the State would be shared equally, the State giving every
family an equal share in proportion to the numbers of people which had
to be supported in the family, from one upwards.
The reason I have called Communism the logical and only possible
ultimate form of Socialism is that there could be under Socialism no
reason for any other form of distribution.
Some time ago certain Socialists used to try to get out of this
necessity for Communism, so as not to frighten rich people with their
proposals for reform. They would say to a man who was making, say,
£5,000 a year because he owned a lot of capital and land and had rents
and profits coming to him from the work of his labourers: “You will
have just as much under Socialism, for we recognise what a superior
kind of person you are, and when the State shares out its wealth among
its citizens it will give you as much as you have now, leaving the
same difference between rich and poor, only seeing to it that the poor
always at least have enough to live on. Where we give one ticket to the
labourer to claim out of the common stores what he wants for a week we
will give you fifty tickets, so that you will get fifty times as much
if you like.” But of course this was nonsense, and was soon discovered
to be nonsense. With everybody working for the State under orders all
would naturally claim equality, and there would be no way of preventing
their getting an equal share except force. In justice, supposing a
Socialist state to arise, there could be only the Communist form of it.
This scheme has never been put into practice, and when we look closely
at it we shall discover, I think, why it never will be put into
practice.
The reason it cannot be put into practice is this: Although we use the
words “the State” this mere idea means in practice real men who act
as officials to represent the State. Actual men with their varying
characters, good and bad, lazy and industrious, just and unjust, have
got to undertake the enormous business _first_ of running production
in the interest of all, _next_ of distributing the resultant wealth
equally to all.
Now there are two qualities in man which make action of this sort
break down. The first is that men love independence--they like to feel
themselves their own masters. They like therefore to _own_, so that
they may do what they like with material things. The next is that men
like to get as much as possible of good things. Both these feelings
are universally true of the human race. You will find exceptional
people, of course, who are just as contented with a little as with
a great deal, and you will find exceptional people who do not care
about independence or about owning, and who are quite willing to be
run by other people, or to give up all possession for the sake of some
special way of living: that is, there is a comparatively small number
of men and women who, in order to live free from responsibility, or in
order to devote themselves to religion or to some form of study and
contemplation, will give up all property and have the material side of
their lives administered for them. But men and women in general will
both want to get all they can of good things with the least possible
exertion in the getting of them, and they will also desire freedom to
exercise their own wills and deal with material objects as they choose.
Now the Socialist scheme requires both these very strong emotions,
common to all mankind, to be suppressed. The people who run the
State--that is the politicians--are to be absolutely just (although
there is no one to force them to be just), they are to forget all
personal wishes and to think of nothing but the good of those whose
labour they direct and among whom they share out the wealth that is
produced. We know by experience that politicians are not angels of this
sort. It is absurd to imagine that men coveting public office (and
living the life of intrigue necessary to get it) would suddenly turn
into unselfish and devoted beings of this ideal kind. You cannot give
this enormous power to men without their abusing it.
The second force making against the establishment of Socialism is still
stronger. You will never get the run of men and women contented to
live their whole lives entirely under orders. In exceptional moments a
large part of individual freedom will be given up to the necessity of
the State--as during the Great War; for if the State did not survive
the individual’s life and that of his children would not be worth
living. The individual in abnormal crises goes through a great deal
of suffering for a moment in order that he and his should have less
pain in the long run. But even in such crises a large part of liberty
remains to him. Under Socialism he would have none. He would have
to do what he was told by his task-masters, much more than even the
poorest labourers now have to do what they are told by task-masters.
And there would also be this difference: that _everyone_ would be in
that situation and there would be no way out. Not a part of life, nor
so many hours a day, but the whole of life, would be subject to orders
given by others. This, humanity would certainly find intolerable.
That is why, I think, Socialism has never been put into practice
and never can be put into practice. There have been attempts at it,
but even when they are sincere and not the mere product of alien
despotism they break down. As in Russia to-day, where, whether the Jew
adventurers who seized power were sincere or mere tyrants, they have,
in spite of their attempt at seizing all the soil and keeping the
peasants dependent on them, been compelled at last to let nearly all
the nation live as owners tilling their own land.
It is no reply to this to say that the State always has owned, and
actually can and does own, _some_ part of the means of Production (such
as the Post Office and certain forests and lands here in England, and,
abroad, most mountain land, all mines and much else) and direct them
with success. The point of Socialism--the one condition necessary
to its existence--is that the State should own _all_ the means of
Production that really count. Between the normal exercise of a partial
function and the abnormal exercise of a universal function is all
the difference between _plus_ and _minus_. A partial State ownership
working in a society the determining character of which is private
ownership is an utterly different thing, even an _opposite_ thing
to general State ownership determining the character of Society and
allowing only exceptional private ownership. Socialism can only be
(_a_) good (_b_) possible when men desire, and are at ease in, the
latter kind of state; that is, desire and are at ease in complete
forgetfulness of self coupled with justice as men ruling, and complete
surrender of personal honour and freedom and appetite as men ruled.
INTERNATIONAL EXCHANGE
International exchange is not really different from the domestic
exchanges which go on within a nation. The foreigner who has some
product of his own to exchange against a product of ours deals as
a private man with other private men, and if you could see all the
exchanges of the world going on you would not distinguish between the
character of an exchange, say, between Devonshire and London and one
between London and the Argentine. The Devonshire man grows wheat, which
he sells perhaps in a London market, and buys manufactured products
which a merchant in London provides. The farmer in the Argentine
does much the same thing, sells wheat and receives in exchange what
manufactures he needs, precisely as though he were living in Devonshire
instead of abroad. He does not trade with “England,” but with a
particular merchant or company in England.
But there are certain points about international trade which one must
get clear unless one is to make mistakes in the political problems
arising out of it.
In the first place, international trade is always subject to a certain
interference which domestic trade does not suffer. All countries have
a _tariff_, that is a set of taxes upon a great number of the articles
coming in from abroad. Even those countries which, as England did until
quite lately, believe in leaving their citizens on equal terms with
foreign competitors and have gone in for complete free trade, examine
all goods at the port of entry or at special points on the frontier,
both in order to raise revenue and to keep out undesirable goods, such
as certain drugs; nor does any country allow _all_ things to come in
unexamined, lest forbidden things should come in unobserved. Moreover,
it is important to measure the nature and volume of a nation’s foreign
trade, and this cannot be done without stopping things at the ports or
frontiers and examining them.
In general, international trade differs from domestic trade first of
all in this--that it always has to pass through an examination at the
frontiers through which it enters. It also differs from domestic trade
in that it has to use another currency. Even when all countries have
a gold currency, there are certain small fluctuations in the exchange
values of the different currencies. For instance: before the war the
English pound was worth in gold about 25¼ French francs, but you
hardly ever had this “Parity” (as it is called) exact. The franc would
fluctuate slightly against the sovereign--sometimes above, sometimes
below “Parity” by a penny, or even sometimes more than a penny, one
way or the other. With many countries whose currency was not in a good
condition the fluctuations would be more violent, and of course since
the war, now that so many nations no longer have a gold currency at
all, but a fictitious paper currency, the value of one currency against
another fluctuates wildly. Within a year you could get only 50 francs
for an English sovereign and then a little later as much as 80 francs.
Within one country exchanges can be simply conducted by counting
all values in the currency of the country; but international trade,
involving the use of two or more currencies, cannot be so simple.
There is also a third point in international trade which must be
understood, and which proceeds from the very fact that international
exchanges do not essentially differ from the exchanges which take
place within the same country, and that is the fact that exchanges are
not simple contracts between two parties, but follow a whole chain of
contracts, covering a great number of parties.
We saw, in the first part of this book, that exchange even within one
country, was not simple barter but _multiple exchange_.
In domestic exchange a farmer sells his wheat to a broker, but does
not purchase a lorry from the same buyer: he receives money from the
buyer, and with that money buys a lorry, say, a month later. But what
has really happened is a whole chain of exchanges in between the wheat
and the lorry--a miller has bought the wheat from the broker, a baker
the flour from the miller, and so on until towards the end of the chain
a caster has sold castings to a motor maker who has assembled them and
sold the lorry to the farmer.
It is the same with international exchanges; as we saw in the earlier
part of this book. There is an international chain of exchanges.
The total number of units engaged in this international chain may be
as large as you like; there may be ten or fifty or a hundred links
before it is complete. But the universal principle holds that imports
and exports usually balance. Whatever you import from abroad into a
country you must, as a general rule, pay for by exporting an equivalent
set of values created within your own country. But there are certain
exceptions to this rule which are sometimes lost sight of.
In the first place, the imports and the exports need not all be what
are called “visible” imports and exports. Many of them may be, and
some always are, “invisible.” The most obvious example of these are
“freights,” that is, sums paid for the carriage of goods between one
country and another. Thus, in the old days before the war you would
find England importing more than she exported, and one of the principal
reasons for the difference was that the imports were mostly brought
in English ships. Thus if a man in the Argentine were sending 50 tons
of wheat to England worth £500, England, after a long chain of trade
with many countries, including the Argentine, would be exporting
values against this £500 worth of wheat, which would be worth, say,
not £500, but only £450. The difference of £50 was made up by the cost
of bringing the wheat from the Argentine to England _in an English
ship_. In other words, £50 worth of the total £500 worth of wheat stood
for the sum which the man in the Argentine had to pay to the English
sailors to bring his wheat over the sea.
Further, a wealthy or strong country very often levied tribute upon a
poorer or weaker one, and this tribute might take several forms. There
was the tribute of _interest upon loans_. If English bankers had lent
to people in Egypt a million pounds with interest at forty thousand
pounds a year Egyptian production would have to export to England,
either directly or roundabout through the chain of trade, forty
thousand pounds’ worth of goods, against which England had not to send
out anything.
Another form of tribute--though a small one--is that paid in pensions.
A man having worked all his life in the Civil Service in India (for
instance) would retire upon a yearly pension of a thousand pounds a
year; but this pension was levied upon the taxpayers of India, and if
the man came to live in England and spent his pension there--as nearly
all of them did--it meant that India had to export a thousand pounds’
worth of goods every year to England, against which England sent
nothing back.
In the same way the shareholder in some works or firms situated in a
foreign country would, if he lived in England, cause an import to come
in equivalent to his dividends or profits, and against that England
would send out nothing.
But the point to remember is, that _the mere volume of trade_ (that
is, _the total of things imported and of things exported_) _is no
indication of the wealth or prosperity of the country importing and
exporting_.
A country may be very wealthy, although it is doing hardly any
international trade, because it may be producing within its own
boundaries a great deal of wealth of a kind sufficient to nearly all,
or all, its needs. Again, of international trade (and it is exceedingly
important to remember this, because most people go wrong on it)
_nothing increases the wealth of a country except the imports_.
It ought to be quite clear, especially in the case of an island like
Great Britain, that it _loses_ what it sends out and _gains_ what
it brings in. Yet people get muddled about even this very simple
proposition, because the individual trader thinks of his transactions
as an individual sale. He does not consider the nature of trade as a
whole. The individual trader, for instance, who makes locomotives and
exports them, gets paid, let us say, £10,000 for each locomotive. In
point of fact this means that in the long run he or someone else in
England will exercise £10,000 worth of demand for foreign goods. But
the individual trader does not usually think of that; he thinks only of
his own transactions, and he would be very much surprised if he were
told that his sending the locomotive abroad was, _regarded in itself,
and apart from the import which it assumed_, a loss to the country of
£10,000 worth of wealth.
You often hear people in political arguments talking as though the
falling off of exports from a country were a bad thing and the increase
of imports also a bad thing. It cannot be so in the long run. The
excess of imports over exports is the national profit on the whole of
its foreign transactions, and any country which is exporting regularly
more than it imports is paying tribute to foreigners abroad, while
every country which regularly imports more than it exports is receiving
tribute.
Of course, if you consider only a short period of time, the falling off
of exports may be a bad sign; for it may mean that the corresponding
imports will not be gathered. If in this country we saw our exports
regularly falling year by year we should be right to take alarm, for
this would almost certainly mean that a corresponding falling off in
imports would sooner or later take place also, and that therefore our
total wealth would be diminished. But considered over a sufficient
space of time, it is obvious that the excess of imports over exports
is a gain and that the excess of exports over imports is a loss.
One last thing to remember about international trade is that the very
different importance of foreign trade to different countries makes the
foreign politics of nations differ equally. A country which can supply
itself with all it needs is free to risk its foreign trade for some
other issue. A country importing its necessities cannot risk the loss
of such trade, for it is a matter of life and death. The United States
is in the first position. It has within its own boundaries not only all
the minerals it needs, but also all the petrol and all the raw material
for making cloth, and all the leather for boots, and all the rest
of it. But a country like England is in quite a different position.
We only grow half the meat we need and about one-fifth of the corn.
Therefore it is absolutely necessary for us to have a foreign trade.
If all the foreign trade of the United States were to be destroyed
to-morrow, the United States, though somewhat poorer, would still be
very rich and able to carry on without the help of anyone else. But if
our foreign trade were destroyed there would be a terrible famine and
most of us would die.
Nations differ very much in this respect, but of all nations Great
Britain is that which is most vitally interested in maintaining a great
foreign trade, and next after Great Britain Belgium is similarly
interested, for Belgium also needs to import four-fifths of its
bread-stuffs. Almost every country except the United States _must_ have
some foreign trade if it is to live normally. For instance: France,
though largely a self-sufficing country, has no petrol. It has to buy
its petrol abroad and must export goods to pay for that import. Nor has
it quite enough coal for its needs, and, before the war, it had not
nearly enough iron. Italy has no coal, no petrol and no iron to speak
of--not nearly enough for its needs. And so it is with pretty well
every nation in Europe. But of all nations our own and Belgium--our own
particularly--are in the most need of maintaining a large foreign trade.
This affects all our policy, it is the root of both the greatness and
peril of England. It also tends to make English people judge the wealth
of foreigners by the volume of their trade, and that is a great error.
FREE TRADE AND PROTECTION AS POLITICAL ISSUES
In this matter of international trade there rose up, about a hundred
years ago, a great political discussion in England between what was
called _Free Trade_ and what was called _Protection_.
This discussion is still going on and affecting the life of the
country, and it is important to understand the principles of it, for
we have here one of the chief applications of theoretical Political
Economy to actual conditions.
I dealt with this subject briefly in the first part of this book under
“Elementary Principles,” but I return to it here in more detail because
it has given rise, in political application, to the most important
economic discussion in modern England.
The Free Traders were those who said that England would be wealthier,
as a whole, if there were no restriction upon exchange at all, whether
internal or external. A man having something to exchange with his
English neighbour was, of course, free to exchange it without any
interference; but the Free Trader’s particular point was that a man
having something to exchange with a _foreign_ purchaser should be
equally free to exchange it, without any interference at the ports in
the way of export duty taxing the transaction. In the same way he said
that the foreigner should be perfectly free to send here any goods he
had to exchange against ours, and should neither be kept out by laws
nor restricted by special import duties at the ports.
“In this way,” said the Free Traders, “we shall get the maximum of
wealth for the whole country.”
The Protectionists, on the other hand, said: “Here are a lot of people
engaged on a particular form of production in England. Those who have
their capital in it are making profits, those who own the land on which
the capital is invested are getting rents, and the working people are
getting wages. The foreigner, having special advantages for this kind
of production, which make him able to produce this particular thing
more cheaply than we can, brings in that cheaper produce and offers
it for sale to Englishmen. The people to whom it is offered for sale
will, of course, buy the foreign stuff because it is cheaper. The
result will be that the English people who have invested their capital
in producing this particular thing--that is, who have got implements
together and buildings, and the rest, suitable for producing this
thing--will be ruined. It will not be worth their while to go on, for
no one will buy their goods. Their profits will be extinguished, and
their capital will decay to nothing. The rents on the land they occupy
will also disappear, and, what is worst of all, the large population
which live on wages produced by this kind of work will starve or have
to be supported, idle, by other people. Their power of producing wealth
will be lost to England. Therefore, let us tax this cheap foreign
import so that our production at home shall be _protected_. Let us
tax the foreign goods as they come in, so that the cost of producing
abroad, with this tax added, comes to at least as much as the cost of
producing the same stuff at home. In this way it will still be worth
while for our people at home to go on producing this kind of thing. The
Englishman at home will be just as ready to buy his fellow-citizen’s
produce as the foreigner’s, for the price of each will be the same.”
The Protectionist even said: “Let us make this tariff so high that the
foreign goods are sold at a _dis_advantage--that is, let the tax on the
foreign goods be such that, added to the cost of production abroad,
they cannot be sold in England save at a _higher_ price than the
English goods. In this way only the English goods will be bought here
and the home industry will flourish as it did before.”
Such were the two political theories, standing one against the other.
Now let us look into the economic principles underlying these two
opposing parties, and see which of them had the best of the argument.
We have already seen, in the first part of this book, the elementary
economic principle that Exchange is only the last stage in the process
of production.
And we have also had fixed the principle that _freedom of exchange
tends to produce a maximum of wealth within the area to which it
applies_, and that interference with freedom of exchange tends to
reduce the total possible wealth of that area. This is so obvious that
all the great modern nations are careful to let exchange be as free as
possible _within their own boundaries_.
Goods can be freely exchanged without interference all over the United
States and all over Great Britain and all over France, etc., because if
you were to set up tolls and interferences with exchange _within_ the
country the total wealth of the country would necessarily be diminished.
Now the Free Traders extended this principle to foreign trade. They
said: “If the foreigner comes to us with something which he can sell
to us cheaper than we can make it ourselves that is an advantage to
us, and it is short-sighted to interfere with it under the idea that
we are benefiting the existing trade which is threatened by foreign
competition. For it means that we are producing something with
difficulty which we could get with much less work if we turned our
attention to things which we can produce with ease. Or, again, it means
that with the same amount of work devoted to things we make well and
exchange against the foreigner’s goods we shall get much more of the
things which the foreigner can make more easily than we can.”
If we take a concrete example we shall see what the Free Traders’
argument means.
Supposing people in this country had never heard of foreign wine, but
had to make their wine out of their own grapes grown in hot-houses,
and at great expense, the wine coming, let us say, to £1 a gallon.
Meanwhile we are producing easily great quantities of coal because
we have great coal-mines near the surface. We come to hear of people
living in another climate who can grow grapes easily in the open,
who need much less labour and capital to ripen them than we do in
our artificial way in hot-houses, and who can therefore send us wine
at 10s. a gallon. Then we can get for each £1 worth of labour and
capital twice as much wine as we got before. Instead of wasting our
time artificially growing grapes in hot-houses to make our wine, let
the people who used to work in the hot-houses become coal-miners,
so that more coal may be produced and this extra coal exchanged for
foreign wine. A pound’s worth of labour and capital in coal will get
us 2 gallons of wine from the foreigner when the same amount of labour
and capital used in making the wine ourselves would only get us one
gallon. Let the capital that used to keep up the hot-houses be spent in
developing mines, and we shall find as a result that we are as rich as
ever we used to be in coal and richer in wine. Our total wealth will
be increased.
In the particular case of the English dispute about Free Trade and
Protection not wine but a much more important thing was concerned,
namely food; and that was what gave the political discussion its
practical value and made it so violent. It is also because food was in
question that the Free Traders won, and that England was, for a whole
lifetime, up to the Great War, a Free Trade country--that is, a country
allowing all foreign produce to come in and compete on equal terms with
home produce.
This country, at the beginning of the discussion a hundred years ago,
was already producing great quantities of manufactured goods: cloth
and machinery, ships and so on. It also produced on its fields the
wheat and meat and dairy produce with which it fed itself. But as the
population increased the amount of food being produced on the soil of
England, though getting larger in the total, got smaller in proportion
to the rapidly increasing population. Therefore there was a danger of
its getting dearer. The Free Traders said: “Let foreign food come in
free. If it is produced in climates where for the same amount of labour
you can get more wheat and more meat and more dairy produce then, of
course, many of our agricultural people will have to give up working
on the land. But they can take to manufacturing, and the total amount
of food which the English will get for so much labour on their part
will be greater. Where an agricultural labourer working an hour, for
instance, can get a pound’s weight of food, the same man working one
hour in a factory will get, say, by exchange of the manufacture against
foreign food, two pounds of food, if we allow all foreign food to come
in free.”
These Free Trade arguments look, when they are first studied, not
only simple and clear, but unanswerable, and indeed most educated
men--nearly all educated men--in Queen Victoria’s reign, thought they
_were_ unanswerable, and that Protectionists here at home (who were
no longer allowed to put their theories into laws) and Protectionists
abroad who had kept up tariffs against foreign trade, were simply
ignorant and foolish men who did not properly understand the elements
of Economic Science.
To see whether the Free Traders were right or wrong in these ideas, let
us next turn to the arguments with which the Protectionists met them.
These arguments were of two kinds:--
(_a_) There were Protectionists who said: “We cannot follow all these
elaborate abstract discussions about a science called Economics; we are
practical men with plenty of common sense and experience, and all we
know is that if the foreigner comes in free we shall be ruined. He can
sell his wheat at such a price that our farmers will lose on it. Our
labourers will leave the land, the rents paid to our landlords will
vanish. You will thus ruin English wealth altogether.”
(_b_) There was another kind of Protectionist who said: “You Free
Traders take for granted, and depend upon, one capital point, to wit,
_that the labour now employed in a particular form of production, and
the capital employed in it, both of which will be destroyed by Free
Trade, can be used more profitably in some other form of Production_.
But we, the Protectionists, say that, in the particular case in
question, they would _not_ be used more profitably. We say that, in
point of fact, things being as they are, the national character being
what it is, the arrangements of our English society and its traditions
being what we know them to be, the ruined industry will go on getting
worse and worse, artificially supported by relief from the community
outside it, the farmer losing year after year and still hanging on, the
land going back to weeds and marsh, the buildings falling down, and so
forth. _We_ say that, though it may theoretically be possible to use in
other ways the labour and capital thus displaced, in practice you will
destroy more wealth than you will create.”
These two kinds of arguments on the Protectionist side are still to be
heard everywhere to-day.
It ought to be perfectly clear to anyone who thinks about the matter
at all that argument (_a_) was nonsense, for people and capital driven
out of an industry ill suited to our present conditions are not
thereby destroyed. They may very well find employment producing more
total wealth in another. But argument (_b_) was a good argument _if the
statement about the impossibility of changing from one trade to another
were in practice true_. The whole discussion really turned upon the
last point.
Unfortunately for the Protectionists, those who defended their cause
in this country nearly all used argument (_a_), and were very properly
derided as fools by the Free Traders. Argument (_b_) was only used by
a comparatively small number of thoughtful men and they were under
this disadvantage--that they were arguing with regard to a possible or
probable future with no past experience to guide them, and that many
years must pass before it could be discovered whether, in practice,
what they said was true or false; whether in practice the ruin of
English agriculture would diminish the well-being of England as a whole
or not.
Further, the population continued to increase at a great rate, and that
all in the towns and on the coal-fields. Our manufacturing productions
went up and up and up, the total wealth of the country enormously
increased, and these processes hid and made to seem insignificant the
corresponding decay of the fields. We had no need for Protection in any
domestic manufactured goods; we had begun to use coal before anybody
else; we had developed machinery before anybody else. The only thing
which there could be any point in protecting was agriculture, and that
would have meant dearer food for the wage-earners in the towns.
The great consequence was that Free Trade won hands down, and for a
long time all its opponents, however distinguished or reasonable, were
laughed at.
But if we wish to be worthy students of Economic Science we
cannot dismiss the quarrel so simply. There is such a thing as a
strong _economic_ argument in favour of Protection in particular
circumstances. The practical proof of this truth is the immense
increase in wealth which took place in the German Empire during the
thirty years before the Great War, which increase exactly corresponded
with a highly protective tariff. The same thing happened in the United
States at the same time. But the theoretical argument in favour
of Protection is much better, because the increase of wealth in
Germany and the United States under Protection might be due to other
causes, whilst it can be shown by _reason_ that Protection itself, in
particular cases, increases the total national wealth. With the proof
of this I will end the present chapter.
We have seen that the following formula is true:--_Freedom of exchange
tends to increase the total amount of wealth of all that area which it
covers._
But what gives the argument for Protection, in special cases, its value
is, as we saw on page 64, a second Formula equally true. Though freedom
of exchange tends to increase the total wealth of an area over which
it extends, _yet it does not tend to increase the wealth of every part
of that area_. Therefore, if a part of the area over which freedom of
exchange extends finds itself impoverished by the process, it may be
enriched by interfering with freedom of exchange over the boundaries of
its own special part.
Therein lies the whole argument for Protection in particular cases.
Let us take for example three islands, two close together and one far
away and prove the case by figures.
[Illustration: FIG. 1.]
[Illustration: FIG. 2.]
We will number them A, B, C. Island A is full of iron ore. Island B is
full of coal. Island C is also full of iron ore, like No. A, but it is
a long way off.
Iron ore naturally comes to the coal area to be smelted, because, being
heavier, it can be carried in smaller bulk. It is cheaper to bring iron
ore to coal than coal to iron ore. If all three islands belong to the
same realm what will happen is quite clear. Island B will import iron
ore from Island A and will smelt it and turn it into pig-iron and steel
and iron manufactures of all kinds, while Island C, a long way off,
will remain unused. We will suppose the climate of No. C to be bleak,
the soil bad, and the people there, since they cannot sell their iron
ore on account of the distance at which they stand, make a very poor
livelihood out of grazing a few cattle.
Let us suppose that the amount of iron ore imported every year by No. B
from No. A is worth £10 million. This of course has to be paid for. In
other words, Island No. B has got to export manufactured goods in iron
and steel back to Island No. A as payment for the iron ore which No. B
imports for smelting. It also has to pay for the freight on the iron
ore from No. A, that is, for the cost of bringing it over the sea to
No. B. Let us suppose this cost to be one million. The total value of
the iron goods produced on No. B, after being smelted with the coal of
No. B, is, let us say, £30 million. Of this, £11 million goes back for
the cost of carrying the ore from Island No. A and for its purchase.
Meanwhile we may neglect economic values of Island No. C, because the
few wretched inhabitants and their handful of cattle hardly count.
Here, then, we have a wealth of £30,000,000 in manufactured iron goods,
of which £10,000,000 goes to Island No. A and £19,000,000 to Island
No. B, and £1 million to whoever carries the ore in ships. If you were
estimating the wealth of the whole realm made up of the three islands,
A, B and C, you would say: “The wealth of these people consists in
manufactured iron and steel goods. It is equivalent to £30,000,000 a
year, of which some £10,000,000 is revenue to Island A and £19,000,000
is revenue to Island B and £1 million earned in freights. The wealth of
Island C is negligible.” Well and good.
Now supposing the political conditions to change. Islands B and C
belong to one realm in future but Island A has become a foreigner. The
realm to which Islands B and C belong turns Protectionist and sets up a
barrier in the shape of a tariff against iron ore coming from abroad.
We have seen that the cost of carrying iron ore from No. A to No. B
was £1,000,000. No. C being much farther away from No. B, let us say
that the cost of carrying is £5,000,000, but it is carried by subjects
of the realm. The tariff put up by the realm to which Island B and C
belong is what is called “prohibitive”--that is, it is so high that it
keeps the iron ore of No. A out altogether, and the smelters on Island
No. B are bound to get their iron ore from that distant Island C. Let
us see what happens.
Island No. B has now got to pay a freight, that is, cost of bringing
the iron ore, five times as much as it used to be. Instead of paying
£11,000,000 for its ore (£10,000,000 at the mine and £1,000,000 for
carriage) it is now paying £15,000,000 (£10,000,000 at the mine and
£5,000,000 for carriage). It still makes £30,000,000 worth of goods a
year, but it only has £15,000,000 left over for its own income, instead
of the £19,000,000 which it used to have. It is thus impoverished.
But Island C, from having hardly any income at all, has now an income
of £10,000,000 a year. Island A is ruined. Protection has put the
getting of the ore under unnatural conditions. It has compelled the
coal-owners to go much farther off for their ore than they need
have done under Free Trade. The total wealth of all three islands
altogether is less than it used to be by £4,000,000, for they are
adding £4,000,000 extra to the cost of getting the raw material. _But
the total combined wealth of B and C, even if they pay foreign ships
to bring the ore, is now greater than it used to be under the old
Free Trade._ No. B has £15,000,000; No. C has £10,000,000--the total
is £25,000,000. If they pay their own sailors to bring the ore it is
£30,000,000. Under the old conditions the total of B and C alone was
only £19,000,000. Island A is ruined and the total wealth of the whole
system is less, but the Protectionists of the realm, which now only
includes B and C, are quite indifferent to that. They are thinking of
the wealth of their common country, and are indifferent to the ruin of
others, and their policy is _increasing_ the wealth of their common
country at the expense of foreigners.
In that example lies the argument for Protection. _If Island C could
do something other than mine ore, if it had other forms of wealth,
or by ingenuity or luck could discover some new fields in which its
activities might develop, then the argument for Protection in this case
would break down._ Island B would say: “Let me get my iron ore cheap
from the foreigner in Island A, and do you, on Island C, develop (let
us say) dairy farming, or something else which I cannot do and which
Island B cannot do. In that way we shall all three benefit, and the
common realm, consisting of Island B and Island C, will be richer than
ever. Island B will have all its old profit of £19,000,000 (instead of
being reduced to £15,000,000), and Island C can well develop a dairy
produce of more than £7,000,000.”
One ought to be able to see quite clearly from an example like this
how true it is that _the argument in favour of Protection applies to
particular cases only, and turns entirely upon whether an undeveloped
part of the energies of the community can be turned into new channels
or not_.
We have an excellent, though small, example to hand in England to-day.
The English people have to send abroad about £4 worth of goods every
year per family for pig-meat, that is, bacon and hams and the rest.
There is no reason why they should do this. They could produce the
pigs on their own farms without drawing a single person from the
factories and keep this mass of manufactured goods for their own use.
The reason we are in this state in the matter of pig-meat is that our
agriculture has generally got into such a hole that people will not
bestir themselves to produce enough pigs. So here is a definite case in
point, and only experiment could show whether Protection would pay here
or would not pay.
Protection ought to take the form of saying:--
“Any pig-meat from abroad must pay such and such a sum per pound at
the ports as it enters.” This would raise the price of pig-meat in
England somewhat. If it raised the price to such an amount that the
English people as a whole had to pay £2 more a family, _and if at that
increased rate of price agricultural people could be stimulated into
feeding the right amount of pigs and taking the necessary trouble to
keep the supply going_, then the total wealth of the community would
be increased £2 per family. Even if the price had to increase till
each family on the average paid £3 more, or £3 10s. 0d. more, it would
still be of advantage to the nation _on condition that the higher price
really did make the farmers breed enough pigs, without lessening their
production of other things_. But if, when the charge on the community
had risen to £4 per family, it did not stimulate the production of pigs
in this country sufficiently to supply the market, then your Protection
of Pigs would be run at a loss.
BANKING
During the last two hundred and fifty years there has arisen, among
other modern economic institutions, the institution of _Banking_.
It has origins much older; indeed, people did something of the kind
at _all_ times, but Banking as a fully developed institution grew up
in this comparatively short time: since the middle of the seventeenth
century. It began in Holland and England and spread to other countries.
Like other modern institutions, it only became really important in
the latter half of this period, that is, during the last hundred
years or so; quite recently--in the last fifty years--it has become
of such supreme importance by the mastery it has got over the whole
commonwealth that everybody ought to try to understand its character.
The Power of the Banks comes to-day into the lives of all of us and
largely affects the relations between different nations. Indeed, it has
become so powerful quite lately that one of the principal things we
have to watch in politics is the enmity which the power of the Banks
has aroused and the way in which that power is being attacked.
The essential of banking lies in these two combined ideas: (1) that a
man will leave his money in custody of another man when that other man
has better opportunities for keeping it safe than he has; (2) that the
money so left in custody _may_ be used by the custodian of the money
without the real owner being very anxious what is being done with it,
so long as he is certain to get it when he wants it.
The putting together of these two ideas--which are ideas naturally
arising in everybody’s mind--is the origin of all banking, and the
moral basis upon which banking reposes.
A man has £1,000 in gold. He has to travel or to go abroad on a war,
or is not certain of the safety of so large a sum if it is kept in his
house. He therefore gives it into the custody of a man whom he can
trust, and who, on account of special circumstances, can keep it more
securely than he himself can. What the owner of the £1,000 wants in
the transaction is to be certain of getting a part or the whole of his
money whenever he may need it. He does not want the individual pieces
of money. So long as he can get the value of them _or of part of them_
at any moment from the man to whom he gave custody of the original sum
he is satisfied.
A good many other people feel the same necessity. The man who has
special opportunities for looking after _all_ their sums of money
collects them together and has them in his strong box in safe keeping.
Those who have acted thus would be very angry if they found their
money had been lost, or that when they came to ask for £20 or £100 out
of their thousand pounds--needing such a sum for the transactions of
the moment--the man in whose custody the whole lay was unable to let
them have the £20 or £100 required. But so long as the _depositor_
(as he is called, that is, the man who hands over his money for safe
custody) finds himself, in practice, always getting the whole or any
part of his deposit on demand, he is content; _and will not be annoyed
to find that the person in whose custody he left the money has been
using it in the meantime_.
For instance: I might leave £1,000 in gold in the custody of someone
who is better able than I to prevent its being stolen. I am saved all
the trouble of looking after it, and I can call on a part of it or all
of it whenever I like. If there were only myself leaving it thus with
one friend, and it was a particular transaction between us two, that
friend would be acting wrongly if he were to take my £1,000 and buy a
ship with it, say, and do trade. No doubt he would earn a profit, and
could say to me when I came back for £100 of it: “I am sorry that I
cannot give you your £100, but I have used the money, without telling
you, to buy a ship. The ship will earn a profit of £200 at the end of
the year, and then you can have back your £100 if you like, and if you
press me, I will even sell the ship and you shall have back the whole
of your £1,000.”
In that case I should naturally answer: “No one gave you leave to use
my money. You have embezzled it, and you have acted like a thief.”
But when a very great number of men entrust their money in this
fashion, and do not specially stipulate that it should be left
untouched, when there is a sort of silent understanding that, if
whenever they want it, the money will be forthcoming, then they do not
ask too closely what has been done with the whole of the sum in the
custodian’s hands. For if _very many_ people are thus “banking” their
money with one safe custodian only a certain proportion will _at any
one time_ want their money, and the rest can be used without danger of
the “banker’s” failing to meet any particular demand. Thus banking,
that is, the use of other peoples’ money, arises and becomes a natural
process because it is of mutual advantage. The Banker can earn profits
with that average amount of money which always remains in his hands,
the depositors have their money safely looked after and may even share
in the profit.
A hundred men, let us say, have given £1,000 each into the hands of
such a custodian, who has come to be called their “Banker.” The total
sum of money in this man’s hands is £100,000. It is found in practice,
over the average of a number of years, that this hundred men do not
“draw” upon (that is, ask for their money to be paid out to them by)
their banker more than to the extent of, let us say, £100 every month
each, and it is also found that, while they need this £100 to pay
wages or bills or what not, they also come back with the money they
earn (say, £120 per month, on the average) and give it back to their
banker for safe keeping. In several years of this practice the banker
discovers that he must have about 100 times £100, that is £10,000, in
free cash to meet the demands upon him, and that he gets rather more
put into his custody in the same period of a month, year in and year
out. It follows that he always has about £90,000 in gold doing nothing
the whole time. He says to himself: “Why should I not use this money
to buy instruments of production--ships or ploughs, or machinery or
what not--and produce more wealth? It will not hurt those who have
deposited it with me, for I have found that, _on the average_, they
never want more than a tenth of their money out at the same time (and
they are also perpetually paying in more money to me--so that they and
I are quite safe), and if I make a good profit by the use of the things
I shall have bought with this £90,000 I can offer them part of the
profit. So we are both benefited.”
That is what the banker began by doing at the very origins of this
institution of banking. It was a little odd. It was not quite
straightforward. But the depositors, most of them, knew what was going
on, and at any rate did not protest. And if, when a profit was made out
of their combined money, they got some of that profit, they were glad
enough to see that their money had been put to some use and that they
had become richer by its use; while if they had kept it to themselves
in scattered small amounts it would not have made them any richer.
In England we can trace the origins of a great many banks, and of the
fortunes of their owners, proceeding along these lines. For instance:
there was a family of silversmiths rather more than two hundred years
ago. They had a shop in which silver objects were bought and sold, and
they also had gold plate to buy and sell. They had strong-boxes in
which these things were kept, and they paid money to men who guarded
these strong-boxes. It was a natural thing for people to go to this
shop and say: “I have here a thousand pounds in gold which is not very
safe at home. Will you look after it for me, on condition of course
that I may call for any amount of it when I want it and what will you
charge for your trouble?” The silversmiths said: “Yes, we will do this,
we will charge nothing,” and in that way they got hold of very large
sums which people left with them. They found, as we have just seen,
that in practice, year after year, only a certain amount of the sums
were required of them at any one time, and rather than leave the big
balance lying idle they used it for buying useful things which would
produce more wealth. They lent the money sometimes to the State for its
purposes, that is, to the King of the time. Sometimes they employed it
in other ways which earned a profit. The people who left the money
with them always found that they could get back whatever they wanted
when they asked for it, and they were content. That is how banking
arose.
Another example of which I know the history and which is very
interesting is that of a squire in the West of England who lived rather
less than two hundred years ago and has given his name to one of our
great banks still existing to-day. This squire was a rich man who
had many friends coming to his table. He had the reputation of good
judgment and his friends would say: “I will leave this sum of money in
your custody,” for they knew that he would be able to put it to good
use and give them part of the profit. Thus, looking after the money of
neighbours, he came to look after the money of a great many people whom
his neighbours recommended, and at last had hundreds of “clients,” as
the phrase went--that is, of people who would leave their money with
him, knowing that he would earn a profit both for himself and for them;
at the same time the money would be safely kept, and they might call
for a portion of it whenever they wanted it.
From such origins the banking system gradually extended until, about a
hundred years ago, or rather more, every rich family in this country
had a considerable sum of money left at a bank, and paid into the
banker’s coffers further sums of money which they received. Each had a
book of accounts with the bank showing exactly how much had been put
in and therefore how much they could “draw” upon. At first the clients,
or depositors, would “draw” some portion of their money which they
might immediately need by way of a letter. Thus, if their banker’s name
was Mr. Smith, they would write this note: “To Mr. Smith. Please pay my
servant who brings this letter £20 out of the £1,000 which I left with
you the other day.” They would sign this letter and send the servant
with it; the banker would give the £20 to the servant and the servant
would give a receipt against it.
That was the origin of what are nowadays called “cheques.” The letter
giving authority for the messenger to draw the money grew more and
more formal and was drawn up more and more in the same terms to save
trouble. Then the bankers would have the forms printed, so that the
client who wanted to draw would have the least possible trouble. If
you look at a cheque to-day you will see that it is nothing but the
old letter put into the simplest terms. At the head of the cheque is
the name of the bank; then there is the word “Pay,” and after that the
client adds the sum which he wants paid and signs his name to prove
that it is really he who is entitled to have the sum and who is asking
for it. The words “or bearer” are sometimes printed after the word
“Pay,” so that anyone bringing the cheque for the client can get the
money for him.
But to prevent people using these pieces of paper to get money without
having the right to it the word “order” was more often substituted for
the word “bearer”; and this word “order” means that the owner, who
is drawing his money out, says: “Do not pay it to me; pay it to this
other person whom I desire to receive the money and whose name I have
mentioned above, who will sign to show that _his_ order for payment has
been met.”
For instance: I have £1,000 deposited with my banker, Mr. Smith. I
write a letter: “Pay £20 to John Jones _or order_.” This means: “Do
not, dear Mr. Smith, send the money back to me, but give it to Mr.
Jones who will bring this letter with him, or, if he cannot come
himself, will send a signed letter _order_ that it should be paid
to him.” At the beginning of the system, Mr. Jones, to whom I gave
the cheque, would write a little letter saying: “Dear Mr. Smith, Mr.
So-and-So, who banks with you, has given me the accompanying letter by
which I can get £20 of his _by my order_. I therefore send you this
letter to tell you that whoever brings this cheque bears my order to
give the money to him.” He signs the letter “John Jones” and the banker
hands over the money to whomever it may be that brings the letter for
John Jones.
In process of time the thing was simplified. In place of the letter
came the shortened form, the cheque, and you wrote: “Pay £20 to John
Jones or order,” and John Jones, instead of sending a letter signed
by himself, merely put his signature at the back of the cheque. This
was called “endorsement,” which is a Latin form of the English meaning
“putting one’s name on the back of anything.” A cheque “endorsed” with
the name “John Jones,” that is, with John Jones’s name signed on the
back of it, was paid by the bank to whomever John Jones might send to
receive the payment. My cheque asking for £20 to be paid to John Jones
having fulfilled its object, and the £20 being paid to whomever John
Jones had sent after he had “endorsed” that cheque, the cheque was said
to have been “honoured” by the bank. The word “honoured” meant that the
bank had admitted that I had the money banked with them, and that they
were bound to hand it over on seeing my signature asking that it should
be handed over.
The convenience of cheques used in this way for business was obvious.
If I owed a man £20 and I had £1,000 with my banker, instead of having
to draw out twenty sovereigns myself and take them to him, all I had
to do was to write out a cheque to the order of this man, who would
endorse it and get the money.
Now as banking grew and came to deal with more and more people, it was
probable that this man, Jones, would have a banking account too with
somebody. If Mr. Smith was not his banker, then Mr. Brown would be.
As we have seen, people not only drew out money from the original sum
they had deposited at the bank, they also paid in money as they got
it, on account of the convenience of having it looked after safely. So
when John Jones got my cheque for £20, he often did not get the actual
cash from my banker, Mr. Smith, but simply gave in the cheque, endorsed
by him, to Mr. Brown, _his_ banker, and said: “Get this from Mr. Smith,
the other banker, and add it to the sum which I have banked with you,
Mr. Brown.” The banker Brown did this, and the cheque which I had
originally signed in favour of John Jones, having gone the rounds, was
sent back to me to prove that the transaction was complete.
As banking continued to grow this system took on a vast extension.
Thousands and thousands of people paid, and were paid, by cheques, of
which only a small part were turned into cash, and of which much the
greater part were paid into the bankers’ offices and then settled by
the bankers among themselves.
After many years of this system it became apparent that the enormous
transactions, thousands of cheques all crossing each other daily in
hundreds of ways, could be simplified by the establishment of what came
to be called the “Clearing House.”
Thus, suppose three bankers--Mr. Smith, Mr. Brown and Mr. Robinson.
I bank with Mr. Smith, and sign a cheque in favour of Mr. Jones who
banks with Mr. Brown, because I owe Jones a bill which I can thus pay.
I also sign a cheque in favour of Mr. Harding (that is, to the order
of Mr. Harding), to whom I also owe money. He banks with Mr. Robinson.
Meanwhile Harding perhaps owes money to Jones and pays him a cheque
ordering Mr. Robinson (Harding’s banker) to pay Jones a sum of money.
Jones hands this over to his banker, Mr. Brown. At the end of a certain
time--say, a month--the three bankers, Smith, Brown and Robinson, get
together and compare the various cheques they have received. It is
obvious that a great many will cancel out.
For instance: I have given Jones a cheque for £20 which Mr. Smith, my
banker, has to pay to Mr. Brown, Jones’s banker. But Mr. Brown has a
cheque of Mr. Harding’s asking Mr. Robinson to pay £20 to Jones, and
Jones has given that to Brown too. Meanwhile Jones has given me a
cheque later on, for something which he owed me, of £10. The bankers
compare notes and see that Smith need not pay £20 to Brown, and then
ask Brown for £10. It is simpler to pay the difference only. Mr. Smith
hands to Mr. Brown what is called the “balance.” The difference between
£10 and £20 is £10, and Brown hands over £10 to Smith. At the end of
another month perhaps it is Robinson, Harding’s banker, who finds that
on comparing notes he has a balance against him of £10 to Brown: and so
on.
When dozens of bankers came to be established with thousands of
clients, or “depositors,” the convenience of this system was
overwhelming. There would perhaps be in a week as many as 10,000
cheques out, and instead of having to make 10,000 separate transactions
of paying from Brown to Smith, Smith to Robinson, Robinson back to
Brown, and so on, through dozens of bankers, the cheques were compared
and only the balances were paid over--or, as the phrase goes, “cleared.”
The Clearing House was the place where all the cheques of different
banks were put in at regular intervals and compared one with another,
so as to see what balances remained over, owing by particular bankers
to others.
Meanwhile, as the banking system grew, most of the ready money in the
community came into the hands of the bankers. There was a perpetual
coming and going, and paying in and paying out, but there was always
among the bankers as a community a very large sum of money lying
untouched, a sort of reservoir. It was nearly always very much
more than two-thirds of the whole amount which the banks could be
called on to pay. That is, the depositors never wanted a third of
their deposits out at any one time. The art of a banker, therefore,
consisted in knowing how to purchase with this idle money left in their
hands fruitful objects for producing future wealth, in other words,
“investing” it in “capital enterprises,” but always prudently keeping
a large reserve ready to meet any demands which their depositors might
suddenly make upon them.
So far so good. The banking system up to this point in its development
was an advantage to the community and to individuals. It enabled a
large number of small sums which could not be used very well separately
to be collected together for big enterprises.
A thousand people, depositing a thousand pounds each, left a million
pounds in the hands of the bankers, of which much more than half a
million could be used at any time for “development,” that is, for
buying instruments with which to develop natural resources. The nation
would be richer if a deep shaft were sunk and coal were got out of the
earth, but it would cost half a million to make that mine. No one of
the thousand small depositors could have undertaken such a task: the
bank, using all their monies together, could undertake it--and did so.
The banking system thus rapidly increased the wealth of the country,
and that was all to the good. People meanwhile felt their money to be
secure, and they had the great advantage of being able to draw cheques
for payments they had to make to those to whom they owed money, and of
receiving cheques for money due to them instead of perpetually handling
and carrying about large sums in metal--the whole passing through the
bank and helping to keep this reservoir of wealth perpetually filled
and available for use in investment.
That state of affairs lasted to within the memory of men now living,
and, as I have said, the banking system during that time was an
advantage to everybody. There was nothing to be said against it.
But then came (as there comes upon every human institution after a
certain time) a further phase of development, in which the institution
of banking produced certain perils and evils. Those perils and evils
are increasing, and are producing the antagonism to the banks and to
their power which everybody is beginning to express to-day, all over
Europe and America, and which we must understand if we are to follow
modern political economy. I will show you how these evils in the
Banking system arose.
A man having £1,000 in the bank could draw upon it up to the total
amount. He could sign a cheque for £100 and then for £500 (making £600)
and then for another £400. Supposing he put nothing in during that
time, he would have exhausted the whole of what he had in his bank; he
would have come to an end of what is called, in the terms of banking,
his “balance.” There, you might think, was an end of his power to draw
cheques. He had got back all his money, so the bank and he had nothing
more to do with each other. At first, of course, that was the regular
state of affairs. A man could draw out all that he had in the bank, but
no more. It seems common sense.
But the banks had plenty of other people’s money lying about which
had not been drawn out, and much of which had not yet been invested
in capital enterprises, such as mining, or what not. They would say
to the man who had once put £1,000 into their hands and who had now
drawn it all out: “You still want to carry on your business; but you
have exhausted all the money you had with us. You will probably want
to borrow some money to tide you over until the time when further sums
begin to come in to you through what you sell in your business. We
are prepared to lend you money out of what we have to use from other
people’s deposits. You will pay a certain ‘_interest_’ upon it (that
is, so much a year on each hundred pounds we lend you--say £5 a year
for every £100), and you shall pay us back when you can.” The bank
accompanied this offer with the right to draw further cheques to, say,
another thousand pounds, which the bank would “honour”--that is, for
which the bank would pay out money which did not really belong to their
client but was lent to him by the bank out of other people’s balances.
And this extra amount, which the bank thus allowed their client over
and beyond what was his own money was, and is, called an “over-draft.”
At first, before the banks would allow anybody an “over-draft” (that
is, a loan), they required the borrower to give security. He had to
leave with them gold or silver plate or a mortgage upon his land, so
that if, in the long run, he found himself unable to pay back, the
banker, could sell the security and recoup himself.
But it was obviously convenient and useful when a client was in a
big way of business to grant him an “over-draft” from time to time
although he had no security to offer. The bank said to itself: “Here is
a merchant making very large profits every year. It takes him some time
to get his money in from the foreigners to whom he sells goods oversea,
but he is bound to get it sooner or later. So, without asking him for
any security (for perhaps he has no plate or title deeds or what not to
give), it is still well worth our while to let him have an over-draft
(that is, a loan) out of the other people’s money. He will pay us
interest upon it, we shall make a profit, and when the foreigners pay
him he will be able to pay us back.”
In this way the banks became on all sides lenders of money to persons
without security, and it became exceedingly important to any trader
whether he could or could not get the banks to back him up in this
fashion.
The thing went farther. A man might have no capital at all, but a good
idea. He might have discovered, for instance, a mine of copper-ore in
some colony. He would come to the banks and say: “I have not the money
to pay labourers to dig for this ore, but if you will advance the money
to me and go shares in the profit the ore can be got out.” The banks
would look at the “proposition,” as it is called, and if they thought
it a good thing they would advance the money and share the subsequent
profits with the borrower. All over the world the banks were thus
“financing,” as it is called, every kind of enterprise.
The system went farther still--and here it is that we come upon the
modern trouble. Hitherto when they gave an over-draft to anybody,
whether with or without security, or even when they gave a loan to a
man who had no capital at all, and “backed” him in his enterprise which
they thought likely to prove successful, they had used the money which
other clients had left with them. But it occurred to the banks after a
certain time that there was no need to use anybody else’s money at all.
_They could themselves offer to honour the cheques of the man to whom
they lent the money, without having any real money with which to pay
those cheques._
Why was this? It was because, with the growth of the banking system,
hardly any of the payments were, by this time, actually made in
gold. Real money only passed in a very small degree. Of the myriad
transactions all but a tiny proportion were “_instruments of credit_.”
Just as a bank-note issued by the Bank of England is a promise to pay
in gold, and yet a promise to pay a million pounds in bank-notes could
always be made with much less than a million real pounds to redeem
the notes so _the banks could create paper money, or its equivalent,
in the form of over-drafts_. If they said to a man who had _no_ money
deposited with them: “We will honour your cheques up to £1,000” _what
they were really doing was increasing the paper currency to the extent
of £1,000_. They were issuing promises to pay, exactly like bank-notes,
knowing that of the total amount out only a small proportion at any
moment would be required in real money.
There was a check on this system of creating new artificial paper money
by the banks (for this is what it came to), and the check consisted in
the control of the Government over the National Bank--in England the
Bank of England. There was a law preventing the Bank of England from
issuing more than a certain number of notes in proportion to the gold
lying behind them, and the private banks could not issue over-drafts,
or loans, indefinitely, because they could not get more than a certain
amount of paper money from the Bank of England to meet the payments
they had to make, and the Bank, in its turn, could not issue more than
a certain proportion of paper money against its gold.
So ultimately the amount of real money, the gold, in the hands of the
banks, both national and private, acted as a check upon this creation
of false money by the banks. But when gold payments ceased with the
Great War that check broke down, and even if gold payments had not
ceased, the power of the banks thus to “create” as it is called,--in
other words, their power to say to any individual enterprise: “You
shall or you shall not have your cheques honoured: you shall or you
shall not carry on”--gave them an immense and increasing power over
the community.
That is why the revolt against the banking system and its control over
our lives in the modern state since the war is becoming so formidable.
It has two chief forms against which men protest.
1. The bankers can decide, of two competitors, which shall survive.
As the great majority of enterprises lie in debt to the banks--that
is, carrying on with loans allowed them by the banks working with
money _made_ by the banks--any one of two competing industries can be
killed by the bankers saying: “I will no longer lend you this money. I
‘call it in’--that is, ask for it to be paid at once. But I will not
exercise the same pressure upon the man who is competing against you.”
This power makes the banks the masters of the greater part of modern
industry. It is argued that the banks do not act from caprice, and will
naturally only back a sound enterprise and only ruin an unsound one.
That is, on the whole, true. But still, those who command them have the
power, if they like, to act from caprice, and whenever you give a few
human beings great power of this sort over millions of others it tends
to be abused.
2. The banks, especially in England, are all in one combination and
keep detailed information upon all of us. Not only have they control
over industry through their power to make or withhold the money which
they alone can now create and hand out to those they favour, but they
also keep indexes of detailed information as thorough and widespread
as those of any Government office. They have a secret service more
widespread and powerful than that of the State, and this hidden power
of theirs, though private and concealed knowledge, irritates plain men
more and more. People feel that they are not free, and that the banking
system, which is international in essence, is a universal and hidden
master.
Therefore all over the world to-day people are saying: “The banking
system, and the few men who direct it, are altogether too powerful.
They control our lives. They are beginning to control the public policy
of the State, especially in England, and there ought to be a national
authority superior to them and keeping them in order.”
A great many schemes have lately been on all sides proposed to
establish such a superior authority. Thus, we have in England a very
powerful movement in favour of what is called the “Douglas Scheme
of Credit,” and of course the Socialists, with their ideas of State
control of everything, would also put an end to the private power of
the banking system. Then there are those who want to have a strong King
who would be able to override any lesser power in the State, including
the bankers.[5] But the points to seize in understanding the political
economy of our time are those I have just been describing to you: what
the banking system is, how it arose, how unnaturally powerful it has
become, and why a universal revolt is arising against it.
There will be a struggle inevitably between the banking, or financial,
interest and the people all over civilised countries: but no one can
tell which will win. In industrial countries the odds are in favour of
the banks, or financiers. In peasant countries against them.
NATIONAL LOANS AND TAXATION
Every country must, to carry on its national services, raise taxes
from its citizens, and those taxes, though levied in money, translate
themselves, of course, into goods, that is, economic values attached to
material objects.
We say that the State “raises,” say, a hundred million pounds in
taxation from its citizens a year, for “State Purposes”; and when you
come to look into what is actually got by the State and how the State
uses what it has got, it means that the State levies so many boots and
so much bread, and so much housing material and so much clothing, and
spends this again in maintaining State servants, that is, in clothing
and housing and feeding soldiers and policemen, and civil servants and
school teachers, and so on.
But in the modern world, and for the last two hundred years or so,
nearly all states have also had to raise taxation _in order to pay
interest upon the State loans_.
A State loan, or _national debt_, arises in this way. The State needs a
great quantity of goods for a particular purpose--usually for the very
unproductive purpose of waging a war. It has to get a lot of metal for
its munitions and guns, and quantities of food to feed the soldiers,
and coal to transport them. Now there are two ways in which a state
gets these. The first is to get the whole amount, as it is needed,
directly from the people, by a very heavy tax levied at the time. That
was what was done for hundreds of years before the second method was
attempted. The king of a country, wishing to wage war, would ask his
subjects for contributions, and he could not wage war upon a scale more
than these contributions would meet.
But about two hundred years ago there began (and since then has very
largely increased), the second method, which is that of _national
loans_.
The State is, let us say, taking in ordinary taxation from its citizens
about one-tenth of their produce. Suddenly it finds itself involved in
a much higher expenditure, amounting to, say, half the produce of the
country. If it asked for half the produce right away as a tax people
might refuse to pay it, or it might make the policy of the State--the
war, for instance, which the Government wanted to wage--so unpopular
that the State could not pursue that policy or wage that war. So the
Government had recourse to _borrowing_ from the citizens, promising to
pay, to those who lent, interest in proportion to what they borrowed,
as well as the capital itself. Thus they would _take_ in taxation for
a war money from a farmer equivalent to _ten_ loads of wheat; but they
would also _borrow_ from him _one hundred loads_ of wheat, promising to
give him as interest _five_ loads of wheat every year for any number of
years until they should ultimately pay back the whole hundred loads as
well.
When these national loans began the Governments honestly intended
to pay back what they borrowed. But the method was so fatally easy
that, as time went on, the debt piled up and up until there could be
no question of repaying it: all the State could do was to pay the
interest out of taxation. It remained indebted to private rich men for
the principal, that is, the whole original sum, and meanwhile, through
further wars, this hold of the rich men upon all the rest of the
community perpetually increased.
The “National Debt”--as it came to be called--remained a permanent
institution, in connection with which all the citizens had to be taxed
in order to provide interest for the rich lenders. Latterly these
burdens of national debt have become overwhelming, and at the present
moment about a twelfth of everything that English people produce is
taken from them and handed over as interest to the comparatively few
wealthy residents in England and abroad who lent great sums to the
Government during the war.
It is true that whenever a loan is raised the Government provides not
only interest but what is called a “sinking fund”--that is, an extra
amount of taxation every year which is dedicated to paying back the
whole of the loan slowly. But long before a loan is paid off some new
occasion arises compelling the Government to borrow again on a large
scale, and the total debt perpetually increases.
The result is that all the great modern European nations are now
loaded with a debt really larger than any of them can bear, and that
therefore they have all taken steps to lighten that burden by various
tricks not at all straightforward. Some of them pay back in money
which appears the same as the money which they borrowed, but which has
a very different value. They have borrowed for a war, say, £1,000,
representing 100 tons of wheat. Then they debase the currency, so that
a sum still called £1,000 will only buy 20 tons of wheat, and in this
way they can pretend to pay the lender back, although they are really
cheating him of four-fifths of what he lent. Two countries, Germany
and Russia, have pushed this so far that the lenders are now not
really paid anything at all. A man who lent the German Government, for
carrying on the war, money which during the war would have bought a
million tons of wheat, is now (October, 1923) paid back in money called
by the same name but able only to purchase a tenth of a ton--which is
the same as saying that he is not paid back at all.
Of all European countries that fought in the war our own has been the
most honest in this matter, but even in England a man who lent the
equivalent of 1,000 sheep, say, and who was promised interest at the
rate of 50 sheep a year, is only getting 25 sheep a year on account of
the change in the value of money.
In this matter of loans we must distinguish between _internal loans_
and _external loans_. An _internal loan_ is borrowed from one’s own
people. It involves taxing and impoverishing one set of citizens in
order to pay interest to and enrich another set. But the country as a
whole is no poorer. An _external_ loan is borrowed from foreigners, and
the interest on it is dead loss to the country. Also, it cannot be paid
in debased currency. A government can cheat its own nationals by paying
them in false money. But it has to pay foreign lenders in real money. A
foreign loan is real. It must be (as a rule) paid in gold. England thus
pays millions a year to America.
Now from State _loans_ let us turn to State _taxation_, which has
to-day for its most permanent object the payment of interest on
internal and external loans.
How does the State tax its citizens?
Taxation levied by the State is divided into two kinds--called _direct_
and _indirect_.
Direct taxation is the taxation levied upon the money which the person
who pays it has at his disposal.
For instance: If you have £1,000 a year and the State makes you declare
that and then taxes you £100 every year, that is direct taxation.
Indirect taxation takes the form of levying a tax on the manufacturer
of an article or on the importer of an article, which tax he passes
on to the person who consumes it, by an addition to the price of the
article. Thus, when you buy a pound of tea or a bottle of wine you are
paying indirect taxation. The price which you paid for the tea is so
much for the real value of the tea and so much more (though you do not
feel or know it at the time) which has been paid on the tea as it came
into England at the ports. The brewers who make beer have got to pay
the Government so much for every gallon they make, and this is passed
on to the people who buy the beer by an extra amount put on to the
price.
The wisest men who have discussed how taxes should be levied laid
down four rules which, unfortunately, no Government has kept to as it
should. It is worth while knowing those rules, because they are a guide
to what good taxation should be.
These rules are:--
1. A tax should fall in such a fashion that it is paid most easily.
For instance: it is much easier to pay £100 a year in small sums which
fall due at frequent intervals than to pay the whole £100 upon demand
in one lump.
2. The tax should be so arranged that the cost of collecting it should
be as slight as possible.
For instance: if I put a tax upon everyone who crosses a particular
bridge, I shall have to appoint and pay someone to collect the tax at
the bridge, and I shall probably have to pay inspectors to go round and
see that these bridgemen do their duty and do not cheat. If I tried to
levy a tax of this kind on a great many bridges that are not much used
the cost of collecting would be very high compared with the revenue
produced. But if I put a tax on every cheque issued by a bank, _that_
tax is collected with hardly any expense. All the Government has to do
is to say that no cheque will be valid unless it carries a stamp. The
banks stamp all their cheques with this stamp, and when they sell a
cheque book to a customer they take the value of the stamps from him.
All the Government has to do is to find out the number of cheque books
issued, and ask for the money from the banks.[6]
3. Taxes are better in proportion as they fall on unnecessary things
rather than on necessary things.
It is much better, obviously, to make people pay for their luxuries
than for their necessities. It is oppressive to make people pay for
their necessities, which even the very poor must have, and it is juster
and altogether better to make people pay for things which they need
not have. Thus, when the tax was first levied upon tea it was a tax
upon a luxury, for only rich people then drank tea. But to-day, when
the poorest people must drink it, it is unjust to tax it, for it is a
necessity.
Unfortunately, it is very difficult to keep to this rule in any modern
country, because the amount of taxes required is so large that unless
one taxes the necessities one will not get enough money for the
requirements of the State: thus tea and sugar, beer and tobacco, all
of them _necessities_ of the poorest people, are enormously taxed. Our
poor people in England are much more heavily taxed than any people in
the world.
4. Taxes should fall proportionately to the wealth of the taxed, that
is, the sacrifice should be equally felt by all. This rule is easy
enough to keep when taxation is light. For a very slight tax on poor
men--who are the vast majority of the State, suffices to bring in the
small revenue needed, and a severe tax on rich men is but an addition.
But when taxation must be heavy to meet the requirements of the
State--say more than a twentieth of poor men’s incomes--then the rule
is difficult to keep. For either you get insufficient revenue if you
spare the poor, or you must tax the poor on a scale which no increase
of the taxation on the rich can really equal. When taxation is too
heavy, you must either ruin the rich or crush the poor. And that is why
heavy taxation has destroyed so many States.
5. The last rule about taxation is that it should be _certain_; and
this means that the State should be certain of getting what it ought to
get, and that the people who pay should know what they have to pay and
not be left in doubt and anxiety.
For instance: the tax on tobacco in this country is a certain tax. It
is levied on a comparatively small number of ships’ cargoes which enter
the country with tobacco, because we do not grow tobacco in England,
and the sum which the importers pay is automatically passed on to the
purchasers. The State knows by experience how much tobacco the people
will buy in the country in the year, and the people who buy tobacco
know what they mean to spend, and can, if they choose, ascertain how
much of this goes in taxation. But the same tax on tobacco in France
is not a certain tax, because the French grow a lot of their own
tobacco--in fact, most of it. The people who grow tobacco naturally try
to hide the total amount of their crop from the Government inspectors,
and a great number of these inspectors have to be going about the whole
time actually counting each leaf on each plant and rummaging in the
bins to see that none is gone.
An example of a most uncertain and unjust tax for the taxpayer in our
own country is the Income Tax, because it is difficult to prevent
unfixed people from hiding their profits or from concealing from the
tax collectors amounts which they have earned. Also the honest citizen
with an established and known position can be bled to the full, while
the rogue and adventurer, the speculator and dealer escapes. But it
is a certain tax from the point of view of the Government, because
they know on the average what a penny on the Income Tax will produce
one year with another, and are not concerned with justice but with a
calculable revenue.
Before we leave this discussion it is worth while mentioning an odd
idea which a few very earnest and active people have got hold of,
called the “Single Tax.”
It is really much more a part of the theory of Socialism than a system
of taxation. Still, as it has come to be called the “Single Tax” we
will treat it under that head.
The idea of the single tax is this:--Rent, or the surplus value of a
site, whether it be due to the extra fertility of farm land or to the
extra convenience of town land, is, say the Single Taxers, not the
product of the individual who owns the land.
If I own a barren piece of heath on which I cannot get any rent for
agriculture, and then a railway is built passing through it and a
station is built on the heath, many town workers who want to live in
the country will take houses which will be built near this station and
live in these houses, running up and down from town for their work.
In a few years this barren heath which brought me in nothing will be
bringing in many thousands a year, for a little town will have sprang
up, and I shall be able to charge rent to all the people who live there
upon my land.
The Single Taxers say that, since I did nothing towards making the
extra value, but that extra value has been made by the growth of
population and by the activity of the whole community, I have no right
to these rents. In the same way they say that I have no right to the
rent of a very fertile field compared with a bad field which pays
little or no rent, because it was not I that made the soil fertile.
So they propose that _all the rents of the country should be levied as
a tax_. They say that no other taxes are needed. If I have money from
dividends in an industrial concern I can keep all that without paying
any taxes on it, and I can be let off taxes on tobacco and drink and
everything else of that sort. But anything I get as rent for land I
must pay over to the State. I may still be allowed to call myself the
owner of the land, but I must be taxed an equivalent to the rent which
it produces.
These people have never been able to apply their theory, and the reason
is pretty clear. It would work most unjustly, considering that people
buy and sell land just as they do any other commodity, and that a man
who had put all his money into rents in land would be ruined by this
system, while another man with exactly the same amount of money, who
had put it into a business, would go scot free. If you were starting a
new country it might be possible to begin with the Single Tax system,
but even then you would be up against the fact that people like owning
land because such ownership gives them independence. But at any rate it
is theoretically possible to apply this system in a new country. In an
old country it is quite out of the question.
THE SOCIAL (OR HISTORICAL) VALUE OF MONEY
There is a special point in Economics which has been very little dealt
with, or rather not properly dealt with at all, and which you will
find interesting as a new piece of study, because it will help you to
understand history as nothing else will: and that point is the _Social
(or Historical) Value of Money_.
You read how, in the past, the King of England, wishing to wage a
great war, managed to raise, say, a hundred thousand pounds; and how
that was thought a most enormous sum: whereas to-day, for the same
sized army, we should need thirty times as much. You read how Henry
VIII. suppressed the Monastery at Westminster which had an income of
four thousand pounds a year, and how this income was then regarded as
something very large indeed--much as we to-day regard a half million a
year or more--the income of some great shipping company. You read how
the National Debt later on actually reached _one_ million, and people
trembled lest the State could not bear the burden.
Yet here we are to-day, raising hundreds of millions yearly in
taxation, spending thousands of millions in our wars.
What is the explanation of this apparently totally different meaning of
money in different times? It puzzles nearly everybody who reads history
intelligently, and it wants explanation. Most attempts to explain it
have failed, or have been very insufficient; some of them quite vague,
as: “The value of money was very different in those days from what it
is now.” Or: “Money was then at least ten times as valuable as now”
(whereas it is clear from the chronicle that it was _enormously_ more
valuable!) Sentences like that leave the unfortunate reader as much in
the dark as he was before. We need a more precise explanation, and that
I think can be given.
There are three things which, between them, decide the social value of
money at any period, and unless we consider _all_ three we shall go
wrong. The reason why most people have gone wrong in trying to solve
the problem--or have abandoned it--is that they only consider the first
of the three. These three things are as follows:--
1. _The actual purchasing power of whatever is used as currency_--in
our case, for nearly the whole of European history, gold[7]: the amount
of wheat and leather and building materials and all the rest of it,
which so much weight of gold (say an ounce) will purchase at any time.
This varies in different periods according to the amount of gold
present in circulation, and its efficiency in circulation. We saw how
these were the factors of price, that is, of the purchasing power of
money, when we spoke of money earlier in the book.
2. _The number of kinds of things_ which money can be used to buy in
any society--or, to put it in learned words, “the number of categories
of purchasable economic values.”
3. _The economic scale of the community_, that is, the number of its
citizens and the amount of its total wealth at a given time.
When we go into the full meaning of all these three things we shall
see how, in combination, they make up the social value of money at any
time, and why that value differs so very much between one historical
period and another.
1. _The actual purchasing power of the currency._
Given the same currency (and in Western Europe it has, for all
practical purposes, been gold for the last two thousand years), we can
measure the purchasing value of such and such a weight of gold in any
period by what is known as the _Index Number_ of that period.
The Index Number is a thing important to understand, because it
comes into a great deal of modern discussion as well as historical
discussion; for instance: wages are nowadays largely based upon an
Index Number.
A particular year is taken, say the year 1900, and the records of what
various commodities were fetching in gold in the market during that
year are examined. Thus it is found that an ounce of gold in that year
would buy (let us say) four hundred pounds weight of wheat, 600 pounds
weight of barley, 80 pounds weight of bacon, 80 gallons of beer, a
quarter of a ton of pig iron, and so on. A list is drawn up of all the
principal commodities which are used in the community. Suppose that 100
such commodities are taken and between them make up by far the great
part--say seven-eighths--of all the values commonly consumed in that
community. The next thing to do is what is called to “weight” each
commodity, for it is evident that a commodity which is very largely
bought--such as bread--must count more in estimating the purchasing
power of money than a commodity of which very much less is used--such
as tin.
According to the value of each commodity used in any one period of time
(say a year) the various commodities are “weighted.” Thus you count
bread (let us say) as twelve times more important than lead, because
the value of the bread used in the community for one year is twelve
times as much as the value of the lead used in the community during
that year. Then let us suppose that the value of the leather used is
three times that of the lead, the value of the iron five times, etc.
You put against each commodity these “weight” numbers.
Next you find out what an ounce of gold would purchase of each of those
commodities in that particular year. For instance: you find it would
purchase a quarter of a ton of lead, 400 pounds weight of bread, and
so on, only you multiply by your weight number the use of gold in each
particular article. For instance: you count the gold used in buying
bread as twelve times more important than the gold used in buying lead.
You then add up all the prices measured in an ounce of gold in your
column; you divide by the number of items in your column, each
multiplied by its weight number, and the result is that your ounce
of gold for the year 1900 will be found to have a certain _average
purchasing power_ which you call, for the sake of further application,
arbitrarily, “100.”
Then you take another year, say 1920, and you find what the ounce of
gold would purchase in the same conditions, similarly weighted, in the
year 1920. You discover that the ounce of gold on the average in 1920
would only purchase half the weight of stuff it purchased in 1900. In
other words, prices have doubled, or, what is the same thing, gold has
halved in value. You put down for the year 1920 the figure “200,”
which means that average prices are twice as great as they were in
1900, and the economist’s way of saying this is: “With the year 1900 as
a base, the Index Number for 1920 is 200.”
In the year 1921 he makes the calculation again, and finds that prices
have fallen, that is, gold has become rather more valuable as compared
with other things, and prices are only three-quarters more than they
were in 1900. The economist writes down: “The Index Number for 1921 is
175, with the prices of 1900 as a base.” He goes back to 1880 and finds
that in 1880, after making a similar calculation, an ounce of gold
would on the average buy five pounds of material where in 1900 it could
only buy four. In other words, prices are lower in 1880 by one-fourth.
So he writes down: “The Index Number for 1880, with 1900 as a base, is
75.”
These Index Numbers taken for each year with a particular year as a
_base_, or year of reference, show the fluctuations in the purchasing
value of gold.
To make the process clearer, we will take a simple instance and imagine
a community in which there were only three things purchased on a large
scale by the citizens--wheat, bacon, and iron. We take for our year of
reference, let us say, the year 1880, and we find that an ounce of gold
would purchase one ton of wheat, half a ton of iron, and a quarter of a
ton of bacon. But the amount spent on wheat was ten times the amount
spent on bacon and twenty times the amount spent on iron.
You add up the twenty tons of wheat, the half ton of iron and the half
ton of bacon--half a ton of the latter because twice as much is spent
on it as is spent on iron, and therefore though it is half the price of
iron you must double the amount, because twice as much is bought.
You get 21 tons. To buy this 21 tons of stuff 3 ounces of gold were
needed. You divide the 21 tons by 3, and you get 7 tons of material on
the average.
Next, as you are taking this particular year for a “base” (or year of
reference) you call the 7 “100,” so that you may compare in percentages
the rise or fall of prices in other years. You then do exactly the
same thing with these three staple commodities in another year--say
1890--and you find that your ounce of gold purchases no longer 7 tons
of stuff, but 14 tons of stuff. Taking the year 1800 as your base
number, you will see that the Index Number for 1890 is “50.”
Then you do the same thing for the year 1920, and you find that with
the same ounce of gold you can only purchase 3½ tons of stuff. 7 is
to 3½ as 100 is to 200, so the Index Number for 1920 will be 200 as
compared with the base year--or year of reference--which is 1880.
You cannot use the Index Numbers without knowing what your base year is
and what average prices were in that base year, but, having settled
that, your Index Number is nothing more than a statement of _average
prices_, or again, the average purchasing power of a fixed weight of
gold in the various epochs you examine.
In reality the calculating of an Index Number involves a great
many more difficult points than these, and of course the number of
commodities taken is very much more than three; but that is the method
in its general outline, and if you go over it carefully I think you
will not find it difficult to understand.[8]
The first thing, then, in finding out the social value of money at any
historical period is to find out the purchasing value of a given weight
of gold--say, one ounce. Supposing we are comparing the time when Henry
VIII. dissolved the monasteries and took their wealth (1536–9) with our
own time, before the War, when our currency was still normal and in
gold, you will find that with 100 as your base for prices in 1536–9 the
Index Number of 1913 is, according to different calculations, somewhere
between 2,000 and 2,400. I have gone into it myself very carefully,
and I make it out to be at least 2,400 (though historians some time
ago, who had not gone into it very fully, used to make it lower); that
is, where one ounce of gold would purchase the things which Englishmen
regarded as their staple commodities in 1536, 24 ounces of gold would
be necessary to-day.
That is the first thing you have to consider when you are comparing the
social value of money at that time with the social value of money in
our own time. You multiply right away by 24. You hear, for instance,
that a man had £100 a year paid him by the King for looking after the
garrison at Dover. You translate it into modern money, and say that he
had £2,400 a year paid him _in our money_.
Most people stop there, and that is why they get their answer to the
problem all wrong. In reality the _social_ value of money then was
_very much more than_ 24 times what it is now, and £100 a year under
Henry VIII. meant _a great deal more than_ what £2,400 means now.
In order to see how true this is we have to consider the next two
points which I mentioned.
2. _The number of purchasable categories._
Suppose you put a man into a little primitive place like Andorra (which
is a tiny independent state shut off from the world in a valley of the
Pyrenees), and he is paid there £1,000 a year. He cannot live in a
house with more than a small rental, because there are no big houses
to be had. Everybody lives in simple, little houses. He cannot spend
his money on many things. There are no roads, no use for a motor car;
no railways, so he cannot spend money on railway fares; no theatres
or cinematographs--none of the hundred things which we have here on
every side. He can buy bread and meat, and wine and clothing, and very
little else--for there is nothing else to be bought. In other words,
the number of _sets of things_ (that is what the word “categories”
means--“sets of things”) on which he can spend money is a great deal
less than what it would be in London. A man with £1,000 a year in
London and a family to keep is, of course, very much better off than a
labouring man, but still he is not rich, as rich people use the term.
He will live in a house for which he must pay perhaps £200 a year,
counting rent and taxes. Then he will--he usually must--travel, and
that will cost him perhaps £50 a year. Then his friends will expect
to meet him and he must have them at his house, and he will have to
spend a good deal in postage and telegraphing--and so on. The man in
Andorra with £1,000 a year simply would not know what to do with it. He
would be so “well off” that he would have a very large surplus--more
than half--to give away, or to help other people with, or to save and
invest. But exactly the same sort of man, with the same ideas and
bringing-up and necessities, put down in London would certainly not be
able to save a penny of his £1,000 a year.
So we see that the social value of £1,000 a year in Andorra is very
different from the social value of the same sum in London. Some people
might be inclined to laugh at this difference, and to say: “Oh,
yes! but the man in London could, if he liked, save, simply by not
spending on those various categories, as you call them.” Yes; he as an
individual might choose to live an odd life of his own and not do what
other people do. But _Society as a whole_--that is, all the community
round him--in London is, as a fact, spending upon those various, very
numerous, categories, while in Andorra he does not, for he _cannot_,
spend upon them; they are not there to be purchased. Therefore it is
true that the _social value_ of the same sum, with the same index
number, is on the average very much higher in Andorra than in London.
You cannot give this difference precisely in figures as you can an
index number, because nobody can precisely calculate the number of
categories nor the respective importance of each, but the least
knowledge of history shows you that in Henry VIII.’s time, in 1536, the
number of categories was very much smaller than it is to-day. So the
man to whom Henry VIII. paid £100 a year as salary for looking after
one of his castles, though the purchasing value of his income--the
amount of rye or pork or what not that he could buy with it--was
what we should call to-day £2,400 a year, had a much higher income
_relatively to the people of the time_ than has a man with £2,400 a
year to-day. He counted much more than a man to-day counts who has five
thousand a year.
But this second point is not all. There is again a third point, as we
have seen, and we must next turn to that.
3. _The purchasing value of the whole community._
The third factor in the making up of the social value of money is the
relation of any sum to the total wealth of the whole community. That of
course depends upon two things: the average of wealth of each family in
the community, and the number of those families.
Supposing, for instance, with things at their present prices, you
consider two communities: (1) the people of Iceland, (2) the people of
Australia. In both countries you can get pretty much the same amount
of stuff for an ounce of gold, and though there are less categories
of purchasable things in Iceland than in Australia, yet most of the
things a civilised man requires can be got in Iceland--at least in the
capital, or can be imported there by the inhabitants if they need them
or can afford to pay for them. Both communities are of our own race
and of much the same standard of culture and the same idea of how one
should live. But Iceland has only four thousand families, and these
families are poor for the most part. Australia has a million families,
that is, 250 times as many, and they are much richer than the families
in Iceland on the average. There are much worse differences of rich
and poor in Australia than there are in Iceland. There are far more
miserable and starving people in Australia than there are in Iceland;
but the _average_ wealth of a family in Australia is much higher than
that in Iceland.
Now suppose that the Government of Iceland were to want to build a
new harbour for the capital, which is on the sea, and in order to get
the money were either to confiscate the wealth of certain rich people
or to tax all the people--supposing it wanted, for instance, £400,000
in order to complete the work. And supposing the people of Australia
similarly wanted to build a harbour and also wanted £400,000 to be
got in the same way. The index number is the same in both places. An
ounce of gold will roughly purchase the same amount of things in both
places, for the index number at any moment is much the same all over
the white world, measured in gold, and we may imagine the categories of
purchasable things to be much the same in both places. Yet the social
value of the £400,000 is quite different in Iceland from what it is in
Australia. In Iceland it means taking an average of £100 from each of
the poor families--if you get it by taxation--or the confiscation of
all the wealth of the very few rich men there may be. But in Australia
it means no more than the taking of about 8s. from each family, and
that from an average family income much higher than the average family
income in Iceland. Under this heading the social value of £400,000
in Iceland is enormous and in Australia is small. If Iceland tried
to build such a harbour it could hardly do so. The economic effort
would be very great, and if it succeeded it would fill a big place in
the history of the island. In Australian history it would pass almost
unnoticed.
Now let us add the influence of all these three points together, and we
shall see that there is a vast difference between the social value of
money in the time of Henry VIII., when the monasteries were dissolved,
and the social value of the same amount of money to-day. We shall see,
for instance, why the King, taking away the annual revenues of the
Monastery of Westminster and keeping them for himself, made such a
prodigious splash, although the actual amount in pounds, or weight of
gold, in which the income of Westminster Abbey could then be measured
was only £4,000 a year. In the first place, you must multiply by 24,
so that the actual income or annual purchasing value in wheat, beef,
rye, pork, beer, which was confiscated, was nearly £100,000 in our
money. Then you must remember that it took place in a community where
there was a very much smaller number of purchasable categories; that
is, where people had a very much small number of “sets of things” upon
which to spend money.
And, lastly, you must remember that it took place in an England the
population of which was hardly more than a sixth--some people would
say it was hardly more than a tenth--of to-day’s, and that population
actually a great deal poorer on the average than the present population
of England. It is true that there was not then the great herd of
starving or half-starving people which we have to-day in England, and
that labouring people were then much better off than they are now;
but, on the other hand, there was nothing like the same number of
very rich people, and therefore the average family income was much
smaller. Put all that together, and it is clear what a tremendous
business the confiscation of this one Abbey meant. It was somewhat as
though the Government to-day were to confiscate one of the smaller
railway companies, or to take away the rentals now paid by a northern
manufacturing town to the great landlords owning the soil, and put the
money into its own pocket.
From this example of the confiscation of the Abbey of Westminster you
can argue to all the other expenditure of the time--expenditure on
armies and navies, and so on--and in this way you can see _how, why and
in what degree the social value of money differs between one period and
another_.
It is most important to get this point in Economics clear in your mind
if you are reading history, because it helps to explain all manner of
things which otherwise puzzle one in the past.
USURY
Usury, the last subject but one on which I am going to touch in this
book, is one which modern people have almost entirely forgotten, and
which you will not find mentioned in any book on Economics that I know.
Yet its vital importance was recognised throughout all history until
quite lately, and it is already forcing itself upon modern people’s
notice whether they like it or no. So it is as well to understand it
betimes, for it is going to be discussed very widely in the near future.
All codes of law and all writers on morals from the beginning of
anything we know about human society have denounced as wrong the
practice of _Usury_.
They have recognised that this practice does grave harm to the State
and to society as a whole, and must, therefore, as far as possible, be
forbidden.
Now what is Usury, and why does it thus do harm?
Modern people have so far forgotten this exceedingly important matter
that they have come to use the word “usury” loosely for “the taking
of high interest upon a loan.” That is very muddled thinking indeed,
as you will see in a moment. The character of Usury _has nothing to
do with the taking of high or low interest_. It is concerned with
something quite different.
_Usury is the taking of any interest whatever upon an_ UNPRODUCTIVE
_loan_.
A man comes to you and says: “Lend me this piece of capital which
you possess” (for instance, a ship, and stores of food with which to
feed the sailors during the voyage of the ship). “Using this piece
of capital to transport the surplus goods from this country over the
sea and to bring back foreign goods which we need here I shall make a
profit so large that I can exchange it for at least one hundred tons of
wheat. The voyage there and back will take a year.”
You naturally answer: “It is all very well for you to make a profit of
one hundred tons of wheat in one year by the use of _my_ ship and of
_my_ stores of food for sailors who work the ship, but what about me?
I grant you ought to have part of this profit for yourself, as you are
taking all the trouble. But I ought to have _some_, because the ship
and stores of food are mine; and unless I lent them to you (since you
have none of your own) you would not be able to make that profit by
trading of which you speak. Let us go half shares. You shall have fifty
tons of wheat and I will take fifty, out of the total profit of one
hundred tons.”
The man who proposed to borrow your ship agrees. The bargain is
struck, and when the year is over you make a fifty tons profit of wheat
on your capital.
That is _the earning of interest on a productive loan_.
There is nothing morally wrong about that transaction at all. It does
no one any harm. It does not weaken the State or society, or even hurt
any individual. There is a sheer gain due to wise exchange (which is
equivalent to production); everybody is benefited--you that own the
capital, the man who uses it, and all society, which benefits by the
foreign exchange. Supposing your ship and stores of food were worth
a hundred tons of wheat, then your profit of fifty tons of wheat is
a profit of fifty per cent., which is very high indeed. But you have
a perfect right to it: your capital has produced a real increase of
wealth to that extent. If your capital be worth ten times as much, then
your profit is only five per cent. instead of fifty. But your moral
right to the fifty per cent. is just as great as your moral right to
the five per cent. No one can blame you, and you are doing no harm.
Now supposing that, instead of coming to ask you for the loan of your
ship, the man came and asked you for the loan of a sum of money which
you happened to have by you and which would be sufficient to buy and
stock the ship. It is clear that the transaction remains exactly the
same. The loan is _productive_. He makes a true profit, that is, there
is a real increase of wealth for the community, and you and he have
a right to take your shares out of it--you because you are the owner
of the capital, and he because he took the trouble of organising and
overlooking the expedition.
These are examples of profit on a _productive_ loan.
Now suppose a man to come to you if you were a baker and say: “Lend me
half a dozen loaves. My family have no bread and I cannot see my way to
earning anything for a day or two. But when I begin to earn I will get
another half dozen loaves and see that you are not out of pocket.” Then
if you were to reply: “I will not let you have half a dozen loaves on
those terms. I will let you owe me the bread for a month if you like,
but at the end of the month you must give me back _seven_ loaves”: that
would be usury.
The man is not using the loan productively; he is consuming the loaves
immediately. No more wealth is created by the act. The world is not the
richer, nor are you the richer, nor is society in general the richer.
No more wealth at all has appeared through the transaction. Therefore
the extra loaf that you are claiming is claimed out of nothing. It has
to come out of the wealth of the community--in this particular case out
of the wealth of the man who borrowed the loaves--instead of coming out
of an increment or excess or new wealth. That is why usury is called
“usury”--which means: “wearing down,” “gradually dilapidating.”
It is clear that if the whole world practised usury and nothing but
usury, if wealth were never lent to be used productively, but only to
be consumed unproductively, and yet were to demand interest on the
unproductive transaction, then the wealth that was lent would soon eat
up all the other wealth in the community until you came to a situation
in which there was no more to take. Everyone would be ruined except
those who lent; then these, having no more blood to suck, would die
themselves, and society would end.
As in the case of the ship, it matters not in the least whether the
actual thing, the loaves of bread, are lent, or money is lent with
which to buy them. _The test is whether the loan is productive or not._
The _intention_ of Usury is present _when the money is lent at interest
on what the lender_ KNOWS _will be an unproductive purpose_, and the
actual _practice_ of usury is present _when the loan, having as a fact
been used unproductively, interest is none the less demanded_.
As in every other case of right and wrong whatsoever, there is, of
course, a broad margin in which it is very difficult to draw the line.
A man guilty of usury and trying to excuse himself might say, even
in the case of food lent to a starving man: “The loan may not look
directly productive, but indirectly it _was_ productive, for it saved
the man’s life and thus later on he was able to work and produce
wealth.”
The other way about (though there is not much danger of that nowadays),
a man trying to get out of interest on a productive loan might say in
many cases: “The loan was not really productive. It is true I made
a profit on it, but that profit was not additional wealth for the
community. It only represented what I got out of somebody else on a
bargain.”
In this margin of uncertainty we have only common sense to guide us,
as in every other similar case. We know pretty well in each particular
example we come across whether a loan is productive of not; whether we
are borrowing or lending for a productive purpose, or for a charitable
or luxurious one, or for one in every way unproductive.
The proof that this feeling about usury is right is to be found in the
private conduct of individuals in their social relations. If a poor
man in distress goes to a rich friend and borrows ten pounds, he pays
it back when he can; and the rich man would think it dishonourable
to charge interest. But if a man borrowed ten pounds of one for the
purpose of doing something which was likely to increase its value,
and we knew that this was his purpose, we should have a perfect right
to share the results with him, and no one would think the claim
dishonourable.
Usury, then, is essentially a claim to increment, or extra wealth,
_which is not there to be claimed_. It is a practice which diminishes
the capital wealth of the needy and eats it up to the profit of the
lender; so that, if usury go unchecked, it must end in the absorption
of all private property into the hands of a few money brokers.
Now, these things being so, the nature of usury being pretty clear,
and both the moral wrong of it and the injury it does to society being
equally clear, how is it that the modern world for so long forgot all
about it, and how is it that it is forcing itself upon the attention of
the modern world again in spite of that forgetfulness?
I will answer both of those questions.
The wrong and the very nature of usury came to be forgotten with the
great expansion of financial dealings which arose in the middle and end
of the seventeenth century--that is, about 250 years ago--in Europe.
In the simpler times, when commercial transactions were open and upon
a comparatively small scale, and done between men who knew each other,
you could pretty usually tell, as you can in private life, whether a
loan were a loan required for a productive or an unproductive purpose.
The burden of proof lay upon the lender. It was no excuse in lending
a man money to say: “I did not know what he wanted to do with it, so
I charged him 10 per cent., thinking that very probably he was going
to use it productively.” The courts of justice would not admit such a
plea, and they were quite right. For under the simple conditions of
the old days the judge would answer: “It was your business to know.
A man does not come borrowing money unless he is in either personal
necessity or has some productive scheme for which he wants to use the
money. If you thought it was a productive scheme you would certainly
have asked him about it in order to share the profits, and the fact
that you did not trouble to find out whether it were productive or no
shows that you are indifferent to the wrong of usury, and willing to do
that wrong under the pretence that it was not your business to inquire.”
The attitude of the law on money-lending in the old days was very much
what it is to-day with regard to certain poisonous chemicals which may
be used well or ill. The seller of those chemicals has to ask what they
are going to be used for, and is responsible if he fails to inquire.
In the same way the old Christian law said a lender was bound to find
out if his loan were intended for production or not. If the law had not
done this, then usury would have been universal and would have eaten up
the State, to the profit of the few people who lent out their money: as
it is doing now.
But as trade became more and more complicated and much larger and lost
its personal character, as the banking system arose on a large scale
and great companies with any number of shareholders, and as it became
impossible to lay the weight of proof upon the lender--when, indeed,
most lenders could not know for what their money was being lent, but
only that they had put it into some financial institution with the
object of fructifying it--then the opportunity for Usury came in, and
it soon permeated all commerce.
Suppose a man to-day, for instance, to put money into an Insurance
Company. It pays him, let us say, 5 per cent. interest on his money.
He does not know, and cannot know--no one can know--exactly how that
particular bit of money is being used. It is merged in the whole lump
of the funds the Insurance Company has to deal with. A great deal of it
will be used productively. It will go to the purchase of steam engines
and stores of food, ships, and so on, which in use increase the wealth
of the world; and the money spent in buying these things has a perfect
right to profit and does no harm to anyone by taking profit. But a
certain proportion will be used unproductively. The original investor
knows nothing about that, and even the managers of the company know
nothing about it.
A client comes to them and says: “I want a loan of a thousand pounds.”
They are quite unable, under modern conditions, to go into an
examination of what he is going to do with it. He gives security and
gets his loan. He may be a man in distress who gets it in order to pay
his debts, or he may be a man who is going to start a business. The
company cannot go into that. It has to make a general rule of so much
interest upon what it lends, under the implied supposition, of course,
that the loan is normally productive. But the borrower _can_ use it
unproductively, and often does and intends to do so.
Thus, with a very large volume of impersonal business, the presence of
usury is inevitable. But though inevitable, and though therefore the
practice of it, being indirect and distant, cannot be imputed to this
man or that, usury inevitably produces its disastrous effects, and the
modern world is at last coming to feel those effects very sharply.
A few pence lent out at usury some twenty centuries ago would amount
now, at compound interest, to more wealth than there is in the whole
world; which is a sufficient proof that usury is unjust and, as a
permanent trade method, impossible.
The large proportion of usurious payments which are now being made
on account of the impersonal and indirect character of nearly all
transactions, is beginning to lay such a burden upon the world as a
whole that there is danger of a breakdown.
If you keep on taking wealth as though from an increase, when really
there is no increase out of which that wealth can come, the process
must, sooner or later, come to an end. It is as though you were to
claim a hundred bushels of apples every year from an orchard after the
orchard had ceased to bear, or as though you were to claim a daily
supply of water from a spring which had dried up. The man who would
have to pay the apples would have to get them as best he could, but by
the time the claim was being made on all the orchards of the world,
by the time that usury was asking a million bushels of apples a year,
though only half a million were being produced, there would be a jam.
The interest would not be forthcoming, and the machinery for collecting
it would stop working. Long before it actually stopped, of course,
people would find increasing difficulty in getting their interest and
increasing trouble would appear in all the commercial world.
Now that is exactly what is beginning to happen to-day after about
two centuries of usury and one century of unrestricted usury. So far
we have got out of it by all manner of makeshifts. Those who have
borrowed the money and have promised to pay, say, 5 per cent., are
allowed to change and to pay only 2½ per cent. Or, by the process of
debasing currency, which I described earlier in this book, the value
of the money is changed, so that a man who has been set down to pay,
say, a hundred sheep a year, is really only paying 50 or 30 sheep
a year. A more drastic method is the method of “writing off” loans
altogether--simply saying: “I simply cannot get my interest, and so I
must stop asking for it.” That is what happens when a Government goes
bankrupt, as the Government of Germany has done.
If you look at the Usury created by the Great War, you will see this
kind of thing going on on all sides. The Governments that were fighting
borrowed money from individuals and promised interest upon it. Most
of that money was not used productively: it was used for buying wheat
and metal, and machinery and the rest, but the wheat was not used
to feed workmen who were producing more wealth. It was used to feed
soldiers who were producing no wealth, and so were the ships and the
metal and the machinery, etc. Therefore when the individuals who had
lent the money began collecting from the Government interest upon what
they had lent they were asking every year for wealth which simply was
not there, and the Governments have got out of their promise to pay a
usurious interest in all sorts of ways--some by repudiating, that is
saying that they _would_ not pay (the Russians have done that), others
by debasing currency in various degrees. The English Government has cut
down what it promised to pay to about half, and by taxing this it has
further reduced it to rather less than a third. The French Government,
by inflation and by taxation, have reduced it much more--to less than a
fourth, or perhaps more like a sixth or an eighth.
The Germans have reduced it by inflation to pretty well nothing, which
is the same really as repudiating the debt altogether.
So what we see in a general survey is this:--
1. Usury is both wrong morally and bad for society, _because it is the
claim for an increase of wealth which is not really present at all_. It
is trying to get something where there is nothing out of which that
something can be paid.
2. This action must therefore progressively and increasingly soak up
the wealth which men produce into the hands of those who lend money,
until at last all the wealth is so soaked up and the process comes to
an end.
3. That is what has happened in the case of the modern world, largely
through unproductive expenditure on war, which expenditure has been met
by borrowing money _and promising interest upon it although the money
was not producing any further wealth_.
4. The modern world has therefore reached a limit in this process and
the future of usurious investment is in doubt.
Though these conclusions are perfectly clear, it is unfortunately not
possible to say that this or that is a way out of our difficulties;
that by this or that law we can stop usury in the future and can go
back to healthier conditions. Trade is still spread all over the world.
It is still impersonal and money continues to be lent out at interest
unproductively, with the recurring necessity of repaying the debt and
failing to keep up payments which have been promised. Things will not
get right again in this respect until society becomes as simple as it
used to be, and we shall have to go through a pretty bad time before we
get back to that.
ECONOMIC IMAGINARIES
I am going to end with a rather difficult subject on which I hesitated
whether I should put it into this book or no. If you find it too
difficult leave it out; but if you find as you read that you can
understand it it is worth going into, because it is quite new (you will
not find it in any other book), and it is very useful in helping one to
understand certain difficult problems which have arisen in our modern
society and which have become a danger to-day. This subject is what I
call “Economic Imaginaries.”
An imaginary is a term taken from mathematics, and means a value which
appears on paper but has no real existence. It would be too long and
much too puzzling to explain what imaginaries in mathematics are, but I
can give you a very simple example of what they are in Economics. They
mean economic values or lumps of wealth which appear on paper when you
are making calculations, so that one would think the wealth was really
there, but which when you go closely into their nature you find do not
really exist.
The first example I will give you is that of a man who, having a
large income, gives an allowance to his son living somewhere abroad.
Supposing a man in England has £10,000 a year, and he has put his son
into business in Paris, but because the young man has not yet learned
his business, and is still being helped from home, he allows that son
£1,000 a year to spend.
When the Income Tax people go round finding out what everybody has they
put down the rich man in England, quite rightly, as having £10,000
a year, and when the value of all incomes in England is _assessed_,
_i.e._, when a table is drawn up showing what the total income of all
Englishmen is, this man appears, quite properly, as having £10,000
a year. But when the people in France make a similar _assessment_,
to find out what the incomes are of all the people living in France,
the rich man’s son in Paris appears as having £1,000 a year. So when
the assessments of England and France are added together and some
Government economist is calculating what the total income of the
citizens of both countries may be, _that £1,000 a year appears twice_.
One of these appearances is an _economic imaginary_. In other words, by
the method of calculation used, £1,000 every year appears on the total
assessment of England and also of France, making £2,000 of £1,000. The
extra £1,000, though appearing on paper, does not really exist at all:
it is an “Economic Imaginary.”
This is the simplest case of an economic imaginary. It is the case
overlap, or counting of the same money twice, and we may put down this
case in general terms by saying: “Every unchecked overlap creates an
economic imaginary to the extent of that unchecked overlap.”
It looks so simple that one might say, “Well, surely everybody would
notice that!” But it is very much the other way--even in this simple
case. The more complicated society becomes, the more payments there are
back and forth, allowances and pensions and all sorts of arrangements
which grow up with increased travel and means of communication and,
in general, with the development of society, the more these overlaps
come into being and remain unchecked, that is, uncorrected, the
greater number there are in which people are not aware that there is
an overlap, or if it is an overlap do not remember to mention it, or
if they do mention it are not believed. In general the more society
increases in complexity the more this kind of economic imaginary by
mere overlap increases in proportion to the total real wealth, and the
more the total “assessment” of the community is exaggerated.
I will give you one instance, to prove this, which is very striking and
which happened in my own experience. A man I knew gave in his income
tax returns a few years ago. He had a secretary at home to whom he paid
a fairly large salary, and he also used a secretary in town. Their
salaries came out of money which he had earned in business but appeared
in his taxable general income, for he was not allowed to take it off
as an expense. Meanwhile, both the secretary in the country and the
secretary in town were paying tax on _their_ salaries, though they came
out of a total income which had already paid taxes, and anyone making
an assessment of the total income of England would certainly have
written down from the official books: “Mr. Blank, so much a year; his
secretary A--, so much a year; his secretary B--, so much a year,” and
added up the total. Yet it is clear that the money put down to A and B
was imaginary.
I cannot tell you the thousands of ways in which this simple case of
overlapping goes on in modern England, for it would be too long to
explain, and I have only given you very simple instances, but you may
be certain that the economic imaginaries of this kind form at least a
quarter of the supposed income of the country.
If there were no other form of imaginaries than this it would be
very simple to understand them, and perhaps allow for them in making
an estimate of total wealth. Unfortunately, there are any number of
different forms much more difficult to seize and cropping up like
mushrooms everywhere more and more in a complicated and active society.
For instance: you have (2) the economic imaginary due to _luxurious
expenditure_.
All over the world where you have rich people spending money foolishly
they are asked, for things that they buy, prices altogether out of
keeping with the real value of the things. If you go into one of the
big hotels in London or Paris and have a dinner the _economic values_
you consume are anything from a quarter to a tenth of the sum you are
asked to pay. Thus people who buy a bottle of champagne in this sort
of place pay from a pound to thirty shillings. The economic values
contained in a bottle of champagne, that is the economic values which
are built up by the labour of all sorts which has been expended in
producing it, come to about two shillings and sixpence. So when people
pay from a pound to thirty shillings for a bottle of champagne they
are paying from eight to twelve times the real economic values which
are destroyed in consumption. There is an extra margin of anything
from seventeen shillings and sixpence to twenty-seven shillings and
sixpence, which is an _economic imaginary_ in that one case alone.
And remember that this economic imaginary goes the rounds. It appears
in the profits of the hotel-keeper, which are assessed in the total
national income for taxation. It appears in the rent for his hotel,
since a man will pay much more rent for a house in which he can get
people to pay these sums than for a humbler hotel of the same size and
of the same true economic value in bricks and mortar. It appears in the
rates which the hotel pays to the local authorities, and which in their
turn appear in the income of humble officials living in the suburbs.
That economic imaginary created by the silly person who is willing to
pay from a pound to thirty shillings for a thing worth two shillings
and sixpence appears over and over again in the various assessments of
the country.
Here is another case (3): _economic imaginaries due to inequality of
income_.
Supposing you have a thousand families with £1,000 a year each; that
is, a total income among them of £1,000,000 a year. Supposing you put
up for competition among those families a very beautiful picture which
everybody would like to have; painted, say, by Van Dyck. None of these
people with £1,000 a year each could afford to give more than a certain
sum for the picture, and probably, when they had competed for it, it
would fetch no more than £100. An official estimating that community
would say that it had £1,000,000 a year income, such and such values in
houses, etc., and that there was a picture present worth £100, and all
that would go down in his estimates or “Assessment.”
Now supposing all but two of these thousand families to be impoverished
by having to pay rents and interest to these two men. Supposing they
were all reduced to just under £500 a year, and that the balance of
£500,000 were paid to those other two. Then each of these would have
£250,000 a year. The Van Dyck is put up for auction in this community.
The poor families, of course, have no show at all. Not one of them can
afford more than £50 at the most, however much he wanted the Van Dyck.
But the two rich men can compete one against the other recklessly. They
have an enormous margin of wealth with which to do what they like, and
the Van Dyck between them may be rushed up to £50,000.
There is not a penny more of real wealth in the community than there
was before. Yet your Government assessor would come down and assess the
community in a very different fashion from the way in which he would
have assessed the first community. He will put down the total income at
£1,000,000, and the houses, furniture, etc., at so much, and he will
add: “Also a Van Dyck valued at £50,000.” Of course in real life, where
are great differences of income, this sort of thing is multiplied by
the thousand. It is another example of the way in which, as communities
get more complicated in a high civilisation, economic imaginaries
appear.
I am only introducing this subject as a very simple addition to this
little book, and I will not multiply instances too much, though one
might go on giving examples almost indefinitely.
Here, then, is a last one (4): _economic imaginaries due to the
confusion between services and economic values attached to material
things_.
We saw at the beginning of this book that wealth did not consist in
_things_, such as coal, chairs, tables, etc., but in the _economic
values attached to those things_; that is, their added use for the
purposes of human beings up to the point where they were beginning to
be consumed. We saw how the coal in the earth has no economic value,
how it begins to be of value when it begins to be mined, and how each
piece of additional labour put into it to bring it nearer to the point
of consumption adds to its economic value, until at last, when it gets
into your cellar, from being worth nothing a ton (when it was still in
the earth) it is worth thirty shillings or forty shillings a ton.
But when people assess wealth for the purpose of taxation, and in order
to find what (in their judgment) the total yearly income of a nation
is, they count not only the economic values attached to things consumed
by the nation, but also _services_.
For instance: if Jones is a good card player, the rich man Smith may
pay him £500 a year to live in his house and amuse his loneliness by
perpetually playing cards with him. I knew a case of a man in South
Wales who did exactly that. It is an extreme case, but we all of us,
all day long, are paying money for services which do not add economic
values to things at all, and which yet must appear in assessment.
All the money I earn by writing is of this kind. Now assessment of
these services creates an enormous body of economic imaginaries, and to
show you how they may do so I will give you an extreme and ludicrous
case.
Supposing two men, one of whom, Smith, has a loaf of bread, and the
other of whom, Brown, has nothing. Smith says to Brown: “If you will
sing me a song I will give you my loaf of bread.” Brown sings his song
and Smith hands over the bread. A little later Brown wants to hear
Smith sing and he says to him: “If you will sing me a song I will give
you this loaf of bread.” A little later Smith again wants to have a
song from Brown. Brown sings his song (let us hope a new one!) and the
loaf of bread again changes hands and so on all day.
Supposing each of these transactions to be recorded in a book of
accounts. There will appear in Smith’s book: “Paid to Brown for singing
songs two hundred loaves of bread,” and in Brown’s book: “Paid to Smith
for singing songs two hundred loaves of bread.” The official who has to
assess the national income will laboriously copy these figures into his
book and will put down: “Daily income of Smith, 200 loaves of bread.
Daily income of Brown, 200 loaves of bread. Total 400 loaves of bread.”
Yet there is only one _real_ loaf of bread there all the time! The
other 399 are imaginary.
Now with a ludicrous and extreme example of this sort you may say:
“That is all very well as a joke, but it has no bearing on real life.”
It has. That is exactly the sort of thing which is going on the whole
time in a highly-developed economic society. I go to a matinee and
pay 10s. for a man to amuse me. He goes off himself in the evening
and pays 10s. to hear a man sing at a concert. Next morning that man
(I sincerely hope) buys one of my books, and a big part of the price
is not paid for the economic values attaching to the material of it,
but for the services of writing it, which is not a creation of wealth
at all. The publisher pays me my royalty, and I spend part of it in
looking at an acrobat in a music hall. The acrobat pays 10s. to keep up
his chapel; and the minister of the chapel, in a fit of fervour, pays a
subscription of 10s. to a political party.
And so on. Here is a short chain of economic imaginaries: 50s.--five
ten-shilling notes--all appearing one after the other in the assessment
of the national income and corresponding to no real wealth.
It is exactly the same thing in principle as the case of the two men
singing for one loaf of bread. And the same principle applies to the
expenditure of rates and taxes. A great part of this expenditure goes
in empty services, not in services which add economic values to things.
We must, of course, distinguish between two things which many of the
older economists muddled up. A thing may be of the highest temporal use
to humanity in the production of happiness, such as good singing, or
of high spiritual value, such as good conduct, and yet that thing must
not be confounded with economic values. When one says, for instance,
that good singing, or a good picture, or a good book has no economic
value, or only a very slight material economic value (the best picture
ever painted has probably not a true economic value of more than 20s.
outside its frame, unless the painter used expensive paints or a quite
enormous canvas) one does not mean, as too many foolish people imagine,
that _therefore_ one ought not to have good singing, or good pictures,
or the rest of it.
What _is_ meant is that the examination of any one set of things must
be kept separate from the examination of another, and when you put down
the money spent on these things as though it represented real economic
values you are making a false calculation.
Well, this is only a hint of quite a new subject in Economics, which
I have put in at the end in the hope that it may be of some value
to you. Meditate upon it. As societies get more and more luxurious,
more and more complicated, more and more “civilised” (as we call
it), so do these economic imaginaries grow out of all proportion to
the real wealth of the society. If on the top of their growth you
suddenly impose high taxation, based upon your assessment, you may
think that you are only taking a fifth or a third or a fourth of the
whole community’s real yearly wealth, when in reality you are taking
a half or more than a half. And this is probably the main reason why
so many highly developed societies have broken down towards the end
of their brilliance through the demands of their tax-gatherers who
worked on assessment inflated out of all reality by a mass of economic
imaginaries.
FINIS
FOOTNOTES
[1] From the Latin word “Fiat” = “Let it be so.” As though the
Government had said: “This is not a piece of gold, only a piece of
paper. But I say it is to be taken as gold. So I order. _Let it be so._”
[2] It is important to keep our ideas rigidly clear on this point. You
can exchange a piece of fertile land for some set of values. Yet it is
not _wealth_. It is not matter transposed from a condition where it
is less useful to a condition where it is more useful to man. See the
definitions in the first chapter, “What is wealth?”
[3] “Enjoyment” does not mean, in this connection, pleasure, happiness.
It is a conventional phrase to mean “consumption _not_ directed to the
making of further wealth?” Thus the wealth consumed at a boring dinner
party is consumed in “enjoyment.”
[4] A _Strike_ is a modern English word (only used where the English
language is spoken), and signifying the refusal of the Free labourers
to sell their labour for the amount hitherto given. They cease work,
thereby interrupting the profits of the Capitalist who furnishes them
with food, clothing, etc., in the shape of wages. They do so in the
hope of compelling him, by loss of profits during their idleness, to
pay them more.
A _Lock-out_ is a modern English word now used all over the world to
signify an action of the Capitalist refusing to pay his workmen what
they have hitherto received, and hoping to starve them into accepting
lower wages by “locking them out” of his factory until they submit.
Strikes are only possible when the labourers have accumulated some
capital on which to live during the struggle. This they accumulate by
contributions to the common fund of a “Trades Union” while still in
employment. A Lock-out is only possible from the fact that such funds
are small and soon exhausted.
[5] In theory Parliament is stronger than the banks, but Parliament
no longer counts as a real governing power. The banks are far more
powerful than Parliament.
[6] This very sensible tax was invented by Disraeli in England about a
lifetime ago.
[7] Silver and gold were used together, but gold alone will serve as a
test.
[8] A simple daily example of an amateur index number is the
housewife’s idea of “cost of living.” She finds that, for the purchase
of her home, a great deal of bread, a little butter, more cheese, so
much for clothing, rent, etc., 40s. to-day go about as far as 20s. in
1913 before the war. In other words she is “taking 1913 as a base and
establishing an index number of 200 for 1923.”
Index
Banking, how arose, 168–173;
its machinery, 173–179.
Banking system, its advantage in concentrating capital, 180;
begins to invest money, 183–186;
great modern power of, 186–188.
Blanc, creator of modern socialism, 133;
its definition, 134.
Capital, Character of, 19–26.
“Capitalism,” term for Capitalist Society, 105;
“Paradox,” 120, 122.
Capitalist State, 101, 104–5;
advantages and disadvantage, 115–123.
Categories, Purchasable, 209–210.
Circulation, Efficiency in, 72–75.
Clearing House, 179.
Coal, Example of addition of values to, 27–28.
Coal Mine, example of how rent arises as a surplus, 47–49.
Communism, only logical and necessary form of Socialism, 135.
Consumption of Capital inevitable, 23.
Consumption of wealth is universal, 31–32.
Currency, Debasement of, 79–83.
Currency, Meaning of, 70.
Denmark, example of distributive state, 108, 126.
Diminishing Returns, Law of, 40–44.
Distributive State, 105–6;
advantages and disadvantages, 124–131.
Division of Labour, 54.
Douglas Scheme of Credit, 187.
Economic Imaginaries, examples of, 231–240.
Exchange, a true form of production, 52.
Exchange, Free, Formulæ of maximum wealth through, 59–60.
Exchange, International, factor of National Currencies in, 142, 143.
Exchange, Medium of, or currency, 70.
Exchange, Multiple, 57–58.
Exchange, Multiple, in International trade, 143–144.
Exchange, Potential of, 53–54.
Exchange value, necessary condition of wealth, 12–14.
Expenditure, Luxurious, productive of Economic Imaginaries, 233.
Exports not a test of wealth, 146–149.
Formulæ defining production of wealth, 26.
Formula, defining wealth, 14.
Formula of Consumption, 32.
Formula of Maximum Wealth through freedom of exchange, 59.
Formula, of Production by Transport and Exchange, 32.
Formula of Protection, 64.
Formula of Potential of Exchange, 56.
Formulæ of Subsistence, Interest and Rent, 50.
Free Trade, arguments for, 153–155.
Free Trade and Protection, detailed consideration of, 150–166.
Free Trade and Protection, Elements of, 61–65.
Gold and Silver, Natural advantages of, as money, 69–70.
Great War, its effect in destroying value of currency, 79–83.
Human energy in production of wealth, conventionally called “Labour,”
18–19.
Imaginaries, Economic, examples of, 231–240.
Imports test of wealth, not exports, 146–149.
Incomes, Inequality of, productive of Economic Imaginaries, 235.
Index Number, 204–208.
Inequality of Incomes, productive of Economic Imaginaries, 235.
Intention, a necessary adjunct to Capital, 22.
Interest, high, not connected with though often confused with Usury,
217, 218.
Interest, Nature of, 39–45.
International Exchange, factor of National Currencies in, 142, 143.
International Trade, why vital to England, 148–149.
Islands, Three, Example of in proof of Protectionist Theory, 160–165.
Labour, Division of, 54.
Labour, term for all human energy in production of wealth, 18–19.
Labour “worth while of” or Standard of Subsistence, 30–38.
Land, conventional term for all natural forces used in production of
wealth, 17–18.
Land, Labour, Capital, Conventional terms for three factors of
wealth, 16.
Law of Diminishing Returns, 40–44.
Loan, Unproductive, the test of Usury, 218–221.
Luxurious Expenditure, productive of Economic Imaginaries, 233.
“Marx,” assumed name of Mordecai, 134.
Material objects, not wealth, 11–12.
Means of Production, 99–100.
Medium of Exchange, or currency, meaning of, 70.
Money, how it arises, 66–69;
Qualities of, 68–69.
Money, Paper, its function, 75–78;
its corruption, 78–83.
Money, Social value of, three factors in, 202–203.
Mordecai, or “Marx,” principal propagator of Socialism, 134.
Multiple Exchange, 57–58.
Multiple Exchange in International trade, 143–144.
Natural forces used in production of wealth, called “Land,” 17–18.
National loans and debt, how arise, 189–191;
method of shirking interest on, 192–193.
Overlap, example of an Economic Imaginaries, 231–232.
Potential of Exchange, 53–54;
formulæ of, 56.
Prices, Names for exchange value in gold, 71–72.
Production, Means of, definition, 99–100.
Production of wealth, three necessary factors in, Land, Labour and
Capital, 15–26.
Production, Process of, 27–32.
Property, Nature of, 95–97;
private, 96.
Protection and Free Trade, detailed consideration of, 150–166;
arguments advanced for, 152, 156–157;
example of the Three Islands, 160–165;
of Pig Meal in England, 165–166.
Protection and Free Trade, Elements of, 61–65.
Protection, Economic, Formula of, 64.
Rent, a surplus, 47.
Rent, Example of Coal Mine, 48.
Rent, Interest, Subsistence, the three divisions of wealth produced,
33–51.
Rent, Nature of, 46–51.
Saving, a necessary process in formation of Capital, 24–25.
Services and Wealth, confusion between productive of Economic
Imaginaries, 236–238.
Servile State, 100, 103;
advantages and disadvantages, 109–114.
Silver and Gold, Natural advantages of, as money, 69–70.
Single Tax, theory of, 198–200.
Socialism, its creator in modern terms. Blanc, 133;
its definition, 134.
Socialism, only conceivable as Communism, 135;
failure of, 135–140.
Standard of subsistence, 36–38.
State, Capitalist, 101, 104–5;
advantages and disadvantages, 115–123.
State, Distributive, 105–106;
advantages and disadvantages, 124–131.
State, Servile, 100, 103;
advantages and disadvantages, 109, 114.
Subsistence, Nature of, 35–39.
Subsistence, Standard of, 36–38.
Taxation, direct and indirect, 193–194;
rules of, 194–197.
Taxes, law in distributive state, 129.
Tribute paid to wealthy countries by poor ones, 145–146.
Unproductive Loan, the test of Usury, 218–221.
Usury, definition of, 221;
why neglected, 223–227.
Values, Economic, attached to material objects, 12.
Wealth, Definition of, 10–14.
Wealth, production of, three necessary factors in, Land, Labour and
Capital, 15–26.
Transcriber’s Notes
Punctuation, hyphenation, and spelling were made consistent when a
predominant preference was found in the original book; otherwise they
were not changed.
Simple typographical errors were corrected; unbalanced quotation
marks were remedied when the change was obvious, and otherwise left
unbalanced.
Illustrations in this eBook have been positioned between paragraphs
and outside quotations. In versions of this eBook that support
hyperlinks, the page references in the List of Illustrations lead to
the corresponding illustrations.
Footnotes, originally at the bottoms of the pages that referenced them,
have been collected, sequentially renumbered, and placed near the end
of the book, just before the index.
The index was not checked for proper alphabetization or correct page
references.
Page 164: “Island B cannot do.” perhaps should be “Island A cannot do.”
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