Principles of political economy

Introduction

At no period in the history of democracy have men been compelled to think so seriously about the question of the strength of democratic nations as at the present time. At no time was it ever so plain that the question of national strength is largely an economic one. It is the purpose of this book to examine the economic foundations of our national strength and to point out some of the more direct methods of improvement, to the end that our democratic nation, and all democratic nations, may grow prosperous and great in all the elements of national greatness.

This result can never be achieved unless the people themselves understand the economic principles upon which national prosperity and greatness depend. Subject peoples may ignore these principles, relying upon their rulers to supply the necessary economic knowledge and expertness. Democratic peoples have no one to depend upon but themselves ; therefore they must know for themselves the leading principles of the science of political economy.

Part One. The Underlying Conditions Of National Prosperity Chapter Page

I. Economy 3

II. Wealth and Well-Being 12

III, Self-Interest . 22

IV, Competition 37

V. Law and Government 50

VI. Morals and Religion 64

VII. The Geographical Situation ■. 78

Part Two. Production Section A. The Productive Forces

VIII. The Primary Factors of Production 89

IX. The Quality of the People loi

X. The Division of Labor 119

XL Power 132

XII. Land 142

XIII. Capital 155

XIV. The Organization of Business 168

XV. The Balancing of the Factors of Production . . 181

SECTION B. THE PRODUCTIVE INDUSTRIES

XVI. The Extractive Industries . . . 193

XVII. The Genetic Industries 208

XVIII. The Manufacturing Industries 221

XIX. Transportation 233

XX. Merchandising 245

XXI. Personal and Professional Service 255

vii viii PRINCIPLES OF POLITICAL ECONOMY

Part Three. Exchange Chapter Page

XXn. Value 265

XXHI. Scarcity 281

XXIV. Money 292

XXV. Banking 304

XXVI. Marketing 318

XXVII. Economic Crises 329

XXVIII. Free Trade 338

XXIX. Protectionism 348

Part Four. The Distribution Of Wealth

XXX. The Law of Variable Proportions 365

XXXI. The General Nature of the Wage Question , 378

XXXII. What Determines the Rate of Wages? . . . 388

XXXIII. The Organization of Laborers 400

XXXIV. The Rent of Land 409

XXXV. The Source of Interest 418

XXXVI. The Cost of Capital and its Price 429

XXXVII. Profits 441

■ PART FIVE. THE CONSUMPTION OF WEALTH

XXXVIII. The Meaning and Importance of Consumption . 453

XXXIX. Rational Consumption 461

XL. Luxury 472

XLI. The Control of Consumption 486

XLII. The Battle of the Standards . 495

Part Six. Public Finance

XLIII. Taxation 503

XLIV. The Financing of a War 514

CONTENTS ix PART SEVEN. REFORM

CHAPTER PAGE

XLV. Communism 531

XLVI. Socialism 541

XLVII. Anarchism ' . . . ^55

XLVIII. The Single Tax 563

XLIX. Constructive Liberalism 572

INDEX . . s^s

Part One The Underlying Conditions Of National Prosperity

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Chapter I

What it means to economize. To economize is to choose among several different things which one would like to have, giving up the things for which one cares less in order to have the thing for which one cares more. Necessity forces this kind of choosing not only upon individuals but also upon communities and nations. Economics is the name given to a body of principles which govern the practice of economy in its broadest sense.

This choosing of what one will have takes on many and various forms. It may be a question as between play and work or between different kinds, of work, different kinds of play, or different objects which one might purchase with one's limited money or purchasing power. The problem is always how to use one's time, one's working power, or one's money in such a way as to accomplish the most in the promotion of one's interest or the fulfillment of one's hopes and purposes. This is a problem, however, not for the individual alone but for the community, the nation, and the world at large. The community and the nation, like the individual, have common interests which can be promoted only by common effort. How to use the energy of the community and of the nation economically, that is, in such a way as to accomplish the largest and best possible results, is a problem of the greatest possible importance. In a democracy especially it is fully as important that the citizen should understand how the community and the nation may economize their energies and achieve the utmost in the way of civilization and well-being as it is that he should understand how he may economize his own individual energy and accomplish the utmost in the promotion of his own interest and the fulfillment of his hopes. Moreover, the former is a vastly greater and more difficult problem than the latter. It will require a broad, careful, and systematic study of economic principles instead of a narrow, piecemeal, haphazard study of individual problems in economy.

When you are asked to do a certain thing and you reply that you have not time, you are sometimes merely trying to be polite. You may really mean that there is something else which you would rather be doing with your time, or which you feel that it is more important that you should do, than the thing you are asked to do. In other words, you have not time and energy enough to do everything you would like to do or that others would like to have you do. You must leave many things undone, and you must, therefore, choose rather carefully the few things that you think most important or that would cause you the most inconvenience or pain if you left them undone. In order that you may do these few and important things, you must refuse to do anything else that would interfere. That is what it means to economize time and energy. It is choosing to do the more important things, leaving the less important things undone. Economizing in the use of money is only one special form of economizing time and energy, since money represents the products of time and energy.

Why we have to economize. In saying that you do not have time to do a certain thing, you are stating one of the most fundamental facts of life ; namely, the great and ever-present fact of scarcity. It is this fact which compels us to economize, which compels us to make our limited fund of energy and our limited time go as far as they will. To waste time or energy is to fail to supply ourselves with some of the things we want. To waste things that have already been produced is no worse than to waste the time and energy that might have produced more of the same things. Wasting time and energy is not necessarily remaining idle, though it may mean that. It may also mean the doing of less important things when there are more important things to be done. If one had unlimited time and energy, or if one had the time and energy necessary to do everything one would like to do, so that the doing of one thing never prevented the doing of anything else that was worth doing, economy would be unnecessary. If that were true, human life and human history would be very different from anything we now know, and this world would be so unlike the present world that none of us would recognize it.

But time and energy are in a sense convertible into goods and commodities; that is, into the products of industry which are the means of satisfying our desires. Therefore, when we say that we cannot afford a certain article, we mean very much the same thing, fundamentally, as when we say that we have not time to do a certain thing. In both cases we are merely stating the great fact that it is necessary to economize, to choose what we will do with our limited energy or our limited money to the exclusion of other things. The fact that time and energy are insufficient to enable us to do everything that we might like to do makes it certain that we cannot produce everything that we should like to have, and that, if we could, we should not have time to do something else. If we were to work all the time, we should have no time to play; and everybody likes to play — that is, everybody worth mentioning. We must therefore choose whether to deprive ourselves of the opportunity to play in order to get certain goods that we want, or to reduce somewhat the number of goods we consume in order to have more time to play. Again, if one works too long on one kind of goods, one has less time and energy left to produce others. At every step in the life of every normal human being, therefore, he is confronted with some problem in economy. As already stated, the necessity for economy grows out of the scarcity of something or other, — either time and energy, on the one hand, or some form of material goods, on the other. Find an individual who experiences no lack or scarcity of anything, and I will show you an individual who has no need for economy ; but you will look a long time before you find him.

Getting and spending. In the practical everyday life of the average person problems of economy are mainly focused on the problems of getting and spending, — of income and expenditure, or of business and the household. If one's income is less than one would like to have it, it means that one's desires run beyond one's income. Such an individual therefore tries, first, to increase his income and, second, to get as much good out of it as he can ; that is, to spend it as wisely as he knows how. This is true not only of every individual and every family but also of every organization, even the State itself, and it is even true of all the people as distinct from their government. The greater part of the time and energy of the people of this world is spent on these matters, but it is spent in a great variety of ways.

A glance at the diagram at the beginning of this chapter will give one a general idea of all the forms in which the problem of income and expenditure presents itself. The reader will get, at the same time, an idea of the principal branches of the great science of economics, for economics is, in one aspect, simply the study of the problem of income and expenditure. This problem is in turn the problem of economizing time and energy, on the one hand, and goods, on the other. Another way of saying it would be that it is the effort to make things that are scarce go as far and accomplish as much as possible.

Economics, — household management. Originally the word economics meant "the principles of household management." It comes from the two Greek words, oIko^, ''a house," and vefxa), '' manage." It was simply a study of the principles of household management. In Xenophon's treatise on this subject he discusses the management of a simple rural household, in which the business that furnishes the income is united with the home in which the income is spent or utiHzed. In fact, it was the kind of rural household that some men now living can still remember, where nearly everything consumed in the household was produced on the farm, so that there was comparatively little buying and selling. In such a household the problems of income and expenditure, of business and home life, are not very widely separated. The income was made up of the products of the farm and not of the money for which they were sold, because they were not sold at all. The expenditure, if such it may be called, was merely the utilization of those products, and not the spending of money, because there was no money to spend. In the broadest sense, as we shall see a little later, that is what constitutes the income and expenditure of the people as a whole. Individuals may buy and sell among themselves, but the people as a whole consume their own products. In recent times, especially in our cities, the business that is the source of income is so widely separated from the home, where the income is utilized, as to make them seem like different problems altogether. In fact, we now have two distinct subjects, or branches, of private economics, known respectively as business economics and home economics. That these two branches, which the Greeks regarded as parts of the same subject, are now so sharply separated is a sign that we have gone a long way from the condition in which business and life were united, toward a condition in which they are to be completely divorced. This should make us ponder seriously, because, while it is doubtless in many ways a good tendency, it is in other ways a bad one.

Public income and expenditure. But the problem of income and expenditure is a serious question for the public as a whole as well as for the private citizen. The State gets its income from different sources and by different methods from those pursued by the individual, but income is as necessary to a State as to a citizen. In order that its limited income may go as far as possible and accomplish the greatest possible good, the question of public expenditure must be studied with the greatest care. It is scarcity in this case, as well as in the case of the individual, v\^hich makes economy necessary. If we could imagine a State with an unlimited income, — which we cannot, — so that when it spent money for one purpose it was not necessary to refrain from spending money for any other purpose, there would, of course, be no occasion for public economy. Xenophon, who wrote our oldest treatise under the title of '' Economics," also wrote a treatise on ''The Revenues of Athens." In the former work he was well within the field of private economics, but in the latter he had got well over into the field of public economics. This branch of public economics, or political economy (that is, the branch which deals with the revenues and expenditures of the State, or with what has been called the housekeeping of the State), is commonly called public finance. It will readily be seen that there is a close resemblance between public finance, which deals with the income and expenditure of the government, and private economics, which deals with the income and expenditure of the private family.

Social well-being. But there is another branch of public economics which is broader than public finance ; that is, the branch which deals with the general problem of social wealth or well-being. This branch deals neither with the income and expenditure of the individual family as such nor with those of the government as such. It deals rather with the income and expenditure of the people as a whole. This is called social economy or social economics. It is the most important study for the real statesman or nation builder. Since in a democracy everyone is a nation builder, in a small way at least, in that he helps to determine the policy of the nation, it is of the greatest possible importance that everyone should study the problems of social economy as well as those of public finance and private economics.

The management of the king's household. A good illustration of the importance of this subject is found in the studies of a group of scholars who, some hundreds of years ago, were studying the problem of providing for the king's household. These were the finance ministers of certain kings of European countries. They are now sometimes called the cameralists. Having charge of the affairs of the king's household, they were, in a sense, studying private economics ; but since the king was a public functionary, deriving much • of his revenue from taxation and other public sources and performing many of the acts of government, these finance ministers were, in another sense, studying public economics. At any rate, they were severely put to it to find revenue enough to pay the expenses of the royal household or to keep the expenses within the royal revenues ; that is, to balance income and expenditure. These were problems in economy. How to get as large an income as possible with the limited energy at their disposal, and how to expend that income so as to add the maximum to the resources of the king's household, were very serious problems.

The social income. The more they studied this problem, the more clearly they saw that in order to increase the royal incom_e the people over whom the king ruled must be made prosperous ; that is, the social income must also be increased. '' Poor people, poor king " came to be an axiom in public finance. Therefore attention was given to the problem of increasing the social income or of promoting the prosperity of all the people. Later writers have given their chief attention to this part of the problem. In the outline at the beginning of this chapter this is called social economy.

Exchange. In one sense, as already pointed out, the social income is the annual production of the nation. So there was a tendency at first to give chief attention to the subject of production, but it was soon discovered that in social economy exchange was an important factor. In studying th^ lO PRINCIPLES OF POLITICAL ECONOMY

internal economy of an individual household, whether a private or a royal household, exchange among the members could be left out of account ; but in studying the internal economy of a whole nation it could not be left out of account, for the obvious reason that the citizens of the nation did a great deal of exchanging among themselves. This is particularly true of the modern nations. Buying and selling has come to be so large a part of the economic life of the people that for a long time it seemed to many students to be the most important aspect of economic life. So there came a time when the chief emphasis was laid upon exchange rather than upon production. Indeed, it was assumed for a time that production would almost take care of itself ; that is, each individual would look after his own part in it if only the government would provide him safe and open markets and a convenient medium of exchange in the form of money and sound banking facilities.

Distribution of social income. Still later, another problem was discovered to be of equal or greater importance. Like the problem of exchange, this was one which could also be ignored in the study of private economics. It is the problem of the division of the products of industry among the workers. When a large number of people take part in the production of a given commodity, say shoes, the question as to how much of the value of the shoes shall go to each person or group of persons is of the utmost im-portance in social economy. The farmer, the -miller, and the baker, as well as the carrier, have all had something to do with the production of a loaf of bread. It is very important to know how much of the value of the bread goes to each of those who have had a part in its production. This is called the problem of distribution ; as you will see, it is somewhat different from the problem of exchange, though very closely related to it. Such questions as the wages of different classes of laborers, the rent of land, the interest on capital, the profits of enterprise, are parts of the general problem of distribution. During the last fifty years, it is fair to say, more emphasis has been laid upon the subject of distribution than upon either production or exchange.

The utilization of the social income. While the consumption of the people has been recognized as the utilization of the social income, and therefore as a thing important in itself, yet students have almost ignored it as a branch of the science of economics. One reason has doubtless been the feeling that every individual would better be left to consume his income as he liked, whether he did it wisely or foolishly, beneficially or harmfully. Attempts to control or direct his consumption have been called sumptuary laws. By pronouncing these words with a wTy face such attempts may be discredited, that is, for a time. Meanwhile, however, every progressive community has gone right on passing sumptuary laws, in one form or another, sometimes to the great advantage of the people, sometimes to their disadvantage. Students are therefore becoming convinced that the consumption of wealth merits a great deal of study, that it is going to be controlled and directed by the State whether we like it or not, and that whether it is controlled and directed wisely or unwisely will depend upon how carefully and intelligently it is studied. In fact, a few are already beginning to discover that consumption is more important than production, exchange, or distribution, — possibly more important than all three combined.

Chapter II

What are economic goods? Before we can go very far in our study of income and expenditure, or of production and consumption, we must get a fairly clear idea as to the sort of things that make up income, or the sort of things that men try to produce. When it was stated in the last chapter that the necessity for economy arose out of the fact of scarcity, it might have been guessed at once that the things that make up one's income in a strictly economic sense are the things that are scarce. More accurately, perhaps, we should say that the only things we try to produce are the things of which we do not have enough. It may sound a little queer at first for one to say that his income consists of things that are scarce, or things of which he does not have enough. It will therefore be necessary to spend some time in making this point absolutely clear ; otherwise we shall never be free from error and confusion. As a matter of fact, the very first step toward a true understanding of the nature of wealth is a clear perception that wealth in the economic sense consists of things that are scarce and so need to be economized. When it is said that the necessity for economy grows out of scarcity, and that we only try to produce the things that are scarce, we do not imply that everything is scarce. Some very useful things are very abundant, — so abundant that everyone can have all he wants ; and when he gets all he wants, no one else is deprived of anything that he wants. Such things do not have to be^^^^onomized ; hence they are not economic goods. In fact, so long as they are sufficiently abundant, they give us no concern ; but when they become scarce, we spend our time in trying to get more. Only those things are economic goods which have to be economized, that is, which are scarce, or of which we do not have as much as we should like to have.

Two meanings of wealth. Now the word wealth has two meanings. In the first place, it is the collective name for all economic goods, or for all goods that have to be economized, — that is, for goods that are scarce. In the second place, it is the name of a condition or state of being. It comes from the older word weal, which means very much the same as well-being. These two meanings, while apparently different, are yet very closely related. The condition of well-being which we call wealth depends upon the possession of an adequate supply of those things which we call wealth, that is, the things which are ordinarily scarce and which have to be economized. He who lacks an adequate supply is poor ; he who possesses an adequate supply is rich or in a state of wealth. In short, those economic goods called wealth are the goods .upon which weal, or well-being, depends. Well-being is increased when these goods are increased or economized ; well-being is decreased when these goods are decreased or wasted.

How well-being depends upon wealth. This could not be said of anything which is not scarce. There is such an abundance of air, for example, under ordinary circumstances, that no one would be any better off than he is now if the supply of air could be increased, nor would anyone be any worse off if the supply of air were slightly decreased. In other words, no one's well-being depends upon more air, even if it could be produced. If, however, air were so scarce that there was not enough to go around, then not only would it need to be economized very carefully, but there would be some advantage in producing more of it. The weal, or well-being, of mankind would be improved in proportion as more air could be produced ; mankind would be injured in proportion as air was wasted or destroyed. While, therefore, we can say that air is a necessity in a certain absolute sense, yet in a practical economic sense we cannot say that anyone would be better off if more air were produced or if it were even wisely economized ; nor can we say that anyone would be worse off if a little air were destroyed or wasted. There would still be enough to satisfy everybody. That is why air, though an absolute necessity, is not an economic good. We should gain nothing by trying to increase the supply or to economize in the use of the existing supply. Since we do not gain anything by economizing it, it is not an economic good. Where abnormal circumstances arise, in which there is not enough air, then it has to be economized and becomes at that particular time and place an economic good. If such circumstances could last, air would become wealth in the same sense that food, clothing, fuel, and certain other things are now wealth. It would then be true of air, as of these other things, that well-being could be increased by producing or economizing air and decreased by destroying it, wasting it, or otherwise making it scarcer.

The question of having more or having less. Water is another illustration, perhaps a better one because there are many places where water is so abundant that it does not have to be economized at all, while there are other places where it is so scarce that it has to be economized very carefully indeed. In the former places water is not wealth ; in the latter it is. In the former no one labors to secure any more ; in the latter they do. In the former no one would be better off if there were more water ; in the latter some people would be better off. In the former, well-being does not depend upon a little more or a little less water ; in the latter it does. In the former class of cases there is no occasion for economizing water ; in the latter it is very important that it be economized and made to go as far as possible. In the former class of cases the formula '' more water, greater well-being ; less water, less well-being " is not true ; in the latter it is true. This is the test in every time and place as to whether water is wealth or not. All that has been said of water may be said of anything else.

The same test must be applied to determine whether it is wealth or not. As a matter of fact, water, like a great many other things, is sometimes too abundant, — so abundant that men find it to their advantage to go to considerable pains in order to get rid of some of it or to lessen the supply. In such cases it may be called illth. In the diagram on page 16 is a classification of all tangible objects with which it would be possible for man to concern himself. Those which are harmful to him he must try to exterminate. Toward those which are useless without being in the way or being otherwise harmful he is indifferent. Those which are useful to him, called goods, concern him most. Of these, some are too abundant at certain times and places. In such times and places his attitude toward them must be very much the same as that toward those which are positively harmful. Yet when they exist in smaller quantities, that is, in quantities less than he needs, he will strive as hard to get more as he will strive to reduce the supply when it. is too abundant. Water in swampy land is an example of overabundance ; in desert land, of underabundance. Manure in a city livery stable is an equally good example of overabundance ; in a sterile field, of underabundance. If the owner of the stable could not sell the manure, or induce someone to take it away, he would be willing to pay someone to remove it. To the market gardener it is wealth ; and if he cannot otherwise secure it, he will pay the owner of the stable for it. In that case it is scarce from the standpoint of the whole community, and is therefore social wealth. If, however, there is more than even the market gardeners and farmers can use, they would be paid for hauling it away instead of having to pay for the privilege. Such goods, when they are overabundant, may, as suggested above, be called illth, to distinguish them from those which are underabundant and called wealth. Relation of value to economic goods. We have gone to considerable pains to point out that one characteristic of economic goods is that they are always scarce. It is this which gives