Outlines of economic theory

Preface

This book was not originally projected as a text-book, nor is it now directed primarily to teachers. In attempting, however, to make it serviceable in his own work in the class-room, the writer has found it advisable to adopt the plan of suggestive questions as introductory to the various topics, and to follow the discussions with a wide selection of questions, serving in part as a review of the text and in part to indicate the bearing of the theoretical discussions upon subjects of current and practical interest. In so far as this method is well adapted to pedagogical needs, it can hardly fail to prove helpful to the independent reader. It has therefore seemed desirable to retain the text-book manner of presentation.

For such teachers as shall make use of the book for class-room purposes, it is advised that the student be required to bring to the recitation-room written answers to both the suggestive and the review questions. Answers to the introductory questions should be attempted before the text is appointed for study.

HERBERT J. DAVENPORT.

(References are to Sections)

PAGE

Introduction, 1-7 1

Scope of the science, 1.

Character of economic laws, 2.

Economics a study of two terms, (1) man; (2) environment.

Man tlie centre of the science, 5, 6.

Law and freewill., 7.

Desires and utility, 8.

Utilities external and internal, 10.

Only external are wealth, 10.

Moral questions irrelevant for this purpose, 9.

Utilities exist (1) in superfluity ; (2) in scarcity.

Only (2) are wealth, 11.

Is material existence essential ? 12-17.

"Wealth socially a sacrifice-commanding utility exterior to mankind.

Individually . . . exterior to individual, 12-21. A question of correspondence., 22 ; not necessarily a product of labour, 23.

Economic Motive, 24-28 29

Selfishness is not the first postulate, 25.

The minimizing of sacrifice is the formula, 25-28.

Desires are each satiable, 29, 30.

Individual economics underlies social, 31, 32.

Antagonism between utility and value, 33, 34.

Value, how fixed — sacrifice for sacrifice, 35, 36.

Method of fixation, 38.

Value. Personal — the measure of sacrifice involved in obtaining or retaining utility, 39, 40. Market — this sacrifice as fixed in the market by marginal adjustments, 41.

Value measures marginal relative utility = sacrifice, 41-43.

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Restated as marginal producers^ sacrifice (a) possibly in effort; (&) commonly in possible products.

Values exist apart from labour, but tend roughly to correspond, 46.

Product measures value of labour, rather than labour, product, 47-48.

In what sense has labour value ? 49.

Question how important, 50.

Usual statement., 52 ; criticised, 53, 54.

Criticism applied to (a) wages, 52 ; (6) interest, 59 ; (c) labour cost, 53.

All economic forces resolved finally into demand, 54.

Wages and Profits defined, 61-66 68

Man and nature are factors, Gl.

Profits and wages identical, 64, 65.

Bislc, m.

What produces the crop ? 67.

Bicardiayi theory (1) stated, 68.

(2) Modified — Enlarged conception of products, 72 ; margin of usefulness, 73 ; origins irrelevant, 73 ; rent, wages, and interest are results — distributive shares — not causes, 82-91.

Law of diminishing returns, 68.

Rent and price, 69, 82-91.

Monopoly aspects, 77.

Law of rent is restatement of law of value, 78.

Rent and population, 79 ; urban land, 80 ; single tax, 81.

Population, 92-99 106

Does cost of production apply to men ? 92.

Evidence of Malthusian statement, 94, 95 ; contra, 96.

Capital and Interest ......... 119

Capital in two aspects — (1) individual ; (2) social. Some ambiguities, 101 ; credits and fiats, 102-104. Relations between (a) credit and savings, (6) credit and capital, 105-107.

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Capitalization takes place mostly through credit system, 106,

107.

Capitalization not a question of existing wealth, 108. Interest.

Advantages obtained by borrowers, 109-111.

Interest is sacrifice made for these, marginally determined,

114-117.

Enlarged conception of income, 115.

Bisk, 118, 119.

"Wages, Pkofits, and Distribution ...... 143

"Wages and profits vary with individuals, 120, 121. Relation of labour supjily to wages ; women's wages, 122. "What is starting point in wages problem ? 123-126. Imprenditors, 127.

Their competition, 128 ; monopoly aspects, 129. Distribution, 130, 131.

Tendencies of interest, 130 ; of profits, 131 ; of wages and profits together ; President Walker's theory examined, 131.

Minor Market Movements. Increasing Returns and Speculation, 132-136 168

Division of labour advantageous to nations, 137 ; a question of

least sacrifices, 137 ; inertia of labour and capital, 140. Domestic competition the real danger to struggling industries,

140.

Protection under monopoly conditions, 142 ; as method of taxing the foreigner, 144 ; temporary stimulus, 145 ; effects on rents and distribution, 146.

Laissez-faire and competition, 147, 148.

"Where is the evil in combination ? 149.

Theory of monopoly, 150.

Limits of monopoly, 151.

Purchasers' combinations, 152.

Trades-Unions 208

May they lower interest ? remuneration for risk ; profits on

oppression of employes ; on adulteration, etc., 153. Conditions of success, 154.

PAGE

Different formal rules examined, 155.

Tax shifts only as demand and supply undergo readjustment.

Therefore tax on ajiy form of rent does not shift, 156; on

incomes does not shift, 156 ; on commodities, capital, or

interest shifts in part, 156, 157.

Shifting ceases when consumer is reached, 159, 160. Increasing and decreasing returns, 160.

Bounties — benefits shift in part, 161.

Fluctuation and inaccuracy inevitable over long periods, 162.

Standard should follow utility rather than value, 163.

Must take account of services, 164, and if possible of changing

standards of living, 165, 166.

Functions of currency, and necessary qualities, 167-169.

All credits are protracted cases of exchange, 170.

Need for money results from division of labour and is limited by it, 173.

Test of sufficiency, 173, 174.

Value of Money, how fixed, 175-183 238

Different kinds of currency — credit, commodity, and fiat, 184, 185.

Increased supply loioers value of unit, 187.

riat or credit issues therefore increase non-currency

demand for commodity elements, 188.

But outflow is unequal to inflow, 189.

International Trade and Currency' ...... 256

Foreign markets as related to currency movements, 190,

191.

Futility of local attempts at inflation, 192.

Value of currency a question of demand and supply, and not of material, 193-201. But first issues are always illadvised, 202.

Bimetallism, 204-206.

National, means alternations of monometallism, 204. International, could be made to succeed, 205, 206.

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Commercial Crises, 207-211 273

A collapse in credit, 207, 208 ; not in lictitious prosperity,

209.

Advantages and dangers of credit, 210, 211. Expansion of currency as remedy considered, 212.

Takiff Taxes and Prices 280

Effects of tariff barriers on commodity and metal production and on prices, 213-217.

ECONOMICS AS ART

The Competitive System, 218-238 284

The modern industrial era analyzed, 218-220.

The Economic Harmonies, 221, 222.

Laissez-faire as an ethical system, 223.

Tendencies indicated by history, 22(3-228.

Laissez-faire and socialism compared economically, 229, 230.

Competitive production criticised, 231-233.

Competitive distribution criticised, 234, 235.

Competitive consumption criticised, 23().

Socialism generally, as remedy, 238-242.

Co-operation and Profit-sharing, 243-246 315

State and Mdnicipal Ownership, 248, 249 319

Social Functions of the Rich, 250, 251 320

Population and National Survival, 252-254 .... 324

Birth-rates, Standards of Life, and Natural Selection, 252-

254 326

Consumption and ethical standards, 259-2(51. Expansiveness of n.eeds as bearing on civilization, 262, 263. Standards and opinions of others, 264.

Nineteenth century unrest, 265, 266.

The cause, 267-274.

Applications of theory to income, vice, luxury, land, and inheritance taxes, 275-281.

Land tax, 282, 283.

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EiGHT-HOUK Day, 284, 285 350

Sweating System, 287-289 351

Labour of Women and Children, 290, 291 ..... 353

Fluctuation and panics, and different remedial proposals, 296.

Commodity standard, 297.

The ultimate evil, 298, 299.

The imprenditor system and wages, 300-302.

Bank issues vs. government issues, 303-307.

International free coinage of silver; American free coinage of

silver, 308-310.

Injustice of the change, 311-313.

Merits of silver as a standard ; statistics, 314-317.

CHARLES GIDE.

Chapter I

Ask yourself some unanswerable questions about Electricity. About Light, Ether, a Elower, a Chair, a Dab of Mud. What does Tennyson mean when he says :

" Elower in the crannied wall, I pluck you out of the crannies, Hold you here root and all in my hand, Little flower, — but if I could understand What you are, root and all, and all in all, I should know what God and man is."

In what sense is it true that a perfect knowledge of any one fact is a perfect knowledge of all facts ?

Mention some relations of Chemistry to Medicine ; of Geography to Botany ; of Mathematics to Physics ; of Geology to Zoology ; of History to Astronomy.

From the point of view of how many sciences can you discuss a stick of wood ?

1. Sociology may be broadly, though perhaps not very precisely, defined as a study of man as a social being. Political Economy is a field of investigation inside sociology, and may be stated to be a study of man j^^^^ ^^^^^ ° in his commercial and industrial activities. This definition will not be found greatly helpful if attempt is made to apply it. The chemistry of farming, or the mechanics of weaving, hardly fall within the field of economic investigation. But it is the murrain of definitions that, in about the

B 1 degree that they get helpful and mentally tangible, they get inaccurate. No science is properly to be regarded as separated by any definite line of demarcation from all others. In some manner, more or less remote, all knowledge is related to all other. The field which any science covers is mostly a question of point of view. Men's commercial and industrial activities are in countless points of contact with questions of social morality and physical health; with questions of pedagogy and jurisprudence; with chemistry, mechanics, and physics ; with law, politics, and medicine ; with physiology, sanitation, and dietetics ; with religion, criminology, and penology. Geography is handmaid to transportation. Geology discloses the gold and silver mines. Astronomy may hide the secret of drouths and famines.

Evidently enough we need a point of view, else Political

Economy is not sociology merely, but sociology and a good

deal more. Political Economy treats of the com-

The economic mercial and industrial activities of men from the field. '' ''

standpoint of values and markets. Law and religion have place in Political Economy accordingly as they bear upon the production and distribution of the things which are bought and sold. Medicine, sanitation, and education are economic questions only as they bear upon the productive efficiency of the economic actor, Man. Vice and crime pertain to economic investigation, in so far as they are elements in the productive efficiency of society, and in the terms of security on which production takes place and effort is rewarded. Political Econom}^ is more than the science of trades and values ; but its horizon includes only what falls into view from this point of survey.

2. Something also needs be said of the attitude of the economic investigator toward questions of morality and attempts Economics as ^* social amelioration. Is Political Economy conscience and as cerned with moral questions, or does it merely de- ^^^- scribe conditions and analyze tendencies ? What

is its function in the struggle of humanity towards a higher plane of living? Are its processes coldly scientific and unsympathetic, or is there some throb of heart and purpose in it ? What of the poor ? Can it help ? Would it if it could ? Is it dismal, or hopeful, or neutral ?

Accordingly as one's point of view is theoretical or practical will the value of facts be differently estimated. To the scientific investigator they are valuable in the first instance for the inferences and tentative generalizations which they suggest; in the second instance, for the opportunity of testing by particular applications the correctness of the generalizations formed. Otherwise than as a basis for generalizations, or as a test of generalizations, facts have no value to the scientist.

The attitude of the scientist, however, is a professional one, taking into consideration only one aspect of the value of knowledge, and this aspect not the most important one. Science alone is not fruitful. If for the purpose of purposes of science, facts are valueless other- ^"^°<=6' wise than as the raAv material for principles and theories and generalizations, it is equally true that the systematizing and generalizing of facts which constitutes science is mere raw material for service to human welfare. Somehow and sometime the scientific law must fit into the business and practice of life in its moral, emotional, or bread-winning activities, — otherwise science has failed to justify itself. It is not its own excuse for being. It is held to a no less rigid account of itself than are harvest fields or orchard trees. '^ By their fruits ye shall know them." But it is the high peace of science to rest secure in the oneness of knowledge — to know that in the interdependence of all truth with all other, no fact stands dimly out of relation and verily unfertile for the needs of life. To the farmer his plough and to the weaver his shuttle. The scientist rightly pursues his search for truth with an eye single to its scientific import, since, for whatever he starts from cover, by some one and somewhere there will be found a place in the uses of living.

Thus any object may be studied in its laws and principles, or in its applications to the well-being of society. Nor is it necessary that both lines of labour be performed by the same investigator. Economics as a science deals with the general laws and tendencies concerning man as an economic actor. As an art, it deals with the application of these laws to the well-being of society. Science treats mostly of what is or tends to be. It is not greatly concerned to commend or to criticise, but to analyze, describe, and generalize. Art devotes itself to the practical outcome of the scientific laws, to questions of what may be and ought to be, and to the different processes of attainment. In the one aspect evil is treated as a fact to be studied ; in the other, as a wrong to be remedied. The bacteriologist best studies bacilli coldly, and the physician diagnoses disease unemotionally, writing no sentiment into his prescriptions. Sympathy has no great place in a hand-book on surgery. Yet the purposes of medicine are philanthropic, and the sick-room has its need of kindness.

Discuss from your present outlook the correctness of the following definitions of Political Economy : —

1. Eeflections upon the formation and distribution of wealth.

TUKGOT.

2. Researches upon the nature and causes of the wealth of nations.

— Adam Smith.

3. How the wealth Avhich satisfies the needs of societies is created, distributed, and consumed. — J. B. Say.

4. The theory of the basis, the methods, and the laws of development of the prosperity of nations. — Kantz.

5. The science of the production and distribution of wealth. — Mill.

6. A study or inquiry concerned with the production, distribution, and exchange of wealth and services. — Sidgavick.

7. A study of man's action in the ordinary business of life.

— Marshal.

8. The reasoned activity of a people tending towards the satisfaction of its needs. — Conrad.

9. As science has for subject that part of the voluntary activity of men which applies itself to the production, appropriation, and consumption of wealth — As an art was long considered to be limited to a search for the conditions in which a people could most advance its wealth — To-day this purpose is confused with that of sociology viewed as an art.

The change in point of view is worth noticing. The early economists regarded the subject purely from the point of view of the state. Political Economy was one aspect of Kingcraft. The second conception was that of the study of wealth and man's relation to it. The third, tlie study of man in his relation to wealth.

THE CHARACTER OF ECONOMIC LAWS

What is the distinction between the moral law and the civil law ^

Between the civil law and a law in Physics or Chemistry ?

Is a law in Chemistry a force or in any sense a cause of things ?

What do we mean when we speak of the planets moving in obedience to law ?

Tell what you mean when you speak of the law of gravitation.

What do we mean when we speak of nature providing, arranging, etc.?

In what sense is the term law used in relation to statistics, prices, the course of things in history ?

3. Too much is sometimes claimed for Political Economy as an accurate science ; and on the other hand too little is often allowed it. As the art of conducting affairs in their diversity and complexity, the applications are full of question, and are open to the charge of inexactness. There is a certain truth in the position of the historical school that each age demands its separate system ; that political economy is a matter of perpetual flux and change ; that there is no one economic science, that there are only economic sciences. This is correct enough if the subject is considered from the point of view of an art; and from the point of view of a science it is also true that Political Economy deals in a considerable measure with mere tendencies, and declares laws which are deduced from hypothetical cases and are true to the exent only that the hypotheses correspond to the facts of life.

But whatever one may judge of the correctness of the laws at present declared by economic investigation, it is not open to doubt that man's relations to wealth, to the creation and distribution of utility, will sometime be found to disclose in some measure constant orders of phenomena. The advance of science is the discovery and proof of regular sequences in nature.

The movements of the stars, the alternations of economic laws ? ^^J ^^^'^ nigl^t, the succession of the seasons, the

currents of the sea and even of the air, have revealed a constancy in their order of occurrence, an invariable following of one fact by another, a fixity of relation between phenomena. It is quite possible that the laws to be observed in human affairs are more obscure — that often tendencies instead of definite measurable facts stand for one side of the constant relation. For example, a tendency of prices to rise after certain occurrences can be scientifically asserted, even though the rise has not taken place, and has perhaps been more than counterbalanced by some other tendency.

4. In some degree prevision and prophecy are possible in human affairs. In this degree there are laws. If it is true that the human will is free, it is none the less true that the manner in which it will manifest its freedom can be predicted because of its regularity. There is no business man and no speculator whose conduct is not based upon the conviction that there is a regularity in social affairs ; no statistician who is not daily confronted with the proofs ; no historian to whom history is not full of illustrations. Marriages and suicides, as well as births and deaths, incendiary as well as accidental fires, all are capable of accurate prediction in totals ; and it would be strange if observation and analysis did not discover other orderly sequences of phenomena in the affairs of industry and trade. It is to a study of these sequences that Political Economy applies itself.

MAN AND ENVIRONMENT

1. Brilliant-plumaged domesticated doves set at liberty on an uninhabited island will revert to sober colours. Wliy? The cultivated strawberry set in the field changes to the type of the wild berry. Why ?

2. Name such different elements or conditions of success in life as you can.

3. On what does the raising of a good crop depend ?

4. In what sense, if any, do you helieve in luck ?

5. Has a good chance in life much to do with success ? 0. Why not raise bananas in Canada ?

7. Could Shakespeare's plays have been written in the Sioux language ? Could they have been thought out in a Sioux civilization ?

8. Are there any millionnaires in Patagonia ? Why ? Where are they found ? Why ?

9. Mention such necessary conditions as you can to the prosperity of a great silk factory.

10. Is an opportunity to get a good education to be regarded as part of yourself or as part of your surroundings ?

11. When you have got the education, which is it ?

12. Apportion the different elements in answer nine into two classes : First, those which are human in their character; second, those which are not.

13. Apportion these elements into (1) those elements which pertain to the owner ; (2) those which pertain to his surroundings and opportunities.

14. Describe the social conditions necessary to the existence of a great silk factory : (a) public tastes, (6) transportation, (c) machinery and mechanical skill, (d) motive power, (e) social security and morality, (/) laws, {g) international relations.

5. We have seen that for humanity science means nothing unless it ultimately serves for human welfare. Thus even in those lines of investigation the farthest removed ^jjg interplay of from the direct study of man, man yet remains human and in some sort their centre and ultimate fact. All sociological studies, however, make him the object of their direct attention. The human race in its relations to its environment, and the individual of the race in his relations to an environment of which the other members of his race are themselves a part, are the subject-matter of all sociological investigation. Man, as one term of the science, is conceived as standing over against an outside world of fact and circumstance. He is neither entirely the master of his destinies, nor yet entirely the puppet of the forces by Avhich he is surrounded. He is himself a force — a centre of energy and activity. He is one of the facts in this complex interplay of human with natural energies. If he receives, he gives. If his environment rains its influences upon him, he puts forth his own efforts in adapting self to environment, or environment to self. He strives and resists and reacts. George Eliot has put tlie case lielpfully when in supplement to the half truth, ''Our deeds are fetters which we forge ourselves," she adds, " Ay, but I think it is the world that brings the iron." The history of human development is the story of what circumstance has done for man, and man for circumstance — the incidence of outside forces upon him, and his reactions thereupon. There are thus two forces in the problem of history,

— man and nature. The resultant is the direction of human development.

This is not a difficult conception. It is one aspect of that which the biologists call the law of adaptation or of correspondence to environment. Life for each one of us is a question of what there is in us plus what is outside — of our powers and energies in face of our surroundings and opportunities. Give Crusoe his island. What will he do with it ? This is in part a question of Crusoe, and in part a question of his island. Likewise for races the question is one, on one side of character and propensity, on the other, of surroundings and opportunity.

6. It is unnecessary for the purposes of Political Economy to push the question into an inquiry as to which of these two forces of human development, if either, is the man as result ^"^ primary fact, and which the derivative. We may, for example, regard coral polyps as a product of the sea. It is none the less true that, once existing, they not merely suffer but work the processes of sea change. It constantly occurs that that which is result becomes in turn a cause

— as for example, in chemistry, where a product of combination or decomposition itself furnishes the basis for a new series of chemical changes — or in physics, where in a row of blocks one falls as the result of an impact received, and by delivering its impact causes the next to fall — or where combustion liberates gases which themselves furnish material for further combustion.

Economic science is not greatly concerned with the history of human development. So far as seems necessary the economist borrows his postulates in tliis regard from others of the social sciences without undertaking in his own behalf the labour of investigation. The main purpose of our immediate discussion is to fix clearly and definitely the first and perhaps the most important distinction in economic theory — the division of its subject-matter into the two terms, Man and Environment — the human and the non-human elements in the problem. Taking man as he is in relation to his environment as it exists, Political Economy treats of him in his commercial and industrial activities as viewed from the standpoint of markets and values.

7. E-egarding Man as the centre of economic science, Political Economy becomes in one of its aspects a system of special

psychology, — a generalization of the influences

T . T , , T , . . , . Are economic

which bear upon human volitions m certain or- j^ws consistent

ders of phenomena. Preference and choice and with freedom of

f ■ ,1 J. • 1 J? j-r • the human will ?

desire are the very raw material of the science. Man's relations to his surroundings can then be rightly known only when he, the most important term, is rightly known. How comes it, then, that Man with his whims and hates, his antagonisms, his desires and his fears, his weakness and his strength, should furnish the basis of a rational science ? Are men not free ? How, then, can their activities be reduced to law and made the subject of orderly prevision ? How can the adequacy of causes and the inviolability of law be made consistent with freedom of choice and the self-determined character of human actions ? If men are mere results, each thought and act the necessary outcome of preceding states, where, then, is human freedom ? And if human freedom holds, where is the place for law in human affairs, the room for generalization, the basis for science ? It is idle to deny that for some purposes and in some lines of investigation the case presents a difficulty. But just as Political Economy is not concerned with the courses of human development, bat only with men as they are, so it is not concerned with the origin and derivation of choice. Men do choose. To this extent at least they are free, that they can and do follow their choices, — in truth, they cannot do otherwise as long as choice governs act. It may be that the sheerest sort of fatalism lies back of choice. It may be that motives are causeless, undetermined, facts of sheer hazard. But they are. Our freedom lies in our ability to follow them. If fatalism holds, character is one term of fate. We are concerned with human character as it is, — with the simple fact that men follow their choices, and with the influences which bear upon these determinations.

Do you like peaches ? How came you to like them ?

How came you to have two hands instead of three ?

What can you do ahout these facts ?

Can you do all things which you choose to do ?

Can you try ? Can you get anything in the way of results ?

Can you deliberately act contrary to your choice ?

Are you master of your preferences and choices ?

Whence come they ?

Are you free to follow them ?

To what zones is civilization mostly confined ? Why ?

Where did it originate ? Why ?

In what direction, north or south, has it moved ? Why ?

What physical reasons can you find for the lead which Western Europe has taken in civilization ?

What is the trouble with the poles in this regard ? With the tropics ? In (a) human needs, (&) ease of satisfaction ?

Will the human race ever come to do well where the snow never falls ? Why ? Buckle's History of Civilization, Vol. 1, Chap. 2, is suggestive on these questions.

In what sense are there economic laws ? What are economic laws ?

The influence of soil and climate is often preeminent. With regard to silver or copper, for example. Chili has a productive power infinitely greater than that of Erance or England. But as to porcelain, France has the advantage ; and likewise each country has certain products which it could obtain, supposing equality in skill and energy, with less of effort than the others. But often again the superiority in productive power depends upon superiority in skill or in energy in a particular place. If, for example, North America has larger productive power as to cotton than have other countries, such as India, Brazil, Algeria, or Peru, it is only because America has applied, and does daily apply, to the culture of cotton as raw material more skill and energy than this or that other people.

— Courcelle-Seneuil, France, translated from Traite d'Economie Politique, 3"^^ Edition, Tome 1, p. 120.

Notice that all social progress is attended by an increase in the confidence of men in their neighbours, which, as we have already remarked, is the ultimate fact in cooperation. Every decrease in social progress manifests itself in diminution of this confidence. Note, likewise, that observance of moral precejjts relative to the duties of man towards himself, favours the growth of his muscular powers, and that observance of moral precepts relative to the duties of each man towards his fellows, concurs in increasing productive forces, and in consequence increases the wealth of society by a better application and wider extension of progress. This is a fact which suggests a multitude of reflections. . . . Customs and institutions are more favourable to production as they distract men less from productive labour, either to insure the safety or the preservation of the riches which labour produces, or to devote themselves to idleness, vanity, and ostentation ; they are less favourable as they demand a larger expenditure of force in those quarrels and contests, whether warlike, judicial or otherwise, which make up, so to speak, the general expenses of society.