Economics I.

Front matter

ECONOMICS I.

A SUMMARY

OF

Chapter I

Political economy is the art which helps the statesman to promote public wealth. The laws of this art are the basis of the science of economics. Sect. i.

Public wealth is the utility and benefit both morally and physically of the various properties of the nation. Property of the nation includes both private property, government property, and all the advantages of the country, such as good climate, etc. Sect. 2.

A property right is a title to a part of the public wealth. Property rights may be created or destroyed without increasing or diminishing public wealth. Sect. 3.

The wealth of a community depends on the utilization of the means of public enjoyment. Public wealth is a flow, not a fund. It is to be measured as income, not as capital. Sect. 4.

The capital of an individual or a community is the amount of wealth in existence at that time. The income is the amount of wealth obtained during a certain period. Capital and income may be converted, each into the other. Sect. 5.

Wealth is the means of enjoyment. The use of this is the public income. The total amount of public income at any moment is the public capital- Ordinarily the term public capital is applied to that capital which is employed for production. Sect. 8.

Private wealth is the right to a part of public wealth. The amount which accrues to this is private income. The total amount of these rights, at any moment, is private capital. Ordinarily the term private capital is applied to that part of those rights which is applied to production. Sect. 8.

The mercantile system of political economy taught that the nation should strive to make money in the same manner as the individual. The nation should get rich by selling more than it bought.

The excess of exports over imports was looked on as the index of national prosperity. Sec. 9. «

The physiocrats said that national power lay not in the supply of gold and silver, but in the supply of food. Sec. 10.

They laid too much stress on the quantity of food as a measure of public wealth and too little on its utilization. Sec. 11.

Adam Smith showed that private wealth was a powerful agency for furthering public wealth. Sec. 11.

Formerly trade was a struggle between buyer and seller. Today it is regarded as a mutual service. Sec. 12.

This is the first result of Adam Smith's perception. Sec. 12.

A second result was the change in the attitude of economists toward state interference. The restrictions to prevent extortion also prevented mutual service. The doctrine of "laissez faire" (go as you please) was introduced. Sec. 13.

A third result was to make people look on political economy as a science rather than an art. Economics is the science of the laws of business; it is not the art of conducting business. Sec. 14.

In economics, law has two meanings. A natural law is an observed sequence of cause and effect. A positive law is a command, both moral and jural, relating to wealth. Sec. 15.

"Laissez faire" led to individualism and freedom. This led to the view that private property is good, because it was seen that freedom in other things had good results. Sec. 17.

The socialist distrusts that the loss from individual freedom outweights the gain. He believes the evils of individual freedom outweigh the gain. Sec. 18.

The individualist glorifies the pursuits of wealth since it is the means of mutual service. Sec. 19.

Individualism calculates the large and remote results. Socialism looks to the details. Too much state action tends to create new evils. The good of state action is often tangible. But the evils are much more indirect and bad because by their subtlety they are not seen until they have become very bad indeed. Sec. 20.

Laws and institutions are the result of natural selection. Sec. 21 .

Education and imitation perpetuate in children the useful qualities of their fathers. Sec. 22.

The human struggle for existence is between groups rather than individuals. It is a struggle more for domination than annihilation. This is true also of some of the higher animals ; ants, for instance, have institutions and usages, which are like those of semi-civilized man. Sec. 23.

In man physical characteristics are strikingly alike. In animals they are different. Sec. 24.

In the community we have a natural selection of ethical types rather than physical ones. This is a danger to the strength of the community. Sec. 25.

Economics and ethics are closely connected. The preservation of the ethical type is not good because it is not economically beneficial. The present system of society is good because it prevents the group type from becoming rigid, and its laws and customs so inflexible as to render it unable to adapt itself to changed conditions. Sec. 26.

Economics is studied historically and deductively. Economics must be studied with ethics, historically. Sec. 28.

Chapter II

As civilization progressed man learned to accumulate his income jnto capital. Sec. 29.

The accumulation of capital permitted the institution of slavery. Sec. 30.

The condition of serfdom gave to the people who lived under it a positive advance in present enjoyment and in possibility of progress. Sec. 31.

Slavery, by its nature, offers little incentive to increased efficiency. Sec. 32.

The two facts that capital originated in robbery and labor in slavery do not prove that the capitalist is a thief or the laborer an inferior. Sec. 33.

The progress of slavery raised the question of the legal ownership of animals and slaves. Sec. 34.

The slaves enal:)led their owners to reach a higher state of moral development. They also helped to make society more secure. Therefore they were public wealth. Sec. 35,

By tending to preserve peace and to increasing the accumulation of property, slavery led to the humanizing influences of family life. Sec. 36.

This led to the gradual necessity for peace and order, in order to secure the protection of accumulated wealth. Sec. 37.

From this, followed the recognition of rights among slaves. This culminated in their emancipation. Sec. 38.

The emancipation often increased public wealth by making more efficient workmen of the slaves. Sec. 39.

The change from slave to free labor took place first in manufac" tures, then in agriculture. The metayer system provided that a certain share of the produce be surrendered to the proprietor of the land. This was the first step toward free labor in agriculture. Sec- 40.

The free country is richest and most powerful in long war. Emancipation, therefore, became a political necessity. Sec. 41.

The greater efficiency of the labor of the North helped overcome the South. Sec. 42.

Emancipation often has effects of doubtful good. Serfdom is often a good thing. Sec. 43.

In Russia the slave has become, by emancipation, the slave of the money lender. Sec. 44.

Emancipation makes the slave depend on himself. This local" izes poverty. The deserving poor are few. There are less famines now, because every man looks out for himself. Sec. 45.

Poverty is diminishing. Industrial inequality has come to be a grievance. Much poverty is due to causes for which the poor are to blame. Sec. 46.

Malthus said that poverty was the necessary accident of the struggle of existence. Society could not provide work for all. If this is so, there is no need to attempt to eradicate poverty. If pov" erty is preventable, the claims of our civilization for favorable judg" ment can hardly stand for a moment. Sec. 47.

Malthus said that population was bound to increase faster than the efficiency of production. Some, therefore, will lack food. Sec- 48.

A low death rate is an index of social prosperity. Sec. 49.

If the productive efficiency increases as fast as population, agricultural products will not be subject to the law of diminishing returns. Sec. 50.

The children of those who have married young die for lack of proper care and support. Sec. 51.

Generally the improvements in production of food will not keep pace with the possible excess of the birth rate over the death rate. Sec. 52.

The pressure of population on subsistence serves as a stimulus to improvements in the arts. If the state provided for every child (1)

the stimulus to be self-supporting would be taken away, (2) the natural selection of the stronger families and individuals would cease and the race would find a dead level, (3) the capital of the community would be impaired by increased consumption and diminished production. In order to restrict population each individual must be responsible. Poverty, then, would exist through neglect of this responsibility. Sec. 54.

The opponents of Malthus say (i) Population never presses on subsistence. There is food enough if it were only properly distributed. (2) If there were a more equal distribution of food population would not be likely to press on subsistence, because increased comfort lowers the birth rate. Sec. 55.

These critics overlook the fact that the surplus of food is the result of family responsibility. Private property and family life stimulates production in all but this lowest. Sec. 56.

Increased comfort does not lower the birth rate necessarily, lioth are the result of prudence. Sec. 57.

Fear of loss of social standing lowers the birth rate more than that of starvation. Social ambition in itself does not prevent an increase in population, but the need of subsistence is felt by all. Those who possess it are stamped as bearing a higher intellectual morality. Prudence is the prime cause of all restraint. Sec. 58.

The waste of more power in the exercise of prudence is a real evil. This may lead to physical and moral evils. Sec. 59.

This danger is slight. The modern family and the law of capital have been checks on population. A change in economic institutions changes the average character. Sec. 60.

Natural selection and functional adaptation alone cannot regulate population, individual responsibility can. Sec. 61.

We must look out for the poor and unfortunate though the process of natural selection be hampered. The ethical loss would far outweigh the gain. Sec. 62.

Criminals should not reproduce. If the pauper wont work he is a criminal. Whether he can work, will work or can't find it demands different treatment. Sec. 63.

Indiscriminate charity fosters pauperism. Sec. 64.

Wilful paupers should be separated from the rest. Sec. 66.

The work test determines the kind of pauper. The attempt to make the work useful is good, but it must not interfere with its character as a test. Sec. 67.

These efforts take three forms, i. Public works. 2. Labor colonies. 3. Advances or loans of money to be repaid. None have succeeded. Sec. 68.

It is asserted that public works preserve the laborer's self-respect. They cannot be constructed in the winter when this need is greatest. It diverts from other employment some who would have found work. The preservation of self respect is more apparent than real. It is a queer notion of self-respect that leads a man to accept money out of the public treasury through political chicanery. In agriculture, however, there is no particular attraction, and the danger of undue diversion from other trades, and of political chicanery is slight. Sec. 69.

Labor colonies do not reach the right people generally. They do not teach men self support. They become places of refuge for the vicious poor. No association of w^orkmen is in a position to guarantee the utility of its future product. If the advances by the state were to be confined to agriculture the danger would be much less. England recently has lent money to the poor to buy land. The plan is good but not of sufficient standing to insure success. Sec. 70.

The German bureaus of information have been quite successful, because the police system is so efficient. It is impossible to provide food and lodging for those seeking work without great danger that such relief will be misused. Much pauperism is due to the stubbornness on the part of the individual against taking certain kinds of work. Sec. 71.

Compulsory insurance is another means of reducing pauperism. The laborers are required to contribute to the fund while they work. The saving may be out of the necessaries, luxuries or savings. If this compulsory saving is out of his necessaries it lessens his labor power and that of his children. If it is out of his luxuries, all well and good, but it generally does not come from this source. If it comes out of his savings it tends to make him dependent instead of self supporting, because it takes away the stimulus to save, which makes the labor self responsible. Sec. 72.

Compulsory saving does not give the moral and educational results which voluntary saving gives. Sec. 73.

There is also danger that the amount of accidents and sickness will increase. Already the number of railroad accidents in Germany has increased. This shows that the diminution of personal responsibility lessens the incentive to work. Factory insurance can be carefully supervised. Government insurance cannot be easily guarded against fraud. Sec. 74.

Insurance tends to decrease individual responsibility. This is not good either ethically or economically. Sec. 75.

Chapter III

As society advanced trade increased. As this went on prices began to be regulated by the law of demand supply instead of by custom. Sec. 76-77.

As machinery replaced hand labor the division of labor became greater. Sec. 78.

Freedom in production and trade is accompanied by increased freedom of consumption. All business which is injurious to other business is for the most part prohibited by law. Prostitution and the sale of liquor are tolerated because the doctrine of " laissez faire " has gained such strength. Sec. 79.

Public opinion and knowledge can enforce those laws where violations are public. Much compulsory legislation has to be supported by the state; e. g., public schools. Sec. S0-81.

Custom and public opinion determine what people shall buy for the most part. Sec. 82.

Formerly wealth was reckoned in cattle, land, etc. Now it is reckoned in the ability to command a price. Price, in its broadest sense, is the quantity of one thing which is exchanged for another. Sec. 83.

Money facilitates trade. It must be homogenus an invariably acceptable. Prices are at present measured in money. Sec. 84-85.

Isolated transactions are bargaining ones. Sec. 86.

Competition is the effort of rivals to dispose of their goods. It may be suspended by a monopoly, by custom, ignorance and sentiment. Sec. 87.

The place where prices are determined by competition is a market. The essential thing in a market is that the buyer and seller know the prevailing rate. Sec. 88.

The supply of an article is the amount available at a given price. The demand is the amount that will be taken at a given price. Where demand equals the supply, there is the market price. Sec. 89-90.

A curve may be made to represent this. Where the supply curve cuts the demand curve, there is the market price. Sec 91.

Additional increments in quantity of the article of consumption do not bring proportionate increase of enjoyment or utility. Sec. 92.

The relation of demand to supply varies with different articles. As the supply increases people are willing to pay less and less for it. With some articles no increase in the supply will increase the demand. Sec. 93.

In a state of competition, price is fixed by the self interest of the buyers. In the absence of competition prices are fixed by law or custom. In the latter case there is no variation in price possible which would mark a scarcity in the supply. Besides a price which is fixed by law or custom prevents often, by its injustice, an adaptation of the quantity of service to the needs. Sec. 97.

If the supply exceeds the demand while prices remain the same either by custom or law, the sales will be fewer than the supply. This will accumulate stock which either will have to depreciate or form such a glut on the market that it will have to be sold at a sacrifice. Receding prices warn producers that there is an increased supply. Sec. 98.

Competition tends to make the price proportional to the cost of production. This price is the normal. Commercial competition fixes the market price. Industrial competition adjusts supply and demand. This results in the approximation to the normal price. Sec.

ICO.

This process is prevented (1) by the absolutely fixed quantity of some articles ; (2) by the monopoly of some articles ; by the uncertainty of the phrase " expense of production." The " normal " generally is measured by the expense of producing additional supplies by those who go into the business at a disadvantage ; {4) byeproducts. It is hard to estimate their cost ; (5) the process of investment is so slow that new inventions may often create a new normal before the original readjustment is made. The expense and the slowness of starting a railroad is an example. Sec. loi.

The adjustment of market price to the normal is important. Sec. 102.

A price is a fact. Value is an estimate of what the price ought to be. It often means a proper or legitimate price. In this sense value means worth. A theory of price explains business. A theory of value passes judgment on its morality or advisability. Sec. 104.

There are two theories of value, the commercial or competitive, and the socialistic theory. The former bases value upon what the buyer is willing and able to offer. The socialistic theory bases value on what it has cost the seller in the way of toil and sacrifice. The competitive theory explains price as the value it would command under perfectly free competition. Sec. 105.

The socialists allege that the relative effects of free competition are unfair. The most disagreeable task ought to be the highest paid. Expense in money is very different from expense in human toil and sacrifice. Trade consists in getting goods for less than their value and selling them for more. Profits are unfair extortions. Sec. 106.

We admit that labor is not paid by its agreeability. We admit that there is an inconsistency between our doctrine of equal political rights and the facts of the industrial world. If you reward labor according to its difficulty of execution you will have no means of easily determining when the supply equals the demand. The Government would have to establish the number in each trade. This is industrially and politically a very bad method. Under the present regime able men have a chance to rise honestly. In socialism the chance would be by political influence. Sec. 107.

The socialistic theory takes away the premium for efficiency. Time which was wasted would count for as much as time well spent. Trade is not robbery. Almost all large incomes are deserved. The commercial theory is better because it puts a premium on efficiency. Sec. 108.

Chapter IV

Law and moral sense look down on gambling as an evil. Sec. 109.

The man who risks one half of his income risks the loss of a large amount of comfort for an even chance of gaining a smaller amount of comfort. It is a poor business investment. It also tends to destroy the sense of moderation and self-respect. Gambling is, for the most part, an attempt to get something for nothing. Sec. no.

Insurance is a form of gambling in so far as it is a wager as to one's lifetime. It is justifiable because it puts money, when it is needed, where it has a high utility to society and to the individual. The possibility of securing it is a source of security and industrial efficiency. Sec. in.

All trade is more or less of a speculation. It is a question whether speculation is gambling or not. It depends on the individual cases. This is why the socialist legards trade as an evil. He admits that it does a necessary work of distribution, but they say that the profits between the buying and selling are unjust and extortionate. Sec. 113.

The speculator does a service to the community when he buys goods when cheap and sells them when dear. He lessens the burden which would fall on the community by the increased cost of goods. Sec. 114.

Anything which tends to prevent the fluctuation of goods undoes the service of distribution (putting goods where they are needed). Sec. 115.

The less accurately the comparison can be made of the relation of demand and supply in different markets, the more speculative the trader's possible profit becomes. Sec. 116.

Formerly business was more speculative for this reason. Now it is an "arbitrage " (mutually beneficial exchange). Sec. 117.

Formerly speculation existed by taking advantage of differences of prices of different places. Now it is by taking advantage of the differences in prices of different times. Sec. 118.

This kind of speculation tends to diminish the fluctuation of market prices if it is legitimately carried on. Sec. 119

The man who purchases grain for the excitement of the wager is just like the man who bets on the horse race. Speculation on " margins " is just like this. Sec. 120.

A corner is where a man or body of men get hold of all the available supply of a commodity, and compel those, who have made contracts to deliver it, to pay an exorbitant price. This hurts honest speculators, producers and consumers. The harm to business methods and morals is much though it is indirect. Sec. 120.

Legislation must limit only the illegitimate speculation. Much legislation in the past has defeated its own objects. Sects. 121-122.

The difference between legitimate and illegitimate legislation is in the tention not in the form. Public opinion, and a strict enforcement of the law, would be beneficial. A man should use his own capital; this makes him less rash. Sec. 124.

With borrowed capital a man can be as reckless as he will. Public opinion should check his career. No law will be required in that case. Sec. 125.

The employers of labor are those who are able ami willing to speculate in the products of labor. The more remote the realization of the speculation the more uncertain it is, and the more speculative. Sects. 126-127.

Great undertakings could not be undertaken under the socialist's regime, because the utility in the future would not be known until it had been built. If every man was paid by the work he had done in making utilities, he would have to receive nothing for his work if his work proved useless. The uncertainty of new projects is well seen in impractical inventions. Sects. 127-128.

The inventor uses his own capital. The inventor's success is large, to compensate risk, and to attract inventors. Sec. 129.

Property is an incentive to gain control of the industrial actions of other men. Sec. 130.

This motive has three effects: (i) An increase of accumulation, which, by its investment, increases public wealth. (2) A process of natural selection which preserves those able to manage capital. (3) Increased intensity of speculation which results from the prose and greater competitors. Sec. 131.

Profits are not immoderate. They are fast becoming less in proportion to the capital invested. Sec. 132.

This system has resulted in industrial profits. The losses it has entailed are its severest indictments. Sec. 133.

If natural selection does not preserve the men who best serve themselves by serving the public, we may let socialism look after the responsibilities attached to great wealth. Sects. 134-135.

Chapter V

Wages are advances of capital to the laborers. .Sec. 136.

Their security is necessary to society. Law often makes them exempt from attachment in order to better protect the laborer. Sec. 137.

The risk of production should be borne by the capitalist and not by the laborer. Sec. 138.

The amount of capital consumed in production is known as the cost of production. Private cost is better known as expense. The excess of return above expense is private profit. This is measurable. Public profit is not. Private profit is justifiable because it conduces to public profit. Sec. 139.

The expectation of profit leads to investment. Capital invested for a remote return is fixed capital. This increases with the advance of society. Sects. 140-141.

The economic institutions of society should encourage investment. The most important institution is that of private property. It is justifiable because it fosters investment. Sec. 142.

Property right is better than government ownership, (i) It offers incentive to improvement. (2) It generally will yield more taxes to the government by reason of the increased value due to the improvement. Sects. 143-144.

Property right is best when the owner is the occupier. It is good when the occupier is the owner's agent. If the land owners oppi-ess the tenants juidicial rents should replace competitive ones. Sec. 145.

All land speculation is not hurtful. Sec. 146.

Grants of monopoly in manufactures as inland stimulates their development. Sec. 147.

Patents are short guarantees of monopoly which make invention, and investment therein possible. Copyrights are justifiable for the same reason. Sects. 148-149.

The public gains, attendant on the transplantation of a process, are far less than those which are attendant on those which have been wholly untried. Sec. 150.

Where grants of monopoly are impractical subsidies are granted. Sec. 151.

A practical means of encouraging investment is the modern system of interest. It is justifiable because it encourages capital to be used that would be idle or wasted. Sec. 152.

The ratio of selling price to the income is the rate of capitalization. For instance, a piece of land is worth $2,000 ; its income is jgioo; the rate of capitalization is 5 per cent. Sec. 153.

Saving banks and insurance companies lead people to save by the benefits which accrue. Sec. 154.

Among ignorant non-commercial people usury laws are good. Sec. 155.

In commercial communities they are a hindrance because they prevent just investments of capital often times. Sec. 156.

Usury laws are circumvented. The borrowers are hurt by the honesty of the honest, and by the high charges of the unscrupulous. The more honest lenders, by keeping out of the market, aggravate the scarcity of money loanable. Sec. 157.

Loans are justifiable by the productiveness of the thing it is to be used for, rather than by the wants of the person who borrowed it. If a loan leads to a productive thing the borrower should have every chance to attract capital to it. If the loan will not be productive the lenders should have little inducement to lend it. The creditor has to look to the investment rather than to the borrower's person. Sec. 158.

The small liability of the members of corporations protects them from unwise directors. In partnership, however, the members are justly liable. Sects. 159-160.

An over-production of machinery causes a commercial crisis. It is wrong to say that the harm comes from too great investment of capital. More often there is too little investment. Sec. 161.

There are no " absolute " or " natural " rights to land. Property right is the chief modern incentive to labor care and avoidance of the waste of capital. The rights of capital are narrower. They effect the methods of management rather than the motives on which it is founded. To modify the method is easy ; to modify the motives is to remove the substruction of society. Sec. 163.

The presence of the modern orginization of capital is per se the strongest proof of its vitality. The maintenance of the rights of the capitalists is vital to our growth. Sec. 164.

Chapter VI

The investment of fixed capital has wrought more radical changes in manufactures and transportation than in agriculture. The productiveness of manufactures has increased faster than that of farms. The investment of capital in agriculture has not gone so far that its interest and maintenance constitute the main elements in the cost of food production. The theory of normal price, under these circumstances, is a hindrance. But we may still rely on competition to protect consumers, and do no injustice to the producers. Sec. 165.

The extreme economy of large production tends to make prices oscillate, by tending to create an oversupply which would lower prices. Sec. 166.

The failure to reach a staple price leads to combination. Sec. 167.

Combinations are economical both to the individual producers and to the public. This is especially true of distributive services. Sec. 168.

The " combine " system is often poor, on account of the unscrupulousness of its members. The public is best served by a one price system such as a " combine " inaugurates. Sec. 169.

Many bona fide " combines " are broken down by selfish consumers. Sec. 170.

Pools take three forms, (i) Division of the field. (2) Division of the traffic. If the state affairs is such that one course is weaker than the other a differential rate is given to the weaker concern, which shall attract trade its way sufficiently to make the divisions equal. (3) Division of the earnings. The two latter systems are very good. Both are productive of mutual trust. All three prevent cutthroat competition. Sec. 171.

In the United States pools are illegal. To obviate this the joint counting rooms take the form of clearing houses. When the majority of stock of each company is put in the hands of a common board of trustees, there is said to be a trust. The stockholders, who have given their stock to the trustees, lose their vote. They receive their earnings. Consolidation is possible, but it is taxed on the whole property in each state. The prevention of consolidation led to combination. The advantages of industrial combination are often overbalanced by the evils of commercial combination. The economy of combination is somewhat offset by the loss of stimulus which competition alone seems able to give. Sec. 173.