Welfare as an economic quantity

Front matter

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COPYRIGHT DEPOSIT.

THE CAUSE AND EXTENT OF THE RECENT INDUS- TRIAL PROGRESS OF GERMANY. By Earl D. Howard.

Preface

This series of books owes its existence to the generosity of Messrs. Hart, Schaffner & Marx, of Chicago, who have shown a special interest in trying to draw the attention of American youth to the study of economic and commercial subjects. For this purpose they have delegated to the undersigned committee the task of selecting or approving of topics, making announcements, and awarding prizes annually for those who wish to compete.

For the year ending June 1, 1913, there were offered: —

In Class A, which included any American without restriction, a first prize of $1000, and a second prize of $500.

In Class B, which included any who were at the time undergraduates of an American college, a first prize of $300, and a second prize of $200.

Any essay submitted in Class B, if deemed of suflBcient merit, could receive a prize in Class A.

The present volume, submitted in Class A, was awarded the second prize in that class.

Columbia University.

Heney C. Adams,

NeiD York City.

Edwin F. Gay,

Harvard University.

Author's Preface

This essay is a study in the neglected field of economic consumption. It is a fragment of what was planned as a comprehensive treatise of this division of economics, and largely developed during my graduate work at Cornell University. But the part may be the better for standing by itself. It is frankly theoretical in general character. I quite agree that questions susceptible of detailed inductive or statistical investigation should receive such treatment instead of merely being given their place in a theory. That, however, must come later.

Most of the essay assumes familiarity with the concepts and terms of recent economics and is technical in its interest. Certain chapters, however, — which are not among the earliest, — may perhaps be intelligible and interesting to the reader whose chief equipment is common knowledge and common sense. These are especially chapters viii (with VII as preliminary) and xvi; and also, though to a less degree, chapters v, xi, xiii, xiv, and xv. Whether a person of practical or reformative interest would be justified in going directly to the concluding chapter is to be doubted.

No fundamental premises of economic thought are essentially affected by the ideas contained in this essay. It does propose certain qualifications and extensions of accepted principles. What may be considered the general contribution it makes consists in the incorporation into systematic economic thought of some ideas that are, if not themselves new, such as can be found elsewhere — perhaps in common thought or in writings of no scientific standing — only as disconnected apergus.

My scientific obligations, and the interrelations of the ideas developed to those of others, are indicated in text viii AUTHOR'S PREFACE

and in footnotes, but I am not sure that all have been duly noted, since the matter was originally written some time ago and has undergone many changes. Though much that is characteristic of the Austrians — Menger, Wieser, and Bohm-Bawerk — is not accepted here, my point of departure is obviously the same as theirs. The development from that point is in a different direction. The differences that emerge are partly, though not wholly, due, to this divergence of the subjects treated. The essay is, however, largely a criticism of the usual exposition of utility doctrine. Suggestions received from recent American theory are also frequently negative, belonging, that is, in the category of association by contrast or opposition.

The manuscript has been subjected to the criticism of Professor Alvin S. Johnson, who acted in place of Professor Clark as a judge of the papers submitted to the Hart, Schaffner & Marx Committee and has reviewed on its behalf the essay here pubHshed. He has made important suggestions regarding terminology and also toward connecting up the ideas presented with those of other economic theorists, and he has made it necessary for me to elaborate and defend or to amend certain points. But I have no reason to suppose that he would accept as valid all the theories here set forth. With this exception the essay has not had the benefit of the friendly criticism of economists. But I am much indebted to two of my associates in the Bureau of Statistics and Accounts of the Public Service Commission, namely, to Mr. James L. Bahret, for numerous valuable editorial suggestions, and to Mr. L. H. Lubarsky, not only for drafting the diagrams, but for important mathematical assistance, including certain notes bearing his initials. Acknowledgment is also due to Professor John B. Clark for encouraging me to complete and publish this little book, which was first presented on somewhat the present plan as a paper in his seminar.

G. P. Watkins.

New York City, May 31, 1914. j

Contents

INTRODUCTION. Welfare and Utility xix

The title of this essay implies a dependence of welfare upon economic conditions — The "variation of utility" a technical description of the subject — What constitutes welfare — Relation of utility to welfare — Neither word is definitely objective or definitely subjective in meaning — The sense in which welfare is an economic quantity — That "weKare" connotes sociality more than does "utility" is not an essential difference

— The quantitative variation of utility is the connecting link between goods and welfare — There are several species of utility and their variation is complex — The economic aspect of welfare is essential, though not exhaustive — Moral judgment requires economic as well as other knowledge — Scope of following chapters — Underlying assumption that men are in general reasonable.

CHAPTER I. Utility defined 1

Utility the basic idea of a theory of consumption — The term defined — The abstract term for a relation — The concept is quantitative — The term has a collective significance — Specialization of goods obscures auxiliary uses — The discovery of new uses and the refinement of old.

The quantitative conception of utility requires a measure — The conceptual measure of utility is contribution to satisfaction

— The power to satisfy must be susceptible of generalization — Expectations must be reasonable — Utility is not proportioned to merely marginal satisfaction; instance the good that is, for the consumption of a small private economy, unique — Equating the satisfactions of different individuals — The absence of definite allocation of super-marginal utility explains but does not justify its neglect.

CHAPTER n. The Species of Utility 10

The classification of the relatively homogeneous is not impossible — Familiar divisions of utility: Positive and negative; marginal, super-marginal and free; direct and indirect — Threefold relation of goods to satisfaction: (1) independent; (2) dependent on other goods; (3) dependent on other persons — Definition of utility proper — Particular utility — Comple-

X CONTENTS

mentary utility — Dependence of the utility of a good upon other goods not to be taken in its broadest sense — Imputed utility — Transputed utility — Its relation to relative scarcity — Transputed utility diflferent from other non-particular utility — Opposed to utility proper when the latter is on the same level — Adventitious utility — May appear in the complementary relation — The socio-psychical factor — Both transputed and adventitious utility presuppose economic value — Utility classified as processive and existential — Multiple utility — The relations of these species of utility reviewed.

CHAPTER III. The Law of Diminishing Utility . . 20

Diminution of utility is not the only type of quantitative variation — What constitutes a supply from this viewpoint — Homogeneity is essential — Diversity and precedence, not the character of the supply, account for the regular diminution of utility — The diminishing rate of diminution — The abrupt termination of the curve (only an apparent exception) due to neglected costs — Possible relation of diminishing utility to general psycho-physical law — But quantity of feeling differs from intensity of sensation — Weber's Law states exactly the presiunptive form of the curve — Description and characterization of Diagram II, showing the normal curve of regular diminution of utility — It is a rectangular hyperbola, that is, its equation is xy=c — Proof and construction of the ciu-ve — Since initial utility is seldom infinite, the axis of ordinates is usually at the left of the initial point of the supply — The constant-outlay curve — Abstract character of the normal law — Actual curves seldom normal, but never straight lines.

Diagram I. The apparent form of the curve of diminishing utility when account is taken of such costs as are neglected until marginal utility is small 27

Diagram II. Normal curve of diminishing utility constructed according to the psycho-physical law as a rectangular hyperbola 28

CHAPTER IV. The Scope and Limitations of Diminishing Utility 40

Bearing of the psychological principle of accommodation upon initial utility — The necessity of immediate consumption, which is presupposed in case of negation of utility through satiation, is not to be regarded as the usual condition — The moderating effect of substitution upon the diminution of utility — The relative and economic (not physical) character of the homogeneity of a supply — All goods are, for certain purposes, reducible to money — Increase of property in general

CONTENTS ri

may likewise be viewed as subject to diminishing utility — But theoretical diminution may become practical limitation — The oneness of a want no criterion for defining a supply — The case of a single good embodying a series of utilities — Its obscuring efifect on diminishing utility — From a social point of view even such goods as are isolated in actual consumption exhibit regular diminution of utility — The difficulty with discontinuity vanishes in the case of a social curve — The demand curve considered as in part a summation of utility curves — The individual's demand curve has the same form as his utility curve — The summation of rectangular hyperbolae — Meaning of the scales — Qualifications — Distortion resulting from possible differences of slope — "Diminution at a diminishing rate" still holds in any abstract case — Technical meaning of "diminishing rate " — Practical value of the conclusion as regards summation — But degree of utility cannot be read back from a social demand curve — The law of diminishing utility as applied to an abstract element of utility embodied in commercially different goods — Generally abstract character of the principle.

Note on the commensurability of all sorts of satisfaction ... 44

CELAPTER V. Peocessive Utility and Existential Utility 58

Double reference of the term consumption — The destruction of goods incident to consiunption is of fundamental economic importance — But it is in some cases not necessary to enjoyment — The uses of such goods tend to be free — The destruction is sometimes intended, hence two sorts of consumption

— Processive consiunption and processive utility defined — Existential utility — Objects of eesthetic appreciation have such utility — Objects of existential utility may deteriorate, but not because of their enjoyment — This distinction not entirely parallel with that between perishability and durability

— Economically perishable goods a smaller circle within those having processive utility — Physical perishability not inconsistent with existential enjoyment, but inimical to it — Physical and economic dm-ability combined constitute the condition most favorable to a large amount of existential utility — Destruction of utility has an important but also a variable place in consumption.

The relation of these distinctions to saving — Saving in concrete goods, as opposed to pecuniary investment — High possible efficiency, or economy, in a subjective income consisting of existential utility — The relation of ownership to superior cultivation of land — The capitalistic ownership of articles of consumption is especially bad — Saving in concrete goods is the most fundamental and the most desii-able form of saving.

3di CONTENTS

CEL^TER VI. Rate of Consumption m Relation to DzMiNUTioN of Utility . 68

Importance of rate of consumption in relation to diminution of utility — Failure in ordinary illustrations to take account of futiure uses — High perishability, physical even more decisively than economic, compels a high rate of diminution — Substitution and preservative measures as means of partial escape

— Physically perishable goods ministering to existential wants

— Elasticity of demand is only partly a phase of rate of diminution of utility; the expansion of demand often not sufficient to encourage the lowering of price — How high rates of diminution are veiled for the city-dweller.

Storage or preservation of goods makes time a factor in the rate of diminution of utility — Economic perishability means a high rate of consumption — But restricted utilization and rapid diminution of utility may be evaded by storing — Postponing the use of part of a supply (distinct from costs of keeping) has thus an effect on diminution of utility — Discounting for futiu-ity of use may be the only reason for diminution — Illustration of future discount — Where consumption is processive and goods are not physically perishable. Utility apart from costs need never become zero — Check from lack of room for storage in the city — Exchange as a factor — Abundance fosters a preference for soUd and durable goods and for existential utilities — Time discount a factor in the diminution of the utility of most goods.

The case of existential utility embodied in goods absolutely durable physically, i.e., with a zero rate of consumption — As regards diminishing utility this case not complicated by time discoimt — An analogy — Rate of diminution for such goods not necessarily but probably low — Rates of supply contrasted with amounts supplied once for all — Future discoimt the link between the two sorts of supply — Concrete cases are mixed — Order of preference between different sorts of goods — Risk an independent question.

Conclusion: Rate of diminution of utility is affected by rate of objective consumption as well as by need or subjective factors.

CHAPTER Vn. The Complementary Relation ... 83

Variety and utility — Refinement in consumption — Diversity of use intensifies effectiveness — Partly a contrast effect — Heterogeneity of goods the opportunity for obtaining complementary utility — The man who wants more wants, not only different things, but complements — Increasing utility a possible effect — The joint utility of complements does not conform to the principle of diminishing utility — The Austrians consider the complementary relation of productive agents only — Illustration of the complex character of relations of goods to

CONTENTS xiii

each other — Complementary utUity in household economics — Comfort — Why mere sumptuousness is bad.

Heterogeneity practically, if not logically, necessary to the complementary relation — Group utility more than a mere contrast effect — The complementary relation is of more than merely economic interest.

CELAlPTER Vm. The standard of Lite as based upon

COMPLEMENTAEY UTILITY 91

The standard of life is a case of the complementary relation — Why, when destroyed, not easily reestabUshed — Economic environment in relation to the standard — The disadvantage of a cheap staple food — High ratio of cost of manufacture to cost of raw materials imf avorable to a high standard — Relatively cheap food less desirable — Illustration of the effect of relative costs upon the character of dwellings in coimtry and city — The demand for decencies — A vis a tergo also helps to sustain a high standard of life. j

Incidence of economic conditions upon the family — Its economic function now is the care of consumption — The transmitting medium for a high standard of life — The dynamic character of this subject.

CHAPTER IX. Complementary Utility m Relation TO THE Variation op Utility 98

The importance often attached to goods essential to one's standard of life constitutes an exception to the regular diminution of utility — This supposes income in general is reducible to a common denominator — Diminishing utility holds of particidar utility regardless of heterogeneity of goods — But it need not hold of complementary utility — Typical curve of diminishing utility — Effect of the introduction of complements on the curve of the variation of utility — Physical identification of the last imit or definite assignment of its utility no more essential than for the first or initial unit — Complementary utility cannot be obtained in the largest doses with the earlier units — Illustration by the elements of a dinner — Suppose extreme himger — Suppose moderate hunger and patience — The complementary relation between successive goods — Suppose each unit chosen as if the last obtainable — Personal idiosyncracy a comphcation — Complementary utility may be of great importance for the variation of utility without causing increasing utility; illustrative curve — Consumption groupings are elastic and some complementary utility is usually in prospect — In matters psychical 2+2 may, in a sense, sometimes equal 4 but are just as likely to equal 3 (diminishing utility) or 5 (the comsdv CONTENTS

plementary relation) — The somewhat dynamic character of complementary utility — Accidents have obscured the effect of complementary utiUty on variation — Diminishing utility the more objective in its natiu-e — Always underlying — Holds unquaUfiedly for particular utility — Transient character as well as exceptional occurrence of increasing utility — Groups themselves, though like, cannot in practice form a supply — Unlike groups do not constitute separate units but are themselves grouped — Complementary utility is not amenable to marginal or market conception — Its possibilities not imlimited — It is of as great practical importance as are the results of diminishing utility.

Diagram III. Possible effect of complementary utility upon the variation of utiUty producing increasing utility 101

Diagram IV. Possible effects of complementary utility upon the variation of utility amounting to less than increasing utiUty . 102

CHAPTER X. Imputation and Transputation of Utility 114

Imputed and transputed utility are somewhat different in relation to complementary utility — Distribution a problem in imputation — Phases of this problem — Conception of imputation brought over into consumption — What the term connotes — Imputation applies to immediate as well as to intermediate goods, but the former application b distinctive enough to be given a separate name, transputation — Transputed utility as opposed to utility proper — To merely complementary utility — Transputation as unbalanced attribution of utility — Character of the criterion — Value is primary in transputation as well as in imputation — Character of the variation of utility under the influence of transputation — Two sorts of scarcity — Case of goods deprived of value by transputation — Illustrations of the effects of transputation — Elasticity in relation to it — Insecurity of high transputed value — Replacement and substitution as limitations upon it.

CHAPTER XI. The Transputed Character of the Initial Utility of Necessaries 125

The supposed high degree of initial utility of necessaries — The logic of the valuation of means — The value of life — The value of means of preserving life — Instinctive imputation to necessaries — Character of the utility of increments of income at various stages — Satisfaction comes chiefly from free income — Free income more important than necessaries — NormaUy mere necessaries have little real utility.

CONTENTS XV

CHAPTER XII. Contrasted Significance of Merely Complementary Utility and Transputed Utility . 131

Contrast between transputed and merely complementary utility as regards their relations to welfare — The former a part of complementary utility definitely apportioned to one or more members of a group — Merely complementary utility is super-marginal — Flexibility of groups helps in maintaining this — Replaceability bears no relation to amoimt of complementary utility, but much to that of transputed.

Unimputed complementary (super-marginal) utility may indirectly aflFect demand and value — Analogy of the rent of land — Somewhat dynamic character of the influence — Determining power of marginal increments possibly overrated — An article that is unique (whose supply for the purposes of a consumer =1), and therefore marginal, will usually have utility in excess of its economic value (marginal utility in the market) — Complementary utility is either imputed and transputed or else super-marginal — A complementary group is usually imique in a particular private economy, and this favors the super-marginal character of its distinctive utility — Economic uniqueness, also, of goods recurrently needed and received.

Unimputable utility — Degree of economic value in general, as well as in the case of transputed utility, not a measure of the favorableness of the environment to man, but rather the opposite.

CHAPTER Xin. The Nature of Adventitious Utility 141

Definition of adventitious utility — Luxury, though related, too vague to be identified with it — How different from other species of utility — No form of curve specially appropriate to it — Its socio-psychical origin does not bar enjoyment by the consumer as if it were due to intrinsic qualities — Psychical parasitism characteristic — Illustration in the value of the diamond — Love of distinction in its economic expression — Relativity of all quantitative judgments the soil of adventitious utility.

CHAPTER XrV. SocLAii Phases and the Economic Status of Adventitious Utility 146

Adventitious utility a socio-psychical phenomenon — The class standard in consumption — Middle class sacrifices to "keep up appearances" — The breaking down of class standards — Fashion is essentially conf ormism — Adventitious utility ia the cause of changes of fashion — Adventitious exploitaxvi CONTENTS

tion of personal services — Objectively immoral character of adventitious consumption — Socio-economic evil — But largely of the nature of personal vice — Value without utility — Mercantile exploitation of adventitious motives — Taxation of adventitious utility — Progressive elements in all waste — The variation of adventitious utility protean — The demand is quantitatively insatiable — Yet the net subjective effect for society remains naught.

CHAPTER XV. Hosts and Masks of Adventitious Utility 155

Host and parasite — The parasite must usually conceal its true character — Esthetic enjoyment as a mask — Complementary effects in art a cover — The complementary use of the rare — Exaggerated esteem of rare articles — Genuineness improperly associated with rarity — A wrong view of substitutes — The "best quality" is relative to the purpose in view

— It is not the rare — Perversion of economy — Natiu-al differences versus imitations intended to deceive — The best should be husbanded — Emphasis on "fineness" of quaUty chiefly adventitious — Elegance only an extrinsic association with rarity — Adventitious elements permeate the economic estimation of all things that require much expense or much leisure — The situation into which adventitious utility enters is always mixed

— The immorality of the material and exclusive superlative.

CHAPTER XVI. Multiple Utility 163

Multiple utility defined — Public service — Analogy of multiple with existential utility — The less strict idea of multiple or collective utility — The inducement to socialize enjoyment — Relation to equality — Public property has reference largely to multiple utiUty — Ability or inability to pay for use not always decisive of economy — Sometimes the state may well change an economic into a free good, e.g., education — Public health — Transportation more clearly of direct pecuniary benefit to the individual — Diu-ability of public works — Monumental public edifices — Unimputable multiple utiUty of the natural environment — Rate of exhaustion of minerals more properly left to private interest — "Conservation" — Public luxury — Apparently disproportionate expense of public celebrations and festivals less so by reason of its multiple character — Possible quasi-complementary quality of public luxury — Royalty and nobility as surrogates for the people in consumption — Then not merely selfish — Democratic feeling fatal to this — A richer development of both multiple and individually enjoyed utility in prospect.

CONTENTS xvii

CHAPTER XVII. The Vakiation of Utility in Re-

liATION TO CoNSUMEk's ReNT, INDIVIDUAL AND

Social ' 173

Consumer's rent a result of the variation of utility — Why "rent" rather than surplus — Not measurable in money — The possible transputed utUity of an article no part of its consumer's rent — Tendency of untransputed complementary utility to escape commercial valuation — Unimputable utility also escapes — Definitions of consiuner's rent in its various aspects

— Relation to total capacity to enjoy — Danger of imlimited acquisition.

Expansion of income in relation to consumer's rent — The individual's progress into civihzation — Significance of the stages as also representative of present social strata — External restraint upon expenditure wholesome — Place of existential utility — The middle situation best — At the top among incomes aTe the vanities of adventitious utihty.

The average income of society — Money even less applicable to the measurement of social than of individual consumer's rent

— Characteristic wastes and economies — Adventitious utility negative — Multiple utility positive — Abimdance with equality unfavorable to adventitious and favorable to multiple utility — Inequality brings the opposite eflFects — Importance for consmnption, and for social economy, of the distribution of wealth — The greater the proportion of medium-sized incomes, the greater are utUity and consumer's rent — Utility of free time — Economics teaches restraint upon individual accumulation.

CHAPTER XVm. Op Certain Practical Applications 184

The practical application of the foregoing theory a secondary consideration — Diminishing utility as appUed to the accumulation of riches too mild a statement of the truth — "The chief enjoyment of riches consists in the parade of riches" — Sumptuary laws useless — Philanthropy — Resulting possibility of inverse selection of the richest — Value to society of the inheritance of property — Possible modification of the institution in relation to the justification of the right of private property — Adventitious ambitions not confined to the rich — Waste of possible utility in a different way at the other end of the social scale — Why this latter situation is less easily disposed of — Futility of computing the economic value of a man — Democracy — The golden mean.

Introduction

WELFARE AND UTILITY

The title of this essay, " Welfare as an Economic Quantity," should give some notion of the interest and importance of its subject. Welfare comprehends or represents all things of reasonable and rightful desire. Its economic foundations, it is true, may seem less interesting. This very fact is presumptive evidence that the dependence of welfare upon economic conditions has not received the attention it deserves. Welfare, or a large part of welfare, is, in mathematical parlance, a function of the control of economic goods. In other words, the quantity or degree of welfare depends in large measure upon economic goods and upon the use made of them. It is the writer's purpose to contribute something toward an understanding of this quantitative relation between goods and welfare.

If it were desirable to make the title also a definition of the subject, it might read, "Kinds of Utility and their Variation." This is technically more accurate, but also less generally intelligible than the other. Such a technical label does not do justice to the human interest of this phase of the study of economic consumption.

It is not to the purpose to discuss in this essay the nature and essence of welfare. It suffices to make explicit the assumption that welfare is an all-round satisfactory state of being, securely grounded in material and economic as well as other elements. The idea is properly associated with that of a sufficiency of economic goods, though the state is not thus simply constituted. Some will be inclined to beg the question at this point, chiefly those sheltered ones who do not know what it is to do without any necessary

XX INTRODUCTION

or convenience. Any one who believes that the essence of welfare is a state of mystic contemplation or something else equally ethereal will not care to read what follows. Such a one must first learn something of the elementary relations between life and work with which economics deals.

The economic term "utility," rather than the more general and popular word " welfare," is commonly used in the following pages because the former is well established in the terminology of economics and has a definite special meaning. The relation between the two is roughly indicated by considering the utility of anything as a part or element of that of which welfare is the whole. Incidentally, the concrete utility is thought of more objectively as inhering in goods. Welfare is collective and general and therefore comparatively abstract. At least it is not thought of as limited by persons and conditions. But utility also is general, or generalizable, and only figuratively the "property" of particular goods. We do speak of the utility of goods and of the welfare of men, but this difference of usage may be merely a matter of viewpoint and emphasis.

Welfare, it may be said, is properly a collective term for satisfactory or pleasant states of mind or for such of these as are duly grounded in or accordant with objective conditions, and thus more or less permanent. Since utility is the more objective counterpart of satisfaction, it would seem that welfare is a sum or system, not of utiUties, but of the corresponding satisfactions. In other words, if welfare is subjective and utility objective, the latter cannot be described as a part of the former. In fact, however, welfare is not thought of as a merely psychical state or subjective quantity, nor is utility thoroughly and completely objective. Perhaps the variable and seemingly loose use of these words is justified by the parallelism that obtains, in a more general sense than is technically denoted, between the physical and the psychical. Where capacity is so variable

INTRODUCTION xxi

and conditional a matter it may not be possible strictly to discriminate between the capacity to satisfy and the result of the manifestation of that capacity.

It may be said, even by those who acknowledge the interdependence of the two, that welfare is a psychical or subjective quantity and not an economic quantity. Classifications emphasizing exclusion, however, are apt to mislead. Doubtless welfare is primarily psychical. The phrase "an economic quantity," moreover, should be taken in a restrictive sense, leaving some elements of welfare admittedly not economic. For the rest we may insist that whatever is controlled by economic means and regulated by economic motives is in so far economic. A psychical quantity is often in this sense also an economic quantity. Welfare is most certainly an economic matter, though not exclusively such. But welfare is just as certainly not a commercial matter. That is a much smaller circle within the general field of the economic. Commerce and welfare do not have so direct a connection in practice that we must inevitably connect them in thought, though economics is concerned with both.