Economics

Front matter

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COPYRIGHT DEPOSIT.

BOOK I. Nature and Scope of Political Economy

Chapter I — Nature and Development of Economic Life. — Nature of economic life. — Unconscious cooperation of society. — Simplicity of early economic life. — Hunting and fishing. — Domestication of animals. — Agriculture. — Manufactures. — Trade. — Commerce. — Economic organizations. — Industrial stage. — Industrial revolution. — Free competition. — Competition in groups. — Organization of capital. — Labor organizations. — The state and industry 17

Chapter II — The Nature and Definition of Political Economy. —Political economy treats of economic life. — Political economy arises from concrete economic life. — Principles arising from man's economic activity. — Relation of man to wealth-getting and wealth-using. — "Wide range of economics. — Technology of wealth-getting. — Creation of utilities. — Principles and laws of political ecoliomy. — Political economy is a science. — Definition of political economy. — Positions assumed by Adam Smith and his followers. — Trend of modern economics. — Economic fact and theory 33

Chapter III — The Scope and Methods of Political Econom,y. — Field of political economy. — Boundary of the science is subjective. — Narrow conception of the science. — Liberal conception. — Outline of economics. — The pure science. — Concrete economics. — Practical economics. — Problem of political economy. — Mistakes in terminology. — Ethics and economics. — Politics and economics. — Private and public economics. — Sociology and economics. — Effect of social organization. — Objects sought in political economy. — Methods of study. — References 42

4: CONTENTS.

BOOK IL

Production, Distribution, and Consumption. PART I.

FAOTOKS AND PROCESSES OP PKODUOTION.

Chapter I — The Nature of Production. — Unity of the economic process. — Character of production. — Creation of wealth. — Who are producers. — Nature of wealth. — Various methods of creating wealth. — Different ways of creating value. — Various factors of production. — Relative conditions 61

Chapter II — Land as a Factor in Production. — Land or nature the first consideration. — Bounties of nature. — Offices of land. — Civilization and the land question. — Population and land. — Law of income from agriculture. — Limited returns. — Extension of territory. — Land area. — Transportation and agriculture. — Policy of the United States. — Monopoly in land. — Agricultural area in the United States. — Variety of agricultural products. — Economic effect of machinery. — Corporate farming. — ^Irrigation. — Effect on prices. — General benefits. — Forests and fisheries. — Land tenure. — References 75

Chapter III — Labor as a Factor in Production. — Service of labor. — Extent of the labor force. — Quality of the labor force. — Various grades of labor. — Division of labor. — Cooperation of labor. — Increased productivity of labor. — ^Improved condition of labor. — Labor organization. — Protection of labor. — Labor laws. — Eight-hour law and its effect upon production. — Restriction of immigration. — References 101

Chapter IV — Capital as a Factor in Production. — Nature of capital. — Non-capital wealth. — Saving and abstinence. — Fixed capital and circulating capital. — Specialized and free capital. — Pure and concrete capital. — Accumulations of capital. — Momentum of capital. — Economic significance of capital in production. — References 114

Chapter V — Production Lnfluenced by Social Organization. — Private organization. — The firm. — The corporation. — Trusts and combinations. — Effect of organized labor on production. — Effect of political organization on value. — Increased productivity on account of organization. — References 122

CONTENTS. O

Part II. Distribution Op Income

Chapter 1— Principles of Distribution.— iiiet product.— Nature of distribution. — Divisions of net product. — Undivided net product. — Law of equal returns. — Dynamic law of distribution. — How the gross product is distributed. — Rights of property. — Monopoly privileges. — References 131

Chapter II — Eent as a Factor in Distribution. — Rent in general. — Contract rent and economic rent. — Cause of rent. — Manner in which rent arises. — Difference in the fertility of soil. — Favorable location. — Limited returns to agriculture. — Margin of cultivation. — Prices and rent. — Rent does not enter into the cost of production. — Rent and free land. — Economic significance of free land. — References 153

Chapter III — Wages as a Factor in Distribution. — Labor and the cause of wages. — Pure wages distinguished from gross wages. — Real and nominal wages. — "Wage-fund theory. — Determination of the rate of wages. — Residual-claimant theory, — Iron law of wages. — Scientific law of wages. — Competing groups. — Influence of labor organizations on wages. — Business sense and wages. — Philanthropy and wages. — Eight-hour day and its effect on wages. — Gradual increase in wages. — Improvement of wages by* legislation. — Economic significance of wages. — References 164

Chapter IV — Interest as a Factor in Distribution. — Nature of. interest. — Economic interest and loan interest. — Development of theories of interest. — Intei'est as an economic factor in distribution. — References 175

Chapter V — Profits. — Gross profits. — Pure profits. — Competition and profits. — The managing class. — Profits and rent. — Pure profits and market prices. — Monopoly profits and monopoly prices. — References 187

Chapter VI — Cooperation and Profit-Sharing as Processes of Distribution. — Nature of cooperation. — Distributive cooperation. — Productive cooperation. — Distributive cooperation in England. — Productive cooperation in England. — Cooperation in the United States 193

O CONTENTS.

Ohaptbr VII — Labor Organizations. — Origin of labor organizations.— Development of trade unions. — Knights of Labor. — Objects of trade unions. — Mistakes of unionism. — Result of strikes. — Influence of trade unions on wages. — Effectiveness of labor organization. — Arbitration and conciliation. — References 218

Chapter VIII — The Doctrine of Socialism and the Present Economic System. — The claims of socialism. — Adjustment of social order. — Greek ideal. — Roman practice. — Thomas More. — Prevalence of old systems. — Modern communism. — Etienne Oabet. — Modern socialism. — Fourier. — State socialism. — Anarchism. — German socialism. — Socialism in America. — The inadequacy of socialism. — Reforms proceed from local government. — Nature of progress. — No formula for reform. — References 239

Part III. Consumption

Chapter I — Nature of Consumption. — Consumption regulates production. — Consumption inseparable from production. — Variety of human wants. — Degree of want. — Satisfaction of economic wants. — Immediate consumption and final consumption. — Productive consumption. — Consumer's profits. . 269

Chapter II — Consumption and Saving. — Analysis of consumption. — Engel's law. — Inducements to save. — Spending and saving. — Luxury. — Economic expenditure and waste. — Desirability of saving. — Reform of consumption. — National consumption. — Sweating system. — Waste and consumption, 275

BOOK III. Exchange and Industry

Chapter I — Utility and Demand. — Struggle for wealth. — Utility. — Demand schedule. — Law of demand. — Market demand. — Competition 293

Chapter IE — Value. — ^Definition. — Differences of opinion. — Free goods and economic goods. — Value as index of utility. — Theories of the cause of value. — Utility the cause of value. — Objective and subjective value. — Intrinsic value 300

CONTENTS. I

Chapter III — Price. — Definition. — Manner in which market price is established. — Market interferences. — Laws of supply. — Normal price. — Limitation of prices. — Cost of production and normal price 310

Chapter IV — Money. — Beginnings of exchange. — Early history of money. — Kinds of money. — Functions of money. — Measure of value. — Standard of value. — Deferred payments. — Multiple standard. — Storage of value. — Principles of circulation. — Amount of money needed by a nation. — Monometalism. — Bimetalism. — Paper money. — Paper money and bank notes. — Monetary history of the United States 323

Chapter V — Credit and Banking. — Credit. — Definition. — Instrumentalities of credit. — Credit and value. — Advantages of credit. — Credit creates capital. — Effects of overstrained credit. — Inflation of the currency. — Banking. — Banks as centers of business. — Rise of banking. — What constitutes a sound banking system. — Bank of England. — Bank of France. — National banks of the United States. — Organization and regulation. — Canadian banking system. — Savings banks. — Postal savings banks 343

Chapter VI — Processes of Exchange. — Organization of exchange. — Importance of exchange. — Means of exchange. — The market. — Domestic exchange. — Foreign exchange. — International exchange 357

Chapter VII — Commercial Crises and Panics. — Definition. — Course of trade in depression. — Trade cycle. — Movement of prices. — Warnings of an approaching panic. — Causes of low prices. — Protective tariff and panics. — History of panics in the United States. — Management and prevention of panics. . 369

Chapter VIII — Speculation. — Trade in securities. — Arbitrary corners in the market. — Speculation in processes of distribution. — Illegitimate speculation 396

Chapter IX — Transportation. — Effects of transportation. — Prices equalized. — Equalizing industry. — Economic value of cheap transportation. — Advantages of water transportation. — Railroad problems. — Water transportation neglected. — Abuses of railroad management. — Railroad rates. — Railroad commissions. — Abuses of monopoly profits. — References 407

Chapter X — The Commerce of Nations. — The Advantages of Commerce. — Trade among Primitive Peoples. — Commerce of Ancient Nations. — The Phcenicians.— Mediscval Commerce. — Nature of

CONTENTS.

Mediaeval Commerce. — Modern Commerce. — The Mercantile System. — National Competition. — The French and the English. — Recent Commerce. — American Carrying Trade. — Development of American Commerce. — Causes of Commercial Success. — Principles of International Trade 420

BOOK IV. Public Economics

Chapter I — Bestrictive Measures. — Free trade and free competition. — Mercantilists. — Physiocrats. — Modern restrictions upon industry and trade. — Legislation in favor of labor. — Legislation in favor of commerce. — Legislation in favor of industry. — Government restriction of monopolies. — Plane of competition. — Government should realize to the people the benefits of monopolies 443

Chapter II — Public Control of Industries. — General management of industries. — Railroad commissions. — Government ownership of railroads. — Lavrs controlling corporations. — Municipal ow^nership of gas- and water-vy^orks. — Government management versus government ownership. — Disposal of public franchises. — Economic freedom demands restrictive laws. — The modern trust. — Government by injunction. — State socialism. — Significance of public economics 449

Chapter III — Taxation and Revenue. — Relation of taxation to private economics. — Taxation a means of improving economic processes. — Public financiering. — Definitions. — Purposes of taxation. — Canons of taxation. — Just and equitable taxation. — Incidence of taxation. — Classification of taxes. — Poll tax. — Income tax. — Real property tax. — Personal property tax. — Franchise tax. — Inheritance tax. — Indirect tax . . 463

Chapter IV — A Rational System of Finance and Taxation. — Irregular development of finance and taxation. — Imperfections of modern taxation. — Methods of collecting revenues. — Double taxation. — Taxation of corporations. — Single tax. — Land and income tax. — Inequitable assessment. — Methods of collection. — Public expenditures. — The budget.— Public debts. — Imperfections of government machinery. — References 488

CONTENTS. 9

BOOK V. Methods of Economic Investigation

Chapter I — The Field of Investigation. — Classification of library material. — Field work. — Historical investigation. — Scope of economic investigation 511

Chapter II — Mode of Procedure. — Economic purpose. — Gathering material. — Accounting and comparing. — Examples of methods of investigation. — The labor question. — Railroad rates. — Interstate commerce lavr. — Eailroad accidents. — Canals and their relation to railroads. — Productive cooperation in England. — Condition of packing-house employees. — Municipal government of Berlin. — Prussian railroad system. — List of topics for investigation 517

Preface

The object of this book is to present a complete working manual for students and instructors. In its preparation the writer has aimed to cover the entire field of economics and to present all of the elements of the science in a clear and concise manner, hence he has made no attempt to elaborate particular theories, believing it to be better to present only principles that have become permanently established.

For it is conceded by all able instructors of economics that the controverted points, involving long and perhaps tedious discussion and analysis, should be studiously avoided by those making a formal beginning of the science. It is also considered best to give the beginner a survey of the entire field before allowing him to enter upon special studies. These points have been carefully observed by the writer in his class-room and in the preparation of this book. The arrangement of the subjectmatter in the book corresponds to the order of instruction

in the class-room.

PREFACE.

On account of the wide scope of the book it is of a necessity much condensed^ but this does not detract from its qualities as a model text-book, which should consist of a well-arranged course of study, with the leading principles of each subject presented in short paragraphs. The text is thus readily supplemented by library reading, and investigation. As a first book should be clear, the writer has endeavored to present every economic topic in a fair and proportional manner, and at the same time to observe a simple and direct style.

Owing to the excellent bibliographies now published it is no longer necessary to make an extended list of references in an ordinary text, therefore only a few of the most common standard works have been referred to at the close of each chapter, which may furnish parallel and explanatory readings on the subjects included in the chapter.

Book V is placed in the text for the purpose of encouraging concrete investigation, a practice greatly needed in these days in order to render economics of great public service and to verify and illustrate economic principles. With this text in hand, accompanied with more extended discussions by the instructor of special subjects such as the theories of value, rent, interest, wages.

PREFACE. 18

profits., and distribution; and of transportation., taxation., money., trade unions., and labor organizations., and with collateral reading, the student will have a thorough preparation in the elements of economics.

The writer wishes to acknowledge the valuable assistance of Professor R. W. Cone, of the University of Kansas, in reading manuscript and proof-sheets.

FRANK W. BLACKMAR.

Unitebsitt of Kansas.

Chapter I. Nature And Development Of Economic Life

Nature of Economic Life.

A part of the general activity of society is called the economic life, because it treats of the efforts of man to obtain and use material things called economic goods. There is, strictly speaking, but one life of man, including his entire activities, individual and social. But in the consideration of the different phases of this life it is convenient to designate a social, individual, intellectual, moral, religious, political, or economic life. Economic life underlies all other activities. It represents man's struggle to improve his material welfare. It began with the struggle to satisfy hunger, and to protect against cold, and has continued as the constant factor in the struggle of the race for supremacy. While the economic life may not be considered the most cherished part of our higher civilization, it is the most essential. It is a great means to a greater end, and has the most important consideration of any phase of human life.

Observe the activities of modern society in which we live, and it will be found that each individual is struggling to obtain for himself a larger share of economic goods. The daily wage-earner, the man working on a salary, the manager of the business, the capitalist who furnishes the means of business, and the person endeavoring to make the world better, each is striving to obtain economic goods -2 (17)

or wealth to satisfy his ends. Indeed the larger part of the time of man is spent in obtaining food, clothing, and shelter, for these wants must be satisfied before the higher products of civilization can be realized. Even should literary culture, aesthetic taste, religious fervor, or philanthropic sentiment represent the fruitage of the best life, yet the struggle for material goods is the uncompromising essential of human existence. This activity in obtaining and using material goods is called the economic life.

Unconscious Cooperation of Society.

The economic life is both individual and social. Man works independently to satisfy wants, or he works with his fellows for the same purpose. The older is civilization and the more prolonged the struggle, the more men work together or cooperate in the production of economic goods or wealth. In one sense it is well to speak of the individual power and the independence of man; in another it is necessary to consider him as dependent upon his fellows. He might say: "By my own efforts have I obtained all this wealth; by my own efforts have I accumulated this store of knowledge and risen to this position in life." Yet from another standpoint it is true that without the cooperation of his fellows he would have accomplished but little, for while he has been seeking his own interests he has been unconsciously cooperating with his fellows. There is such a division of labor in the accumulation of wealth that a man is dependent upon the whole world for the wealth which he enjoys.

Consider the simple life of an ordinary laborer, and while his services are essential to the production of social wealth, observe how much he depends upon others for what he uses. From the tailor or clothier he receives his clothing ; from the grocer or butcher his food ; and. from the furniture dealer the articles for his household. But follow out the conditions further, and we see that the tailor depends upon the weaver, and the weaver upon the farmer who supplies wool and cotton. In each case the farmer, weaver, and tailor are dependent upon the baker, clothier, and all others in connection with them. The grocer obtains his flour from the miller, and the miller the wheat from the farmer, and the machinery to run the mill from the machinist. The grocer obtains sugar from the refinery, which receives it from the factory and plantation. Even the spices, which form rather an insignificant part of the necessaries of life, have passed through many groups of hands before they are furnished to the consumers. Thus the ordinary laborer has the whole world waiting on him in exchange for the labor he furnishes.

Thus all the activities of the economic life are woven together into an intricate web, and the individual who apparently works alone, independently seeking his own welfare, is in reality a cooperative creature, working in connection with thousands in providing the necessaries and luxuries of life. His service to the Avorld may be nothing more than polishing a boot-heel or cutting bolts in the machine shop, but for this service he receives his reward in a multitude of ways.

Competing with his fellows in a special occupation, he cooperates with them in general production. Competition of class with class is after all but a method of the division of labor, for while the farmer class is furnishing the raw material for other groups, farmers are receiving clothing and implements and manufactured articles from other groups. The independence of the farmer has become proverbial only because he possesses the means of the food-supply and furnishes the raw material, and possibly because, having the food-supply and raw material, he may become a manufacturer and supply his needs in a meager way. But in the complexity of modern life he is no more independent than members of other groups. He may isolate himself and live a slow, independent, and non-progressive life, if he will, but he is not apt to turn civilization back upon itself in this way. He is as much affected by division of labor as other groups, and indeed on account of the modern appliances to farming it may be said economically that he is a manufacturer of grain, fruit, vegetables, wool, cotton, and sugar.

Conscious Cooperation of Society.

Although the cooperation of individuals in economic life began unconsciously, it has led to the necessity of conscious cooperation. Men lay plans and work together in the production, distribution, and exchange of wealth. This cooperation is mostly carried on in groups of individuals which have some special interests in the same thing. Thus, a group of laborers unite in an attempt to advance their own wages and their own interests, and to receive a larger share of the net product of industry. Another group of laborers unite in a special enterprise of creating a given line of economic goods, such as boots and shoes, while another group of people unite in a cooperative industry of trade, and still another group unite and form a bank, by which they aid the processes of exchange in wealth-creating. Others unite in mining enterprises, railroad-building, or other great industries where one person feels unable to cope with circumstances; and finally we may say the state itself cooperates with all industries within the boundary of its own jurisdiction. Thus we have, besides the involuntary or unconscious cooperation of individuals in the production of wealth, an organized or conscious cooperation of individuals in groups carrying on special industries. This latter tends to enforce more clearly the idea of economic interdependence of individuals.

Simplicity of Early Economic Life.

At first the economic life of man was very simple. Single-handed he began the struggle to satisfy hunger and protect himself against the cold. In primitive social conditions man's selfish nature was laid bare. He began his career by finding things, and the finder was possessor and owner if he had the strength to defend his property. Roots find berries and the leaves of trees, with other bits of food that fell to his lot, he devoured to sustain life. He was but a wanderer, living an uncertain, nomadic life, with no settled place of abode and without regularity of movements. Life was precarious, for he was gorged at one time and starved at another. His shelter was often temporary; rocks and caves or rude huts of bark and branches were his habitations. Even his improvised garments gave incomplete protection to the body from the rigors of the cold and the heat of the sun.

Hunting and Fishing.

Later, man learned to catch fish and game, and hunted

or fished in packs or hordes. These new industries had

immense consequences in the development of the human

race. In the first place, they gave additional food-supply,

22 ECOisroMics.

which left some leisure for the making of instruments and implements and the creation of better houses for protection. An increased food-supply always gives to men means of improvement; it is the first step forward in material civilization. In the second place, it developed an adroitness or skill in the struggle for existence. The perpetual struggle in the accumulation of wealth has been along the line of the mastery of nature. As a man learns to master or outwit it, he adds the means of his own material welfare and develops intellect. And finally, it may be said that fishing and hunting led to association in wealth-producing, and finally developed unconscious cooperation in obtaining food. Implements were made and devices contrived by means of which to accomplish these ends with greater ease and certainty.

Domestication of Animals.

After a while man enters a higher state of existence, and increases his food-supply by the domestication of animals which furnish him meat and milk and service as well. This adds greatly to his leisure, and to a more complete social development. The race has multiplied into great family groups, which settle down in the more or less permanent conditions to hunt and fish and tend their flocks. Wealth is now more easily created and consequently more abundant, and there is less necessity for want and strife. The social organization of men becomes more compact, and the conditions of labor begin to prevail. This leads to more definite cooperation in wealth-producing.

Agriculture.

Soon a new period of progress is entered upon as the knowledge of seed-planting and harvest leads to agricultiire. The fertile soil now adds to the food product and increases the means of human welfare, making possible a more perfect economic life. Man is rapidly becoming a cooperative animal. His residence becomes fixed, and his wandering ceases. Settled laws and customs prevail, and the tribal ownership of land gives security to all. More goods can now be acquired than are needed for bare subsistence, and the conveniences and comforts of life appear. JSTew economic relations spring up, and the divisions of labor begin to be prominent as each follows a special occupation. In its effect upon civilization agriculture has a vast influence in developing a more perfect social life and a better political organization.

Manufactures.

With increased food-supply the desires of men for a variety of implements, instruments, wearing apparel, and a larger equipment of dwellings, demand the especial services of part of the community in manufactures. And so we find that individuals employ their whole time in the creation of certain lines of goods to exchange for goods of other lines.

Trade.

This creation of more goods than can be used by the producer leads to trade. The surplus goods of each individual of each group are now exchanged for articles more desirable, and barter, the first forai of exchange, appears. As society becomes more complex, the method of barter is too clumsy for carrying on the trade of different communities. This leads to the introduction of money, which becomes an instrument of exchange. Usually, money was some common commodity whose value was quite well known to all traders or exchangers of goods. By means of the use of money, trade was greatly stimulated, and consequently manufacturing increased. In seeking those articles which are most desirable for money on account of convenience when large values must be considered, the tribes of the nations of the world finally adopted the precious metals as money.

Commerce.

The habit of exchanging surplus goods leads to the development of commerce, which brings a special group of people to attend to the work of trading. ]!^ot only do individuals deal with individuals, but tribes with tribes, and nations with nations. Caravans are used on land and ships on sea for carrying the surplus goods, and each new exchange stimulates desire and develops the energy of men in supplying wants already created. Thus does the economic life become broadened and the desire of men for more wealth becomes intensified.

Economic Organizations.

In the early period of development we find society arranging its own economic groups, — the agriculturists, or those who till the soil; shepherd class, or those who tend the flocks and herds ; and the trading or merchant class. But we find those who, on account of their skill, spend their entire time in the manufacture of goods. The two latter classes divide into many special groups, the traders dealing in a single article or group of articles, and the manufacturers confining their skill to a single product or group of products. As economic society grows more complex, the manufacturers and traders group themselves in towns and cities. The farmers are usually collected in villages and country hamlets. Economic life shifts again, and the manufacturers and laborers in special industries live together, and subsequently become organized into guilds, which represent the first artificial industrial organizations. As the number and kinds of industries multiply and the divisions of labor increase, society tends more and more to arrange itself in groups. The small towns and villages grow into great cities, which become the means of new associations. The guilds in these cities represent the organization of the manufacturers and laborers in the same commodity or the same industry in one group for their own protection and for the advancement of their own interests. The importance of all these divisions of labor is seen in the rapid development of economic society in all branches. Wealth is rapidly increased by the facilities for its production and the excited desire of mankind everywhere for a larger supply of economic goods. Men have more to live for, more to live upon, and yet are more dependent upon the exertions of their fellows for what they accomplish in the general processes of production.

Industrial Stage.

With the impetus now given to economic life, man enters upon what is known as the industrial stage, which continues to the present. Prior to this, nearly all of the manufacture of articles was dependent upon the muscular efforts of man and beast. Machinery was used to a limited extent, but the chief manufacture was by hand . However, the introduction of power manufacture was the beginning of a new industrial life. By the use of machinery and the control of the powers of nature, rapidity of manufacture was increased a hundred fold. This caused the introduction of new methods of production, and changed to a great extent the conditions of economic life. Industrial Revolution.

The result of the introduction of machinery was, that instead of the manufacturer working in his home, surrounded by his apprentices and journeymen, great factories were established, with improved machinery, in which were congregated large groups of laborers who worked for wages. Buildings and machinery were provided by the combined efforts of capitalists, and laborers worked under the direction of a master. Economic society now arranges itself in new groups or classes: there are laborers, managers, and capitalists.

Under the old method goods were manufactured in the shop in small quantities and placed in stock for sale. Under the new method large quantities of goods are created in a single factory and sold to dealers. The laborers receive their remuneration in the form of a daily wage and supply their own homes, living apart from the manufacturers and capitalists. In fact a large number of the manufacturers of the old method became laborers in the factories under the new. This was the formal beginning of the wage system which is nearly universal at present. The divisions and subdivisions of labor became so great that it took a large number of workmen to complete a single article. After it was necessary to have buildings and machinery to carry on industry, and as laborers could not furnish these without a system of cooperation, which had not been introduced, they were obliged to rely upon others called capitalists to construct buildings and furnish machinery and raw material, while they accepted a daily