Elements of economics, with special reference to American conditions, for the use of high schools

Front matter

.af^l

NEW YORK . BOSTON • CHICAGO DALLAS • SAN FRANCISCO

MACMILLAN & CO., Limited

Preface

The growing importance of the newer economics makes necessary a simple statement of its fundamental principles. The present work, designed especially for the use of secondary schools, has been prepared with this object in view. Since the book is intended primarily for the beginner, every effort has been made to secure simplicity of treatment.

This simplicity manifests itself chiefly in two directions. In the first place, emphasis has been laid upon the concrete and descriptive side of economics. Great attention, therefore, has been paid to the subject of the production of wealth, and much material of an industrial character has been added. In the second place, each chapter is preceded by an outline of its contents and followed by a series of questions which bear on the general topic of the chapter. In those schools where only a very limited amount of time can be devoted to the study of economics, it will be found possible to omit or summarize certain parts of the book according to the special needs of the students, or the particular inclination of the teacher.

To those who have come under the inspiring influence of Professor Simon N. Patten, it is almost superfluous to acknowledge here the debt of obligation embodied in this work.

Philadelphia, April, 19 12.

Book I. The Factors Of Production VI

VII.

Land Reclamation . . . . • .

VIII.

IX.

X.

American Labor ....

XL

XIL XIII.

The Risks of Labor .

Some Labor Problems

94 103

Contents

CHAPTER

XIV.

XV.

XVI.

Education of the Worker Capital ....

The Social Surplus

BOOK 11. PRODUCTION IN THE UNITED STATES

XVII. American Agriculture

XVIII. Soil Fertility

XIX. The Production of New Species

XX. American Industry

XXI. Large Scale Production

XXII. Business Organization .

XXIII. The Industrial Army .

XXIV. Transportation XXV. Regulation of Transportation

PAGE

138 146 152 158 167

182 189

Part IV Exchange Of Wealth

XXVI. Value and Price . 206

XXVII. Price and Monopoly . . . . . .214

XXVIII. Instruments of Exchange 222

XXIX. Modern Finance . . . ' . . . . 232

XXX. Foreign Trade 240

XXXI. Taxation .248

Part V The Distribution Of Wealth

XXXII. Preliminary Survey of Distribution . . 255

XXXIII. The Theory of Rent . . . . . . 265

XXXIV. The Theory of Interest . . . . " . 274 XXXV. The Theory of Profits ., ... 281

Contents

XI

CHAPTER

XXXVI.

XXXVII.

PAGE 288

Part VI Economic Experiments And Programs

XXXVIII. Experiments of the Employer .

XXXIX. Experiments of the Worker .

XL. The Program of Regulation

XLI. Programs of Socialization

XLII. Social and Economic Progress

304 316

329 337 348

INTRODUCTION

Every subject of study has its particular field of inquiry. Thus, mathematics arises from a study of form and number and includes, among other subjects, a fundamental knowledge of geometry and algebra. Physics, in a similar manner, investigates the general realm of matter and leaves to chemistry a more careful analysis of the elements and their compounds. Likewise, history concerns itself with the general development of mankind along political, industrial, and social lines ; while civics deals with the more special study of government. In studying economics, we shall find that, in exactly the same manner, this subject further specializes in a field peculiar to itself and rests upon a basis distinct from that of every other science.

The rapidly growing importance of economics and its vital connection with everyday life combine to make it highly desirable for all wide awake people to understand something of this science and to grasp clearly its fundamental characteristic. Economics arises from the study of wealth and investigates the problem of welfare. Of course welfare, from the standpoint of material well-being, is not possible without wealth. Therefore, in order to understand the objective basis of economics we must have a clear conception of the meaning of wealth.

Wealth may be either material or immaterial. For exarhple, houses, factories, food, and clothing are articles of xiv Introduction

material wealth ; while health, capacity, and character are illustrations of immaterial wealth. Both kinds of wealth possess value, but immaterial differs from material wealth in that it cannot be subjected to the process of exchange ; that is, immaterial wealth cannot be bought and sold like food and clothing. It is needless to say that immaterial wealth is of greater value than anything else in life. However, a study of this kind of wealth does not properly belong to the field of economics, but is a legitimate part of the science of education, or of psychology, or of ethics, or of some similar study. Nevertheless, when immaterial wealth is productive of material wealth, economics becomes indirectly interested in the solution of some of its problems. For example, if education produces efficiency and efficiency results in the production of material wealth, economics acquires an indirect but real interest in the growth of education. That is, just as wealth is a means of promoting welfare, so may education increase the amount of wealth produced by society.

However, economics is primarily concerned with material wealth, and it is therefore imperative for the student to have a clear conception of its essential characteristics. In the first place, material wealth may be bought and sold ; that is, its ownership may be transferred from one individual to another. We have just seen that this characteristic is distinctive of material wealth. The strength of a Hercules, the genius of a Shakespeare, or the honesty of a Lincoln can never be transferred from one person to another. On the other hand, the palaces of kings, the paintings of old masters, or the products of a steel mill may easily pass from the hands of one into the possession of another. It is always possible, therefore, for material wealth — no matter

Introduction xv

what its character or how high its value — to be exchanged for some other commodity of equal value.

But material wealth possesses something more than this element of transferability ; it possesses the quality of satisfying human wants. Some things are easily transferred from one person to another, or from one place to another, and yet do not satisfy any individual want. For example the dirt of the street is only too easily brought into the home, but it is not material wealth because it satisfies no one's want. However, this same dirt, needed by the contractor in large quantities, would satisfy an individual want and would in this case be regarded as material wealth. This want-satisfying quality possessed by material wealth is called utility. While degrees of utility possessed by different articles may vary greatly, yet all forms of material wealth must possess some utility. It may readily be seen that necessities of life, such as food, housing, and clothing, possess the greatest possible utility; that is, they satisfy wants that are most intense and universal in all mankind. On the other hand, automobiles, books, or fine pictures satisfy wants that individuals have gradually acquired, but that are not absolutely essential to life itself. In both cases, however, these different forms of material wealth possess utility; that is, they all satisfy, in a greater or less degree, the wants of mankind.

In addition to the qualities of transferability and utility, material wealth must possess still another characteristic. The wealth with which economics is concerned must involve human effort. Locomotives, footballs, chemical apparatus, maps, textbooks, clothing, and thousands of other commodities are all produced by man's conscious industrial effort ; that is, they are all " economic goods." In the xvi Introduction

same manner, in the production of commercial coal and iron and in the working up of other raw materials of industry, man's labor is an essential element in the finished product. When individuals appropriate gifts of nature, such as forests and minerals, they transform them through their industrial effort into economic goods. On the other hand, such free gifts of nature as air and sunshine cannot easily be appropriated and, although they possess the highest possible utility, their existence is not the result of any human effort. Air and sunlight are not manufactured, therefore we cannot properly regard them as economic goods. Water, on the other hand, while a free good in primitive society, becomes an economic good in the modern city because human effort has been expended in building aqueducts, laying water mains, and otherwise providing a water supply. Free gifts of nature tend to become economic goods; but, so long as they remain " free " and do not form an actual basis for industrial effort, they do not constitute a part of that wealth with which the study of economics is primarily concerned.

From this discussion, therefore, it may be seen that material wealth — the physical basis of economics — is a term applied to all economic goods, that is, to those goods which may be transferred from one individual to another, which satisfy human wants (or possess utility), and which represent some industrial effort.

The beginner in the field of economics must bear in mind not only this concept of material wealth, but he must also clearly understand the relation between wealth and money. One of the first errors into which he is likely to fall is the belief that these two are synonymous, and that, therefore, a study of economics is merely a study of " How to make money." Such a misconception must be immediately

Introduction xvii

corrected. Material wealth includes infinitely more than money, and the study of economics is therefore infinitely broader than an ordinary lesson in money-making. The popular misconception of the importance of money arises from the simple fact that money is employed by civilized societies as a standard of measuring the value of all economic goods and as a means of exchanging one form of wealth for another. Gold and silver, from which money is coined, are forms of material wealth ; but so are iron and coal, furniture and clothing, food and drink, books and pictures, and countless other economic goods. It is therefore just as absurd to think of money as inclusive of all wealth as to think of one individual as embracing the human race.

Material wealth, then, is the concrete basis of economics. Without material wealth no science of economics would be possible. But a knowledge of wealth, in and of itself, is not the highest aim subserved by a study of economics. Wealth is but a means to welfare, and the real purpose of the study of economics is to understand how welfare may be promoted through the medium of wealth. Accordingly, in our treatment of economics, we shall discuss (i) the ideals necessary to attain this goal of welfare; (2) the means of promoting welfare through the consumption, production, exchange, and distribution of wealth; and (3) the various efforts of men, individually and collectively, to realize the economic ideal and to attain the goal for which all are striving.

CHAPTER I The Goal of Economic Endeavor

I. What is our goal ?

1. In play: a. Success

h. Achievement

2. In life :

a. The production of wealth h. The promotion of welfare

3. The old view and the new

11. How to attain this goal

1. Through opportunity: a. Its meaning

h. Its possibilities in America. c. Its real significance :

(i) The older attitude

(2) The newer view

2. Through adjustment : a. Its meaning

h. Its existence in nature

c. Its never ending character

d. Its prerequisite

What is Our Goal ? — ^ A baseball team may aim to pile up a big score, or it may aim to play a good game. The big score is success; the good game is achievement. The In play : team that aims to pile up big scores wants games Success or With weak opponents ; but the team that aims to achieve- pjay a good game desires in its adversaries equal,

if not greater skill. The big score team triumphs, while the good game team learns. The latter may lose every game of the season, and yet attain a proficiency in baseball far above that of the former team.

It is thus entirely possible to play baseball for scores or to play for the love of a good game. Exactly the same possibilities present themselves in the economic world, except that the choices are rather more numerous and complex. For example, a man may have as his aim in life any one of the following objects of economic endeavor. He may

strive for money, the counters of the economic

In life : i -i i

The produc- 8^™^? ^^d, hke the miser, hoard them and gloat (ion of over them. Or he may overlook the counters and

"^^"^^ ■ work for the things which the counters repre-

sent, — the wealth of society. Again, a man may have for his object the satisfaction of his wants ; in which case he works for the counters, exchanges them for the wealth, and thus, by the possession and use of the wealth, satisfies the wants which led him to work.

Many men, however, have as the chief object in life the attainment of progress, — a forward movement of the entire group to which they belong. If a large group is striving for progress, civihzation will be advanced and the welfare of The promo- ^^^^ member of the group will be augmented. Honofwei- Of coursc, in order to secure progress, it will be necessary to use money and wealth in order to satisfy the wants of the individual ; yet there is just as wide a difference between working for wealth and working for

The Goal of Economic Endeavor 3

welfare as there is between playing baseball for scores and playing to play a good game. In the first case man works for counters; in the second, for development.

Economics is not merely " the science of wealth " but is becoming more and more " the science of welfare." The early idea was that economic goods are the logical end of economic endeavor ; that the nation which is producing economic goods in great abundance is a successful nation, irrespective of any other test. The newer view xheoid holds, on the other hand, that true advancement view and lies, not in the production of goods, but in de- "®^' veloping the lives of men and women, and that, while this end may be achieved through the production of goods, the production is merely incidental to the development of manhood and womanhood. Production is not an end in itself, but merely a means to welfare.

How to Attain this Goal. — The attainment of welfare — individual and social well-being — depends in the first place upon opportunity; in the second place upon adjustment. Let us examine briefly the part played by each of these factors in individual and social welfare.

Opportunity is an equal chance given to the members of each generation to become unequal. Far from signifying equality, opportunity involves only the thought that each person shall have an equal start. The " starter," who shoots the pistol for the mile run, does not make „,

. , Through

the runners equal when he insists that each start opportunat the same time from the same mark. On the ^*ycontrary, he gives the contestants a fair chance to show how unequal they are. Those who urge the necessity of opportunity are doing no more than the " starter," — insisting that each contestant in the race of life shall start, fully prepared, with an equal chance to do good work.

As a nation, America to-day presents rare opportunities. Contrast, for a moment, the conditions of the eighteenth century with those of the twentieth. In 1700 capital was scarce, living was precarious and, in order to secure even the bare necessities of life, men, women, and children were Its possihiii- forced to work hard and continually. In 1900, ties in howcvcr, the inhabitants of the United States

have abundant capital and a marvelously developed system of wealth production. The bare necessities of life, and some of the comforts as well, can be supplied in an eight-hour working day for adults, while the children attend school. In 1700 the possibilities for opportunity were limited; in 1900 they have increased a hundredfold.

The real significance of this new opportunity is augmented by the modern view of man's possibiHties. Modern Its real sig- scicncc justifies the belief that, within racial lines, nificance. most men are born approximately equal and normal; hence opportunity is the chief factor in human development.

This view was not always held. Even to-day people believe in total depravity. Under this hopeless view of the human race, some men are depraved, sinful, wicked ; others are shiftless, lazy, inefficient, and poor ; while the fortunate ones are wise, capable, and efficient. During the centuries when this view was prevalent, birth was looked upon as the determining factor. This attituHe toward life was an attempt to justify existing conditions ; it led to submission and despondent resignation. It was all but fatalistic.

In the course of time, however, thinkers arose and proclaimed the doctrine of the equal distribution of human capacity. Such men talked of the right to life, liberty, and

The Goal of Economic Endeavor 5

the pursuit of happiness, and asserted that all men are created free and equal. Equalize Opportunity, proclaimed these " free and equal " thinkers, and, to a great extent, you equaHze achievement. Birth — heredity — was no longer the key to the situation; it was now to be found in opportunity and environment. This view of human life is full of promise and inspiration, transforming men from fatalists into enthusiastic workers. According to its teaching, perhaps nine-tenths of all men and women, in a given grade of civilization, are born with about the same capacity to do good work.

Take, for example, two boys of equal ability, born on the same day. In the course of their lives, one is sent to high school and college and does splendid work in the world ; the other is badly fed, poorly clothed, and sent into a cotton factory at the age of twelve. The first boy, because he had a chance, developed in exactly the same way that the second boy would have developed had a chance been given to him. An overwhelming majority of people, like these two boys, are normal at birth and if given an opportunity will lead normal, happy lives.

Welfare can be secured only when a normal relation is established between men and their surroundings. The establishment of a normal relation between men and their surroundings is called adjustment. If men live in poverty when the world about them is rich and fertile, ^. , there is maladjustment ; but if the wealth of the adjustment : community is so divided that men and women ^^^^^'^^^^sare living in comfort, adjustment has been secured. The aim of adjustment is to change unfavorable conditions so that men may lead normal, happy lives. Adjustment, therefore, involves an approximation to the normal.

The phenomenon of Adjustment is seen in nature as well as in society. A river, for example, adjusts itself to the changes in earth formation. If a mountain range is thrown up, the river wears down its bed until, flowing at a normal gradient, it has created a canyon of the Colorado. But Its existence the rivcr is not content. It continues its work, %n nature. cutting away the surrounding hills, until it flows through a great plain like the Mississippi Valley. Society, nke the river, seeks to adjust itself to the changing contour of the environment by wearing it away and smoothing it down until a normal relation is established between men and their surroundings. It accomplishes its purpose by means of men and women all working together, cooperating to remove the obstacles in the path of progress.

The process of adjustment is continuous because the normal is always changing. The unattainable of one age is the attainable of the next. Through science, invention, ,, education, and the creation of surplus wealth,

Its never ' ^ '

ending the dreams of the past, — the abolition of slav-

character. r i r i r i j i

ery, freedom from overwork, from cold and hunger, from famine and pestilence, — become the realities of the present. Thus the possibilities of human life are ever widening.

Men and women, therefore, who have the welfare of society truly at heart are continually striving to shape social conditions so that every one may be happiest and most effective. If enough people work for such an end, the full Its pre- possibilities of society will be realized and the requisite. normal for that community will be attained. But to secure this adjustment, — to guarantee the welfare which is the goal of economic endeavor, — man must first be given opportunity.

The Goal of Economic Endeavor 7

1. What economic goal have you in view ?

2. What are your reasons for having any goal ?

3. What should determine the choice of a goal ?

4. Would you be willing to take a " cinch " job with a big salary ?

5. What does "' opportunity " mean ?

6. Should any limit be placed on opportunity ?

7. Would not the opportunity of the few be limited if opportunity were provided for the many ?

8. What is the object of maintaining unlimited opportunity ?

9. What part can an individual play in securing adjustment ?

Introduction to Economics — H. R. Seager. Elements of Economics — C. J. Bulloch. Elementary Economics — Ely & Wicker.

Principles of Economics — E. R. A. Seligman.

Chapter II

I. Efficiency '

I. Its meaning

2. Its importance:

a. To the employer b. To the worker c. To the nation d. To the family

3. How secured

II. Conservation

I. Its meaning

2. Its threefold aspect:

a. Conservation of natural resources

(i) Forests

(2) Minerals and water power b. Conservation of industry c. Conservation of vitality :

(i) Health

(2) Life

III. Prosperity

2. National prosperity — How China compares with

the United States :

a. In population

b. In race

c. In natural wealth

d. In industrial development

e. In transportation facilities /. In tradition g. In controlling environment :

(i) In regard to rivers

(2) In variety of food h. In social surplus :

(i) Its origin

(2) Its forms

(3) Its good results

3. Individual prosperity

We have seen that the road to welfare lies through opportunity and adjustment. To arrive at his journey's end, however, man must learn the lessons of efficiency, conservation, and prosperity.

Efficiency is the Capacity to secure a Maximum Return for a Minimum Outlay. — Hence, one man is more efficient than another if, with a given expenditure of energy, time, and material, he can produce a larger or better result than the other. For example, where two men are making

Belgian blocks, one produces sixty while the other, without putting forth any additional effort, makes a hundred. The first man was clumsy with his hammer; the second made every blow count. The second man was therefore more efficient than the first.

Every progressive employer is interested both in his own efficiency and in that of his workmen. In fact, the efficiency of his employees is a measure of his own capacity; for unless he secures a maximum return for a itsimporminimum outlay of administrative ability, he himself is inefficient. If he has a man soldering employer. lanterns who makes ten motions to the lantern, while the job can be done in eight, he is losing some product every hour of the day through this man's inefficiency. Or, if lo Elements of Economics

he is using old, out of date machinery when more effective machinery can be secured, or if his plant is poorly arranged, he is inefficient because he is failing to secure a maximum return for a minimum outlay.

The worker is no less interested in efficiency than his manager, because his welfare is as equally dependent upon it. The workers are divided into groups whose boundaries To the are measured in terms of efficiency. At the

worker. bottom are those who are living on the ragged

edge of existence, who are always losing their positions because of their incompetency. Then come those who " stick," — who retain their positions but never rise. Next come those who advance, but slowly. Finally, at the top, are those workers who are always advancing and progressing because they are always increasing their efl&ciency.

Efficiency may also be considered from the standpoint To the of the nation. Uncle Sam may well ask, " Is

nation. ^j^g country efficient? Are all industries doing

efficient work ? Are pur railroads efficiently managed ? Is our school system an efficient one? "

But why these questions ?

" Because," says Uncle Sam, " there is a patch of country over toward the East called Germany, and a little island over here in the West called Japan, and both are becoming marvelously efficient." ^

And then Uncle Sam adds : "I happen to want to sell a few of my products over in the East and back there in the West, but unless I can run my country as efficiently as they can, I'm afraid my markets are done for."

Finally, we may look at efficiency from the standpoint of the home. If it is necessary that the father be able to produce efficiently in order to support his children, it is no

Economic Ideals ii

less necessary that the mother buy and keep house efficiently in order that the income of the father may be used in the most advantageous manner. Efficiency in the jothe home is just as important as efficiency in the f^-^^^yfactory, — more so, perhaps, in view of the many bad digestions and spoiled dispositions that have grown up with inefficient home management.

No matter, therefore, from what standpoint we view this question we see its far-reaching importance ; and it acquires this importance because social welfare depends jjo^gg. largely on efficiency. When a nation is efficient, dency is producing many goods cheaply and easily, it creates the possibility of universal prosperity in which all may share. Since efficiency is merely good sense plus good training, it can be assured only through the maintenance of a successful educational system.

Conservation means Wise Use. — It is the complement of efficiency. Efficiency is measured by a maximum of result; conservation, by a minimum of waste.

Although conservation is usually associated simply with natural resources, i.e. minerals, forests, water power, etc., it really includes (i) natural resources, (2) industry, (3) vitality.

The conservation of natural resources began with the care of forests which were so ruthlessly destroyed from colonial times to the end of the nineteenth century. Forests had been literally " butchered," — all trees, young as well as old, being cut or destroyed. Then, too, forest fires of terrible proportions raged every year throughout „

^ c o •' ■J o Conservation

different areas, destroying lives and property, as of natural well as completing the forest destruction which ^^^°^^'^^^- the timber butchers had begun. Gradually, as the forests disappeared and the price of lumber rose, it became apparent that, unless the forest waste was stopped, a time would come, and that very shortly, when there would be no more wood.

Although the idea of conservation of natural resources related originally to forests, it has been expanded until, to-day, the nation is fully aroused to the necessity of conserving all of its natural wealth. Forests even if permanently destroyed might be replaced, but minerals are not replaceable, and water power, upon which industry must more and more depend as coal rises in price, may be monopolized and taken out of the hands of the people. Everywhere conservation is essential.

Industry, too, offers opportunities for the conservationist. For years, mining companies threw carelessly aside the finer bits of anthracite coal which have since proved of such value in making steam for office buildings and factories. The refuse from slaughterhouses, formerly thrown away, Conservation is now Converted into a hundred different kinds of industry. q( products in great packing houses which " use every bit of a hog except the squeal." Hoofs, horns, hair, bristles, bones, blood, sinews, fat, hides, intestines, — all have some destination, while the refuse which remains is converted into fertilizer. New inventions, perfected devices, new processes of manufacture, all help in the conservation of industry.

But most important of all is the problem of the conserva-

Conserva- ^^^^ ^^ ^^^ ^^^ womcu. As Ruskiu has well tionof pointed out, men and women are the most im-

vtaty. portant resource. " There is no wealth but

Hfe." Hence, if a nation would be truly efficient and prosperous, it must use wisely the men and women of each genera.tion. This conservation of vitality may take the form of conserving health or of conserving life.

As sick people cannot do their best work, a nation of sick people can scarcely be described as efficient. In the United States it has been estimated that the average adult is sick in bed four or five days during each year ; while headaches, colds, and such minor ailments keep him from work another three or four days. If, then, there are thirty million adults at work and each one loses seven days a year, the total loss, irrespective of the loss of health and the cost of drugs and medical attendance, is two hundred and ten milHon working days each year. If half of this sickness is preventable, the nation is deliberately losing more than a hundred million working days annually because of its failure to adopt the simplest health precautions, such as clean water, pure milk, clean streets, airy houses, and the like.