Elementary economics

Front matter

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THE EPHEBIC OATH

Part One. What Makes A Nation Prosperous Chapter Page

I. What makes a Nation Prosperous 3

II. Wealth and Well-Being 8

III. The Geographical Situation 16

IV. The Quality of the People 28

V. Competition 39

VI. Cooperation 45

VII. Law and Government 51

VIII. Morals and Religion 63

Part Two. Economizing Labor

_ IX . The Division of Labor y^

X. Power 83

XI. Capital 91

XII, The Organization of Business 100

XIII. The Economical Use of Labor on Land . . . . iii

XIV. Keeping a Proper Balance among the Factors of

Production 117

Part Three. The Productive Activities

XV. Ways of getting a Living 125

XVI. The Extractive Industries 132

XVII. The Genetic Industries 143

XVIII. The Manufacturing Industries. . 159

XIX. Transportation 170

XX. Merchandising and the Professions 182

vii viii CONTENTS

Part Four. Exchange Chapter Page

XXI. Value: its Meaning 193

XXII. Value: its Cause and Quantity . . . . . . 199

XXIII. Scarcity 206

XXIV. Money . 215

XXV. Banking 223

XXVI. Commercial Crises 235

XXVII. International Trade . 244

Part Five. Dividing The Product Of Industry

XXVIII. The Bargaining Process 253

XXIX. The Law of Variable Proportions 257

XXX. The General Nature of the Wage Question . 261

XXXI. What determines the Rate of Wages . . . 266

XXXII. The Organization of Laborers 276

XXXIII. The Rent of Land 283

XXXIV. Interest and the Demand for Capital . . . 290 XXXV. Interest and the Supply of Capital .... 296

XXXVI. Profits 301

XXXVII. The Government's Share . . . . . . . . . 306

Part Six. The Consumption Of Wealth

XXXVIII. Meaning and Importance of Consumption . . 319

XXXIX. Rational Consumption , . " 325

XL. Luxury 332

XLI. The Control of Consumption 340

XLII. The Battle of the Standards 346

Part Seven. Reform

XLIII. Communism 353

XLIV. Socialism 363

XLV. The Single Tax 372

XLVI. Anarchism 380

XLVII. Constructive Liberalism 388

INDEX 399

PART ONE. WHAT MAKES A NATION PROSPEROUS o G

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Chapter I What Makes A Nation Prosperous

Production and economy the basis of prosperity. A nation prospers on what it produces. It can continue to prosper only so long and in so far as it continues to produce, year in and year out, century after century and millennium after millennium. Production, however, is not enough, — the nation must also economize. In fact, production itself is a form of economy.

However much the nation produces, it prospers only in so far as it continues to produce, year by year, more than it consumes and wears out. When every year sees something added to the stock of durable goods, something additional produced for future years, there is an expansion and an accumulation of wealth ; in short, there is prosperity. If at any time a nation begins consuming in a year all that it produces that year, the accumulations of the past quickly deteriorate and disappear, prosperity is gone, and poverty lies ahead.

Two primary factors in production. How much a nation can produce will depend primarily upon two things : first, upon its geographical situation, that is, upon how rich its land is in plant food, minerals, forests and power, how favorable its climate is, and how well it is situated for trade and transportation ; second, upon its people, that is, upon how energetic and how wise they are in making use of their natural resources.

A nation's geographical situation is not easily changed ; but the habits of the people may be changed, and these are even more important than the geographical situation. By reason of their energy and wisdom, nations have grown rich and great in the midst of very poor geographical surroundings. Others have grown poor in the midst of rich surroundings by reason of their lack of energy or their unwisdom. A nation can therefore control the factor upon which its prosperity most depends ; which means that it can, in most cases, be as prosperous as it deserves to be, or that it must blame itself and not its geography if it does not prosper.

How to secure a full and wise use of the national energy, where millions of individual wills have to be persuaded and wisely directed, is one of the greatest and most important of all questions. The working energy of, say, a hundred million people is tremendous, but the opportunities for waste are also tremendous. Upon the wise utilization, on the one hand, or the waste, on the other, of that vast fund of energy hangs the question of the prosperity or the poverty of the nation.

Hard work is, of course, necessary, but mere hard work is not enough. The work must be wisely directed. This requires a vast fund of knowledge — scientific, political, and administrative. It also requires organization, in order that each individual may do that for which he is best fitted and also in order that different individuals may work with, rather than against, one another.

Importance of economy. The word "economy," in its widest sense, includes the using of all the energy of the people and the wise direction of that energy. For any person to be lazy or idle is a waste of that person's energy and is therefore uneconomical. To direct that energy unwisely is to waste it in another way and is also uneconomical. Both forms of waste prevent the highest prosperity of the nation.

What it means to economize. In its simplest possible sense, to economize is to choose among several different things that one would like to have, giving up the less important in order to have the more irhportant. This choosing takes on many forms. One may have to choose between play and work, between different kinds of work or different kinds of play, or between different objects which one might get for one's work or one's money.

When you are asked to do a certain thing and you say that you have not time, you may be saying in a more polite way that there is something else which you consider more important than the thing you are asked to do. You are compelled to economize your time, since you have not time enough to do everything. You

WHAT MAKES A NATION PROSPEROUS 5

must leave many things undone, and it is necessary, therefore, that you choose very carefully the few things which you think it most important that you should do with your limited time and energy. Similarly, when you say that you cannot afford a certain thing, you frequently mean that there are other things for which you think it more important that you spend j^our money. Not having money enough to buy everything, you must choose very carefully and try to get the few things which will be worth most to you in the long run. To do otherwise either with your time or your money would be to fail to achieve the largest prosperity or well-being. This is as true of a nation as of an individual.

Why we have to economize. When you say that you do not have time to do a certain thing or that you cannot afford to buy a certain object, you are stating two of the fundamental facts of life : first, the ever-present fact of scarcity ; second, that you are an economic being, capable of recognizing the fact of scarcity and of guiding yourself accordingly. It is the fact, of scarcity that makes it necessary for us to economize, and it is our wisdom that enables us to meet the situation and conform our lives to it. The fact that our time and energy are scarce or insufficient to enable us to do everything that we should like to do makes it certain that we cannot produce or earn everything that we should like to have. Besides, 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. One of our many problems of economy is therefore that of choosing whether to deprive ourselves of the opportunity to play in order to get certain goods that we want, or to do without the goods in order to have time to play as much as we should like.

At every step in the life of every normal person he is confronted with some problem of economy, and the necessity for economy grows out of the scarcity of something or other. We never think of economizing things that are sufficiently abundant to satisfy everybody, such as air, sunlight, water in many places, wood, stone, or sand in others. Let any of these things become scarce, however, and we must begin to economize them.

It happens that in the spots where most of us live many desirable objects are scarce. These objects must be increased — and that requires an economical use of our time and energy — or they must be economized and made to go as far as possible in the satisfaction of our wants. Show me a person who experiences no lack or scarcity of anything and I will show you a person who has no need for economy ; but you will look a long time before you find him. Show me a creature who does not appreciate the fact of scarcity and I will show you a creature who does not know enough to economize, however much he may need to.

Getting and utilizing. In the practical everyday life of the average person of the present, the problems of economy come mainly under the heads of getting and utilizing, of income and expenditure, or of business and household management. A person's common experience of scarcity takes the form of an income which will not buy all the things he desires or, which means the same thing, of desires which run beyond his income.

Three ways of economizing. One must, therefore, because of scarcity, economize, first, by using his time and energy to better advantage in order to get a larger income ; second, by spending his income as wisely as possible so as to buy the things he needs most ; third, by economizing the goods purchased so as to make them go as far as they will. Most men have to economize in all these ways. The greater part of the time and attention of all civilized men is spent on these matters of economy, which is one reason why the study of economics is the most important of all studies. Whether they prosper or not depends upon how well they solve these problems.

A glance at the diagram at the beginning of this chapter will give one a general view of all the forms in which the problems of getting and utilizing present themselves. This also gives in outline the leading branches of the great science of economics, which has to do with the problems of getting and utilizing things that are scarce. It has nothing to do with things that are not scarce and therefore do not have to be economized. When a thing is scarce, it leaves some of our wants unsatisfied. If we can produce

WHAT MAKES A NATION PROSPEROUS 7

or economize it, it leaves fewer wants unsatisfied and leaves us better off. That is the way we increase our prosperity.

Production, itself, is a form of economy. It requires, first, that we utilize our working power and not let it lie idle ; second, that we utilize it wisely, doing the most important things and leaving the less important things undone; third, that we do what we undertake in the most efficient way, with the least waste of effort. After goods are produced, their wise use is another form of economy. Economy,, in this wide sense, is the basis of all prosperity.

1. What are the two principal things upon which the prosperity of a nation depends ? Which is the more important ? Why ?

2. Why is economy so important ?

3. What does it mean to economize ?

4. Why do we have to economize?

5. In what three ways does the average man economize?

6. Why is it more important that we give attention to things that are scarce than to things that are sufficient?

Chapter II Wealth And Well-being

Prosperity and wealth. The study of national prosperity must necessarily lead to a study of such things as wealth and well-being. Prosperity consists in getting an adequate supply of those things called wealth and in utilizing them wisely. When we have secured an adequate supply of those things we have the means of well-being. When we have utilized them wisely we have achieved well-being. ^The p^a terial nbierts whirh we tr^^J:o geL and to utilize are called upej

What are economic goods ? Before we can go very far in our study of getting and utilizing, or of production and consumption, we must get a clear idea of the sort of things that men try to produce or to get. 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 scarcity has a great deal to do with our concept of wealth and with our efforts to produce it. At any rate the only things we try to produce are the things of which we do not have enough. These are the things about which we are anxious. The very first step toward a true understanding of the nature of wealth, then, is a clear perception that wealth, in the economic sense, consists of things that are scarce and therefore need to be economized. Some very useful things are very abundant, however, — so abundant that everyone can have all he wants. Such things do not have to be economized, hence they are not economic goods. Only those things are economic goods which have to be economized ; that is, which are scarce.

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

WEALTH AND WELL-BEING 9

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 in the latter sense depends upon the possession of an adequate supply of those things which we call wealth in the former sense ; that is, of the things which are ordinarily scarce. He who lacks an adequate supply of these things is poor, though of air, sunshine, and other things which are not scarce he has as much as anybody. He who possesses an adequate supply of scarce things is wealthy, 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. It could not be said of anything which is not scarce that our well-being increases when we have more of it and decreases when we have less of it. 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, if that could be done. 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.

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 and other places, such as the arid West, where it is so scarce that it has to be economized very carefully. 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 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 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.

In the diagram given below is a classification of all tangible objects with which it would be possible for man to concern himself.

Tangible Objects

Objectsof repugnance("Illth")|™"S' ^^'"'^"^ '" ™=>"

L Things useful but too abundant

^^^.' . f ■ i-rr f Thlngs usclcss but not harmful

Objects of indifference -{ ^, . ^ ,, ^^ . .

I. Things useful but suincient in quantity

L Objects of desire (Wealth) : Things useful and scarce

Those which are harmful to him he must try to destroy. 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 —

WHERE WATER IS WEALTH he will strive as hard to get more as he will strive to reduce the supply when they are 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.

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 them the power to induce men to work and to economize. Another characteristic is that they all have value, or power in exchange. The power to command other desirable things in peaceful and voluntary exchange — that is, value — is very much the same as the power to induce men to work. That is to say, the thing which possesses one kind of power will always possess the other, if, indeed, it be not incorrect to speak of them as different kinds of power. The object which possesses this power to appeal to human motives in such a way as to induce men either to give up some desirable object in exchange for it or to labor in order to produce it is always said to be valuable. This power depends in all cases upoii the scarcity or insufficiency of the existing supply of the object in question.

These things, again, are economic goods, or wealth. Since, as we have just shown, they all possess value, it amounts to the same thing to say that wealth consists of things that have value. In short, such words as "wealth," "value," "economic goods," and "economy" all center around the one great fact of scarcity, — the insufficiency of certain things at certain times and places to satisfy desires. Out of this great fact grow also such ideas as property, industry, and foresight. No one wants to secure property rights, for example, in anything of which everybody has enough. But when anyone fears that there may not be enough of a certain thing to go around, and that he may, therefore, be left out, he naturally wants to guard against that calamity by getting possession of a supply. He will try to get possession of a supply either by producing it himself or by buying it of someone else, and he will try to guard his treasure carefully. When the state steps in and undertakes to protect him in his possession, he

WEALTH AND WELL-BEING 13

has then secured a property right in the thing in question. Again, productive industry, as already shown, is directed toward lessening scarcity, or increasing the supply of something whose supply would otherwise be insufficient. Frugality and foresight are exercised to provide against further scarcity.

Meaning of scarcity. A thing is scarce when there is not as much as people want. A thing may be rare without being scarce and scarce without being rare. Flies are rare in winter time in cold countries, but they cannot properly be said to be scarce because no one wants any more. Grass cannot be said to be rare in summer time, but if there is not enough for the farmer's cattle, the farmer at least will want more. In that sense grass is scarce, even in summer.

Scarcity a matter of time and place. A thing is scarce, if at all, in some definite time and place. No matter how much water there may be in the Mississippi River, it does not alter the fact that water is scarce a few liundred miles to the westward ; no matter how much copper there may be in the bowels of the earth, it does not alter the fact that there is less copper in available form than is needed on the surface. It is this fact which induces men to labor to move things from one place to another.

Before proceeding farther it is necessary to make one important qualification — men do not always know what they really need or upon what their well-being depends. If they are mistaken on any phase of this question, they will be placing a high value upon some things that are not good for them and a low value or no value at all upon some things that are good for them. They are poor economizers who do this, but there are many poor economizers in the world. If they think they need more than they have, they will strive to get more, either by offering something for it, thus giving it a market value, or by trying to produce it, thus creating an industry. This explains why it is that the student of economics is sometimes compelled to include among economic goods, or wealth, articles which he himself would not use or which he regards as harmful, such as opium, alcoholic drinks, or tobacco.

Importance of desiring the right things. It sometimes happens that men desire things which they do not need and need things which they do not desire. In such cases they will try to get or produce what they desire rather than what they need. The industries will be organized to produce the things which the people desire. If they desire opium or vodka they will produce these things rather than things that will do them more good. In such cases the more efficient their system of production becomes the more harm they will do themselves ; and an efficient industrial system promotes national deterioration rather than national well-being. If one were to make a study of the wreckage of nations, one would probably find that more had decayed because their wants were wrong than because they were not able to supply their wants. Teaching or persuading people to want the right things has 'commonly been regarded as the work of the educator and the preacher, but no one who really has at heart the welfare of the people can be indifferent to the quality of their wants or desires.

Necessity of economizing means of production. Thus far in discussing the necessity for economy we have been considering the means of satisfying our wants directly. But we must also consider the necessity of economizing the indirect means of satisfying wants. In the effort to produce goods to satisfy our wants it is necessary to make use of various factors of production, such as labor, tools, raw materials, etc. These do not themselves satisfy our wants, but they enable us to produce things that do satisfy. They also are scarce and haye to be economized.

To be sure, many things that are essential to production are not scarce. These are not considered as factors of production; that is, they are not economic factors of production at all. Carbon dioxide is just as essential to the growing of plants as nitrogen, phosphorus, or potash, but there is plenty of carbon dioxide in the air ; whereas, in most soils, nitrogen, phosphorus, and potash are scarce or tending to become scarce. Therefore these three substances are considered as factors — that is, economic factors — in plant growth. Applying the same formula here as we did to

WEALTH AND WELL-BEING 15

other things earlier in this discussion, the average farmer can say, and say truly, " More nitrogen, more plant growth ; less nitrogen, less plant growth." Therefore agricultural production is increased by increasing' the nitrogen in the soil. The same may be said of phosphorus and potash, but the formula does not apply to carbon dioxide. This is a principle of the very greatest importance, as will be seen later. Some of the greatest problems in economics and social justice depend upon this formula and are incapable of solution without it.

Why a thing has value. The fact that desirability and scarcity, and these alone, give value to a thing is perhaps clearly enough established by this time. Few will care to question the statement that not only must men desire a thing but they must desire more than they have before they will strive to get more either by purchasing it or by producing it. Moreover, this is as true of a factor used in production, such as tools, as of an article of direct consumption, such as bread. It may not be quite so obvious, but it is none the less true, that this is also one of the great sources of that conflict of human interests which gives rise to most of our problems of justice and equity.

1. What are economic goods?

2. In what two senses is the word "wealth" used?

3. In what sense does well-being depend upon economic goods as distinguished from things that are abundant enough to satisfy everybody ?

4. Of what class of goods can you say that you are better off as you get more of them and worse off if you have less of them? Can you say this of air ? of water ? If so, under what conditions ?

5. What goods have value? Why?

6. What do you mean by scarcity ? Is it the same as rarity ?

7. What is a factor of production? Is labor a factor of production? Is land a factor of production? Could your neighborhood produce more goods if it had more land? Are tools, machines, and buildings factors of production ? Could your neighborhood produce more goods if it had more tools, machines, and buildings ?

Chapter III The Geographical Situation

It was stated near the beginning of Chapter I that a people must generally blame itself rather than its geographical situation if it does not prosper. The human factor 'is more important than the geographical factor in determining national prosperity. Never-, theless the geographical factor is not to be ignored. However, gifted, energetic, and farsighted a race may be, it will find it easier to expand and become prosperous in a rich than in a sterile country. In view, however, of the wonderfully rich territory occupied by the American people, it is obvious that they cannot excuse themselves on the ground of limited resources if they do not become as prosperous and as great a people as they would like to be. Their prosperity, power, and greatness are limited mainly by their own energy, wisdom, and virtue rather than by their environment.

What is a favorable geographical situation? It is easy to overemphasize the bodily comfort of living in a warm as opposed to a hot or cold climate and to ignore the bracing effects of changeable weather. It is also easy to overemphasize the tremendous productivity of certain tropical regions and to forget that they produce the enemies as well as the friends of man in great profusion. It is equally easj^ to go too far in the opposite direction and to hold that hard conditions, such as a harsh climate and a sterile soil, are best for man's development. If hard conditions are all that men need, the Eskimos of the Far North are peculiarly blessed.