Elements of Political Economy

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ELEMENTS OF POLITICAL ECONOMY

First Edition . June 1903

Second Edition . . , May 1904

ELEMENTS OF

POLITICAL ECONOMY

BY JAMES BONAR, M.A., LL.D.

AUTHOR OF "MALTHU3 AND BIS WOKK," "PHILOSOPHY AND POLITICAL ICONOMT," KTC.

SECOND EDITION

LONDON

JOHN MURRAY, ALBEMARLE STREET

Y^ZI "!

Preface

This book gives a general outline of the leading principles of political economy as they are illustrated in the commercial life of modern peoples, and of our own nation more particularly.

It is no more than the beginning of a study ; but perhaps it may be sufficiently lucid to induce some readers to carry out the study for themselves and help others to do the like.

J. B.

Hampstead, yd March 1903.

Chapter VIII., on " Interference with Foreign

Trade," was due to the kind suggestion of a

distinguished Statesman and Economist. It

was written in August and published separately

in September 1903.

J- B.

Hampstead, 15/A March 1904.

a 2

Chapter I General Outline Paqs

What Economy and Political Economy are. What Wealth is. Economy of Societies not merely Economy of Individual " writ large." Abstract consideration of Certain Motives desirable. Craving for Comforts. Consumption and Final Utility. Division of Labour. Extent of the Market. Value. Difficulties of Barter. Money. Barter not Superseded. Main elements of Modem Economy. Whence Differences in Value ? Abundance and Scarcity partly dependent on Cost. Cost Varies partly with the Market. Value not explainable by Cost — involves Desire plus Limit. Why Value not simply equal to Cost With Division of Labour, not only Supply, and Demand, and Labour, but Capital, Profits, Wages. Capital — what it involves. Relation to Time — Phenomenon of Interest. Profits. Rent. Separation of Functions not same as Distinction of them. The Separation perhaps not the Final Economy. Technical Advance irrevocable and universal. Tendency, in spite of Governments, of the whole world to become One Country ........ I

Chapter II Value

Production, Distribution, and Consumption. The Two Senses of Value. Value in Exchange the more Measurable. Analogy of Statistical Data. Normal Price. Modern Goods, and Elastic Response of Supply and Demand to Price. Relation to Price of the Costliest Part of Supply. Does Price determine the Margin, or vice versdt Marginal Products and Marginal Sellers. Particular Cost in Relation to Price. Low Prices and Extended Economies. Monopolies. Intermediate Cases . 31 vii viii CONTENTS

Chapter III Capital

PAGE

Defined. Definition may include Land. Capital as a Tool, and as Provision for the Future. Few things " obviously Capital," and alternatives only too open in modern times for spending wealth. Abstinence and Providence. Present and Future — how related in Work done with Capital. Calculation of greater Gain. Longer Ways the more profitable. But within Limits. Capital in less abundance than other Wealth. Hence Interest. Embodied in distinct Classes, Lenders, and Employers. Borrowed Capital and Cost. Renewal of Capital probable. Conditions of the Renewal . ... 45

Chapter IV Wages And Rent

Wages part of Cost, but Men never mere Instruments. In what sense Wages more Flexible than other Items of Cost. Not at least Inflexible (Wages Fund). Skilled in relation to Unskilled Labour. Workmen's Minimum not of Bare Living. A Market not in same sense for Labour as for Goods. No part of Employer's Capital a fund for Wages. Wages not directly paid out of Produce. Trades Societies. Labour not Constant. Trades Unions and their Power to raise Wages. Relation of Wages to Population. Relation of Population to Rent. Wages as a Bare Living hardly ever exemplified. Effects of the high or low price of Food. Improvements in Agriculture. Present System perhaps Politically recommendable, but not therefore best Economically . . .60

Chapter V Profits And Income

Marginal producers. "Rent" in wide sense. Such wide uses of Terms not Advisable. Income, Gross and Net. Wages of Superintendence. All above the Marginal Extortionate Profits? Modern Industry Essentially " Dynamical." Analogy of a Fair Lottery Applicable? Insurance against Risks. Tendency on the Whole towards Free Trade. Protection. Differences in Currency. Standards of Currency. Uses of a Bank ; Bank of England. Trading in Debts. Bills. Lending on Land, etc. On Shares. Money Market and Stock Exchange . . 78

CONTENTS ix

Chapter VI The Commercial Commonwealth Paoi

A Commercial Commonwealth of Civilised Nations. Community of Risks and Depression. Crises and the Telegraph. Proportion of Foreign Trade to the Whole. Foreign Loans and Investments, the Balance of Trade. Movements of Gold. Specie Point. Effects of Defective Currencies on Distribution and Production. Inconvertible Currency. Silver Question in India. Effects of Government Interference . . . 107

. CHAPTER VII

PRINCIPLES OF TAXATION

Equality and the other Canons of Taxation. " Ideal State " and its Taxation. Military Expenditure. Services of Law and Justice. Fees. Public Works, Debts, Grants in Aid. Sources of Revenue. Post Office. Loans. Direct and Indirect Taxation. Taxes on Goods • . . . • 118

Chapter VIII Interference With Foreign Trade

Essence of Foreign Trade. The Political difference from Domestic. Various Classes affected by a Protective Duty. Effect on the Consumers. Effect on the Producers. The Argument that 44 We should do as the rest do." The Argument that Protection increases Employment Causes of High and Low Wages. A Protection of all Trades Impossible. The Position of the United States and of European Countries. Direct Grant better than Import Duty. Argument that Protection keeps Capital at Home. Meaning of an Excess of Imports over Exports. Possibility of a Closed State. Better to look at Quantities than at Values. Temporary Protection. " Basis of Taxation " in 1842 and now. Raw materia] and manufactured. Sugar Bounties. Preferential Duties in 184a. Proposed in 1903. Imperial Free Trade. Canada and English Agriculture. Retaliation and the Dangers of It. Trusts assisted by Protection. Open Doors and Closed States . , . , 146

CONTENTS

Chapter IX Direct Taxes

FAOE

Direct Taxes not wholly Direct. Estate Duties. Legacy Duties. Income Tax. Business Stamps. House Duty. Land Tax. Advantage of a System of Taxation as opposed to a Single Tax. Economic Sacrifice involved in Income and Estate Duty . 184

Chapter X Rates

Local Expenditure. Relief of the Poor. General Principles. Local and Imperial — Distinction sometimes doubtful, witness Transference and Proposals for such. Basis of Annual Value, Difference of Rate from Tax. Incidence of the Rates. Scotch Plan of Division. Rates for Special Services not really Rates. House as Index of Fortune. Compounding Householders. Municipal Housebuilding . • • 194

Chapter XI The Final Issue

Does all point to Socialism? Modern Socialism and Anarchism. Do Trusts lead to Socialism ? The Social Question. The "Submerged Tenth," and the Unsatisfactory Relation of Employer and Workman. Co-partnerships and Co-operation. Effects of a Growth of Capital beyond Population. Friction in the Transition from Poverty to Comfort. Is there a Fallacy in Saving ? 207

CONTENTS

PAGE

Division of Labour. Irrevocable Advance. Value. Lowered Prices (Diagram). Joint Cost. Demand and Supply (Curves). Capital. Wages. Population. The Lottery of Professions. Bimetallism (Diagram). Universal Free Trade. Cost of Carriage in Foreign Trade. Specie Point. Depreciation of Silver. Rates and Taxes. Statistics of Excise and Customs. Customs in 1827 and 1831. Incidence of Import Duties. Registration Duty on Corn. Estate and Legacy Duties. Progressive and Degressive Taxation. Deducted Income-Tax. Effects of Estate Duty. Local Taxation. Socialism. Unskilled Labour. Two Nations in every Nation. The Crux of Marx. Co-operation. Municipal Trading. Birth-rate . 227

POLITICAL ECONOMY

Chapter I General Outline

What Economy and Political Economy are. What Wealth is. Economy of Societies not merely Economy of Individual " writ large." Abstract consideration of Certain Motives desirable. Craving for Comforts. Consumption and Final Utility. Division of Labour. Extent of the Market. Value. Difficulties of Barter. Money. Barter not Superseded. Main elements of Modern Economy. Whence Differences in Value ? Abundance and Scarcity partly dependent on Cost. Cost Varies partly with the Market. Value not explainable by Cost — involves Desire plus Limit. Why Value not simply equal to Cost. With Division of Labour, not only Supply, and Demand, and Labour, but Capital, Profits, Wages. Capital — what it involves. Relation to Time — Phenomenon of Interest. Profits. Rent. Separation of Functions not same as Distinction of them. The Separation perhaps not the Final Economy. Technical Advance irrevocable and universal. Tendency, in spite of Governments, of the whole world to become One Country.

What Economy and Political Economy are. — In its narrowest and earliest sense, economy is housekeeping (CEconomy, okovotxla), the husbanding of the material resources of the family, what

A we now call domestic economy. In its widest and latest sense, economy is the husbanding of any and every kind of resources, material or mental, warlike or peaceful. When this general idea of the husbanding of resources is applied to societies, we have political economy.

Political economy is the husbanding of the external resources of human societies ; and the study of political economy, in spite of the adjective political, concerns the whole body politic — not only, or even mainly, the government. It only deals with the government of a country so far as the government influences the economy of the nation. It deals with separate citizens and households only so far as they also affect the whole society of which they are a part. As an endeavour after science, it investigates the broad general causes that determine the nature of a nations material resources, that tend to increase or lessen their amount, and that tend towards an equal or unequal sharing of them among the citizens. It must take account incidentally of such elements as national character and personal talents, which are not external or material ; but these elements are only treated by it in their relation to the external elements, or else the treatment is not merely economic. It may be said here once for all, that, when the context leaves the sense clear, i.] WHAT WEALTH IS 3

English political economists are in the habit of calling themselves simply economists, and their study economics, and of using economical or economic as the corresponding adjective ; but they are not thereby claiming all and every economy as their province; their study remains confined to the economy of the external resources of a society of men.

What Wealth is. — External resources are desired as a means of living, or as a means of well-being; in either case as a means of fulfilling human ends, and satisfying human wants. When material objects are made subservient to human purposes, they become wealth to the man whose servants they are, whether he has won them by his labour and personal gifts, or owes them to good fortune and circumstances. Collectively, they are his wealth ; severally, the items of the collection are mainly his goods or commodities; but his wealth also includes those external resources which are not embodied in detached objects — services of nature, or of fellow-men, not capable of being stocked or stored. The essential notion of wealth in economics is of a sum total of external means of satisfying human wants and fulfilling human purposes, whether the means be commodities or services. Evidently, therefore, wealth is great or small according to the wants of the possessor ; relatively to these wants, a stock of goods means abundance, or means scarcity. We usually judge of wealth in relation to the wants of the citizens of the society where we live, presuming that we can tell what the wants of ordinary men are, from our knowledge of ourselves and observation of others.

Plenty or scarcity, economy and waste, can of course occur in a small household as well as in a great society. One man may so use his resources that they go far, while another with the same resources may fall short of him. Where the result depends on their own efforts, one man, if he is skilful, may get a larger result than an unskilful neighbour. The ideal economy would be, to gain the greatest possible result with least possible effort, to secure the end by the best and best-used means, whether the end were the getting of wealth, or the keeping of it, or the spending of it.

Economy of Societies not simply a Magnified Economy of Individuals. — All this is true where we are dealing with societies instead of single persons; but experience shows that we do not get the whole truth about the economy of societies if we look only to the economy of individuals, or even of families. There are ways of economy possible for a society of men, and not possible for the individual or even for i.] THE "ECONOMIC MAN" 5

the household, except in society. Division of labour, for example, is possible for the separated man only by a metaphor. As in politics, so in economics, the qualities of the whole body are not simply the qualities of the parts "writ large." The larger characters are different in much more than the size. Though the economy of individuals is idyllically interesting, and the study of it is suggested by the very etymology of CEconomy, it is the study of the economy of societies of men that is suggested by the word economics in common usage. The "economic man" for good or for evil, is the man living with his fellow-men. To consider him stripped of all social elements, would be a useless effort of abstraction. Detachment of man from society often seems more decidedly impossible in thought than in fact : a man may be sometimes found away from his fellows, but cannot, it seems, be thought of away from them ; no notion of him would be quite bare of social elements. Political economy, at least, makes no such abstraction ; it is nothing if not social. But it has an abstraction of its own : it considers society only in relation to its wealth. Is this abstraction possible and desirable?

How far Political Economy requires Abstractions. — It is true that we cannot easily find, or even conceive, a society from which all the elements are absent except the economical — a society devoted entirely to the husbanding of its material resources. But most things that do not exist separately may quite well be considered separately; or it would be hard to say what in this world could be so considered at all. There are certain features of the economy of wealth that make a special study of that subject more likely to be fruitful than a similar abstraction made elsewhere among social fects.

There is first the feature of physical necessity : no human life can dispense with the means of living. Another feature is, that, even when the means of living are secured, there are desires in civilised men for the comforts of life— desires which, as a matter of experience, lead to more uniform and therefore more measurable courses of action than almost all other classes of desires. The nearest rival in this respect is the desire of marriage ; and from its close connection with the desire of wealth, and from their strong influence on one another, the two desires, or rather the general tendencies resulting from the two, have been presented together by all recent political economy.

If political economy had attempted to include the results of other human passions, such as the love of honour or of knowledge, i.] THE CRAVING FOR COMFORTS 7

it would at once have discovered how little uniformity can be traced in the data, and how uncertain a forecast could be based on them regarding the conduct of men and societies. But, with those two selected passions, the larger the field the greater the uniformity, and the more trustworthy the estimate of general tendencies. The effects of prudence are proverbially more measurable than those of benevolence. There is nothing, on the whole, of which men have so much in common as a regard for their own welfare.

The Craving for Comforts in Modern Societies. — The person uninfluenced by economical motives is so exceptional in a large modern civilised society, that he has no appreciable influence on its general course of action, which remains, at least in intention, economical. In savage tribes now, and in some early civilisations long ago, economy would be concerned mainly with the means of living, hardly at all with the comforts of life. Economical principles may be discovered in ants and bees ; and some races of men, left to themselves, remain as these animals. But the larger economical development of modern civilised men seems to be due to the larger and later development of purely human qualities, with their strength and weakness, especially the insatiable craving for comforts, together with an acute sense of the limited means of procuring them. Psychology may be left to decide whether we should speak of desires themselves as infinite, or attach the quality to the objects of desire. In either case, it is ordinary experience that wants of one kind, or the want of things of one kind, cannot be satisfied without bringing forward an attendant train of other claimants. When the point of satisfaction is reached in one instance, there are further aspirations in other directions. It is a feature of civilised men to be satiable as regards any particular species of the good things of life, insatiable as regards the whole genus of them. Perhaps in the fulness of time the predominant desires of civilised men may be desires for what is not external or material ; the economy of the world would then be altered ; what is given to another would be still kept by the giver. But at present there is no sign of the waning of the desire for material goods. Each ordinary man has a hierarchy of wants, beginning with physical needs, and he satisfies the less urgent as soon as the more urgent have received their provision. Since each mans wants, and their points of satisfaction differ slightly from every other man's, there is a basis here for exchange, just as in the difference between one man's qualities and another's there is a basis for the division of i.] FINAL UTILITY 9

labour, so closely connected with exchange in modern industry.

Consumption of Goods and Final Utility. — The actual application of goods to the satisfaction of wants, is in a sense the end of economy ; goods are desired for the sake of being consumed, either in the present or in the future, and, if not for their own sake, as a means of procuring others that are desired for their own sake. Economy has more to do with the social steps that lead to this consummation than with the consummation itself, which is less social than individual.

But a study of consumption brings out at least one characteristic that throws light on economical movements over the whole field, namely, that men judge stocks of goods not by the greatest but by the least or final utility of the goods. Food, for example, is a necessity, but a man's appetite for it decreases with the successive quantities supplied to him. Where particular goods, as in this case, are divisible and measurable in fractions, the importance a man attaches to a stock of the particular goods will be determined, not by the usefulness of the goods in the abstract, or by the usefulness of one item invaluable if present alone, but by the usefulness of the nearly superfluous last item retained. You can see what his judgment on them is, by the use to which he puts the last portion of the stock that he counts it worth his while to get or use at all. According to what he considers its abundance or its scarcity, h£ will put this last portion of it to a base or a noble use ; and if to a base, you may be sure he has reached what he considers abundance of it. The descent, of course, may be checked by the power of exchange. What is not desired by one man may be prized by another. Superfluous physical necessaries, for example, may always find a purchaser; and the final utility to the first possessor would be the utility of the thing as a matter of sale. The phenomenon of exchange is likely to occur, as we shall see, wherever the lowest use of an article means a greater depth with one man than with another. If the articles are measurable in small quantities, the dividing line between what is personally useful at all, and what is only useful to procure something else in exchange, may be very fine. With or without exchange, a line of distinction exists ; and the fact of its existence is of real economic importance. Apart from exchange, goods cease to be goods for me if they are present in abundance beyond my wants for the future and my wants for the present. They are " things," but not goods. I "attach no value to them"; and, in the case where the excess was due to my i.] DIVISION OF LABOUR 11

labour, I should cease to bestow the labour beyond the point of satisfaction.

The virtues of Division of Labour. — But it is precisely by creating such superabundance that the division of labour makes social economy more effective than private economy. Division of labour is one of the vital processes of the industrial body. When the labour of making all the goods wanted by society, and not supplied gratuitously by nature, is divided among the members, so that, instead of making all of them, each working member devotes himself to the making of one kind of goods alone, the result is greater dexterity in the making, saving of time lost in passing from one employment to another, more intimate knowledge of the nature of the things, and therewith more ingenuity and inventiveness in dealing with them. Also, in proportion to their civilisation, societies of men turn to account the inherited special aptitudes of their members. Variations among animals, though they may serve to the survival or ruin of the possessors, do not seem to be so utilised for the good of the animal community. But there is no human community without some considerable development of division of labour, and the progressive extension of it is a leading characteristic of modern civilisation.

Earlier and Later Forms of it. — In the simpler forms of society, not only is the economy of division of labour and separation of employments clear, but there is little or no doubt possible as to the several authors of the economy effected. Not only is the work divided, but the parts are locally separated ; and, though the whole process is social, there is no risk of confusion between the contributions of one member of society and another. There is little difficulty in saying who was the producer and what he produced, in any given case. To "produce" is to bring forward what was lying latent or behind the scenes in nature : it consists in helping nature to help man — nature meaning the physical world distinguished from man. In the simpler forms of division of labour, the precise contributions of particular men to this united effort are almost unmistakable. The independent workmen of to-day, such as the country blacksmith, village shoemaker, or city cobbler, are a near example of what we may suppose to have been the beginning of the industrial division of labour. But large factories, where hundreds of workmen work together, each making parts and no one a whole article, are the characteristic form of the division of labour now ; division is a misnomer, or at least it is less striking than the union, i.] LIMITED BY THE MARKET 13

and even the undistinguishable blending, of contributions to the final result.

Limited by the Market. — There is in another sense union from the first. " Division of labour is limited by the extent of the market." Suppose that division of labour had been introduced by a common agreement of all severally to adopt separate employments on condition that all did so, and that the produce should be divided as well as the labour. Even under those conditions, unless the size of the community was large enough, and the nature of the country was such as to cause a need for the classes of goods produced, there would be no economy in separating all employments ; a smith must have produced more than horse-shoes if he lived in rocky Ithaca, and even a maker of boats on that little island must liave made something else as well, if he were not to be an unprofitable servant. The need, or the absence of need, for a separate trade would (where there was not a paternal or despotic government, or else a fraternal agreement of the kind described) be discovered by the ease or difficulty each producer found in inducing others to give him their goods for his. It would appear in the process of exchange, of which the essential nature is, what the primitive form was, barter, — the giving of goods for goods.

Rise of Market Value. — Value in its commonest sense is the relation to each other, in exchange, of two such goods, or sets of goods, thus exchanged or bartered for one another. If my goods are wanted, some one else will be willing to give me their value, or goods of his, in exchange for them. If there is no such person found by me, then I have produced beyond the needs of my fellows, and all the advantages enumerated as belonging to division of labour seem to have proved to that extent a delusion, and the economy to be no economy, in my case.

It is possible, however, that the extent of the market may be quite great enough, while a difficulty occurs in the nature of the goods held on the two sides, and in the times when they are respectively wanted. The baker may not want boots at the time the shoemaker wants bread ; the boatmaker wants bread, though the baker may not want a boat at all, now or* any other time. The boatmaker, though he would think his boat equal to many loaves of bread, would be embarrassed if the whole equivalent in bread were given to him for the boat. The baker's article is divisible into small portions, but for these there may not be so easily divisible equivalents on the other side ; and it may be hard to get such a part of another's article as i.] MONEY 15

would be reckoned by both to be fairly worth the part of the batch or the single loaf. One man, again, turns out his articles day by day, and every day ; another spends weeks or months, or even, like the farmer, a year in turning out his.

The Purpose of Money. — Money may be conceived to have been invented to overcome such difficulties, and enable the economy of division of labour to have its perfect work. Though the baker and boatmaker may not want each other's wares at the same time, it is possible to find some third kind of ware that is wanted by both, roughly speaking, at all times. Such a kind of ware might become a means of effecting exchange where otherwise the case seemed hopeless. In Virginia, one hundred and fifty years ago, tobacco was often such a means of exchange; and many different articles might seem fit to answer the purpose, according to circumstances. But to play the part of money it is not enough for an article to be generally wanted ; and there must be not only fitness to serve as a measure of value, but fitness to serve as a means of exchange. There must, for example, be divisibility, in order that difference of value may not cause things that are indivisible to be only exchangeable in rare coincidences. The rare coincidences would occur when he who was anxious to get a particular article, and had one of his own to offer for it, found the possessor of the coveted article willing or even anxious to secure the offered article, when both were willing at one and the same time, and when the one article, without addition or subtraction, was deemed equal to the other. But " money answereth all things." With money as a common third to mediate between them and perform the necessary addition or subtraction, the two men need not wait for the rare coincidences. If barter facilitates division of labour, money facilitates barter.

It does not supersede Barter. — It is not rightly described as enabling men to dispense with barter. Goods are offered because goods are wanted ; exchange, among all ordinary sane men as an affair of business, is in intention barter. This appears in the highest developments of international trade as well as in the simplest forms of local industry. But money is a necessary tool at a certain stage in the development of. division of labour; and the precious metals are the best materials for that tool. If goods are to be given, not directly for the goods wanted, but, in the first place, for k third article which in due time will procure the goods wanted, the giver (the seller) will need to be sure of the i.] COINS AND CURRENCY 17