Elementary economics, with special reference to social and business conditions in the United States

Preface

Recent events have brought the people of the United States face to face with numerous new economic problems, many of which are likely to remain unsolved for years to come ; besides, they have complicated to a marked degree those old problems which were pressing Tor solution at the outbreak of the Great War. In consequence, our leaders are becoming more and more convinced that increased attention should be given in our secondary schools to a serious consideration of the fundamental principles on which these problems rest.

Such a conviction is a new one in many quarters, for hitherto the no tion_has very gener ally prevailed, especially among universi ty teachers, that no formal study of the Principles of Economics should be undertaken before the sophomore year in college. Obviously such a notion carries the implication, unconscious perhaps, that the fundamentals of Economics, even in their simplest forms, should be withheld from the great mass of young men and women engaged in industry, and restricted to the select few who are able by one means or another to become college students. Such a notion not only carries vicious implication, but it also is ill founded ; for hundreds of high schools the country over prove by experience that their pupils are fully capable of grasping the elements of economic science when presented concretely and in a way to show their relationship to practical affairs.

The public high school is now the "finishing school" of the typical leader of American life, and it is likely to continue to perform that function for another generation at least*; and just so long as this condition prevails our high schools cannot, if they

VI PREFACE

would, escape the responsibility of presenting squarely and as fully as possible the elementary principles that govern our everyday business actions.

Since the great bulk of the leaders of to-morrow can have no other academic training in economic principles than that gained in the public high school, it is highly essential that the textbook placed in their hands should be S Qinethinp; more than a n introduction to a college course to be pursued two or three years hence. It should, with due regard for the capacities of high school pupils, endeavor to introduce its readers to the principles that u nderlie business..a7idi_dgt'P-^^T^'"P- in large measure the practices of the business world.

' ~ In preparing this text I have had four ideals in mind : to ^V choose for discussion only those topics which are fundamentally important ; to push the discussion of laws and i:)rinciples to a point where every serious-minded high school pupil would feel a real mental challenge ; to illustrate every law and principle by references to historical events and to everyday experiences, and by the use of gra]>hi(' material ; and finally, to show the relation of each taw and principle to the industrial activities in which practically every high school boy and many of our girls must engage.

In keeping the viewpoint of the high school I have had the assistance of teachers in secondary schools of various types in all sections of the country ; and for their kind and disinterested cooperation I take pleasure in expressing my sincere appreciation. I am under special obligation to one of my colleagues, Dr. M. H. Hunter, who has read and criticized the entire manuscript, and rendered invaluable aid in preparing the Exercises and Problems that accompany each chapter.

Charles Manfred Thompson

Urbana, Illinois June 1, 1919

Part I. Introduction — Economics As A Social Science Chapter Page

I. The Social Viewpoint

1. The Social Sciences ....... 3

2. The Individual and Society ...... 6

3. Wealth and Welfare 9

II. Nature and Content of Economics

4. Nature of Economics ....... 16

5. Divisions of Economics .... o.. 19

Part II. Consumption Of Economic Goods

III. Nature of Consumption

6. Motives behind Economic Activity . . . .29

7. Nature of Demand 32

8. Elasticity of Demand . . . . ' . . .34

IV. Laws of Consumption

9. Human Wants Are Unlimited ..... 40

10. The Law of Diminishing Utility ..... 44

11. The Law of Marginal Utility 46

Vlll

CHAPTER '

V. Demand, Supply, and Price

12. Relation of Demand and Supply to Price

13. Determination of Market Price .

14. The Competitive Market Price .

Exercises and Problems Supplementary Reading

VI. Some Practical Aspects of Consumption

15. Harmful Consumption

16. Unwise Consumption .

17. Conservation and Thrift

18. Substitution Exercises and Problems Supplementary Reading

54 56 69 64 66

67 69

72 78 79 81

Part III. Problems Of Production

VII. Organization of Industry

19. Historical Background .

20. The Single Enterpriser and the Partner

21. The Corporate Form of Organization Exercises and Problems Supplementary Reading ship

85 88 90 95 96

VIII. Division of Labor and Large-Scale Production

22. The Factors of Production .

23. Division of Labor

24. Territorial Division of Labor

25. Large-Scale Production Exercises and Problems . * Supplementary Reading

IX. Land (Natural Resources)

26. Land as a Productive Factor

27. Natural Resources of the United States

28. The Law of Diminishing Returns Exercises and Problems Supplementary Reading

97 100 106 108 111 113

114 118 122 128 129

IX

CHAPTER

X. Capital as

A Factor in Production

29. Source of Capital

30. Nature of Capitalistic Production

31. Different Kinds of Capital Exercises and Problems Supplementary Reading

130 132 134 138 140

XI. Competition versus Monopoly .32. Impetus of Competition

33. The Law of Monopoly Price

34. Limitations on Monopolists Exercises and Problems Supplementary Reading

141 145 147 151 153

XII. Transportation

35. Stages in the Development of Transportation in the

United States 154

36. Railroad Competition ...... 158

37. Rate-Maldng . 161

38. Government Regulation of Railroads . . . 162 Exercises and Problems ...... 166

XIII. Marketing the Products of Industry

39. Separation of Producers and Consumers

40. Indirect Methods of Marketing

41. More Direct Methods of Marketing .

Exercises and Problems Supplementary Reading

169 170 176 179

XIV. Government and Production

42. Patents, Copyrights, and Trade-marks

43. Regulation of Industrial Monopolies

44. Regulation of Public Utilities

45. Fixing Prices Exercises and Problems Supplementary Reading

183 186 190 192 193 195

Part IV Chapter

XV.

THE EXCHANGE OF ECONOMIC GOODS

46. Characteristics of a Good Money .... 199

47. Uses of Money 202

48. Kinds of Government Money ..... 205

XVI. Monetary Laws Illustrated From the History of THE United States

49. Some Important Monetary Laws .... 213

50. Monetary History of the United States . . .216 Exercises and Problems ...... 224

XVII. Banking and Its History

51. Development of the Principle of Banking . . 227

52. Different Kinds of Banks 229

53. A Bank Statement 231

54. Banking in the United States 233

XVIII. Domestic and Foreign Commerce

55. Nature and Volume of the Trade of the United

States 241

56. Paying Trade Debts 243

57. The Balance of Trade 247

XIX. The Tariff in the United States

58. Historical Sketch 258

59. Basis of Free Trade . .262

60. Economic Arguments for Protection . . . 263

61. Protection and Nationalism ..... 264

XI

CHAPTER

XX. Fluctuations of the Price Level

62. Effects of Fluctuating Prices .

63. Measurements of Price Fluctuations

64. Price Level and Industry Exercises and Problems .

Supplementary Reading .

272 274 277 279

Part V. Distribution Of The Social Income

XXI. Distribution of Wealth in the United States

65. Differences in Wealth and Income .

66. Some Social Problems Arising from Distribution

67. Proposed Solutions ......

Exercises and Problems .....

Supplementary Reading .....

XXII. Return to Labor (Wages)

68. Noncompeting Groups of Workers

69. Efficiency and Wages

70. Methods of Wage Payment Exercises and Problems .

Supplementary Reading .

XXIII. The Labor Problem

71. Rise of Organized Labor

72. Aims and Methods of Organized Labor

73. Methods of Settling Labor Disputes

74. Labor Legislation ....

75. Foreign Immigration Exercises and Problems .

Supplementary Reading .

XXIV. Return to Land (Rent)

76. Nature and Source of Agricultural Rent

77. Urban Rents .....

78. Economic Rent and Price Exercises and Problems .

Supplementary Reading ■ .

283 287 291 292 294

330 334 338 341 344

Xll

CHAPTER PAGE

XXV. Return to Capital (Interest)

79. Interest Peculiar to Modern Industry . . . 345

80. Why Interest is Paid and How Much . . .346

81. Variations in the Interest Rate .... 351

XXVI. Return to the Business Man (Competitive Profits)

82. Place of the Business Man in Industry . . . 356

83. The Nature and Source of Profits . . . .359

84. Cooperation and Profits ..... 363

XXVII. Socialism

85. Nature and Purposes of Socialism .... 369

86. Criticisms of the Socialistic Program . . . 374

87. Some Substitutions for Socialism .... 377

XXVIII. Social Insurance

88. The Risks of Industry 382

89. Kinds of Social Insurance : Europe . . . 386

90. Progress and Outlook of Social Insurance in the

United States 389

XXIX. The Share of the Government in Distribution (Taxation)

91. Government Revenues and Government Expendi-

92. Bases of Taxation 401

93. Kinds of Taxes 404

Classified Course of Reading Index

411 415

Chapter I The Social Viewpoint

1. The Social Sciences

Nature and content of the social sciences. — The subjects of study that deal with the various phases of human activity, as expressed in social groups, are known as the social sciences. Those which we may profitably notice in this connection are history, ethics, government, law, sociology, and economics.

History brings to us from the past the record of social achievement, which, if properly interpreted, serves as a guide for present action and assists to forecast the future. History is not merely, as an eminent English historian once wrote, past politics ; it is a great deal more. It is, so to speak, the foundation on which all the other social sciences are built, since a complete understanding of any one of them depends on a correct knowledge of past events and past developments.

Ethics is concerned with the human d utie s of mankind ; with the application of the golden rule to human relations. Every day we hear professional men speak of the ethics of their respective professions. A physician, for example, is guided in his professional acts by an elaborate code of medical ethics. Likewise the lawyer, the surgeon, the dentist, and the teacher, each has the ethical standards of his group to follow and to maintain.

A third social science is government, or political science, known in the high school as civics. This science deals with the governmerit of social groups as expressed in constitutions and in the administration of laws, and with numerous other social aspects, as political conventions, primaries, and elections. Closely akin to political science is law, which concerns itself primarily with laying down definite rules to govern individuals in their relations with each other and with the state.

Another social science is sociology, which, in its narrow sense, deals with tho distinctively social relations among individuals. Consequently, the chief concern of sociologists is with the social welfare of the people. To that end they engage not only in a study of the causes that produce inequalities, but also in an attempt to better social conditions. Theirs is a very practical work which leads them into the homes, as well as into the social centers now to be found in all large cities. It is well to notice in passing, however, that some authorities use the term " sociology " in a broader sense to include all the social sciences.

Still another social science is economics. Unlike those already mentioned, this science deals largely with the material aspects of life. It tries in a scientific spirit to explain the activities of inankind in securing a living ; to study man as a ivealthgetter and a. wealth-user ; to account for the motives and forces that constantly appear in the business relations of the world. Because of the materialistic viewpoint which economics must necessarily take, many writers and teachers consider it to be a mean science, " dismal," selfish, and even soi'did. They forget, however, that the average man, irrespective of his occupation or station in life, must produce goods as well as consume them ; that he cannot, if he would, avoid intimate business contact with his fellow men and with his surroundings ; and that his opportunity to enjoy the higher things of life must follow aft(M-, and wait on, the satisfaction of his more materialistic needs.

Close interrelation of the social sciences. — We have spoken of the social sciences as if they were independent and distinct one from the other. Such, however, is not the case, for they are merely different aspects of the same science, each regarding society from its own particular viewpoint. Yet, since the human mind cannot grasp the social field as a unit, it has been found desirable to treat them as distinct sciences. In other words, we deal with the various social sciences as independent subjects of study for the sake of convenience and a clearer understanding. Consequently, in our colleges and universities, where ample opportunity is given for research and specialization, they have been developed independently under the direction and guidance of highly trained specialists. We must remember, however, that in spite of this development the study of society and social relationships is in itself a complete and single science.

Numerous examples of this close relationship are to be found on every hand. Foreign immigration, to illustrate, commands the attention of the historian, the political scientist, the sociologist, and the economist. The historian accounts for the events and developments that have caused millions of men, women, and children to migrate from their old homes in Europe to America. The political scientist is chiefly concerned with the immigrant's knowledge of the forms and purposes of government, with his attitude toward American democracy, and with his influence on American politics. The sociologist studies the more distinctly social questions connected with immigration, such as housing conditions, standards of living, morals, education, and entertainment. Lastly, the economist approaches the subject from the standpoint of industry, concerning himself with the effect of immigration on such things as wages, production of wealth, and foreign trade. Each specializes on a small portion of the subject — too often as if it were the whole subject — but it requires the combined labors of all to produce a complete and accurate account.

Some subjects, such as the Constitution of the United States, or negro slavery, for example, belong so exclusively to one or another social science as to make it appear that treatment under any other one is impossible. Obviously, the political scientist has the chief interest in the former, while the historian claims the latter. Nevertheless the economist must not neglect either. Without a proper understanding of the Constitution he could not account clearly for the various economic developments in such fields as labor legislation, interstate commerce, the protective tariff, money and banking; and no description of negro slavery can ever be complete which fails to take in consideration the economic environment in which it developed, its profitableness and unprofitableness, or its effect on the free labor with which it competed.

2. The Individual and Society

The individual viewpoint of industry. — The normal individual very naturally regards all industry from his own narrow point of view. He is inclined to feel that his business is the hub of industrial activity, that it is essential to the welfare of society, and that it even deserves encouragement at the hands of the government ; and this feeling he often has regardless of the best interests of society. A short wheat crop with high prices may bring joy to the wheat farmer, though it may bring distress to multitudes of consumers. Likewise, the glaziers in the neighborhood of numerous greenhouses may welcome a severe hailstorm as a blessing, when obviously it is detrimental to society as a whole. Even those whose special duty it is to regard industry from the social point of view often fall into the same error. Every winter metropolitan newspapers view heavy falls of snow as godsends to the unemployed men of the cities, who, as a result, are able to find work cleaning streets and sidewalks. Such erroneous notions arise from the practices of modern society, in which each individual produces not for his own direct consumption, but for the markets. It would be different if each supplied his own wants directly by his own labor. The wheat farmer would view a short crop with alarm ; the glazier would see no blessing in a hailstorm that compelled him to repair his own greenhouse ; nor would the residents of any city regard a heavy snowfall as a godsend if each man were compelled to shovel the snow from his own doorway.

Social viewpoint of industry. — While it must be admitted that the individualistic, or selfish, viewpoint of industry is the force that drives men to seek improved methods, we must not lose sight of the fact that the welfare of society is more important than that of any individual or group of individuals ; and that no individual claim for preferment can stand as an obstacle in the way of social betterment. This broader viewpoint, the viewpoint of society, has made steady headway during the past generation. Not many years ago industrial leaders took the ground that it was none of society's affair how they conducted their own business. Now they think and act differently — they recognize their responsibilities to society. Recently one of America's best known captains of industry made the public statement that in the operation of his business and in the use of his wealth, he considered, not alone his own desires and needs, but also the desires and needs of society. The same spirit has permeated other industrial groups. Professional men, farmers, small business men, labor organizations, and even unorganized labor are catching the spirit that, while American democracy stands back of every individual in his efforts to be successful and happy, his success and happiness must not be acquired at the expense of the success and happiness of society at large.

Because of these different viewpoints the economist and the business man are inclined to disagree, and too often they have a mutual disregard for each other's opinions. The economist is likely to regard the business man as selfish and self-centered, while the business man looks on the economist as a dreamer, and on his plans as visionary and impracticable. Both are right and both are wrong. The business man as such, if he is to succeed in a large measure, must conduct his business as if it were all-important, while the economist, on his part, must include society as a whole in his field of investigation, and formulate principles regardless of individual desires and purposes.

Industry and free public education. — The interest of society in private industry is one of the chief reasons for the establishment and maintenance of free public education. Clearly, children as well as their parents have the correct notion that school attendance increases the chances for higher individual incomes in after life. Almost all college students, and, it is safe to say, a majority of high school pupils, particularly boys, frankly admit, when questioned on the subject, that they attend school primarily to prepare themselves for better-paying places in the industrial world than they otherwise could expect to get. They are encouraged to take this view by educators and teachers who dwell on the fact that each day a boy spends in high school or college adds ten dollars or more to his income in after life. The desire to increase one's earning power is laudable enough, but may we not properly ask : Can the expenditure of pubhc money be justified, from an economic point of view, on the ground that it will assist individuals to increase their own incomes? The answer involves the two aspects of industry — individual and social. Society appeals directly to the narrow motives of the individual, we may say — not improperly — to his selfishness. It gives him, at public expense, the opportunity to prepare himself to earn more than would otherwise be possible, knowing full well that in the long run he will normally return to society, through increased production, not only the cost of his training and education, but also something in addition.

An efficient industrial society. — In spending enormous sums on public education, society has in mind an improved citizenship from the standpoint not only of culture and government, but also of industrial efficiency. At one time education stood almost exclusively for a higher appreciation of literature and art. Later it stressed the need of a better and a clearer understanding of the working of the government. Now society demands that the possessor of an education, in addition to being cultured and versed in the science of government, shall be industrially efficient. To that end commercial courses, commercial high schools, technical schools, and technical colleges in the universities have been established. Also the courses in the so-called literary schools and colleges have been changed to meet the new demand. There is nothing alarming in this educational tendency. It merely means that the next generation will value not less highly the cultural development and the stir of civic duty that comes from study in schools and colleges, but rather that it will also appreciate the need of an increased industrial efficiency and prepare itself through education and training to meet that need.

3. Wealth and Welfare

Free goods and economic goods. — The word '' good " has two slightly different meanings. When a business man speaks of goods he means commodities, such as hay, wheat, clothing, and furniture. The student of economics gives the same word a broader meaning. He includes not only commodities, but also personal services rendered by domestic servants and others. No serious confusion, however, is likely to arise from this difference of meaning, for the laws and principles applying to commodities very generally apply to personal services.

It is much more important to distinguish between free goods and economic goods. A free good is a gift of nature, supplied without labor and without limit. Economic goods, on the other hand, are characterized by their scarcity as compared to the demand for them. The best examples of free goods are air and sunlight, though in exceptional cases these may become economic goods. Water in a brook or spring may also be considered as free, despite the fact that some effort is always necessary to secure and utilize it. Free goods are extremely important in the life of human beings, yet the chief attention of students of economics must be directed toward economic goods.

Nature of wealth. — In discussing wealth two important facts must be kept constantly in mind. First, the wealth of an individual may or may not be wealth in a social sense. Second, an increase in wealth may, owing to increased prices, be accompanied by a decrease in the world's supply of commodities. On first thought most of us would say that the wealth of any society is composed of the total wealth of its individual members. Such, however, is not the case. The execution of a real estate mortgage, while it places in the hands of the o^vner evidence of wealth from which he may derive an income, has not added a single item to the wealth of society. It shows merely that one party has temporarily given up his command over a portion of social wealth, which in most cases of this kind is money. Some forms of individual wealth may even represent a positive- decrease in social wealth. Such are government bonds sold to carry on war. Clearly, then, it is a mistake to attempt to estimate the total wealth of any large social group by adding the wealth of its individual members.

Nor does an increase in social wealth necessarily indicate that there has been an increase in the number or amount of commodities possessed by this same society. Here again we are likely to be misled by our first thoughts on the subject. An over-abundance of wheat, for example, though it should make bread cheap and plentiful, might well cause the total value of the wheat to be less than would be the case if but one-half or one-third of the amount had been raised. Conversely, a shortage in wheat might well raise the value of the total crop, alsqlitlie value of the land on which it is produced, far above the values based on normal yields. In any case, there is no exact relation between the wealth of a social group and its stock of commocnties ; and for that reason we should not be hasty in concluding that a wealthy /community or country is necessarily prosperous.

Wealth and natural resources. — Obviously, the foregoing discussion leads to the conclusion that wealth and welfare are not necessarily identical terms. Any social group that is compelled, for example, to consume great quantities of coal for heating purposes must of necessity be wealthier than a similar group more|favored by nature, if the two groups are to share equally in the satisfaction of wants. A New England mechanic must necessarily be wealthier than his Florida brother if during the year the two are to have exactly the same wants supplied, for he must consume wealth in the form! of fuel, warm clothing, and heat-producing foods, to enjoy exactly the same comforts which nature in warm climates furnishes freely and without limit. The same principle is involved in comparisons of the North and the South just prior to the beginning of the Civil War. The value of the northern,' hay crop occupies a large place in these comparisons, but scarcely ever does one find any mention of the value of the year-round grazing lands of the South. The mere fact that the North cured more than a hundred million dollars' worth of hay each year is ample evidence of , the presence of wealth in that section, but it does not prove that its welfare was increased over what it would have been had the climate permitted the stock to graze in the fields during the winter months. An abundance of natural gifts ordinarily produces^prosperity and a relatively high degree.'bf human welfare, which may or may not be accompanied by great wealth, either social or individual. Consequently, in judging the well-^^ being of a large social group, such as a state or a section of the United States, a mere knowledge of the wealth of that section or state is' not sufficient. We must first know something of the gifts of nature which it enjoys.

Wealth and its distribution. — We must also remember that a large social group, as such, may be relatively wealthy and even enjoy a high degree of total welfare and still have among its members many who suffer fron|a lack of the common necessaries of life. This situation we often meet in large cities, where alongside lavish displays of wealth we find multitudes of undernourfshed creatures dragging out a miserable existence in dirty, crowded tenement houses. On the one extreme is abundance ; on the other, poverty and want.] This inequality offers the hardest social problem we are called on to solve. It engages the attention of serious thinking people everywhere, for it seems to contradict the prevalent notion that progress in the industrial arts has been accompanied by an increase in the welfare of all classes of society.!

1. Why should history be called a social science?

2. What is the essential difference between poHtical science and law?

3. What is meant by the expression "legal ethics"?

4. Under which social science should a study of charity be made? Why?

5. What is the interest of the historian, the poUtieal scientist, the sociologist, and the economist in the following social subjects :

a. Farm tenancy?

b. Presidential elections?

c. Corruption in city politics ?

d. Expansion of foreign commerce?

e. The Great War?

/. Railroad development? g. The post of&ce?

6. What is meant by the expression "individual viewpoint"?

7. How can the expenditure of public money for river or harbor improvements be justified ?

■ 8. Why does society bear a portion of the expense of public education?

9. How does education increase industrial efficiency?

10. Can an individual be industrially efficient and at the same time be cultured? Explain.

11. Just how, if at all, does training for industrial efficiency lessen the desire and ability of an individual to be a good citizen ?

12. Define "wealth."

13. Explain the effect of prices on wealth.

* 14. What is the difference between wealth and welfare?

15. Why, since nature is so bounteous in the tropics, are the people of Central America relatively poor ?

16. Why are the people of the Arctic regions relatively poor ?

1. Mention three or four public improvements in your community. What interest do they hold for you as a student of :

a. History? c. Sociology?

h. Political science (civics)? d. Economics?

2. Do students ever have individual viewpoints which society would not sanction, as to methods of :

a. Earning money? c. Spending leisure time ?

b. Securing academic credit? d. Using school equipment?

3. Enumerate the motives that cause young people to attend high school or college.

a. Comment on these motives.

b. Are any of them selfish?

c. Are any of them entirely unselfish?

d. Would society wholly condemn any of them?

4. Air and sunlight are free goods. Name others.

5. May a free good ever become an economic good ? Give examples.

6. Name five articles that are clearly wealth ; and five that are not wealth. Which of the following are wealth :

a. Salt in the ocean? /. Egyptian mummy?

c. English sparrow? h. Burglar's tools?

d. Submarine? i. Mississippi River?

e. Rose bush? j. Climate?

C