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Title: The basic facts of economics
A common-sense primer for advanced students
Author: Louis F. Post
Release date: April 27, 2024 [eBook #73475]
Language: English
Original publication: United States: Columbian Printing Co., Inc, 1927
Credits: Aaron Adrignola 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 THE BASIC FACTS OF ECONOMICS ***
Transcriber’s Note: Italics are enclosed in _underscores_. Additional
notes will be found near the end of this ebook.
The Basic Facts
of Economics
A COMMON-SENSE PRIMER
FOR ADVANCED STUDENTS
[Illustration]
By LOUIS F. POST
[Illustration]
_Author’s Edition_
WASHINGTON, D. C.
2513 TWELFTH STREET, N. W.
1927
_Price Fifty Cents_
Copyright, 1927, by
LOUIS F. POST
PRESS OF
COLUMBIAN PRINTING CO., INC.
BINDING BY
GEO. A. SIMONDS & CO.
WASHINGTON, D. C.
Accurate Observation and Clarity of Thought
are the Prime Requisites of Economic Study
PUBLICATION COMMITTEE
ANDREW P. CANNING, _Chairman_, Chicago, Ill.
JAMES H. BARRY,
San Francisco, Calif.
GEORGE A. BRIGGS,
Los Angeles, Calif.
MRS. EDWARD O. BROWN,
Chicago, Ill.
EDMUND VANCE COOKE,
Cleveland, Ohio.
STOUGHTON COOLEY,
Los Angeles, Calif.
OTTO CULLMAN,
Chicago, Ill.
MRS. ANNA GEORGE DE MILLE,
New York City.
JAMES H. DILLARD,
Charlottesville, Va.
ROBERT E. GRAVES,
Chicago, Ill.
ANGELINE LOESCH GRAVES,
Chicago, Ill.
WILLIAM C. HARLLEE,
Washington, D. C.
LEWIS J. JOHNSON,
Cambridge, Mass.
FENTON LAWSON,
Cincinnati, Ohio.
WILEY WRIGHT MILLS,
Chicago, Ill.
C. L. MOULTON,
Glen Ellyn, Ill.
JACKSON H. RALSTON,
Palo Alto, Calif.
WALTER I. SWANTON,
Washington, D. C.
EDWARD N. VALLANDIGHAM,
Chestnut Hill, Mass.
JOHN Z. WHITE,
Chicago, Ill.
TABLE OF CONTENTS
PAGE
PREFACE vii
FIRST LESSON--ECONOMICS 1
SECOND LESSON--MONEY 9
THIRD LESSON--TRADE 17
FOURTH LESSON--THE BASIC FACTS 27
FIFTH LESSON--THE PRODUCTIVE PROCESS 40
I. HUMAN FACTORS 42
II. NATURAL RESOURCE FACTORS 50
III. ARTIFICIAL OBJECTS 52
IV. SECONDARY CATEGORIES 56
1--CAPITAL 56
2--TRADE 60
3--UTILITY, VALUE, MONEY, PRICE, BANKS 63
4--BALANCES OF TRADE 67
V. AN ILLUSTRATION OF THE PRODUCTIVE PROCESS 70
SIXTH LESSON--DISTRIBUTION 74
I. WAGES FOR LABOR 75
II. RENT FOR LANDOWNERSHIP 83
III. TRADE 91
IV. MONEY 94
SEVENTH LESSON--REVIEW 97
QUESTIONS FOR SELF-EXAMINATION 101
PERSONAL ACKNOWLEDGMENTS 103
PREFACE
The purpose of this common-sense explanation of Economic phenomena is
to disclose and emphasize those comprehensive and familiar primary
facts which embody the myriads of secondary facts that are involved in
Economic science. To avoid confusing those complicated details is to
promote the clear thinking which every Economic problem demands, be the
problem one of collegiate study, of political policy, or of business
importance.
The following pages aim, therefore, at encouraging all thoughtful
citizens so to classify the details of the general subject in their own
minds as to enable them to avoid centering their mental vision upon
Economic trees so intently that they cannot see the Economic forest as
a whole. It aims also at discouraging the opposite inclination to view
the Economic forest so exclusively as a whole that the Economic trees
of which it is composed cannot be distinguished.
L. F. P.
The Basic Facts of Economics
A COMMON-SENSE PRIMER FOR ADVANCED STUDENTS
FIRST LESSON
ECONOMICS
On the surface, Economics appears to be the science of making money.
This appearance is due, however, to a careless recognition and
erroneous application of the fact that Economic accomplishments are
measured by money standards and expressed in money terms.
When, for example, a builder builds, he builds to make money. Money
measures the Economic extent of what he is doing, and money terms
express its Economic desirability. They also express and measure his
motive, which is the compensation he can command in the currents of
trade.
A merchant makes money when he manages a profitable business.
So does a manufacturer.
Farmers make money when they sell their produce profitably. Nor only
when they sell it, but also while they cultivate it; for every day’s
growth adds to the money measurement of a crop.
Wage-workers by the day, the week or month, and salary-workers by the
year, also workers on commission or for percentages or for profits,
make more or less money as working opportunities are more or less
plentiful, and wages or salaries or percentage totals and profit totals
are consequently higher or lower.
Engineers, lawyers, physicians, architects, dentists, clergymen,
teachers--all professional workers,--make money to the extent of the
marketability of the services they offer.
And investors, do they not invest by money measurements and in money
terms for the purpose of obtaining Economic incomes measured by money
and expressed in terms of money?
Manifestly, the immediate object of everybody’s activity in the field
of Economics is to make money.
Does one desire food? By making money he gets food. Does one desire
clothing? He gets it by making money. Does he wish for housing,
furnishings, automobiles, railway or steamboat transportation,
necessaries of any kind, luxuries of whatever variety, household
service, professional service, legislative or judicial service,
mechanical service, mercantile service, clerical service? By making
money he gets them. Does one wish for slaves? If slavery be an
institution of his time and place, he may have slaves by purchases with
the money he makes. Should he be a slave himself, he may purchase his
freedom with money if he can get it. Does land-ownership appeal to one?
Let him make money and he can buy land. Whatever object the Economic
field may offer for the satisfaction of human desires, that object is
attainable by making money. In no other way can it be attained through
Economic processes.
If gifts be cited as exceptions let the fact be noted that giving is
not an Economic process. It lacks the element of exchange or trade. So,
too, of theft in any of its forms. In genuine Economics there must be
two gainers in every trade. There is no such science as Economics of
the Forty Thieves variety.
Even in such seeming exceptions to the Economic importance of money
as are offered by barter, in which no money passes and no money
accounting is made, comparisons of the objects thus directly exchanged
are nevertheless contemplated by the exchangers in terms of money.
The owner of a horse that might sell for two hundred dollars, would
not barter it for a horse that could sell for only one hundred--not
unless he got “boot” enough to even up the money difference to his
satisfaction. Nor would the boy with a two-dollar penknife “swap even”
for a one-dollar jackknife. It is only when the two horses or the two
knives seem to their respective owners to be approximately equal by
money measurement that an “even swap” is conceivable.
Another seeming exception to the money-making characteristic of
Economics depends upon individual isolation. That isolated individuals
may gather food and improvise shelter and clothing without thinking of
them in terms of money, is true enough; but the activities of persons
thus isolated are not Economic exceptions, for the science of Economics
is a social science. Although some Economic phases or phenomena may be
picturesquely and aptly illustrated by reference to the experience,
actual or imaginary, of isolated individuals like Robinson Crusoe
on his island, states of human isolation are outside the limits of
Economics.
Inasmuch, then, as the object of the human factor in the science of
Economics is to make money, and as there can be no science of Economics
without the human factor, Economics is comprehensively and accurately
definable, on the surface, as the science of making money.
But making money in the Economic sense must be distinguished from
narrower uses of the phrase. To manufacture coins legitimately, as at a
mint, is to “make money,” but only in one Economic particular--only in
the narrow mechanical sense in which weaving cloth is “making cloth.”
Like weaving cloth, it is but an item in the multitudinous phenomena of
that money-making which superficially defines the science of Economics.
The same observation is applicable to the occupations of engraving and
of printing paper currency legitimately.
Illegitimate makings of either paper currency or coin, like all other
forms of forgery, are not in any sense making money within the purview
of Economic science. They are varieties of theft, and Economic science
excludes theft of every kind, even legal kinds, such as slavery. This
exclusion is not for moral reasons, it may be well to interject for the
benefit of such advanced students of Economics as recoil from mixing
moral principles with Economic science. It is due to the fact that
exchange, or trade--an essential element in Economics,--is in theft
utterly lacking.
In the Economic sense, making money is making it for all concerned
in any particular process, and not for one or more of the parties at
the expense of the others. No art of getting something for nothing
can be within the scope of Economic science. One-sided methods
of making money, whether frankly labeled “theft” or “gambling,”
or shrewdly disguised in spurious business ethics, are alien to
Economic money-making. Within the domain of Economics no money-making
transaction belongs unless it involves the making of money by all
parties to the transaction.
To make money in that mutual sense is to augment the supply or the
serviceableness of whatever commodities money terms may measure and
express, and of the portions or shares of all who contribute to the
augmentation.
In phrasing more complete than that of “making money,” Economics
is the science of making money by earning it. Getting money without
earning it is related to Economics only in a science-disturbing sense.
It disturbs the normal Economic relations of effect to cause in the
production and dissemination of humanly desirable objects. To realize
the truth of that statement, the student need only momentarily conceive
of theft as universal. Since universal theft as an Economic phenomenon
would be utterly destructive of normal Economic relationships, of
beneficial effects from normal causes, so must theft to any extent
operate destructively to that extent. The only thinkable relation of
theft to Economics is analogous to the relation of murder to the human
race. That Economic study may comprise considerations of how to exclude
stealing from Economic customs, does not go to prove that stealing is
a factor in Economic science. It goes no farther than to prove that
stealing may become an Economic parasite.
Even as a parasite, stealing could hardly have wormed its way to the
Economic border line, much less across it, but for a disposition among
advanced students to confuse normal Economic phenomena with arbitrary
business customs.
“Business” might indeed be the nearest approach to a synonym for
“Economics.” It would be an exact synonym but for one variation.
Whereas Economics relates to a comprehensive social organism which
(notwithstanding “scientific” contentions to the contrary) is subject
to natural laws of human association (sequences of cause and effect),
Business is but a limited collection of individual interests or private
organizations that are influenced and largely governed by arbitrary
customs. These customs may or may not be in harmony with the normal
relations of cause and effect in Economics. And as to each particular
business, it is operated, as accountants frankly admit, only “for the
benefit of its proprietor.”[1]
[1] The quotation is from “Modern Business”, by Thomas W.
Mitchell, Ph. D. New York: Alexander Hamilton Institute.
1918–1919.
In some of its vulgar connotations Business might very well answer to
the insolent definition that it consists in the adventures of sprightly
gentlemen trying to sell nothing for something to other sprightly
gentlemen who are trying to buy something for nothing. In so far,
however, as that definition may be appropriate, it applies only to
business abuses, not to Business as a possible synonym for Economics.
It defines Business only as theft might define morality.
To be a closer synonym for Economics, Business must deserve a
definition relating its customs to natural Economic law (a subject
to be considered in a later Lesson) and extending its functions more
completely to universal mutual service. Moreover, its definition
must widen the Business concept so as to include all kinds of such
service. Business can no more exclude from its realm particular
Business specialties, though that be customary, than it can include the
operations of “confidence men,” as it is sometimes supposed to do. Its
functions are not limited to commerce, nor to banking, nor to any other
of those Business specialties to which careless speech, and sometimes
snobbish thought, tend to narrow the meaning of the word.
Business is that function of social life which includes all serviceable
specialties. Such terms as “commercial,” “mercantile,” “industrial,”
“agriculture,” “labor,” “the professions,” and so on, denominate
specializations or sections or subsidiary departments of Business, not
Business as a whole. They are useful for subclassification; but, like
all subclassifications, whether in Economics or in any other science,
they are misleading when perverted into general terms for primary
or fundamental or comprehensive categories. The term Business, like
the term Economics, should include them all. Every kind of service
necessitates busy-ness; and serviceable busy-ness, what is that but
Business?
Considered comprehensively, then, and excluding parasitical adhesions,
Business might be, as some advanced students of Economic phenomena
suppose it to be, another name for Economics. In the scholastic sense,
Economics is the more orthodox term; in the practical sense Business
could better express the idea. Both terms might have practically the
same meaning if considerately used. Honest Business, inclusive of all
serviceable activities--service for service, to adopt a phrase in
definition of Business--would be identical with Economics. Either, like
the other, may be described superficially as the process of the science
of making money.
Quite consistently with the foregoing survey, Economics has been
described as the science of “mankind making a living.” This definition,
too, excludes the solitary life by limiting Economic science to
cooperative mankind--in other words, to Economic association. It,
too, identifies Economics and legitimate Business; for only through
legitimate Business activities can cooperative mankind make a living.
It, too, excludes theft in all its forms and guises; for so much of
a living as some may make by any kind of theft, others must lose as
victims of theft. It, too, brings Economics on the surface and Business
on the surface within the definition of “the science of making money;”
for only by means of money measurements in money terms does or can
mankind in the mass make its living.
But making money is only a surface fact in Economics. It is but a
means to the end. By no possibility can it be rationally regarded as
the ultimate object. The ultimate object of Economics is earning the
living that money will buy. Both the object and the method lie below
the surface of money-making. To Economics, making money is somewhat as
book-keeping is to a commercial business. It is the surface expression
of all underlying Economic phenomena.
Before those phenomena can be thoughtfully observed and studied,
the relation to them of money-making must be keenly scrutinized and
intelligently considered.
SECOND LESSON
MONEY
What is Money? and what are its functions? Money is the medium of
trade, its denominations the language.
Resting on the surface of Economic phenomena, Money and Money terms
spread over the whole of the Economic area. All subsurface phenomena in
Economics are measured in trade by Money units; the details of trading
transactions are discussed and recorded in Money terms.
Money terms vary with localities. In the United States, Money talks in
terms of “dollars;” in Great Britain in terms of “pounds sterling;” in
France in terms of “francs;” in Germany of “marks;” elsewhere in local
terms too numerous for other than encyclopedic description. But the
value measurements that Money makes of commodities in the processes of
trade are everywhere, at any given time, practically the same.
For lack of stability those measurements do vary from time to time
with confusing effect. To compare them with measuring rods for length,
breadth and thickness, it is as if yards, feet and inches were
constantly contracting and expanding with reference not only to the
magnitude of measurable objects but also to one another. Precisely
in that way does Money in fact fluctuate. It always has, and unless
scientifically standardized, it always will.
Nevertheless, whatever the fluctuations and local discrepancies of
Money may be, it everywhere talks, when its language is translated, to
the same general Economic effect at any given time. Stabilized, as it
might be, it would talk to the same general Economic effect everywhere
and all the time.
What language is to thought, Money terms are to trade. The trading
transactions of the whole world are effected by means of Money
standards and in the language of universally interpretable Money terms.
Conventionally defined, Money consists of coins minted by
governments from precious metals more or less alloyed. Those forms
are supplemented, however, with subsidiary forms commonly known as
“currency.”
There is an Economic theory that metal coins alone are Money, paper
currency being but promissory notes redeemable in coin. This theory is
useful for testing Money media by coinage standards. But with reference
to nearly if not all purposes of current trade, the intrinsic value of
the Money piece is of slight Economic importance, or would be if Money
were stabilized.
What counts in Economic measurements is Money denominations--Money
language rather than Money pieces. For in the world-wide processes of
trade, only a slight proportion of either metal coin or paper currency
passes from hand to hand. Nearly all Money measurements are entered in
books of account; and in these the debits and the credits so nearly
offset one another, by and large, that the difference as a whole is
too slight for consideration in passing down from the Money surface of
Economics to the basic facts. A common and impressive exemplification
is afforded by clearinghouse statistics. These show that the enormous
banking transactions in Money terms which merge at the clearings daily,
are balanced off with a trifling percentage of tangible Money.
Let the fact be emphasized then, that in defining Money as the medium
of trade, Money terms rather than Money forms are to be understood as
the trading medium.
When a customer at a retail store buys a supply of groceries, his
payment may be made in Money pieces, either metal or paper. Yet it
may be made instead with a check drawn against his bank balance, or
through a charge to his account in the retailer’s books. If paid in
Money pieces, either at the time of purchase or later, some if not all
of those pieces will go to the storekeeper’s bank and be credited to
him in Money terms on the books of the bank. If the payment be made by
check, the amount of the check will be entered in the storekeeper’s
bank account as if it were a payment in Money pieces instead of Money
terms. Be such transactions as they may, however,--cash payments or
check payments or drafts or promissory notes--tangible Money plays on
the whole but a small part.
From purchases by customers at retail stores back to wholesalers;
back of wholesalers to manufacturers of finished products and
of unfinished products and of tools and of every other kind of
merchantable object; back to land-owners for the sources of supply and
the sites for production and delivery; back to farmers, to miners,
to transportation agencies, to a vast though scattered army of
wage-workers; through many a complicated series of accounts at stores,
factories, mines, real-estate offices, railway and steamship offices,
banks, clearinghouses--must we wend our way if we would investigate
the processes of trade in detail. Yet only in slight degree do those
processes involve the use of Money forms. Though coinage standards play
their part, almost all trading transactions are made in Money terms and
not with Money pieces.
In the process, then, of making a living, mankind trades commodities
in terms of Money rather than in its forms, doing so principally
through financial accounts. Peering into the details of those accounts
(as professional accountants and other business specialists must often
do when examining the particulars of their respective specialties),
however useful this may be within the limits of the specialization,
is always futile and often confusing or misleading for purposes of
Economic study or investigation as a whole. In Economics the purpose is
not to understand the technical details of business specialties simply.
It is chiefly to relate those details to one another by determining
their respective Economic categories so that the whole subject may be
reasoned about comprehensively.
Some business specialties may necessitate a knowledge in detail of the
physical characteristics of sugar, for instance, or of cotton; but
what an understanding of the science of Economics requires in such
particulars is an intelligent grasp of the nature of sugar or cotton
with reference to fundamental Economic categories--whether they are
human, or natural, or artificial,--and to what extent, therefore, they
are Economically related to all other commodities in the realm of
trade. For into one or the other of those three categories, all the
myriads of Economic details assemble themselves.
For purposes of Economic specialization, this assignment of details
to categories is not enough; but without it no specialization is
dependable. Some such identification of particular facts with reference
to their fundamental differences or identities, is absolutely necessary
for accurate observation of Economic phenomena and clearness of
Economic thought; and are not accurate observation and clarity of
thought the prime requisites of Economic study?
Not to make those identifications and differentiations is to
turn Economics into the hopeless mixture of “masses of particular
unexplained facts” which John Morley deplored as characteristic of a
certain type of Economic science. “Scraps and pickings of reality” are
worse than useless in any study of Economic science unless harmoniously
classified according to their respective fundamental characteristics.
This comment does not mean that Economic details are to be ignored
except for classification, even by non-specialists. Far from that.
It means that they are to be thoughtfully considered and accurately
classified for further and comparative consideration. To illustrate:
Mankind must be regarded as a class or category in Economics; but not
according to personal or individual capabilities, idiosyncracies, or
social, business, or legal status. To the business specialist, the
personal qualities of an associate or assistant are important; but
Economics as a comprehensive science, the science of all “mankind
making a living,” knows those special distinctions only in a secondary
sense. It is concerned primarily with the individual man only as a
unit in the human mass--only from the fact that he is in the human
category and not in one or more other Economic categories. So of all
Economic facts. To study Economic details without reference to Economic
generalizations might be likened to studying an alphabet without
reference to language, or numerals without reference to mathematics.
Economic problems are not problems of how one individual may make a
living at the expense of others. Such problems belong in the plundering
pursuits. In Economics the basic problem is how all may make a living
at the expense of none.
To that problem business details give no clew, unless the details be
assigned to fundamental Economic categories. Piling up details without
assigning them is, as Henry James the Elder wisely expressed it, to
“sink the truth in endless confusion.” The last person in all the
world from whom to get the basic facts of Economics is the business
specialist, for he habitually limits his observations to his own
specialty. Perhaps, however, a certain type of Economic teacher may
be equally untrustworthy in that respect--the teacher who, though he
imitates the physical scientist in devotion to details, disregards the
physical scientist’s fidelity to the relations of cause and effect.
On the Economic surface we have the category of Money. To the
wage-worker Money is the medium for trading the commodities he helps
to produce for those he wishes to consume. To the merchant, however,
or the manufacturer, or other Economic specializer, Money presents
also a variety of minute details for expert study. The business
accountant, for example, must familiarize himself with numerous details
in connection with Money in its minute relationships to his specialty.
He might very likely confuse facts Economically different, yet as a
special business matter practically identical--the Money measurement of
a natural mineral deposit, for instance, with the Money measurement of
its artificial equipment. As an accountant in that specialty he would
be right in doing so. Or, in slavery days, for another instance, an
accountant might properly have classified the Money measurement of a
human chattel with that of a domesticated horse or a constructed house.
He also would have been right; for, as an accountant, he would have
been dealing with a customary classification of private property; and
not with Economic science comprehensively. It is doubtless specialty
work of such kinds that has involved the science of Economics in so
much confusion, especially among advanced students who are prone to
identify business conventionalities with Economic normalities.
As a science, Economics cannot make its categories according to
conventional maladjustments. It must make them according to essential
differences. These admit of no categorical identification of mineral
deposits with mining machinery, or of human beings with domesticated
animals or buildings. Such classifications are as absurd in Economics
as identifying sun and earth would be in astronomy, or bone with brain
in anatomy.
The science of Economics--that is to say, the science of Business in
the broad social sense in contradistinction to the narrow private
sense--neither requires nor permits such classifications as slaves
with domesticated animals, or mining machinery with natural mineral
deposits. It is obedient to the ancient but still vital maxim of
philosophy that things which are essentially different must not be
mixed nor things that are essentially the same be separated.
Essentially different things in Economics are indeed confused by Money,
which knows no difference, except in degree of Money measurement,
between slaves and cattle, or mineral deposits and mining machinery.
As the medium of trade, Money must measure the values of everything
tradable; and custom may make tradable objects--human beings, for
instance,--which in the science of Economics are no more within the
normal boundaries of trade than are transfers by theft.
Whether we think of Money as tangible coin, or only as the Money signs
and symbols of account books, Money is not a basic fact in Economics.
Mankind cannot live upon Money. It is neither eatable nor wearable. Nor
is it shelter. Likewise of Money terms. Money is a secondary Economic
factor--a representative of value, whereby the relative desirability
of commodities is measured and expressed in trade. It is therefore the
comprehensive surface-fact of Economics beneath which the basic facts
must be sought.
In other phrasing, Money is that secondary category in Economics which
comprehends every kind and form of medium for trading commodities
in the world-wide process that we descriptively characterize as
“mankind making a living.” Mankind being a basic Economic category,
and the process of making a living being the Economic human necessity
and purpose, Money can have but one comprehensive significance in
Economics. Be it in the form of coin, or in the form of paper currency,
or in the form of entries in books of account (where it appears only in
name and arithmetical denominations), it is the universal medium and
Economic measuring rod of exchanges or trade.
Whether one makes Money or not depends, as a rule, upon which side of
his accounts in ledgers the Money balance appears at final accountings.
It is Money in this sense that goes farthest to justify the superficial
definition of Economics as the science of making money.
We only skim the surface of Economic phenomena, however, by coming
to an understanding of the nature and the function of Money. Money
is only one of the secondary categories which must be identified and
properly related in any thoughtful study of Economic science. Below
that financial surface are phenomena which Money merely measures
and compares. The first of those underlying phenomena is Trade, for
which Money is the medium and upon which our attention must next be
concentrated.
THIRD LESSON
TRADE
Trade, for which Money is the Economic medium and Money-terms the
Economic language, consists superficially in interchanges of tangible
commodities, but essentially in interchanges of human service.
Tangible commodities, with a semi-exception as to real estate, are
produced by interchanges of human service from the very extreme of the
primary production of those commodities to and including their final
delivery for ultimate consumption. Real estate, too, is thus produced
in so far as it consists of structures, of soil cultivation, of
mining mechanisms, of excavations, or of any other kind of artificial
alteration.
All commodities are subjects of Trade. Artificial commodities, such
as depend upon human service for production, are not only subjects of
Trade but are also its products. This is absolutely true of every kind
of artificial commodity that is produced to completion, inclusive of
final delivery, by means of Economic specializations--specializations
in human service. The primary materials and the unfinished parts are
gathered together and delivered, both in the intricate process and
finally, by means of Trade.
A loaf of bread, for example, is brought to completion from
harvest-field to bakery, and thence as a finished product, through
many deliveries (including delivery to its ultimate consumer) by means
of Trade. So is the implement with which it is cut at the consumer’s
table, and the plate on which it rests, the table at which it is
served, the cloth which covers the table, the chair in which the
consumer sits at the table, and the dining room floor beneath them all.
Of the vast variety of such commodities as loaves of bread and knives
for cutting them and plates and tables and tablecloths by means of
which they are served for ultimate consumption, very few if any at all
of that variety of commodities--whether finished, as a loaf of bread on
the consumer’s table, or unfinished, as the growing grain or the flour
of which the loaf is composed, or the fuel that bakes it, or the bricks
or the metal of the baker’s oven, or the finished oven itself--give
distinctive expression to all the human services they embody.
That fact could be further illustrated with any artificial commodity
in course of Trade. A hogshead of molasses on a wharf would answer
the purpose. To thoughtless observation this commodity might seem
to embody no other human service than work on a sugar plantation
and by barrel-makers in a coopering shop. But if we think about it
with penetration and clarity, we readily realize that it embodies
the services also of lumbermen, of miners, of railway workers, of
bankers, possibly of importers and mariners, probably of exporters and
their assistants, certainly of draymen, of wharfmen, of merchants, of
book-keepers and other accountants--a veritable host of specialists
whose contributory services are not emphasized by the tangible
commodity (a hogshead of molasses on a wharf) as are the services of
plantation-hands and barrel-makers. Multitudes of human services in
distracting variety are concealed in that familiar commodity from the
vision of all but specialists; perhaps from their vision too in so far
as the services are outside of their respective specialties. And if we
were to follow that hogshead of molasses to its Economic destination,
we might perceive many an additional human service embodied and
concealed in commodities of Trade for which the material would have
been supplied in part by molasses from the hogshead and probably in
part by the hogshead itself.
Trade is not a mere business custom, as is sometimes carelessly
supposed. Only to the extent that they conform to natural Economic
law can trading customs be socially beneficial or continue without
developing social disaster.
Many customs do enter into Trade, even as habits enter into the life
of individuals--some beneficial and some vicious, some in harmony with
natural law and some defiant or evasive of it. But essentially Trade is
a natural expression of Economic relationships. It is consequently as
dependent upon conformity to natural laws as are the physical functions
of individuals. Drawing inspiration continuously from natural human
impulses, giving constant and increasing satisfaction to natural human
needs, bringing natural human units ever closer into a natural social
whole, contributing one of the two indispensable and fundamentally
effective as well as obvious natural powers and facilities for the
continuous and increasing production of human satisfactions, Trade is
evidently as natural to the social whole as is breathing or eating to
the individual. It must therefore be as completely subject to natural
law.
By nature man is “a trading animal.” So it has often been said, and the
saying is manifestly true. There is, however, no implication here that
man is an animal only. The suggestion is that, although an animal, he
is more than an animal, and that Trade develops phenomena which go to
prove it.
Of all animals, man only is within the jurisdiction of the natural
Economic laws of Trade. What other animal than man could be correctly
described, in a comprehensive sense, as “a trading animal”? Not only
is this characteristic distinctive. Not only is it peculiarly human.
But also, and by force of natural Economic law--not commercial custom,
but those natural sequences of effect from cause to which arbitrary
commercial customs must yield or come to grief,--it enables mankind,
the larger man, the social man, to multiply the Economic powers of each
individual of the human race.
Primary among those natural laws of Trade is the thoroughly tested
sequence alluded to above, that Trade multiplies productive power.
It does so by inviting, requiring and developing that characteristic
phenomenon of Trade which is commonly called “division of labor,”
but may be distinguished best as Economic specialization.[2] This
phenomenon gives to the world, gives to it as a natural effect of
Trade, a productive power per capita far and away beyond the productive
power of any isolated individual.
[2] The principle of Economic specialization could hardly
be better illustrated than by the reply of an old-time
compositor in a printing establishment who contemplated
making a contract for the erection of a cottage home for
himself and his family, when a friend suggested that he
might save money by digging the cellar himself between
working hours at the case. He replied: “I can dig a better
cellar and more easily at the case with a composing-stick
than on the spot with a pick and shovel.”
By means of a vast variety of Economic specialties--such for
illustration as farming, engineering, mining, lumbering and their
respective and numerous subdivisions, through a vast variety of
other Economic specialties, such as transporting and manufacturing
and merchandizing, along with their respective and multitudinous
subdivisions, all supplemented by such other Economic specialties as
banking, teaching, preaching, adjudicating, writing, acting, and the
fine arts--the necessaries for individual sustenance and the luxuries
for individual enjoyment are produced and delivered in quantity,
variety and perfection which, when calculated per capita, rise far
above and extend far beyond all the possibilities of isolated
individual life, far above and beyond the possibilities of community
life in narrow environments.
Were there but one individual to be considered, the natural advantages
of Trade would seem as fanciful as a fairy story. Were there only a
small group, the natural advantages of Trade, though manifest, would
be too few and too primitive to disclose its wondrous powers of
production. But when millions of individuals cooperate, some serving
all and all serving each through the intricacies of worldwide Trade,
mankind is welded into an Economic unity, a gigantic oneness--a larger
human being, “the social man” as this social organism is sometimes
not inaptly called--an organism composed of individuals who give it
vitality and whom in consequence it serves as a beneficent giant might
serve a cooperating pigmy.
Involving the production of commodities by individual contributors
of human service through an infinity of specializations, and their
assignment to individuals by the intricate processes of service for
service, Trade tends not only to increase the per capita supply of
commodities, but also to effect their fair per capita assignment in
proportions corresponding to the relative desirability of the numerous
and various contributions of individual service to their production.
In describing Trade as consisting essentially of interchanges of human
services, we are of course to be understood as including not only such
services as are embodied in tangible commodities, but also personal
service. Nor does it make any Economic difference whether the personal
service be of the “servant” type or of the “professional” type.
“Professional” services, such as those of Economists, Engineers,
Architects, Clergymen, Lawyers, Physicians and Teachers are in the
Economic domain of Trade. Not only are they exchanged for tangible
commodities, but they contribute to the production of such commodities
by conserving, and it may be by increasing the efficiency of more
obvious producers. The Economist studies productive relationships
for the purpose of securing harmonious industrial adjustments; and
so vital is his function that righteous social relationships are
imperiled, and righteous readjustments obstructed, if he mistakes
chaos for order. The Engineer designs, plans and directs; and so
important is his function that the work of hosts of producers depends
upon it. If he mistakes, great structures may fall. The Architect is
an Engineer in a special sense: if he makes mistakes, buildings may
lack stability or beauty or both. The Lawyer may disentangle societary
complications that would operate as a check upon production and Trade.
The Clergyman may discourage obstructive conduct; the Physician may
conserve the health of more direct producers so as to increase their
efficiency; the Teacher may increase their efficiency by instruction.
And so of personal services of the Personal Servant type. Whatever a
Personal Servant may do for a commodity specialist which otherwise the
specialist must do for himself at the cost of contributing less to the
production of tangible commodities, is to that extent a contribution
to the production of those commodities. Interchanges of human service,
if the interchangers act in freedom, each getting from the channels
of Trade the equivalent in service of the service he renders, are
contributions to Economic production.
The relative desirability of human services rendered in promoting
production, whether directly or indirectly, is commonly as well as
commercially and Economically known as Value, which, as already
explained, is expressed in Money terms and compared by Money
measurements.
To receive a share in the continuous distribution of commodities
through Trade is the human motive for all Economic activity, from
leadership in Economic service to service for “wages.”
A “wage-worker,” for illustration, lends a hand--becomes “a hand,”
if you please,--at harvesting wheat. His compensation is to be, let
us assume, his food and lodging during harvest and twenty dollars in
Money at the end of his job. The work being done, his food and lodging
having been meanwhile supplied to him, and the twenty dollars in Money
having been duly paid him, what has been the Economic nature of his
transaction? Has not this “harvest hand” exchanged his contribution
of service to the production of wheat, for his living while helping
to produce it and for a twenty-dollar measurement of any commodity or
commodities he may wish to draw from the channels of Trade?
Assume now that he draws from those channels a pair of shoes, a hat
and other commodities at the village store, including, perhaps, some
tobacco for his pipe and a bit of candy for a little friend. As
matter of Economics, then, what has he done but Trade his service at
harvesting for his living while at work and some service-produced
commodities for still further satisfying his desires?
And the Economic leader in that connection, the farmer who hired
the “harvest hand,” what has been his part in the transaction? In
the last analysis has he not for harvest service traded food, house
accommodations, household service, and his Money title to twenty
dollars’ worth of any commodity or commodities that may be flowing
through the channels of Trade--a title for which he presumably has
given, or through debit and credit adjustments must in the future
give, his own service or the service of others which he may naturally
and justly or only customarily and unjustly command as his own?
When an employer in any branch of Economics pays an employee “wages”
or “salary” or other compensation for service, he buys his employee’s
service by an interchange, through Trade, of human service for human
service.
Nor are interchanges of service limited to employers and employees.
The point of final interchange is almost invariably like the
illustrative instance of the “harvest hand” at a retail store. Through
the processes of Trade, myriads of commodities for the satisfaction
of human wants, commodities produced by human service to the point
of delivery to ultimate consumers, flow to ultimate consumers out
of retail stores. These depots for final delivery in Trade are the
customary terminals of production, where certifications of service in
terms of Money are usually exchanged for products of service in the
form of commodities.
Although such exchanges, like other exchanges throughout the processes
of Trade, are made in Money terms and by Money measurements, these
terms and measurements testify, as explained in the preceding Lesson,
only to the relative values which govern the exchangeable relations of
any commodity or commodities with any other commodity or commodities.
Curiously enough, Economic students who ignore “value levels” readily
recognize “price levels.” But what else are “price levels” than “value
levels” expressed in Money terms? If a hammer will exchange for a
chisel in the processes of Trade, they are of equal value--not price,
but value. If the Money price of one is two dollars and that of the
other is also two dollars, they are of equal price as well as equal
value. And except as Money may vary in purchasing power through lack
of stabilization, or commodities may vary in relative desirability or
industrial cost, the price level and the value level tend to rise and
fall together. That is to say, the essential consideration is one of
relative values of commodities (which is determined by difficulties
of production and delivery), but the superficial consideration is the
purchasing power of Money, by which those relative values are more or
less accurately measured and expressed in price lists.
Values thus expressed rise and fall. They do so in terms of Price when
measured by Money; they do so in the essentials of Value when measured
by comparisons of commodities. As a rule, however, Money-prices are
fair guides to Commodity values. Commodity values rise and fall
according to cost of production, inclusive of delivery; and in so
far as Money is stable, the rise and fall in prices is evidence of
variations in production cost.
The relative rise and fall in Value, be it measured by prices in Money
or otherwise, is so common a phenomenon of Trade that critics might be
pardoned for denying a Value level.
Nevertheless there is such a level. It may be illustrated by “sea
level.” We readily understand and confidently base important physical
calculations upon the assumption of a constantly level sea. Yet there
is no such thing. Waves rise above the surface of the sea at their
crest and fall below it in their hollows. Tides contribute other
variations. So with Value in Trade. Literally a level of Value is
unknown. Values continually rise and fall, like the waves and the
tides of the sea. Yet there is as to Value a “mean level.” Such a
level or tendency may be found in the relation of service-cost to
consumption-desirability.
Though we measure service-value by Money, though Money fluctuates as a
Value-measuring device, though some individual services fall in product
value relatively to the productive power of service, though some
individual services may increase in Value for one reason or another,
there is nevertheless a Value level in Trade which tends constantly
to maintain an equilibrium between service-value and service-utility.
Money-measured Value and Money standards of Value may rise above or
fall below the service-cost of produced commodities. Nevertheless,
service-cost in commodities is the determining fact--the Value level in
Trade. Measured and expressed by Money, that Value level is the Price
level.
Trade phenomena, to which this Lesson has been devoted, though they
lead down to the Basic Facts, the foundation facts, of Economics, do
not themselves, either wholly or in any of their details, belong in
the Basic Fact region. Though nearer to the Basic Facts of Economics
than the phenomena of Money, our consideration of which immediately
preceded our consideration of Trade, the phenomena of Trade are one
layer above the Basic Facts toward which we have been delving down from
the Economic surface, Money, and through the subsurface, Trade. To the
Basic Facts of Economics our next Lesson will be devoted.
FOURTH LESSON
THE BASIC FACTS
The purpose of the preceding Lessons has been to pierce through the
surface and the immediate subsurface of Economics down to the Basic
Facts. On the surface, as we have seen, Economics appears to be the
science of making Money, whereas Money is in fact only the medium and
measure of Value in Trade. We have further seen that the immediate
subsurface, Trade, consists apparently in exchanges of tangible
commodities but essentially in interchanges of human service. We are
now to inspect the Basic Facts.
The Basic Facts of Economics consist of natural groupings or categories
of all the myriads of minor facts with which the science of Economics
is concerned. Of those categories there are exactly three. By no
possibility can there be more; by no possibility can there be less.
Natural law fixes the number.
The first Basic Fact--not first in order of creation, but first in our
perceptions of Economic necessity--is Man. Without Man, Economics could
have neither incentive nor power, neither cause nor effect.
The second Basic Fact is Natural Resources, without which Man could
not exist. Natural Resources comprise the surface of our globe,
together with all natural objects external to Man and in their natural
condition, upon the surface, under the surface, and above the surface,
including the air surrounding the surface.
Through applications of the energies of the first to the offerings of
the second, Artificial Objects are produced, and these constitute the
third of the three.
To one or another of those three natural categories every variety of
detail that may be involved in any Economic problem must be assigned.
Not so to assign those details to their appropriate categories is to
invite confusion of thought and to risk arriving at false and socially
dangerous conclusions.
The Economic student who mixes such Natural Resources as building
sites with such Artificial Objects as buildings, or natural deposits
of minerals with mining machinery, or natural surfaces with railway
roadbeds and tracks and equipment, or farming tracts with farm
improvements, or human slaves with real estate or stocks of merchandize
or factory mechanisms, makes an inexcusable blunder.
Such mixtures may be unobjectionable in accountings of the assets of
a private business for private purposes; but in general Economics
they are perplexing and misleading. In this comprehensive social
science every Economic detail must be classified in harmony with the
three Basic Facts--Man, Natural Resources and Artificial Objects,--or
confused thinking will result. To make those classifications, however,
is to lay a firm foundation for correctly estimating Economic phenomena
of all possible kinds and in all their relations.
The human factor, Man--an impossibility without Natural Resources in
the comprehensive sense of that term,--applies his energies of mind
and body to the Natural Resources of our terrestrial globe and its
enveloping atmospheres, thereby producing and for his satisfaction
consequently consuming every variety of Artificial object within the
range of his Economic desires and his Economic capabilities. This is
true of Man and of Man only.
Lower animals do not produce Artificial Objects. Do they cultivate?
No. Do they design or invent? No. Do they Trade? No. Do they in any
way improve? No. As was eloquently said by a distinguished Economist
of the last century, “the sea-gull of the English Channel who poises
himself above the swift steamer, wants no better food or lodging than
the gulls who circled round as the keels of Caesar’s galleys first
grated on a British beach.”
If wild birds make nests and wild animals make burrows or build dams,
and wild bees make honey, so do wild berry bushes grow berries and
wild apple trees bear apples; yet who would think of classifying wild
fruits as Artificial Objects? Manifestly, uncultivated fruit is as
truly in the category of Natural Resources as is the wild tree or
bush that bears it. And how do wild animals and their characteristic
products differ in that respect from wild fruit bushes and wild fruit
trees? Evidently in no wise at all. Their products of nest and burrow
and water-dam and all the rest, like the leafing and the fruitage of
the tree and the bush, are natural objects. They are not artificial.
An Artificial Object is a product of human invention and construction.
For every purpose of Economic classification, wild animals, like wild
trees and wild bushes and wild Nature in all its varieties, belong in
the category of Natural Resources. When the wild trees or the wild
bushes are cultivated, or the wild animals are domesticated, they pass
into the category--as manifestly as buildings and farm produce do--of
Artificial Objects drawn forth from and upon Natural Resources by Man.
If now we unravel the countless and confusing Economic phenomena of
our world by assigning each miscellaneous fact as it faces us to its
natural place in the three categories or Basic Facts, and then observe
with common-sense acuteness the natural laws of cause and effect that
govern the mutual relations of those Basic Facts, we put ourselves in
position to solve correctly every Economic problem that can challenge
solution. Not to do so is to invite confusion of thought and false
conclusions. Those Basic Facts are the “Big Three” of the Economic
universe.
Hints at all this came to us in passing through our Lesson on
Economics, our Lesson on Money, and our Lesson on Trade. For
confirmation of those hints and of the generalizations of the present
Lesson, let us with Money in hand and Trade in mind visit one of the
Trade terminals which are known in every-day speech as “retail stores.”
What do we see at this “store” but a complex aggregation and
combination, in multitudinous and confusing variety, of the services of
Man in producing Artificial Objects from and upon Natural Resources to
ultimate consumers through channels of Trade and in terms of Money?
The number of those products here assembled, together with the
complexity of the infinite detail involved in their production, would
be bewildering were we to plunge into the ocean of particular facts
unequipped with a clear mental grasp of the Basic Facts and their
mutual Economic relations. For illustration, here is a barrel of
potatoes to which the store clerk calls our attention with a view to
delivering it to us in Trade for some of our Money.
Now, what could be simpler at first thought than a barrel of potatoes
as an Economic fact? A farmer has “raised” the potatoes and brought
them to market, where we may have them for their Money price. But what
of the farmer’s “help”? and the plough with which he prepared the
ground? the hoe or more modern implement he used in the processes of
cultivation and of reaping the crop the horses or the motor he ploughed
with? the building in which he stored the crop before marketing it?
the wagon he carried it to market in? the transportation equipment
with which it was carried from a larger market place to this retail
store? the factories in which the barrel was promoted from lumber to
its present condition of usefulness? the factories and stores and
railroads and ships and wagons and tools? the banks and book-keepers
and truckmen? All such factors must be taken into account, with many
more, in their vast and various and intricate relationships, if we
are to know the Economic history and to solve the Economic problems
regarding even so familiar an Artificial Object as a barrel of potatoes
on sale at a retail store.
Every one of those Economic details can be considered intelligently,
readily and accurately, through the medium of the three Basic Facts,
into one or another of which must fall, not only that barrel of
potatoes and all the details of its production, but also the entire
stock of the store, and of all other stores, and every Economic
agency back of them to the very beginning of each productive process
through which they have passed. All Economic details, the familiar
and the unfamiliar, the obvious and the mysterious, the known and
the unknown, generalize with precision into the three Basic Facts of
Economics--Artificial Objects, Natural Resources and Man.
Natural Resources are the source and the indispensable condition at
every stage, from beginning to end, in the production of every kind of
satisfaction for human wants. Man is the active agent at all stages.
Artificial Objects constitute the category into which each result
generalizes at each stage of production. From Economic particulars
we derive knowledge of Economic detail and skill in applying that
knowledge; but only from their correct generalization can we derive
Economic wisdom.
Thinking _about_ the three Basic Facts is necessary to an
understanding of their mutual relations; thinking _from_ them is
necessary to an understanding of the mutual relations of their
constituent parts. Reversely, we must think from Man to Man-power of
numerous kinds, both mental and physical; from Natural Resources to
soil, minerals, air, water, building sites, and so on; from Artificial
Objects to houses, tools, machinery, food, clothing, et cetera.
In another form of statement, the Economic student must know and
understand the comprehensive categories or Basic Facts in order to
grasp the Why of Economic adjustments, the natural relationship of
Economic effects and causes. To understand the How, he must also
know and understand the little facts of Economic specialization,
such as the mutual relations of the details which go to make up
those wholes--the particular facts, for instance, of agriculture or
architecture or engineering or merchandizing or manufacturing or
banking or professional service,--as well as their three comprehensive
classifications or Basic Facts--Man, Natural Resources and Artificial
Objects.
One of the deplorable tendencies in Economic study comes from a
disposition among advanced students to think exclusively within such
narrow fields as banking, manufacturing, transportation, merchandizing,
the cotton trade, the silk industry or agriculture. All trustworthy
Economic thinking must be from fundamentals--from Natural Resources,
Man and Artificial Objects--to the minute details of the respective
Economic specializations. All Economic specializations, to the
uttermost of their Economic minuteness, are subject fundamentally and
in their mutual relations to the natural Economic laws that govern the
inter-relationship of the three Basic Facts--Artificial Objects, Man
and Natural Resources.
That barrel of potatoes in the retail store may serve for an example.
The barrel itself, an Artificial Object, was produced by Man from
antecedent Artificial Objects--staves and hoops. The staves and the
hoops were produced by Man from preceding Artificial Objects--lumber
and iron. The lumber and the iron had come from trees felled and ores
extracted by Man; the trees were Natural Resources, unless cultivated
by Man, in which case they were Artificial Objects produced from and
upon Natural Resources (the earth) and descended from trees which in
their earlier days were themselves Natural Resources. The iron ore
was an Artificial Object produced by Man from Natural Resources known
as ore deposits. So the barrel holding those potatoes at that retail
store proves to be throughout its whole Economic history nothing but a
combination of many kinds of Artificial Objects every one of which has
been produced and all of which have been combined by Man from and upon
and within the Natural Resources of earth and air and light and heat
and electricity and other natural characteristics of the planet that
Man inhabits.
So, also, of the potatoes in the barrel.
And like that barrel and those potatoes, the retail store in which we
find them was itself produced through many Economic specializations and
many stages of industrial progress, each of which, from the extraction
of iron from natural mineral deposits and the taking of timber from
natural forests, was a production by Man of Artificial Objects from
and upon and within the sphere of Natural Resources down to the
placement of that artificial structure, the retail store, upon its
Natural-Resource site at an advantageous point for delivering finished
products to ultimate consumers.
As to that barrel of potatoes and that retail store upon the floor
of which it rests, so of all Economic phenomena. They belong
respectively, according to their respective Economic characteristics
and pursuant to natural law, in one or another of the three categories
or Basic Facts which we have respectively identified as Natural
Resources, Man, and Artificial Objects.
Pursuant to natural law? Certainly. But where do we get any natural
law in Economics? To quote a sarcastic attempt at refutation, “Do we
pick it off the trees?” Yes, some of it we pick off the trees. Who
can intelligently observe the growth and fruitage of a tree without
recognizing operations of natural law? How do trees grow except by
operation of natural law? And except by operation of natural law, how
do men’s bodies grow? Is it enough to answer that the growth of the
body is a problem of physical science, which is subject to natural
law, whereas Economic science contemplates a lawless lot of phenomena?
Or men’s minds, do they unfold without the aid of any natural laws of
human mentality? And what of social or mass mentality--shall we call
it “public opinion” or “herd instinct”?--how does that phenomenon
originate and develop except through processes of natural law?
As with a tree, so with the whole physical universe, inclusive of the
human body. And as with the human body, the physical body and the
social mass, so with the mental equipment. Must not all, for their
very existence and for their development also, be dependent upon and
in all their activities responsive to natural law in one or another of
its jurisdictions--responsive happily or unhappily according to their
degree of conformity or defiance, of devotion or indifference?[3]
[3] For an extended and impressive discussion of the
application of natural law to Economics, see “Natural Law
in Social Life”, by W. R. Lester, M. A., published by
The United Committee for the Taxation of Land Values, 11
Tothill Street, London, S. W. 1, England. For a specific
application to the coal industry, see minority report on
the bituminous coal problem by Warren S. Blauvelt (formerly
of Terre Haute, Ind., latterly of Troy, N. Y.) in the
Proceedings of the National [American] Conference on Social
Work at its fifty-third session in 1926.
Individual activities, whether physical or mental, if that
discrimination be permitted, assuredly work out well or ill as they
harmonize or run counter to natural law. This must be true also of
social activities. The choices made by human beings, and the influences
which affect their choices, operate to produce harmony or discord in
Economic relationships in so far as they harmonize or are in conflict
with natural Economic law.
Economics being the science of a certain range of social activities,
“the science of mankind making a living,” as it has been aptly
called--a science, and not a mere collection of odds and ends of
information--the same conclusions must be true of the science of
Economics as of the physical sciences. Both are scientific in so far
and only in so far as they are within range of natural law.
It is, indeed, a common contention in scholastic Economic circles that
the science of Economics is not governed by natural law as the physical
sciences are. The answer would seem to be conclusive, in so far as that
contention is true, that Economics cannot be a science at all.
Nor are some of the Economics of modern universities strictly
scientific. They disclose a tendency to confuse business customs
with Economic science as if they were identical. This characteristic
of those “business colleges” of a previous generation seems to have
charmed the “scientific” Economists of some of our universities. But
Economic science and business customs or arts are not identical.
Business arts and customs which conflict with natural Economic law
are as certain to culminate in disaster as is the life of a man who,
approaching a wide and deep chasm, attempts to walk across it without
a bridge. Such a bridge cannot be created, it must be produced in
accordance with natural physical law. The same is true of Economic
processes. As physical science cannot create, but can only discover and
apply natural physical laws, neither can Economics create, but must be
content to discover and apply natural Economic laws.
The contention that Economics is not subject to natural law may be
fairly regarded as a lineal descendant of the social doctrine that
there are no natural rights in human relationships, but that human
rights are only conventional. This is the lawless and vicious doctrine
upon which slavery and every other form of social larceny have rested,
from that form which held the Forty Thieves together, to that modern
policy of “get what you can and keep what you get.”
Economists who can offer any other effective process for satisfying
Economic desires than by the production of Artificial Objects from
and upon Natural Resources and in accordance with natural laws,
Economic as well as physical, would thereby kill every inference that
may be correctly drawn from any contention in these pages. But until
that miracle has been performed it behooves all advanced students of
Economics to think, and to think clearly, without active prejudice
or indolent confusion, upon the natural phenomena of the Economic
realm. Give to those phenomena whatever name you please--my name for
them is “natural law”--the fact nevertheless remains, a Basic Fact in
Economics, that no Man nor any number of Men can produce Artificial
Objects to or from any stage of the productive process except from and
upon Natural Resources.
Natural law in Economics is not comparable with “common law” in the
sense of a coordination and sanctioning of social customs. Nor is it
“business law” in the sense of a clutter of commercial customs. And
of course it is not “statutory law” in the sense of commands from
political authorities to obedient citizens. In Economic science, as in
every other science or art worthy the name, natural law uniformly and
inexorably governs the relationship of cause and effect.
Browning struck a key-note when in his “Abt Vogler” he wrote of the
“manifold music” evolved by bidding the organ obey, that--
... “effect proceeds from cause,
Ye know why the forms are fair, ye hear how the tale is told;
It is all triumphant art, _but art in obedience to laws_.”
If any Economic experiment “works” (as a pragmatist might say of
it), why does it work? What other explanation can there be than that
it “works” because it is a correct adaptation of cause to effect in
obedience to mandates of natural Economic law.
Consumption of food is a natural effect of the natural necessity for
food--a natural law. Production of food is a natural effect of the
natural need of food for consumption--a natural law. Resort to Natural
Resources as the sole source and foundation from and upon which to
produce food is a natural effect caused by the natural need for food--a
natural law.
Nor can natural law be limited to the individual man any more than it
is to trees. Associated man also is governed by it. It is the latter
relation that distinguishes it as Economic. From the natural desire
of individual man for production from and upon Natural Resources,
social Trade develops, not arbitrarily but as a natural consequence of
a related natural cause. Let thoughtless students and professors of
Economics who deny natural Economic law--the normal conditions of cause
and effect that govern cooperative mankind in making a living--explain
Economic phenomena, if they can, without reference to Economic cause
and effect, or Economic cause and effect with natural Economic law left
out.
Natural Economic law might, perhaps, be given another and more
accurately descriptive name. Yet its existence and its potency for
good results or bad, according to obedience or indifference to it, are
beyond all possibility of denial by any Economic student who knows
what it means and who, thinking with clarity, speaks with a sense
of responsibility. Its name, “natural law,” is simply a common and
convenient term, whether truly descriptive or not, for indicating the
undeniable fact that in Economics as in every other science, identical
effects invariably proceed from identical causes.
Most plainly and incontestably is that observation true with reference
to the three Basic Facts in Economics. That they are no haphazard
phenomena in their mutual relations or otherwise must be inferred from
universal experience. Artificial Objects for human use are produced
by Man, and only by Man, from and upon and only from and upon Natural
Resources. Man does not create. He produces, which means that he
adapts. And in his processes of adaptation or production, he succeeds
to the degree that he conforms to natural conditions over which he has
no control except by conformity. Call those conditions by whatever name
we may, they have all the characteristics of natural law, or natural
orderliness, over which Man has no other powers of command than by
adaptation of natural means to artificial ends. Natural law would
therefore seem to be the most appropriate name--law beyond the control
of Man except by his adaptation of natural resources to artificial
effects.
Questions of natural law or no natural law in Economics aside, however,
we are confronted by facts which common-sense minds cannot escape. Even
if there be no natural laws of Economics--a contention that would seem
to demand more imagination than thought,--it is none the less a fact
that Artificial Objects never have been produced, are not produced now,
and in all probability never will be produced on our revolving globe,
except by Man and from and upon Natural Resources. Also it is a fact,
whether subject to Natural Law or not, that Man cannot live without
Artificial Objects, nor without Natural Resources from and upon which
to produce and consume those objects. These facts recognized, disputes
over the existence or non-existence of natural law in economics are
mere mental gymnastics which may be ignored without prejudice to the
essentials of any contention in these pages.
The process of human adaptation of Natural Resources to Artificial
effects--or, to use the Economic term, the process of Production,--no
matter how complex, is continuous from original conceptions in the
human mind to completion and delivery of products to ultimate consumers
by the human mind and hand.
FIFTH LESSON
THE PRODUCTIVE PROCESS
The Productive Process in Economics is a complicated sequence of
activities in the bringing forth by Man, from and upon Natural
Resources, of Artificial Objects. It begins with initiatory adaptations
of natural raw materials; it ends with deliveries of finished products
to ultimate consumers, in accordance with their demands.
Finished products may be catalogued in general terms as food, clothing,
dwellings, luxuries and other Artificial Objects which have come into
the possession of ultimate consumers for the satisfaction of their
wants. Drawn from Natural Resources, these products return to Natural
Resources in the course of their consumption, though not necessarily to
the identical places from which they were drawn.
Their substance is indestructible. Man can no more destroy an atom of
the physical universe than he can create one. His powers in Consumption
as in Production are limited to _altering_ Natural Resources in
location and form. The essential Economic difference between Production
and Consumption is that Production alters natural objects so as to
adapt them to the satisfaction of human wants, whereas Consumption
alters Artificial Objects in the process of satisfying those wants.
Production is the drawing forth by Man of Artificial Objects from and
upon Natural Resources; Consumption is the passing back by Man of
Artificial Objects to Natural Resources.
With the processes of Consumption the science of Economics has nothing
to do. Its functions end with delivery to final consumers. Whenever
Consumption is declared to be a phase of Economics, thoughtful
consideration will ascribe the declaration, not to the processes of
Consumption but to the preceding demand for Artificial Objects to
consume.
The human demand for Artificial Objects to consume is the incentive
to the Productive Process. Production, therefore, and demand for
Consumption, are Economic correlatives, Production having Consumption
for its object, demand for Consumption depending upon Production for
satisfaction. Without Production by Man, there could be no Artificial
Objects to consume; without Consumption by Man, there would be no
incentive to produce.
Production must, of course, precede Consumption. No Artificial Object
can be consumed before it has been produced. But demand for Consumption
as certainly precedes Production. An opposite inference might be drawn
from the fact that particular Artificial Objects are often produced
in advance of specific demand for them. In fact, however, the output
is always in response to demand, either actual or probable--like the
outflow from a reservoir of water which follows the inflow but to which
there would be no inflow were it not for anticipated demand. Production
in advance of actual demand indicates nothing more than that the
producers are confident that such demand exists in embryo. If they err,
the Products have no market; if they have guessed aright, the volume of
Products increases to meet the demand. By and large, then, demand for
Consumption regulates Production; or, in Economic phrasing, supply in
Production is determined by demand for Consumption.
Being continuous, the human demand for Artificial Objects to consume
stimulates continuous Production; being progressive, it promotes
improvement in Productive methods and accomplishments.
I. HUMAN FACTORS
The Productive Process is accomplished by Man’s exertions, mental and
physical, each of those forms of exertion being dependent upon the
other.
In that connection Man is governed by natural law, a manifest law of
human nature. It resembles the familiar law of external nature in
obedience to which physical force advances along the line of least
resistance. The former, the Economic law, may be concisely, accurately
and indisputably expressed in these terms: Men seek to satisfy their
Economic desires with the least exertion.
The validity of that generalization is sometimes questioned on the
basis of the fact that men often seek to satisfy their desires with
excessive exertion. But is that true? Is it not at best only apparently
true? Although for the purpose of satisfying a desire for something,
one were to walk three miles when he might reach his goal and satisfy
his desire by a shortcut only one mile long, but which is unknown to
him or is haunted by a dreadful ghost or infested with predatory men or
savage animals, or so reputed to be, he would nevertheless be seeking
to satisfy his desire with the least exertion. To risk contact with a
ghost or a robber or savage beasts would add much more to his exertion
mental and physical, than a walk of three miles for the satisfaction of
a desire that might be satisfied by a walk of one. The statement that
men seek to satisfy their desires with least exertion is to be read
with the interpretation that they do so with the least known and the
least dreaded exertion; also that the desire may include effort for the
sake of effort, for effort desired as in exercise for health’s sake or
exertion for the sake of play.
The Economic principle that men seek to satisfy their desires with
least exertion does not imply that all men, or any of them know what
the least possible exertion is. It is least only in their more or
less biased or ignorant judgment. There is no contention that they
do satisfy their desires with least exertion. The contention is that
they naturally seek to do so. Critics of this natural law of Economics
should have a care lest they fail to “see the forest for the trees.”
Like the principle in physics to which it is analogous this law of
Economics involves the element of least resistance. As in physics the
line of least resistance may not be a straight line, although that is
its tendency, so in Economics it may not be a direct line. Nor may
it be the same line from generation to generation. Precisely as in
physics physical obstacles may divert a line from direct to crooked,
so in Economics such obstacles as customs, habits, superstitions and
ignorance may cause analogous diversions. But as the physical line
of least resistance, though not always the shortest by foot rule
measurement, is the shortest considering obstacles, so the Economic
line of least exertion is as straight as habit, custom, superstition,
advice, ignorance, and other obstacles permit.
Let the principle be tested by Money measurements. Will any sane man
pay $100 to satisfy any Economic desire of his which he knows he can
satisfy as perfectly for $75, or $80, or $90, or even more than $90
so it be less than $100? Certainly not. Then the Economic law in
question may be expressed in terms of Money. Instead of saying that
men seek to satisfy their Economic desires with least exertion, we
may express the same natural law by saying that men seek to satisfy
their Economic desires at the lowest Money cost. Both statements have
the same meaning. The only difference between them is that the latter
is expressed in terms of Money measurement whereas the former is
expressed in terms of human effort.
Another familiar demonstration of this natural Economic law that men
both individually and in the mass seek to satisfy their Economic
desires with least exertion, is the human craving for Labor-saving
invention. Could any more comprehensive exemplification of the natural
law in question be demanded? Why does mankind crave Labor-saving
methods for producing Artificial Objects from and upon Natural
Resources, if there be no law of human nature which impels mankind to
seek satisfaction of Economic desires with least exertion? John Orr
concisely sums up this Economic law in these words: “Very strong and
deep is the desire of men to find the easiest way of doing things.”[4]
[4] “Short History of British Agriculture,” By John Orr. Oxford
University Press, 1922.
The earliest expression of this principle was by Henry George in 1879.
Alluding to Political Economy, the term by which Economics was then
identified, he wrote: “It lays its foundations upon firm ground. The
premises from which it makes its deductions are truths which have the
highest sanction; axioms which we all recognize; upon which we safely
base the reasoning and actions of every-day life, and which may be
reduced to the metaphysical expression of the physical law that motion
seeks the line of least resistance--viz., that men seek to gratify
their desires with the least exertion.”[5]
[5] “Progress and Poverty: An Inquiry into the Cause of
Industrial Depressions, and of Increase of Want With
Increase of Wealth. The Remedy.” By Henry George. New York:
D. Appleton and Company. 1883.
In the Economic realm all human exertion is usually and appropriately
distinguished by the technical term “Labor.” This Economic term for
human exertion in the production of satisfactions for human wants
has been much abused by colloquial interpretations. So interpreted,
Labor is often limited in meaning to the exertions of persons hired in
“lower class” pursuits for fixed “wages.” For somewhat “higher” grades
of service, “salaries” instead of “wages” are paid. For self-employers
still other terms are colloquially used, such as “profits” for the
services of merchants and manufacturers and contractors; “fees” for
the services of lawyers and physicians; “commissions” for the services
of salesmen and brokers; and “discounts” for the services of bankers.
Those verbal variations are of course admissible for such secondary
purposes as private business may require; but for fundamental or
general Economic distinctions which concern the whole human family,
they are recklessly undiscriminative and hopelessly confusing. This
lack of discrimination is attributable to a tendency in Economic study
toward devotion to infinite detail regardless of precise generalization.
The result is a confusion of fundamentally different objects in messy
categories, such as Labor with Labor-products; such as Labor-products
with Natural Resources; such as income from Natural Resources with
income from Labor--as, for instance, “Land” (Natural Resources) with
“Capital” (Artificial Objects). It is like thinking of oil and water as
a chemical compound when they happen to be in the same receptacle.
Fundamental conclusions in Economics cannot be based upon unassorted
details. Students must concentrate their study upon the big facts, the
Basic Facts, those primary categories which distinctively classify the
whole swarm of secondary facts. Well enough it may be not to start
out with assumed principles, nor with the scientific substitute known
as “hypotheses;” but all rational study of Economics must begin with
the Basic Facts and proceed thence to a consideration of details with
reference to their basic relations.
The distinctive phase of the present Lesson with reference to human
exertion is exertion of the Economic type. Whatever its kind as matter
of secondary classification, all human exertion comes within the
meaning of the comprehensive Economic term for human service, which, as
already stated, is Labor.
No more truly in the Labor category are the services of “wage-workers”
than are those of farmers, of manufacturers, of merchants, of
brokers, of bankers, of architects, of lawyers, of physicians, of
engineers, of authors, publishers, teachers, or the services of any
other useful workers who participate in the intricate processes of
Economic production. All are within the Labor category. Be the Economic
service whatever it may which any human being--from inventor to
chattel slave--contributes to the satisfaction of human wants, such
service belongs in the same basic category with every other Economic
service. Consequently, it must be identified in fundamental Economic
classification by the same technical term.
What term may be best for that purpose is of minor importance, if of
any importance at all, since names are for identification rather than
description. Consequently, the technical term Labor, adopted long
ago by Economists of the highest rank to identify human service in
Economics, is fully justified regardless of its descriptive qualities.
Even as a descriptive term, what other word could better identify human
service as a whole?
Among the outstanding minor classifications of Labor is Business, and
to this another attaches which some advanced students in Economics
classify by itself fundamentally. The latter is the service of the
“entrepreneur” or “enterpriser.” As a secondary classification this
distinction is probably useful; but for comprehensive Economic study it
is as useless as “carpenter” or “bricklayer” would be. Worse yet, it is
misleading.
The “enterpriser” is a worker whose compensation for service is not
fixed but depends upon the profitableness of the enterprise he pursues,
which may be any business venture from mining or manufacturing to
merchandizing, and in any capacity from employer seeking “profits”
to salesman on “commission.” To eliminate this type of Economic
service from the fundamental Labor category in Economic science
is not only useless and misleading but also absurd. The fact that
the “enterpreneur’s” service may or may not prove profitable to
himself--the fact, in other words, that when he enters upon an
enterprise he “takes chances” as to compensation--does not alter the
Economic character of his functioning. He is none the less nor any
the more in the Man category of Economics in contradistinction to the
Natural Resource category and the Artificial Objects category. The
only Economic difference, essentially, between him and the “common
laborer” or “wage-worker”--except that one may be more serviceable than
the other, individual for individual--is that the compensation of the
“common laborer” or “wage-worker” is nominally secured by contract,
whereas the “enterpriser’s” is contingent; and this difference is not
fundamental. To take the “enterpriser” out of the Labor category in
Economics by assigning him to a fourth fundamental category, is to
trifle with Economic classifications. Why extend the basic categories
of Economics from Natural Resources, Artificial Objects and Man, to
Natural Resources, Artificial Objects, Man and Enterprisers?
A similar classification of Business itself--which, by the way,
is usually managed by “enterprisers”--would likewise be absurd and
trifling as well as confusing. What is legitimate Business but human
service? And what else in Economic classification fundamentally can
human service be but Labor? Business is in the Man class of Economics
in contradistinction to the Natural Resource class and the Artificial
Objects class. No other fundamental classifications are possible.
Consequently, the activities of Business classify themselves naturally
in the domain of Economics as Labor.
And so of the professions.
So, too, of every other kind of human service in the Productive
Process, whether the service take on such direct forms of Production as
making Artificial Objects and such as delivering them from hand to hand
or place to place, or such indirect forms as promoting the comfort,
the enjoyment, the health, the education, the cleanliness or what not
(provided it be Economically legitimate), of such human workers as
literally do make or deliver Artificial Objects. All are in the Labor
category.
Labor comprises, too, the serviceable operations of partnerships as
such; also of corporations, of chambers of commerce, of labor unions;
the services of schools and churches and theaters and social clubs;
of political parties and religious societies--every kind of corporate
service, in short, including the service of governments--to the extent
that such service contributes, in addition to the contributions of
its constituents in their individual capacities, to the production of
Artificial Objects.
And Production--let the reference to this fact be not
overlooked--comprises Delivery throughout the whole Productive Process
to and including its termination in delivery to ultimate consumers.
Railway workers and sailors and storekeepers and household servants
and waiters at hotels and restaurants and all their Economic associates
from employer to “menial,” are producers as truly as are farmers,
mechanics or manufacturers.
Human services of the corporate type, as well as those of the
individual distinctively, are too numerous and too intricately woven
together to permit of detailed consideration here. It is enough to note
that far and away as some of them may at a glance seem to be from the
Productive Process in Economics, they will be found upon intelligent
inquiry--except as they may be more or less perverted in operation--to
be in the Economic category of Labor. That is to say, they are human
factors in the Production of Artificial Objects from and upon Natural
Resources.
One kind of corporate service, a comprehensive kind, should perhaps
be given brief special consideration for the double purpose of
illustrating the Productive functions of every variety of corporate
service and of explaining the Economic characteristics of that
outstanding one of all. This particular kind is Government.
The “business” of Government, to use a colloquialism, the Labor of
Government, to use the technical Economic term, is comprehensive and
effective in the Productive Process to the degree--a reservation
that applies to all other subclassifications of Labor, from the
lowest grade of “hired man” to the most powerful partnership or
corporation, from the most awkward apprentice to the shrewdest business
“enterpriser,”--that its functions are wisely and fairly devoted to the
task.
Governments are legislative, executive and judicial agencies of
social wholes. It is their function to contribute service to the
production of Artificial Objects by preserving public order, defining
and protecting private rights, distinguishing and conserving common
rights, and managing or providing for the management of common affairs.
To the degree that governments faithfully exercise their legitimate
public functions and refrain from interfering with legitimate
private functions, they contribute to the Productive Process. This
is demonstrated by observable Economic results. Wherever Government
approximates a realization of its functions, Economic conditions are
manifestly better than where it neglects or abuses them. Evidently,
then, Government is a form of human service which, like all other human
service forms, belongs as an Economic factor in the Labor category.
And as with Governments, so is it with all other organizations in
so far as their organic activities tend to promote good order, fair
dealing, righteous social adjustments, peace, and general Economic
prosperity.
The essential considerations with reference to Labor may be compactly
summarized in these terms: (1) Labor can create nothing; it can only
_produce_, by altering the forms and locations of natural substances.
(2) Nothing but Labor can so produce. (3) Labor is therefore the sole
directing factor in the production of Artificial Objects from and upon
Natural Resources.
II. NATURAL RESOURCE FACTORS
In the foregoing discussion of the relation of Labor in its broad
Economic meaning to the Productive Process, it has been necessary, as a
precaution in the interest of clear thinking, to give warning that the
technical term Labor is often blurred in its significance by colloquial
or business interpretations. A like warning is necessary with reference
to the technical term for Natural Resources. This term, adopted long
ago and quite appropriate and distinctive, is Land.
If it be said that Labor applied to Land produces Artificial Objects,
the Economic meaning is the same precisely as if it were said that
Artificial Objects are produced by Man from and upon Natural Resources.
But all rational Economic meaning departs from the statement if
indefinite colloquialisms or loose business terms be substituted for
the precise technical terms.
Yet the technical term Land, like the technical term Labor, suffers
in significance from a variety of colloquial and indefinite business
interpretations. Indiscriminately it may mean open prairie land, or
improved farms, or vacant building-lots, or buildings and the lots
on which they stand, or all of them together. The absurdity of such
undiscriminating interpretations is obvious to any one who reflects
upon the significance of the three Basic Facts of Economics--Man,
Natural Resources and Artificial Objects.
Such colloquial and business-habit confusions of the technical Economic
term Land, like similar confusions with reference to the technical
Economic term Labor, often mislead advanced students of Economics as
well as “the man on the street.” In any serious consideration of the
Productive Process it is of the utmost importance that the Basic facts
be kept distinctively and definitely in mind.
As Labor in Economics means service by and for Man, and nothing else,
so Land in Economics means neither more nor less than any and all
Natural Resources. It is the technical Economic term for the Natural
Resource factor in the Productive Process.
Without Land, Labor would be powerless to produce Artificial Objects.
But Land is abundant in all varieties. Trees grow in forests, minerals
repose in the earth, the soil offers itself to the farmer, the sea
to the sailor, solid ground to the builder, flowing streams to all.
Together with the winds, the lightning, the snow, the rain and all the
other subtle and mysterious forces of Nature, those Natural Resources
respond freely to the multifarious energies, the broadening knowledge
of natural law, and the intensifying skill of Labor. They are among the
natural substances and forces which are comprehended in the word Land
as a technical Economic term.
As Labor is the active factor in the production of Artificial Objects,
so Land is the corresponding passive factor.
III. ARTIFICIAL OBJECTS
Unless the category of Artificial Objects (which are the continuous
outcome of the Productive Process) be treated with like fidelity to the
meaning of technical Economic terms, there will still be confusion and
consequent bafflement in Economic study.
Yet such fidelity is sadly lacking. There is an unfortunate tendency to
indulge in the same colloquial trifling and business habits of speech
with the technical term for this Basic Fact as with the technical term
for the Man factor and the technical term for the Natural Resource
factor. Although Wealth is the generally accepted technical term
for Artificial Objects, careless uses of this term have well nigh
obliterated its technical significance.
Technically it is correct to say that Wealth is produced by Labor
applied to Land. This means neither more nor less than that Artificial
Objects are produced from and upon Natural Resources by mental and
physical exertions of Man. So used and understood, those technical
terms enable us to trace Economic details in the Productive Process
easily and accurately through all their complexities from origin to
destination. We have but to assign them to their respective categories
or Basic Facts and always to think of them in that connection. Yet, as
with Labor and Land, so with Wealth. Colloquializations and arbitrary
business meanings of this specific technical term multiply complexities
and make Economic confusion worse confounded.
By colloquial usage and in business accounts the word
“wealth”--“capital” when used as a sub-classification of Wealth,
that is, Wealth devoted to the production of more Wealth--has taken
on a variety of misleading connotations. In business accounts, for
example, whatever will bring a price to the owner is accounted
Wealth, or Capital as a sub-classification of Wealth, whether the
object of the price be a building, a domesticated animal, a slave,
a vacant building-lot, an unused agricultural area, or an improved
and cultivated farm. Some of those items of “wealth” or “capital”
do belong, Economically, in the Wealth category, buildings and
domesticated animals being among them; but many fall wholly or in part
into one or the other of the two other categories, Labor and Land.
Evidently the science of Economics, which comprehends the interests of
all and not merely those of a private business, cannot classify slaves
as Wealth. Since they are not and cannot be Artificial Objects, but are
human beings, they belong of necessity in the Man or Labor category.
They differ radically from animals. In the wild state animals belong
Economically in the category of Land (Natural Resources) as truly
as wild vegetation does; in the domesticated state they are Wealth
(Artificial Objects) as truly as produced vegetation is; and if used
to produce Wealth they are Capital (Wealth used for the production of
Wealth) as truly as machinery is. But slaves in their “wild state” are
not Natural Resources for the use of Man, as wild animals are; they are
human beings, and as such they belong in the Man category.
As used in business accounts and colloquially, the word “wealth” does,
as indicated above, include some kinds of true Economic Wealth, such as
“store goods,” buildings, farm produce, machinery and other Artificial
Objects. But in those undiscriminating uses it also includes such
Natural Resources (Land) as mineral deposits, water fronts, building
sites, railroad rights of way; also mere titles to various kinds of
property interests, such as bonds, mortgages, deeds, bank balances,
money in hand and corporation stocks.
Some of the Economically desirable things which are included
colloquially and for business accountings in the term “wealth” are
truly Wealth in the technical Economic sense, let us repeat, since
they are Artificial Objects produced by Man from and upon Natural
Resources--that is to say, by Labor from and upon Land. But others
are not at all in the Wealth category, and putting them there has no
other Economic result than confusion. Such of them as consist solely
of Natural Resources belong in the Land category. Artificial Objects
alone belong in the Wealth category. Deeds, mortgages, bank balances,
money in hand, corporation stocks and the like, belong in no Economic
category at all below the surface of customary titles to property.
They are nothing but evidences of legal title to property of any
kind--Natural Resources, Artificial Objects, Man himself when and where
ownership of Man by Man is conventional.
To illustrate that species of confusion, for the importance of precise
discrimination in Economic thought cannot be overemphasized in Economic
study, a farm is often accounted “wealth” or “capital” in colloquial
and business usage. So of its purchase “price” or “value,” and also of
a mortgage upon it. Yet its purchase price and a mortgage are merely
evidences of title to property. Neither of them is Wealth or Capital
within the meaning of precise Economic terminology. If they were, the
more the mortgages upon a farm the more valuable it would be. A farm
the purchase price of which is ten thousand dollars would be worth
fifteen thousand if it were mortgaged for five, and seventeen if it
carried a second mortgage for two. And that would be absurd. The farm
itself really consists of a combination of Artificial Objects and
Natural Resources--that is to say, of Wealth and also of Land--two
radically different things as matter of Economic discrimination. Its
site is a Natural Resource, its untilled soil is a Natural Resource,
the space which it and its surrounding atmosphere occupy are Natural
Resources. All those characteristics are in the Land category. But its
artificial enrichments of soil by tillage or other human activity, and
artificial replacements of exhausted or partly exhausted fertility, the
fencing and the ditching and the buildings, what are they? what can
they be but Artificial Objects, and therefore in the Wealth category?
Nor is this conclusion vitiated by the fact that permanent improvements
of the soil or location by means of drainage or “made land” or the
like may with lapse of time lose their artificial characteristics in
consequence of an ultimate natural merging with the site.
A different type of illustration, though identical in Economic
terminology, would be an urban residence or a building for business.
Its site, the enveloping atmosphere, the space--all these are in the
Economic category of Natural Resources or Land. But the building is
an Artificial Object and therefore in the category of Wealth. If the
building burn down or be torn down, then the property--the site and the
space it commands--is in the category of Land alone. In no respect can
the site and the space it commands be Wealth in the technical Economic
sense--in the discriminative sense which identifies basic differences.
In that sense nothing is or can be Wealth except Artificial Objects
produced by Man from and upon Natural Resources. The common
characteristic of Wealth in the technical Economic sense is that
it consists of natural substances which have been adapted by human
exertion to human uses. Another term would serve as well, but no term
would serve if used also to designate something radically different.
IV. SECONDARY CATEGORIES
In Economic analysis Wealth takes on two aspects. They are
distinguishable by secondary classifications. One is Wealth in the
possession of consumers; the other is Wealth in process of utilization
by Labor for the production of further Wealth. For the former no
technical Economic term is in use; for the latter the technical
Economic term is Capital.
1--_Capital_
Capital is a highly important technical term in Economics. It must
not be confused, therefore, with the same word as loosely used in
business accounts, where, like the term for its parent category,
Wealth, it mingles such essentially different things as Wealth and
Land--Artificial Products and Natural Resources. And, as observed in a
preceding paragraph, not only such different things as Wealth and Land,
but in some circumstances Labor also.
Such undiscriminating uses of the term Capital are doubtless defensible
enough in business accountings; for in private business anything may
be thought of as business “capital” if it can be summarized in terms
of Money. But for Economics as a comprehensive social science, the
dumping into the same basic category of such radically different things
as Labor, Land and Wealth--Man, Natural Resources and Artificial
Objects--is indefensible and miraculously confusing.
Limited strictly to distinguishing Wealth consumed in the process
of producing more Wealth--Artificial Objects devoted to further
production of Artificial Objects,--the term Capital is a convenient
subclassification of some kinds of Wealth. To appreciate that
characterization one need but think, for instance, of any sort of
productive machinery. Is it not an Artificial Object? Is it not
produced by Labor? Is it not produced from and upon Land? Is it
not used by Labor upon Land for further production of Artificial
Objects? And are not those observations true also of seed gathered
and saved for planting? of minerals mined for metal? of metal to be
transformed into productive machinery? of food material turned into
food at a restaurant? Are they not true of every kind of intermediate
product--from Machinery (which, though finished as machinery, is
only an intermediate factor in the process of producing Wealth for
ultimate consumption), back to the rawest of artificial raw materials
and forward through all gradations to the food on a dinner table, the
clothing on a diner’s body, the floor under his feet and the roof over
his head?
One obsession regarding Capital, even when the term is used with
Economic accuracy, is that it consists of saved Wealth. There is no
such process, in any literal sense, as saving Wealth--Artificial
Objects--except for ripening or reproduction purposes. Even for those
purposes the saving is in the nature of using, its object being the
production of more Wealth rather than preserving this Wealth. Any
saving of Wealth in the Economic sense, consists in utilizing it in the
Productive Process.
Are art objects exceptional? Not such as are relatively reproducible.
Only “uniques” are exceptions, if indeed they may be regarded as within
the boundaries of Economics. Saved over long periods, hundreds upon
hundreds of years in some instances, these would seem to be out of the
field of contemporary Economics. What gives them their extraordinary
value? The same kind of non-Economic sentiment, on a higher plane,
perhaps, that gives extraordinary value to heirlooms. Such products are
not Wealth in the Economic sense any more than sacred tombstones are.
Though produced by Man from and upon Natural Resources, they cannot be
satisfactorily reproduced. They are closer to the nonproducible Natural
Resource category than to the reproducible Wealth category.
That titles to Wealth may be saved is true enough. But in no extensive
sense can Wealth itself be saved. Unless consumed in the production of
more Wealth, or in the satisfaction of human desire, Wealth goes to
waste.
Titles to Wealth, except such as are specific like the title to a
particular house, are titles not to existing Wealth but to future
Wealth. A title to a house, being specific, testifies to property
rights in a particular structure which is in process of consumption.
A title to its site is not a title to Wealth, but to Land, which,
however, may be exchanged for Wealth. Such general titles as Money
obligations declare, are titles to anything upon the market when
demanded, including Wealth that may have been produced years after
the total consumption of everything for which the Money title was
originally exchanged. One’s “savings” in the form of Money or credits
are not Wealth produced but titles to Wealth not yet delivered to him,
and perhaps yet to be produced.
Only in the sense of withholding for use or of using or permitting its
use in further Production of Wealth, is Wealth actually saved; and
such saving is part of the Productive Process. It is a dedication of
that portion of produced Wealth to service in the production of further
Wealth. Wealth so dedicated is Capital.
A familiar example is seed saved for sowing. Also seed sown for
growing. And seed in the barn awaiting the sowing season, that too is
Capital. Seed in the field sprouting and growing and producing grain
for the coming harvest, is likewise Capital. The ripened grain ready
for harvest is Capital in turn, for it, too, is Wealth to be utilized
in the production of more Wealth--bread or seed or both.
And so of mechanisms, which grow not as seeds do but only as the hand
of the mechanic coaxes them into shape. When, for example, a machine
which aids in the flouring of grain is produced, he who owns the
machine owns Capital. He has saved it by putting purchasing power into
a productive implement instead of putting it into ultimate products
for his own consumption. Owning the machine, he owns bread-producing
Capital. Using it, he consumes it in the production of bread.
A coffeemill, for further illustration, is a machine produced by Labor
from and upon Land, which, when Labor uses it for grinding coffee
(another product of Labor from and upon Land) brings the latter product
nearer in serviceability to the ultimate consumer.
For a complex illustration, consider a railway passenger car. It is
Wealth because it is an Artificial Object produced by Labor from and
upon Land. But does it fall into that subdivision of Wealth which
is distinguished as Capital--Wealth used for the production of more
Wealth? As to its owners it is Capital, for they are using it to
increase their share of Wealth in process of production; but as to
the aggregate of social Wealth, its passengers, if not using it for
productive purposes, are consuming Wealth unproductively. To the extent
that the passengers are not on productive missions, but are gratifying
their own wants, a passenger-car is in Economic contemplation Wealth
in process of ultimate consumption to satisfy wants; to the extent
that its passengers are on productive missions it is Wealth devoted to
the Production of more Wealth, and therefore in the subcategory which
is distinguished as Capital. The fact that part of its use is for
Production and another for enjoyment does not disturb the principle
which distinguishes Capital from Wealth in process of ultimate
consumption for the satisfaction of wants.
Capital is Wealth in forms that are consumed in the further or better
production of Wealth toward final forms for ultimate consumption. To
save such Wealth in the sense of preventing its consumption would be to
waste it; but to permit its consumption in the Productive Process is to
give it serviceability.
So with all other details of the Productive Process, from natural raw
materials to and including delivery to ultimate consumers. Capital is
produced by Labor from and upon Land and in forms of Wealth--either
Artificial materials or Artificial contrivances--which, being adapted
and devoted to further Production of Wealth, are part of Labor’s
artificial materials or mechanism or both--Wealth produced for
augmenting Productive power. In Economic phrasing, Wealth used in the
Production of Wealth is Capital.
2--_Trade_
Another prominent sub-classification of secondary facts involved in
the Productive Process is inseparably associated with Capital. This
subordinate category is Trade, to which our attention was directed in
the second stage of our delving down from the surface of Economics to
its Basic Facts.
Trade is an essential part of the Productive Process in Economics.
It is inseparable from Labor specialization. If some Labor be
devoted to the Production of one kind of Artificial Objects, one
kind of Wealth--food, for instance--the producers of such Wealth
must satisfy their desires by trading with other kinds of Labor
specialists--clothing producers, for instance--for what the latter make
and the former do not make. Evidently, then, the more minutely Labor
takes on specialized activities, the more extensive and intensive must
Trade become. And when, as in our civilization, Labor is so minutely
specialized that nobody can satisfy his Economic desires by his own
productive activities directly, Trade is an indispensable part of the
Productive Process.
In form it is an interchange of commodities; but in essence it is, as
already explained, an interchange of Labor functions--of human services.
Springing out of a manifestation of natural law which is rightly
distinguished in Economics as “division of labor,” and thus inspiring
and facilitating specialization in the Production of Wealth, Trade is a
natural phenomenon. Within manifest limits and without extra exertion
two producers can produce more than twice as much as one, four more
than twice as much as two, and so on, subject only to the limitations
of Natural Resources. By exchanging products they therefore naturally
multiply their productive powers.
For a crude illustration, is it not plain that two frontiersmen working
cooperatively can build a habitation for each quicker and better than
either could build one for himself? Or two messengers, each charged
with one errand a mile away in one direction from a central point
and another a mile away in the opposite direction, can they not do
the four errands twice as quickly and easily, even if not more than
twice, if they divide their functions? By such division each messenger
would walk one mile out and one back, two for each and four in all,
delivering four messages; whereas, without such division, each would
travel two miles out (one in each direction) and two miles back, four
for each and eight in all. In addition to the saving of time and
energy, each will have saved productive capabilities too subtle for
specific enumeration.
The principle of those illustrations applies to the whole Productive
Process. By division of Labor, that is to say, by Labor specialization,
Economic accomplishment is multiplied beyond all the possibilities of
isolated individual production.
But division of Labor would be useless were it not for Trade. Each
of those frontiersmen must trade his share in the other’s habitation
for the other’s share in his habitation; each of those messengers
must exchange his claim to compensation for delivering one of the
other’s two messages for the other’s claim to compensation for
delivering one of his. This, then, is the sum and substance of Trade
in Economics--adjustments of compensation for specialized Production
through division of Labor.
The effect is magical. By division of Labor and Trade the single
individual becomes a vital part of a comprehensive human organism, of
a greater man, of the Social or Economic Man--a Man of almost infinite
Economic powers.
Those two kinds of Economic energy, making and trading, permeate the
multitudinous phenomena of that Productive Process in the course
of which Man draws forth Artificial Objects from and upon Natural
Resources, for the satisfaction of human desires; or, to use the
technical Economic terms, in the course of which Labor produces Wealth
from and upon Land.
3--_Utility, Value, Money, Price, Banks_
In connection with division of Labor and Trade we are brought into
contact with the phenomena of Economic Utility and Economic Value.
Utility is an absolute term indicative of essential desirability. Value
is a relative term indicative of the relative Utility of commodities;
or, more precisely, of the degree of desirability of one variety of
Labor or Land or form of Wealth in comparison with other varieties.
One variety of Labor or of Land or of Wealth may be twice as desirable
as another, unit for unit, in which case one unit of the former will
exchange in Trade for two units of the latter. Thus the relative
Utility of a Commodity is indicated in Trade by its Value.
For measuring Value in all its variations from least to greatest and
comparing these in the Productive Process, the Economic instrumentality
is Money, that surface layer of Economics through which we passed in
our exploration down to the Basic Facts; and the synonym for Value in
terms of Money is Price.
By way of illustrating Utility, Value and Price, one may say of a
quantity of Wealth in the specific form of wheat, that it has Utility
because it can be productively advanced to food or be used as seed
for the production of more wheat and so of more food; that it has
Value because its desirability is a subject of comparison with the
desirability of other desirable things in Trade; and that it commands
Price because it can pass from owner to owner through Trade in terms
of Money. Or of Land in the specific form of a building-site, one
may say that it has Utility, for it will afford natural support for
the foundations of a dwelling or a store or a factory or a railroad
right-of-way, and command the natural light and the air within its
boundaries; that it has Value because it can be exchanged for other
Land or for Artificial Objects; and that it has Price because Money or
credit in Money terms may be had for it upon transfer in Trade.
Yet a commodity may have the highest degree of Utility without having
Value or commanding a Price; or it may have great Value and command a
high Price though of little Utility.
Let us observe here a difference in meaning, often ignored by
advanced students, between the terms “utility” and desirableness.
Thoughtfully considered, “utility” defines an absolute quality,
whereas “desirableness” indicates a varying relationship. This obvious
difference is often confused by such terms as “total utility” for
Utility, and “marginal utility” for degrees of desirableness. For an
example, the “total utility” of water is great, because by natural law
man cannot live without water. Yet an abundant supply of water may
reduce its “marginal utility” to zero. On the other hand, the “total
utility” of diamonds is slight, whereas their “marginal utility,” due
on the one hand to their scarcity and on the other to human vanity, is
great. Such distinctions as “total utility” and “marginal utility” are
nothing but subclassifications of Utility. They serve no better purpose
for fundamental Economic study than the distinction which “utility”
and “desirability” express without as much risk of confusing thought.
Water, for example, is none the less useful because it is abundant,
even though its abundance seems to lessen the desire for it relatively
to desire for scarcer things. As to water, nothing is really lessened
but desire relatively to supply. Nor does the scarcity of diamonds add
an iota to their Utility. It adds only to the relative demand for them
and therefore only to their Value in Trade.
To repeat, then, the assertion made above, a commodity may have the
highest degree of Utility without having Value or commanding a Price;
or, it may have great Value and command a high Price though of little
Utility.
For further illustration of Value and Utility thus defined, nothing has
greater Utility--greater “total” Utility, if that professorial term be
preferred--than the sun; but the sun has no Value except as its Utility
is controlled by ownership of Land favorably situated with reference
to it; for it cannot be exchanged in Trade for anything else. Nor has
it Price, for Money cannot buy it. Though it may be bought and sold to
some degree indirectly through the buying and selling of Land which
controls the sun’s utility to that degree, this value is not sun-value
but Land Value.
Yet all commodities--whether in the Wealth class, as a house or food;
or the Land class, as a natural building-site, or an ore deposit, or
soil fertility, or the sun to the degree that its light and heat are
owned through ownership of Land--have Utility, Value and Price. The
last of the three is expressed in terms of Money.
Money is the common medium of Trade. Where and when Money is in use, he
who wishes to trade a hat for shoes need not hunt for somebody who has
shoes but wants a hat instead; all he need do is first to find some one
who has shoes and wants Money. And since persons who want Money (which
as a common medium of Trade is in effect everything in the channels
of Trade) are so many in comparison with those who at a given time
want shoes, Money infinitely diminishes the difficulties of trading
commodities.
Money is also a common denominator of Value, as we have already
observed. Without it each of us would be obliged to express the Value
of each exchangeable object in the complicated terms of all other
exchangeable objects. We should have to say, for example, that a hat
has the Value of a pair of shoes or of a chair or of an umbrella and so
on; that a pair of shoes has the Value of a hat or of a chair or of an
umbrella, and so on; that a chair has the Value of an umbrella or of a
pair of shoes or of a hat and so on; and that an umbrella has the Value
of a hat or a pair of shoes or of a chair and so on. And then we should
have to complicate the comparisons with specifications of quality. But
Money terms obviate the necessity for such vague and multifarious Value
comparisons as are here merely hinted at. They enable us to say that
a hat, a pair of shoes, a chair, an umbrella are each of the Value of
five dollars, or a pound sterling, or so many francs, according to the
names and fidelity to financial standards of Money pieces in the places
where we engage in Trade, and according also to the quality of the
commodities specified.
It should, however, be here repeated and emphasized, that Money pieces
in whatever form, be it coin or scrip, are themselves of slight
practical importance in the ramifications of Trade. Not tangible Money,
but the Money terms which measure and express the relative Values of
commodities--these play the great part.
In adjustments of Trade outside the pocketmoney class of transactions,
Money pieces do not serve to the extent of five per cent. Nearly all
those adjustments are effected by means of Money terms in books of
account and through the medium of checks and drafts and notes and bills
of exchange. These are in effect orders upon banks (one of the forms of
Labor) for the transfer of credits recorded in their books of account.
Banking is an improvement upon Money pieces in Trade, very much as
Money pieces are an improvement upon crude barter. It lifts the
Money-piece customs of Trade to book-keeping levels. If everybody
were a bank depositor, and every bank were connected with every other
by a perfected clearinghouse system, all necessity for Money pieces,
except for “pocket cash,” would vanish. In that event the check and
the promissory note and the bill of exchange, operating as orders to
the book-keepers of banks and clearinghouses, would effect transfers
of debits and credits the world over so that all Trade would be barter
systematized--plain barter freed from the obstructions incident to
barter in primitive Economic circumstances. Except for the use of
“pocket cash,” Money pieces of every kind, whether metal or paper,
would be like children’s toys to grown-ups.
4--_Balances of Trade_
Out of worldwide Trade, which, like Trade in narrower circles is
effected by means of Money terms in books of account and through
the medium of drafts by creditors upon debtors, a subclassification
has evolved in Economics of the business-customs type. This
subclassification alludes to a situation in Trade between the people
in the aggregate of one country and those of the other countries of
the world, in which the balance for that country is at any given time
on the credit side. Its exports exceed its imports. This situation is
known in the business circles of creditor countries as a “favorable
balance of trade.”
The suggestion that such balances are favorable is doubtless true with
reference to banking and some other business relationships. Business
must be better with banking, apparently at least, when the buying and
the selling of drafts on the people of foreign countries is brisk than
when it is dull. It must be better, also, with exporters who draw the
drafts and sell them. The drawing and the selling of drafts against
foreign balances is surely a more profitable occupation when there is
an excess of exports to draw against than when the balance of trade is
the other way. It must be even more satisfactory in those connections
when the excess of exports is continuous.
But as matter of comprehensive Economics, in which not only bankers
and exporters but also all the other Wealth-producers of a country
are concerned, it cannot be true that a perpetual credit balance of
international trade is a favorable balance. In international trading,
as in trading between individuals (which, by the way, international
trading in the last analysis is), the aggregate of exports and of
imports must counter-balance. Otherwise the producers of the exports,
considered as a whole, must be engaged in foreign trade at a loss.
They give more Value than they get. Surely, trading at a loss is not
favorable trading.
Would a farmer prosper if every year he sold a thousand dollars’ worth
of his products and got back only eight hundred dollars’ worth of other
products? Wouldn’t that depend upon how much credit to him had piled up
in account-books as a result? If none, wouldn’t he have exchanged his
products at the rate of $10 for $8? How long would a farmer prosper if
he considered that kind of balance of trade as favorable?
Precisely so with international trading. The only difference is that
in the farmer illustration we have a solitary individual, whereas
in international trade we have many individuals grouped in national
wholes. In comprehensive Economics that difference is no difference at
all.
A credit balance between national communities is simply the difference
in Value remaining after all international trading to a given date
has been entered in the books of account. If that balance be on
the credit side of one of the nations, the creditor individuals of
the creditor nation may draw against it. To them it is a favorable
balance, in book-keeping terms. But if it is never to be paid off
with imports, which seems to be the aspiration of those who applaud
so-called “favorable balance of trade” theories, is it not in truth an
unfavorable balance?
If the reply be that the balance will be paid in gold, what difference
does that make in any comprehensive Economic sense? Gold itself is a
product of Labor applied to and upon Land. To import it in payment of
international balances would be precisely the same, Economically, as
importing other products of Labor.
Some private businesses may prosper through “favorable” balances
of trade, but Business everywhere and as a whole, Business in the
comprehensive sense of the science of Economics, must find “favorable”
balances of that unbalanced kind extremely unfavorable to the people of
every nation as a whole and to most producers individually.
International balances of trade are but aggregates of individual
balances. The favorableness or unfavorableness of either kind
depends upon difficulties of collection. If, for illustration, an
individual has a credit balance in his account at a bank, it is a
favorable balance provided he may “check it out” at will in payment
for products or services; but to the extent that obstacles to his
“checking out” are put in his way, the balance has an unfavorable
aspect. If the obstacles be prohibitive--a 100 per cent stamp tax, for
illustration,--the credit balance would be decidedly unfavorable. It
would be unfavorable in less degree only as the stamp-tax was reduced
from 100 per cent, down to 50 per cent or 25 per cent or 1 per cent.
The depositor would have sold more value than he could buy; that is,
he would have “exported” from his products more than he could “import”
from the products of others.
A like conclusion is inevitable in the aggregate of world trading. To
the extent that exports of Wealth are not offset by imports of Wealth,
to that extent every trading balance is unfavorable. The Economic
benefit of credit balances of all kinds, whether individually or in
community totals, depends upon ease of collection.
V. AN ILLUSTRATION OF THE PRODUCTIVE PROCESS
By means of the primary and the subsidiary categories described and
illustrated in this Lesson, all the tangled data of the Productive
Process in Economics may be readily unraveled. Consider for further
illustration the Productive phenomena involved in so simple a specimen
of Wealth (Artificial Objects) as a needle in the hands of a house-wife
engaged in mending family clothing.
She bought the needle at a retail store along with many other needles
gathered together in a bunch--a “paper of needles.”
How did that “paper of needles” get into the stock of the retail
store? It came with other commodities from a wholesale store. How? By
a railway train, on the complicated structure and management of which,
as well as upon the roadbed, the track and the station houses, a great
variety of Labor had been expended.
Where and how did the wholesale store get that needle? Directly or
indirectly, and by similar complicated methods of transportation, from
a needle factory.
How did the needle factory get it? Its workers made it. How? By means
of machinery, Artificial Products--Wealth used as Capital for the
production of further Wealth.
Of what did those workers make the needle? Steel. Where did the steel
come from? From transformations of iron in a steel mill. The iron? From
iron ore. The ore? From natural deposits in the earth.
By what magic was all that brought about? By an infinite variety
and complexity of specialized Labor, which, applied to a variety of
special kinds of Land (Natural Resources)--in country, town and
city,--produced all the Wealth (Artificial Objects) necessary for the
production of more Wealth, namely the Capital; and this consisted
of implements and structures made from and upon Land by Labor; of
implements and structures for the production of those implements and
structures, also made from and upon Land by Labor; of transportation
facilities of many kinds similarly made and operated. Also buildings
for stores as well as factories--all in a confusion of industrial
specialties that can be unraveled only by generalizing the details in
accordance with natural law as disclosed by the Basic Facts.
Let that unraveling be done and still we may be bothered by collateral
problems to which those details give rise--banking, for instance, and
book-keeping all along the productive lines.
To follow in detail the ramifications of the Production of that needle
from the first effort of Labor to which it owes its existence, to its
delivery at the retail store in a “paper of needles” to the house-wife
in whose deft hands we find it, would drive even a magician mad. But
all confusion is banished if we classify the multitudinous details
according to their natural characteristics respectively, as Labor, Land
and Wealth.
And as of the details of that needle’s production, so of all Economic
details, from least to greatest, from simplest to most complex,
throughout the labyrinthine intricacies of the Productive Process in
Economics. To study separately all the Economic constituents of even
the simplest civilized habitation and their respective relations to
it, Economically, one would need training in many different kinds of
specialties, from forestry to decoration. Yet systematic Economic
thinking assigns every Economic detail to three categories which
can be studied without risk of confusion. It need hardly be again
explained that those three categories are Labor, Land and Wealth. Every
constituent of such a habitation, no matter how minute, is assignable
for primary Economic study to one or another of those Basic Facts--to
Land for the site, and for all the rest, from architectural designing
to decorative completion, to composites of Land and Labor.
Likewise of every other human contrivance for human satisfactions.
In multitudinous detail it is an inexplicable mystery except to an
all comprehensive body of experts, and even to them if they ignore
the Basic Facts. Yet every complexity disappears when the details are
assigned to their appropriate natural categories of Man as the sole
producer, Natural Resources as the sole basis and source of production,
and Artificial Objects as the product; or, reverting to technical
Economic terms, when the confused details are appropriately assigned
to Labor as the Productive power, to Land as the basis and source of
Production, and to Wealth as the Product.
All Economic details, from least to greatest, from simplest to most
complex, from most familiar to most mysterious, throughout the
labyrinthine intricacies of the Productive Process in Economics, are
like the details in the Economic history of the house-wife’s needle of
our illustration. What the points of the compass are to navigation, or
the four fundamental divisions of arithmetic to mathematics, such are
the three Basic Facts to the Productive Process in Economics.
SIXTH LESSON
DISTRIBUTION
At the outset in this Lesson let the difference between Distribution of
Wealth and delivery of Wealth be again emphasized.
Delivery is part of the Productive Process to which the next preceding
Lesson was devoted. No Wealth is finally produced until, finished for
ultimate consumption, it has been produced to ultimate consumers by
final delivery.
Quite another thing is Distribution in the technical Economic sense. In
this sense Distribution is the apportionment of Labor-produced Wealth
in appropriate categories with reference to the Economic relationship
of Labor to Land--of Man to Natural Resources.
A better term than Distribution, since this term has been so much
abused by giving to it the sense of delivery by transportation (a mere
phase of Production), would probably be Division. But Distribution
of Wealth has too long served as the technical term for the Economic
division or sharing of Wealth, to be discarded offhand.
Although the Distribution of Wealth in appropriate shares, with
reference to the Economic relationship of Labor to Land, affects the
sharing of Wealth by individuals, it does not completely dictate either
the proportions or the magnitude of individual shares. These may be
determined not only by natural Economic law but also by purchase, by
common usage, by conventional inheritance statutes, by highway robbery,
by forgery, by burglary, by petty theft, by “confidence” tricks, by
lucky speculation or gambling games, by beggary, by “crooked business,”
by generous gifts, by legal distortions, by taxation, by a thousand
and one other influences, legitimate or illegitimate, outside the
jurisdiction of natural Economic law. Radically different are those
fundamental Economic apportionments in Distribution with reference to
the natural relations of Labor to Land.
Fundamentally, Economic Distribution is a twofold apportionment of
the Wealth produced by Labor from and upon Land, whereby one portion
is naturally allocated to Labor as its producer and the other to
Land-ownership as the controller of Natural Resources and sites.
Presumably, then, as Production of Wealth has two Basic factors--in
technical terms Labor and Land, in other terms Man and Natural
Resources--so Distribution of Wealth has two basic apportionments,
one corresponding to the Labor or Man factor in Production, the other
to the Land or Natural Resource factor--Wages for Labor, Rent for
permission to use Land.
That there can be neither Wages for Labor nor Rent for Land unless
Wealth has been produced, is a manifest law of nature. The nonexistent
being naturally indivisible, Production of Wealth must precede
Distribution of Wealth. Inasmuch, then, as Labor produces all Wealth
and without Labor no Wealth is or can be produced, some Wealth must
naturally be distributed or allocated to Labor as Wages before any can
be distributed or allocated to Land-ownership as Rent.
Consequently, the Wages allocation of Wealth demands consideration
first.
I. WAGES FOR LABOR
As with many another abuse of technical Economic terms, so colloquial
and business interpretations have distorted the significance of the
technical term Wages. Even Economic teachers allow their imaginations
to glide away from the comprehensive significance of this technical
term much as they do from its corresponding technical term Labor.
All too readily does conventional Economic thought, when considering
Wages, center upon the compensation which “shirt-sleeve” classes of
hired men bargain for, “salaries” taking the place of “wages” when
“white collar” workers cross the business line of vision. Still more
select levels of Labor are compensated with “fees,” “commissions,” or
“profits.” To thinking students, however, students of Economics who
recognize Economics as a science subject to natural law rather than a
grouping of arbitrary business customs--to such students all special
or mere conventional kinds of compensation for human service assemble
themselves naturally in the same fundamental category, and for clarity
of thought are always distinguished by the same technical term.
What the term for natural compensation out of human production for
human service in aid of production might better be, is of no importance
provided the term be treated distinctively. For Labor compensation
out of Labor-produced Wealth, Wages if treated distinctively is an
appropriate term, and its long time comprehensive use in Economics
entitles it to preference. Wages, then, the technical term in Economic
science for that natural allocation of some Wealth to Labor, which
produces all Wealth, demands primary consideration in any study of the
Economic phenomena of Wealth Distribution.
By natural Economic law all Wealth in Distribution goes to Wages as
compensation to Labor, up to the point at which differences in the
desirable qualities or locations (or both) of particular portions of
Land disclose relatively high and low opportunities for Production.
In those circumstances Wages for production on the superior Land would
be higher--a larger product of Wealth--than for the same Labor-power
expended on inferior Land. Consequently another natural law of
Economics becomes manifest. Rent for superior Natural Resources arises.
It is the difference between Labor productiveness on the poorest Land
in use and the productiveness of equal Labor-power on better Land.
Thus Rent has a place along with Wages in the primary Distribution of
Wealth. This Economic phenomenon is to be more definitely described
farther on. Meanwhile the phenomenon of Wages commands our principal
attention.
So long as Land freely offers equal opportunities for Production, the
category of Wages comprehends the whole product of Labor. It is only
as variations in the desirability of particular kinds and locations of
Land play a part in Production that Wages as a whole are distinguished
from total product. In those circumstances, however, the Wages category
embraces the entire Product less Rent for superior Land.
It is not to be inferred, though, that deductions for Rent necessarily
reduce Wages as a quantity. In normal circumstances the fact is the
reverse of that. Although Rent reduces the proportion of Wages to
Wealth it does not necessarily reduce the aggregate of Wages. On the
contrary, Wages may be more in quantity when normal Rent is deducted
from aggregate Wealth than before Rent arises. The reason is that
Rent takes of Wealth only a surplus which is measured by degrees of
superiority of the better over the poorest Land in demand.
Subject, then, to normal in contradistinction to arbitrary deductions
for Rent, the Wages allocation of Wealth is assignable to earners
in the Labor category in shares approximately proportionate to the
desirability of their respective services.
Subsidiary classifications of Wages are identified by more or less
descriptive terms for colloquial convenience and private accounting
purposes. Among these terms are “salaries,” “commissions,” “profits,”
“fees,” “labor costs,” and “dividends.” All of them are doubtless
convenient for keeping track of private business or other personal
details; nor are they objectionable for Economic research provided they
be not considered as primary or fundamental.
All such terms as “salaries,” “commissions,” “labor costs,” and the
like in private or business accounts, are in the Wages category of
Economics. “Profits” and “dividends” are mixed, very much as with
reference to the Productive Process in private and business accounts
Wealth and Land are mixed. “Profits” may be and they usually are made
up of a mixture of Wages for human service (Labor) and of Rent for
natural resources (Land). Convenient as such confused classifications
may be for account-keeping in private business affairs, or for other
manifestations of mere custom, they have no legitimate place in the
orderly categories of social Economics. However useful in business
accountings, which concern only the private interests of business
proprietors, they are intolerable in the science of Economics, which
concerns not only a proprietor, nor every proprietor, but all mankind.
Even for private accounting purposes there seems to be a wise tendency
among accountants toward more accurate assignments to normal Economic
categories. One business classification holds high Economic rank
deservedly. This is that subcategory of Wages known as Interest.
Interest may be rightly regarded as the Wages of Capital. This is
no play upon words, nor any confusion of Economic terms. It is a
necessary inference from manifest facts. Since Labor produces all
Wealth, and Capital is a distinct form of Wealth--Wealth devoted to
the production of further Wealth,--Labor is the producer of Capital;
and inasmuch as the use productively of Capital increases Wealth, a
share of that increase is properly assignable in Distribution to the
Distributive category called Wages, though for discriminative purposes
to a Wages subdivision. That subdivision is distinguished as Interest.
It is a subdivision in Distribution in perfect correspondence with that
subdivision of Wealth used in Production which is distinguished as
Capital. As subdivisions or secondary classifications, therefore, the
productive factor known as Capital and the corresponding Distributive
element known as Interest are legitimate Economic categories, provided
their Economic characteristic as products of Labor be not ignored nor
they be confused with Land and Rent. This proviso is often ignored,
however, as when Capital is classified with Land instead of Labor, and
Interest with Rent instead of Wages.
In connection with the subject of Wages, Taxation for the support of
Government demands passing consideration. If it be true, as indicated
in our Lesson on the Productive Process, that the legitimate activities
of Government belong in the Wealth production category as a Labor
factor, then the Economically legitimate income of Government, whether
through Taxation or otherwise, would seem to belong to the Distributive
category of Wages.
Controversies over Taxation take the form primarily of “Taxation
according to ability to pay” versus “Taxation according to financial
benefits conferred” upon the taxpayer by the social whole of which the
agent is Government.
The former contention--apportionment of Taxation according to ability
to pay--puts Government in the position of a highwayman whose “loot”
corresponds to so much of the proportionate property of his victims as
he is able to extort. But how shall taxes be measured in proportion
to governmental or social benefits received in financial form by the
taxpayer? A sound Economic discrimination might be made by levying upon
Rent only, instead of both Rent and Wages as is now customary.
But by what right could Government levy upon Rent only if its
claims to an income are as a producer of Wealth functioning in the
category of Labor, the natural compensation for which is not Rent
but Wages? The answer would seem to be that inasmuch as all Wealth
is produced by Labor from and upon Land, and as the Rent allocation
of Wealth attaches to Land-ownership--Land itself making no claim
to compensation,--Government might with Economic consistency exact
its Wages as a factor in Production from the receivers, actual and
potential, of Rent, whose ownership of the Land, valueless without
Governmental protection, rises in Value with Economic progress and
falls in Value with Economic decline.
Such an adjustment would exact no more of Economic science than
appropriate alterations of the technical terms respectively for the
two fundamental allocations of Wealth in Distribution. Instead of
identifying one allocation as Wages and the other as Rent, the two
could be identified respectively as Individual Wages and Social Wages.
This mode of identification would in no wise disturb the natural
characteristics of the two allocations into which the Wealth produced
by Labor from and upon Land naturally distributes itself.
In that connection it may be useful to note the fact that Taxes on
the Wages allocation of Wealth tend to check the production of
Wealth. They interfere with Trade, that gigantic factor of Production,
by thrusting the tax upon consumers as part of the Price--not only
the tax, but also business profits on the tax. On the other hand,
taxes upon Rent tend to check the Economic evil of speculation in
Landownership and the consequent monopolization of Natural Resources
unproductively.
Related to the problems thus suggested is the policy commonly and
widely known as “the Single Tax,” the fiscal method proposed and
widely popularized by Henry George for initiating and promoting an
evolutionary process in the direction not only of ethical readjustments
of fiscal methods but also of ethical readjustments of the Economic
relations of mankind to Natural Resources and to Artificial Objects
produced from and upon Natural Resources in accordance with natural
Economic law.
That policy rests upon three Economic principles. One is the principle
that Land (Natural Resources) is not an individual inheritance but is
a common inheritance. Since no man or body of men ever has or ever can
create Land, it is by edict of natural Economic law the inheritance of
all that are living. But inasmuch as Land cannot be well utilized (such
Natural Resources as the sea and other open waters excepted) unless
subjected to private possession for farming, mining, manufacturing,
merchandising and homes, or the like, private possession, control and
management of areas of Land are an Economic necessity. To adapt that
practical necessity, therefore, to the common right, the Single Tax
policy proposes to make private possession secure without prejudice to
common ownership, by the assignment annually, through taxation, of the
annual Economic Rent or Value of all Natural Resources to Governmental
treasuries by way of annual compensation to the community for the
annual values which the community gives to that Land. Concurrently the
Single Tax policy would exempt Artificial Products and their producers
from all taxation, on the principle that Artificial Products (Wealth)
are the private property of their producers and purchasers.
The contention of “Single Taxers” is that such a policy would place
Taxation upon a sound and ethical basis; that it would secure to
utilizers of particular Natural Resources the full value of their use;
that it would properly take from them for the benefit of all, the value
of their monopoly of possession of common property; that it would
stabilize the value of monopolized but unused Natural Resources (Land)
at the level of their value for use, thereby abolishing speculation
in the future values of Natural Resources; that it would open
opportunities for Labor in its broadest and fullest sense to utilize
Natural Resources in the production of Wealth (Artificial Objects)
from Land (Natural Resources); that it would remove the artificial and
lessen the natural barriers to Trade; and that it would bring about
conditions of industrial freedom and equality on the basis of which
every other needed social or Economic reform could rest securely and
function effectively.
As the practical approach to that fundamental Economic reform--that
reform of which its principal and distinguished advocate, Henry
George, said that it would not accomplish everything in the way of
Economic adjustment, but that without it nothing could be accomplished,
for without it every Economic improvement instead of raising Wages
raises Rent, instead of increasing the compensation of producers of
Artificial Objects increases the values of the Natural Resources from
which alone Artificial Objects can be produced and on which alone
they can be traded, used or enjoyed--as the practical approach to
that fundamental Economic reform the Single Tax policy proposes its
application gradually. It aims to substitute by stages the Taxation of
Land according to its value as a commodity, for the present unrighteous
and obstructive taxation of the actual uses of Land.[6]
[6] See “Progress and Poverty,” “Protection or Free Trade,” and
“Social Problems,” by Henry George, and “What Is the Single
Tax?” by Louis F. Post.
Irrespective, however, of Taxation problems or of private _versus_
common rights, and retaining the long-time technical terms for
primary Distribution of Wealth--Wages as to Wealth not allocated to
Landownership, and Rent as to Wealth so allocated--we may proceed to
our study of Rent for Landownership as the secondary allocation of
Wealth in Economic Distribution.
II. RENT FOR LANDOWNERSHIP
For the use of any Land which is more desirable in its natural state
than the best to be had for the taking, part of the Wealth produced
from and upon it by Labor is allocated, through operation of Natural
Economic Law, to the Distributive category for which the technical
Economic term is Rent.
That allocation of a share of Labor-produced Wealth to Rent necessarily
diminishes the proportion allocated to Wages, but it does not
necessarily lessen the quantity.
Without Rent, Wages takes the whole Product; with Rent, Wages can
of course take only a fraction of the whole. Yet as a result of
enhancement of Labor-power--specialization, steam, electricity and
other productive developments--that fraction of the whole may be
greater in amount than the whole in less productive circumstances.
Rent is that proportion of total Wealth production which results from
the use by Labor of Land lying above the Economic frontier, which in
Economic terminology is best known as the Margin of Production.
For illustration, here are two tracts of agricultural Land of
equal area and equal accessibility. One will yield to a standard
of Labor-power more Wealth than the other, for the soil is richer.
It will therefore be in greater demand by Labor than the other.
Consequently, if its potential yield of Wealth be large enough and Land
of its quality and location scarce enough to attract Landownership,
Labor can utilize it only on condition of paying to that ownership
a Wealth premium for the privilege. This premium is Rent. If paid
periodically, it would be regarded as “groundrent”; if the “groundrent”
were capitalized for selling or other commercial purposes it would
take on some such term as “land value” or “selling value” or “capital
value.” But whatever the form or the colloquial term for it might be,
this premium for superior Land is technically classed in Economics
as Rent. As Ricardo[7] expressed it at a time when “Land” seemed to
mean only agricultural soil, “Rent is that portion of the produce of
the earth which is paid to the landlord for the use of the original
and indestructible powers of the soil.” Its tendency is to absorb all
the Wealth produced from and upon superior tracts above what could be
produced by like Labor from and upon inferior ones.
[7] “Principles of Political Economy.” Chapter II.
Still better agricultural Land would extract still higher Rent out of
the Wealth product for the like special privilege of Production. Thus,
with alterations in the so-called Margin of Production, the natural
allocations from Wealth to Wages would rise or fall as the Margin
receded or advanced, whereas the natural allocations from Wealth to
Rent would rise with the advances of the Margin and fall with its
recession.
The same marginal principle applies to other kinds of Land precisely
as it does to the agricultural, some advanced Economic students to the
contrary notwithstanding. For a non-agricultural illustration, here
are two mineral deposits. One is more easily worked than the other, or
more conveniently situated with reference to demand for the mineral
product for Consumption. It is therefore more attractive to Labor than
the other. Consequently, Labor will naturally yield to the ownership
of the superior deposit (Land) a larger proportion of the mineral it
extracts (Wealth) than to the ownership of the inferior deposit. The
proportionate excess is Rent.
For still another illustration of the same Rent principle, here are two
building-sites in a town or city. They are of equal size, and in every
other physical respect equally desirable. But one of them is at the
center of the business or other social activities of the town or city,
the other at the outskirts. The former being in the Economic sense
more desirable for Labor purposes than the latter, Labor yields to its
ownership a larger proportion of Wealth as Rent than to the ownership
of the other.
In a vast variety of special instances, such as those used above for
illustrative purposes, Rent exacts from the flow of Wealth a continuous
allocation which depends for its proportions to the aggregate flow
upon the desirability of different qualities and locations of Land (as
the Natural Resource factor in the production of Wealth) relatively to
the desirability of such qualities and locations as may be had for the
taking.
“The rent for any piece of land,” writes Max Hirsch, the Australian
economist,[8] “is determined by the excess of its productivity over
that of an equal area of the least desirable land in use, after the sum
of exertions which in both cases yield the most profitable result has
been deducted.”
[8] Page 127 of “Democracy vs. Socialism.”
All such exactions are phenomena of natural Economic law. Land exists
in quantities to which Nature assigns impassable limits, and this
limited supply of Land varies in fertility and in desirability of
location. He who produces from and upon better grades will naturally
achieve greater or better results with the same expenditure of Labor
than he who produces from poorer grades. This difference is measureable
by variations in the productive grades of Land, from nothing in excess
of production cost on the lower side of the Margin of Production--the
poorest in demand, the Economic frontier--to something in excess of
production cost on the higher side of the Margin, the hither side of
the Economic frontier, and to more and more for higher and higher
grades up to the best.
It should be observed in this connection that the Margin of Production,
the Economic frontier, is not a surveyor’s line, like the boundaries of
a farm or a county or a State. It is a term for an Economic difference,
from lower to higher degree in the desirability of particular Natural
Resources though they be separated by long distances or short ones.
Nor need the intervening space recede from highest to lowest by
geographical degrees, or relative desirability depend upon richness of
soil or mineral deposits.
Trading opportunities may do much to determine the Margin. A rich
gold deposit beyond the reach of trading possibilities lies below the
Margin, for it cannot be utilized. A farm twenty miles away from a
trading center would be nearer the Margin than one two miles away, even
though the two farms were equally productive, because the marketing
costs would affect the Value of the product prejudicially. Space for
a building-site a hundred and fifty feet from the nearest street line
would be nearer the Margin than one fronting on the street.
Although the old conception of the Margin of Production--“margin of
cultivation,” as it was called--as bounding an open space of free
agricultural land be obsolete, the principle of the Margin remains,
namely, that the better the opportunity to profit by use of any
location on our earth over use of the most profitable location thereon
to be had for nothing, the higher will the Rent of the former be.
That marginal principle will persist so long as some locations are
preferable to others. And in those circumstances Rent will continue
and be allocated with reference to “marginal” or zero-value Land. The
better the opportunity to profit by the use of any location above the
most desirable to be had for nothing, the higher will be the Rent of
the former.
Whether the surplus of Production or possible Production be called
Rent for Land, or deductions from Wages for superior opportunities to
Labor, or be otherwise distinguished from Wages for Labor, it none the
less exists as a distinct and natural allocation of Wealth produced
from and upon Land by Labor. Although Rent depends wholly upon Labor
for its Production it is a differential gain in Wealth which is due
not to superior productiveness of Labor but to relative superiority of
different kinds and locations of Land.
This continuous allocation to Rent of shares of Labor-produced Wealth
may--it constantly does--take on Capitalized forms. As Wealth is
produced it flows toward the productive factors in two distinct and
continuous streams--Wages for Labor and Rent for Land. But as Land
has in business custom the rank of a commodity, the legal right of
its owners to appropriate Rent assumes the form of Capitalized Land
Value. An annual income from Rent, for example, be that income actual
or only potential, may be bought and sold in business intercourse for a
Capital sum or “purchase money.” Commonly it is so sold along with the
legal Land title by which it is secured to the owner, but often with
Artificial improvements, the whole being called “real estate,” as if
the improvements and the Land were fundamentally identical.
As a result, the word “rent” takes on in the customary business sense
a different meaning from the meaning of Rent in the normal Economic
sense. In private business it may mean annual “groundrent,” or annual
house-and-ground “rent”; and when capitalized, all legal rental
rights may be combined in Price or Value. A concurrent custom is the
transformation noted above of Rent for Land into Capital value or
selling Price.
Such capitalizations operate as mortgages upon future Production; and
as the capitalizations increase, that kind of mortgage burden grows
in Economic weight. If Production continues advancing, the consequent
increase of Wealth as a whole easily bears the burden, which rests
then upon the naturally increasing Rent allocation rather than upon
Wages. But in consequence of such capitalizations, Rent tends to
become a football for Land speculation. This results in excessive
capitalizations of Rent, which tend in turn to lower the Margin of
Production, the Economic frontier, abnormally. As a consequence,
Rent exactions in the form of speculative Land Prices rise above
capitalizations of Rent at normal levels.
Exemplifications of such Economic phenomena may be observed in any
community where at any time speculative Prices for Land have figured.
In such circumstances, so long as Wealth is sufficiently increased by
Labor--whether from improvement in Labor-power or from progressive
advantages in Land opportunities,--increasing Rent is offset by
increasing Wealth, and Economic prosperity abounds. But when increase
in Wealth-production lags behind Rent, prosperity is checked and a
“slump” in Land-values, Economically perilous, follows.
Other causes of Economic depression than “slumps” in speculative
Land-values there doubtless are. They spring from such superficial
maladjustments in the processes of Trade as are connected with
defective banking, fluctuations in the values of corporate stocks and
variations in Money standards from lack of effective stabilization.
Even as to business depressions apparently so produced it is, however,
exceedingly difficult if not impossible to declare with certainty that
the leading part is not played by speculative Land values. For in our
neo-feudalistic era, Land values are intricately confused with Wealth
values in corporation stocks and bonds. To the extent that Land values
and Wealth values are thus mingled, it is quite impossible to account
for many Economic upheavals without more distinctive inventories of
property in Trade and more accurate Economic classifications than in
business circles or among advanced students of Economics have as yet
been reached.
Before passing to the next subdivision of Distribution, it may not be
a diversion to direct attention to the most remarkable distortion of
technical Economic terms that has yet harassed Economic thought with
confusion. This is the attempt of some Economists to identify Rent with
Wages, by ascribing extraordinary compensation for extraordinary human
service to “rent of ability.” As a subclassification of Wages there
could hardly be any objection to this assignment except its tendency
to mix Rent for Land with Wages for Labor in the minds of students. As
a fundamental classification, however, its absurdity is manifest. Can
anybody “rent” his ability, however great it may be, without putting
it at work? Could the ablest physician, for instance, get a fee unless
he offered to work with his ability? Could the most brilliant author
command royalties unless he wrote books? Of course not. It is only as
one works or promises to work that he is compensated for any degree
of ability. Although Landownership may command compensation in Rent
for such special opportunities as the Land offers to Labor, regardless
of whether it is utilized or not, Man cannot rent his ability without
obligating himself to use his ability; and the man who obligates
himself, though he may call his compensation “rent” if that pleases
either his vanity or his love for confused thinking, gets for his
ability no rent whatever. What he gets is Wages for making his ability
serviceable as a Labor unit. Nor is such compensation any the less
Wages or any the more Rent, if it be (as with lawyers) a retainer for
pledging future service which in the end has not been required of him.
Compensation for work, or for a contract to work, is Wages whether the
contract be in consequence of the worker’s ability or regardless of it.
All compensation for service units, from lowest grades of ability to
highest, is in Economic terminology and analysis, not Rent for Land but
Wages for Labor. The bricklayer, contrasting his Wages with the Wages
of an apprentice, might call his larger income “rent of ability,”
if that flattered him; but his doing so, though it might enhance
Economic confusion, would not alter the Economic relationship of Wages
for Labor and Rent for Land. If Economic thinking is to be done with
definite terminology instead of word-juggling, all compensation for
human service must be expressed by a technical term different from the
technical term for premiums for varying grades of Natural Resources.
The accepted technical terms are Wages for Human service and Rent for
Natural Resource advantages. Though “rent of ability” be picturesque in
dramatics, it is farcical in Economics.
The importance to Economic study of assigning every item of Economic
phenomena, Distributive as well as Productive, to its appropriate
Economic category--Labor or Land in Production and Wages or Rent in
Distribution--cannot be lightly ignored nor carelessly trifled with.
Nor can it be too strongly emphasized. Without such assignments
Economic phenomena are like printers’ “pi”; so assigned, they may be
studied with precision.
III. TRADE
The Distribution of Wealth, as well as its Production, is effected
through Trade. As in the Productive Process from the very beginning of
Labor specialization up to the point of delivery to ultimate consumers,
so in the process of Distribution, Trade is the continuous and the
culminating agency. It determines the kind of Wealth and the quantity
that each factor in Production shall receive.
We have seen that Labor as a whole, a social unit, produces Wealth from
Land and that this activity and this result are governed by natural
Economic law--by natural relations of Economic effect to Economic
cause. We have seen also that a correlative natural law, a correlative
connection of effect to cause, constantly allocates one portion of
the total Product to the Labor factor and another portion to the
Land factor. We may readily see, moreover, that those two primary
allocations subdivide into almost infinitesimal and extremely confusing
secondary categories, comprising every variety of Labor, every variety
of Land, every variety of Wealth, every variety of Economic desire.
It is to satisfy those desires out of that continuous flow of Wealth
that the infinitude of processes indicated in the next preceding
Lesson enter into the comprehensive Productive Process which includes
delivery to ultimate consumers, and that an infinitude of corresponding
processes enter into Distribution.
Many of those processes overlap, playing now a part in Production and
now in Distribution. Some of them are natural, some are customary,
some are legalistic. But all are subject to the cooperation or to
the obstruction of natural law as manifestly as is the navigation
of a sailing vessel on the ocean. In so far as the customary or
the legalistic do not conform to natural Economic law, natural
penalizations inevitably result; in so far as they do conform to
natural Economic law, the results are socially as well as individually
beneficial. As with gravitation in the physical universe, so with its
correspondent force in the Economic domain.
Not only, then, are the minute details of Labor specialization merged
in Productive wholes and delivered in their completeness to ultimate
consumers by means of Trade, as we learned in the next preceding
Lesson, but, also by means of Trade, the two great divisions of Wealth
(Wages and Rent) are assigned respectively to Labor interests and to
Land interests in proportions determined by comparisons of Value.
Individual deliveries, in contrast with Distribution into the two
basic categories, Wages and Rent, consist in the delivery of Wealth
to individuals in proportion to the effective demands of each. Their
demands are limitless, for when satisfied with quantity they naturally
demand quality. But there is a limit to all effective demands. The
limitation on the one hand is the producer’s ability to produce, and
on the other the consumer’s ability to obtain in Trade. Ability to
produce depends in high degree at any time upon the general productive
knowledge of the time. Ability to obtain depends upon the Economic
power in Trade of the individual seeking to gratify his wants. If he
is isolated from all the rest of mankind, he is outside the Economic
circle and can obtain only what he himself directly produces. If he
is one of an absolutely free community, he can obtain what others are
willing to give him in Trade for the service he renders directly or
indirectly to them. If Production be arbitrarily obstructed, whether
by impediments to Natural Resources or to Trade, his ability to obtain
Wealth is not so much according to what he produces or to the service
of any other kind that he renders, but according to his command over
the sources of Production and the channels of Trade whereby he may levy
tribute or escape it.
As human services naturally tend to exchange at par for equally
desirable human services, so do different forms of Wealth, each product
of human service, tend to exchange at par for equally desirable forms
of Wealth; and as Wealth in the Rent category and Wealth in the Wages
category are alike service-products of Labor applied to Land, exchanges
of every kind of Wealth tend to be effected on the basis of equality in
the expenditure of Labor for their Production.
Let it now be carefully observed and faithfully remembered in this
connection, that however various the kind and the amount of Wealth
that individuals receive, each variety is but a subdivision of Wealth
as a whole, and is therefore either Wages or Rent, those being the two
primary divisions of Wealth in Distribution. A “captain of industry”
may get a large share of Wealth for his service while a skilled
laborer gets a small share for his; but each will take his share from
Wages, not from Rent. On the other hand, the owner of a rich mining
opportunity may get a large share of Wealth and the owner of a small
area of farming land or a village building-lot may get a small share;
but each will in that respect get Rent, not Wages. To the extent,
however, that the “captain of industry” derives any part of his income
from Natural-Resource privileges, that part is Rent; and to the extent
that the mine owner or the farm owner or the village lot owner derives
any part of his from his service, that part is Wages.
Thus the factor in Production technically termed Land is represented
in Distribution by the Wealth element technically termed Rent; whereas
the factor in Production technically termed Labor is represented in
Distribution by the Wealth element technically termed Wages.
IV. MONEY
All allocations of Wealth, from the two primary ones--Wages and
Rent--to the least of all that are secondary to either of those two,
are made through Trade, and in the course of Trade are measured by
comparisons of Value, which is the universal regulator of Trade. And as
in Production so in Distribution, for Value measurements Money is the
more or less stable yardstick and Money terms the spokesmen.
Would we know the Value of Wealth in any of its distributive
allotments, we must look for it in terms of Money. Would we know
the Value of any of the various kinds and degrees of Labor that
have produced it, Money terms offer us the only language we can use
or understand. Would we know the Value of any of the various kinds
and degrees of Land from which and upon which such Wealth has been
produced by Labor--whether identified by the term Rent as in Economics
or by such colloquial or business terms as “groundrent,” or “selling
price,”--Money is our sole interpreter, defective though it be. Would
we place any or all of this information on record, we must do so in
terms of Money.
What, then, is Money--this prestidigitateur of both Production and
Distribution? Is it coin? Is it a promise to pay? Is it a fiat of
Value? Is it a magic signal?
Before considering whether or not it is coin, let us think of how
slightly coin is used in Trade. Before suggesting promises to pay,
let us reflect upon the variability and questionability of promises.
Before falling back upon “fiat,” let us know somewhat of the wisdom and
responsibility behind the “fiat.”
If we probe deep, as in these Lessons we have tried to do, shall we not
find that the only level of Value is the Labor level?
Not Labor time. That varies in Value with individuals. But Labor
service or product. And do not the market prices of stable Labor
products come as near to the Value level as may be necessary for all
the purposes of Trade relations?
An absolute level of Value is doubtless as far beyond the possibilities
as an absolute sea level. But as we adopt a “mean level” of the sea,
why not a “mean level” of Value? And why not express the relations of
this level in terms of Money properly stabilized?
The most conspicuous method yet suggested for realizing such a Value
level takes the specific form of a proposal to determine Money
standards by frequent comparisons with the Price level of simple types
of Wealth. Resting nominally upon the Value in Trade of such staples,
this method rests fundamentally upon the Economic fact that Labor, as
the continuous producer of all Wealth, is the real source and regulator
at all times of all Values in the channels of Trade, and that Money is
the measuring rod and its terms the language.
To go farther into this Economic field would necessitate a surface
survey of Economic intricacies, and these pages aim only at clarifying
fundamentals. Having returned from the Basic Facts, upon which all
Economic details rest, to the Money surface with which it began, our
common-sense primer for advanced students is at the end of its task.
SEVENTH LESSON
REVIEW
The science of Economics, having now been traced from its surface to
its three Basic Facts and back to the surface, let us, for the purpose
of bringing the whole subject compactly within its narrowest limits,
retrace our steps briskly but thoughtfully by way of review.
Economic accomplishments are measured by Money standards and expressed
in Money terms. Resting on the surface, those standards and terms
spread over the whole Economic area.
Beneath that surface we first find Trade, for which Money is the medium
or the means of expressing relative values and adjusting balances.
Trade consists essentially in interchanges of commodities, inclusive
of natural resources and of human service. It is not an arbitrary
custom or set of customs, but a phenomenon of natural law through which
artificial objects are produced to completion and final delivery. But
Trade, though lying beneath the Money surface of Economics, is not a
basic fact of that science.
Only by piercing through the Trade surface as well as the Money
surface, can the bottom level of the Basic Facts of Economics be
reached. Those facts consist of distinct categories which comprehend
in generalized forms the myriads of miscellaneous facts with which the
Science of Economics is concerned.
Of those categories or Basic Facts there are in number neither more nor
less than three--Man, Natural Resources, Artificial Objects.
All Artificial Objects are produced by Man from and upon Natural
Resources. The technical term for the activities of Man in that
connection is _Labor_; for Natural Resources, _Land_; and for
Artificial Objects, _Wealth_. In technical Economic terms, therefore,
all Wealth is produced from and upon Land by Labor.
Many colloquial and business subdivisions of those three categories may
be useful provided they be not mixed in their meanings.
One of those subdivisions is Capital, which, in its technical meaning,
is distinctively a part of Wealth produced by Labor from and upon Land.
It is, however, often used loosely to include Land, the technical term
for Natural Resources. Even slaves, and by Economic as well as by
private business classification, have been placed in the subcategory
called Capital, a form of Wealth; and this notwithstanding that
as units of the human factor, slaves belong in the Labor category
of Economics. Although such loose distinctions may be of use in
private business accountings, they are intolerable in the science of
Economics, which, like every other science, demands precision in the
differentiation of terms.
The application of Man’s powers of body and mind to Natural Resources
for the production of Artificial Objects--of Labor to Land for the
production of Wealth--is the Productive Process in Economics. It
involves such subcategories as business enterprise, professional
service, invention, hired-man work--in a word, every grade of
useful activity. These subcategories are developed by industrial
specialization, or, in technical Economic terms, Division of Labor,
which necessitates another subcategory. This is Trade.
Without Trade, products of Labor specialization would remain forever
useless; but through Trade the most minute and incomplete of
those products is brought to its useful place in the aggregate of
Wealth--ploughshares to ploughframes, for instance, or ore to the
steel of the factory, or wallpaper to the interior of the house.
The Productive Process though intricate through specialization and
Trade, is readily observable by generalization into the three major
categories, Labor and Land and Wealth. In observing that Process care
must be taken to distinguish delivery from Distribution. Delivery is
part of the Productive Process. No Wealth is completely produced until
it has been delivered to ultimate consumers. But Distribution has to do
with Wealth apportionment.
In apportionment, or Distribution, there are two major categories,
Wages and Rent, corresponding respectively to the two Production
categories, Labor and Land. A minor Distributive category,
corresponding to the minor category in Production called Capital,
is distinguished as Interest. This term identifies the earnings of
Capital. Inasmuch, however, as Capital is part of Labor-produced
Wealth, Interest must be a subdivision of Labor-earned Wages.
The Wages category in Distribution comprises, fundamentally, all
that part of Labor-produced Wealth which is not allocated by natural
Economic law to Rent for permission to use Land. This allocation
is determined by the greater desirability of some Natural-Resource
locations (Land) over the most desirable that may be had for the
taking--of those at the “Margin of Production” as it is technically
called, the “margin of cultivation” as it was called when agricultural
areas alone were thought of as Land, at the Economic frontier as it may
be most significantly described.
All assignments of Wealth in Distribution being determined by
comparisons of desirability of service (Value measured in terms of
Money), we find ourselves at the close of our brief review back at the
Money surface of Economics where we began our delving expedition down
to the Basic Facts.
As a result of that expedition we know, if we think with clarity and
fidelity, that Economics is the science, not of making Money, but of
Producing and Distributing Artificial Objects from and upon Natural
Resources by Man. The usefulness of our expedition depends upon our
grasp of and fidelity to the generalization of all Economic facts into
those Basic Facts which are respectively distinguished in Economic
terminology as Land, Labor and Wealth.
Questions for Self-Examination
I
1.--Name the three Basic Facts of Economics as described in the
foregoing pages.
2.--Define them as there defined.
3.--In your judgment are there any others? If so, name and define
them.
II
1.--What is Money as defined in the foregoing pages?
2.--How would you define it?
III
1.--What is Trade as defined in the foregoing pages?
2.--How would you define it?
IV
1.--What are the Basic Facts of Economics as in this book explained?
2.--Comment upon that explanation, and give your own.
V
1.--Describe the Productive Process as explained in the foregoing
pages.
2.--Describe it as in your judgment it ought to be described.
VI
1.--Describe the Distributive Process as explained in the foregoing
pages.
2.--Describe it as you think it ought to be described.
VII
1.--Review the Primer briefly but considerately throughout.
FOR THEIR ADVICE, THEIR SUGGESTIONS, THEIR CRITICISM AND THEIR
ASSISTANCE IN OTHER RESPECTS, THE AUTHOR HEREBY EXTENDS GRATEFUL
ACKNOWLEDGMENTS TO GEORGE A. BRIGGS, HARRY GUNNISON BROWN, ANDREW P.
CANNING, STOUGHTON COOLEY, LEWIS JEROME JOHNSON, ALICE THACHER POST,
FREDERICK W. ROMAN, MARY VAN KLEECK, AND JOHN Z. WHITE.
IT IS GRATIFYING TO MAKE RECORD ALSO OF THE FINANCIAL AID CONTRIBUTED
TO THE PUBLICATION OF THIS PRIMER THROUGH A GENEROUS PERSONAL BEQUEST
TO THE AUTHOR FROM THE LATE MRS. MARY E. GARST SMITH OF NORTH
BROOKFIELD, MASS., WITH AN EXPRESSION OF HER HOPE FOR ITS USE ON LINES
WITH WHICH THIS WORK IS IN ACCORD.
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.
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