Principles of national economy

Introduction

This book is frankly written from the national point of view. Someone has suggested that much futile discussion would be prevented if everyone were required to point at the thing of which he was talking. It would be a wise rule if no one would ever speak or write about ^^ society," or ^Hhe community" in general, but only of such groups as can be named and located. The United States of America is such a group. So also are England, France, Canada, and a number of others. These and similar groups are the largest that are capable of carrying through definite economic policies.

Not only is this book written from the national point of view ; it is frankly a theory of national prosperity. In this respect the author has the illustrious example of the great Adam Smith, whose work was entitled "An Enquiry into the Nature and Causes of the Wealth of Nations." Prosperity is assumed to be desirable and worthy of the highest efforts of the scholar in economics as well as the statesman. It is believed to require not only an ample production but also a fair distribution of the products among all classes, to the end that all may share in the national prosperity.

The writer may be accused of bringing purely ethical considerations into an economic discussion. He has no desire to repudiate the charge, certainly not on the ground that ethical considerations are unworthy of an economist. The charge, however, does not happen to be correct, unless a preference for national prosperity as against national poverty can justly be called an ethical preference. The author pleads guilty to this preference, and the book is written as an expression* of it. Having this preference, the author frankly argues for those iv PRINCIPLES OF NATIONAL ECONOMY

habits, policies, and institutions which are most likely to contribute to national prosperity. Assuming that others have the same preference, the language used may sometimes be that of a propagandist, and the reader may even be exhorted to behave in such ways, or to support such policies and institutions as will contribute to the end which all are assumed to desire. These exhortations, however, are based wholly on reasoning as to the probable effect on national prosperity of the habits, policies, and institutions under discussion, and never on sentimental views of morality.

Let it be understood, therefore, that this book is written for those who are interested in the problem of national prosperity and who believe that this should be the aim of all good citizenship. It is also written for those who are not too squeamish to consider moral questions whenever they can be shown to have a definite connection with the central problem of national prosperity. Finally it is written for the studiously inclined and not for those who merely wish to find support for their prejudices.

PART I. THE FACTORS OF NATIONAL PROSPERITY CHAPTER y PAGE

I. What makes a Nation Prosperous 3

II. Economic Desires 15

III. Economic Goods . . .^ 38

IV. Economic Activities . ."^ 47

V. Control of Economic Activities 72

VI. Economic Institutions loi

VII. The Quality of the People y • • 123

VIII. The Geographical Situ.^tion K ^ 141

Part II. Economizing The Factors Of Production

IX. The Interrelation of the Factors of Production . . 153

X. Economizing Labor by the Division of Labor .... 166

XI. Economizing Labor by the Use of Power 180

XII. Economizing Labor by the Use of Capital 189

XIII. The Relation of Thrift to Nation Building .... 203

XIV. Forms of Business Organization 213

XV. Economical Use of L.\bor on L.and 226

XVI. Economizing Land 241

XVII. The Balancing of the Factors of Production . . . . 256

Part III. The Productive Industries

XVIII. The Extractive Industries . . . ; 267

XIX. The Genetic Industries 278

XX. The Manufacturing Industries 290

XXI. Transportation 303

XXII. Merch.'^ndising 3^5

XXIII. Personal and Professional Services 324

Part IV. Exchange

XXIV. What is Value? 335

XXV. What determines the Value of a Thing 343

XXVI. Scarcity 354

V vi PRINCIPLES OF NATIONAL ECONOMY

CHAPTER PAtJE

XXVII. Money 364

XXVIII. Banking 394

XXIX. Marketing 416

XXX. Economic Crises 427

XXXI. Free Trade 443

XXXII. Protectionism 453

Part V. Distribution

XXXIII. The Law of Variable Proportions 471

XXXIV. The Problem ojf Distribution . 484

XXXV. What determines the Rate of Wages ? 494

XXXVI. The Organization of Laborers 506

XXXVII. The Rent of Land 515

XXXVIII. The Desirability of Capital and its Relation to

Interest 526

XXXIX. The Cost of Capital and its Relation to Interest . 537

XL. Profits 551

Part I. The Factors Of National Prosperity 5 .^

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Chapter I

i/ WHAT MAKES A NATION PROSPEROUS

Why the study of economics is important. Economics would have little interest for the serious student if it did not throw light upon the conditions of national prosperity and the methods of promoting it. National prosperity is generally understood to depend largely, if not mainly, upon business in its widest sense. The student is sometimes tempted, therefore, to begin the study of economics with an examination of the peculiarities of some of the large business establishments and business methods of the present day. These, however, are highly complex affairs, besides being the result of a long process of development from simpler beginnings. There is also a temptation to begin with a historical study of these simpler beginnings, but, because of lack of evidence, it is much harder to find out what business was like a few centuries ago than to find out what it is like today. The way to begin the study of economics is to analyze the business of getting a living and reduce it to its simplest elements. In this way we shall find what elements all business — large and small, primitive and modern — have in common before undertaking the study of the special peculiarities of different kinds of business.

The primary purpose of the business man, as well as of all those who work with or for him, and others who work independently, is to increase his own prosperity. Under a properly organized industrial system, however, no one can increase his own prosperity except by some method that tends also to increase the prosperity of the whole nation. If there is a single case where this is not true (that is, if there is a case in which anyone can prosper by any method or practice that does not add or tend to add something to the prosperity of the whole country) there is an obvious defect in the laws or the organization of industry. This defect must be corrected if the nation is to attain its highest prosperity. The more such defects there are, the less the nation can prosper ; and the fewer there are, the more it can prosper. Before we are in a position to correct such defects or even to know whether they exist or not we must have a pretty clear understanding of the conditions of national prosperity and the things which promote or hinder it. Ways of getting wealth. The prosperity of a nation, like that of an individual, depends, in the most general sense, upon how many useful things and services it can manage to get. To have little and be satisfied with little may bring contentment, and contentment may be as desirable as riches or wealth, but it is not riches nor wealth. A peaceful nation may get those things that are called wealth (i) by finding and appropriating them, (2) by making or producing them, or (3) it may get them from other nations in peaceful and voluntary exchange, provided it can find or produce within its own borders things that can be given in exchange.

How many useful things it may find within its own borders will depend partly upon how rich its land is in what are called / natural resources — such as soil, minerals, forests, water power, grass, and a multitude of other things — and partly upon how active and intelligent its people are in searching for these things. How many useful things it can make will depend mainly upon how active, intelligent, and skillful its people are in all the arts of production and how thrifty and enterprising they are in designing, buying, and utilizing tools and other instruments of production. How many things it can get from other nations will depend primarily upon how many things it can find and produce to give in exchange, how favorably it is situated geographically for carrying on trade with other nations, and partly also upon how wise and enterprising its people are in learning the needs and desires of other nations and in adopting sound methods of carrying on international exchanges.

WHAT MAKES A NATION PROSPEROUS 5

The problem of national prosperity is, however, by no means so simple as it may seem from this general way of stating it. It is infinitely complicated, so much so that when the student begins to study it he is in danger of being bewildered by a vast number of details. There are certain general principles which help to avoid this bewilderment. It is necessary, therefore, to begin at the beginning and study some of these principles.

)/ Economy. It is generally understood that economy has something to do with prosperity; but what is economy, and what does it mean to economize ? In its original sense to economize meant to manage a household. The word '^economics" is derived from two Greek words, oIko<;, "a house," and ve/xco, ''manage." Nowadays the study of the management of a national household is not inappropriately called national economy or, more generally, political economy. Its purpose is to find the answer to the question at the head of this chapter — What makes a nation prosperous ? It appears, therefore, that the words "economy," "economics," and "economize," as they are understood today, have a wider meaning than the management of a private household.

^ What it means to economize. In its simplest sense 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 those for which one cares more. Necessity forces this kind of choosing not only upon individuals but also upon communities and nations.

This choosing of what one will have takes on many and various forms and takes place many times every day in the life of every normal person. One may have to choose 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 wealth 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 own 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 to be more important 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 left 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 funda-

WHAT MAKES A NATION PROSPEROUS 7

mental 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 does not necessarily mean remaining idle, though it may mean that. It may mean also 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 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.

By the use of time and energy we find or produce goods and commodities ; that is, the material things 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 the goods which are necessary to the satisfaction of our desires, or the time and energy necessary to produce those goods. 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 in 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, both of which are fundamentally problems in economy. In order to increase one's income one must economize one's time and working energy. In order to make one's income go as far as possible one must economize it, buying only the most important things and making them go as far as they can be made to go in the satisfaction of one's wants. In brief, economy of goods con-

WHAT MAKES A NATION PROSPEROUS 9

sists in trying to make things that are scarce go as far and accomplish as much as possible.

Economics and household management. It was stated above that historically economics meant the management of a household and that when the word was first used a household was a simple, self-sufficing household. In such a household the problems of getting and spending, of income and expenditure, of business and home life, were not very distinct. The income was made up of the products of the farm and not of the money for which those products could be sold, because they were not sold, as a rule. There was practically no expenditure of money ; but the household used the things that were produced within it, since the farm was considered a part of the household. In this simple household, however, the fundamental problems of economy had to be worked out very much as they are in the modern business or the modern household. The working power of the household had to be very carefully economized. The economizing of the working power consisted, first, in keeping it active instead of allowing it to go to waste in idleness ; second, in directing it efficiently, so that as little effort as possible should be wasted by lost motion, poor tools, or inefficient and haphazard ways of doing things ; third, and quite as important as either of the others, in directing it wisely, or directing it toward the production of things of vital importance to the well-being of the household and not wasting it in the production of trivialities.

Household management and national economy. In some respects the problems of the self-sufficing household more nearly resemble those of the modern nation than those of the modern business or the modern household. The prosperity of the nation requires the same forms of economy in production. The nation that wastes its time and working energy in idleness or leisure will, of course, fail to achieve its maximum prosperity. Likewise the nation whose people do things in inefficient ways, by slipshod methods, or with inadequate tools and equipment will fail to become as prosperous as it might become. In these two respects the private business of today and the nation's business are much alike. In the third form of economy, however, there is some difference; a private business may prosper by producing frills and luxuries, sometimes even by pandering to vice. This could not be true of a self-sufficing nation any more than of a self-sufficing household of the primitive type. It is quite as important that the national energy be devoted to the production of important rather than of unimportant things as that the nation should be industrious or efficient in its methods of production. In other words, it is no greater waste of the nation's resources to have them remain idle than to have them misdirected or employed, however efficiently, in the production of useless things. Again, it is no more wasteful of the nation's resources to have its labor used very inefficiently by slipshod methods and poor tools than to have it engaged by the most efficient methods and the best possible tools in the production of useless or harmful commodities.

In the primitive, self-sufficing household there was very little buying and selling within the household. In the modern self-sufficing nation there is a vast amount of buying and selling among its own citizens. The subject of exchange, therefore, forms a most important part of the economy of the nation but a negligible part of the economy of a self-sufficing household. Again, the problem of the sharing of the incorhe among the members of the household may have been a matter of some importance, but it could not have been nearly so important as it has become in the modern nation with its great diversities of interests and its wide separation of industrial classes and groups.

Another important change has taken place in the household itself: whereas in the primitive, self-sufficing household the problems of getting and utilizing were very closely related, in the modern household they are very widely separated. In recent times, especially in our cities, what is called business has come to be regarded as the source of income, whereas the home is the place where the income is utilized. Business Hfe and home life are so distinct as frequently to be regarded as different and almost unrelated fields of action. This separation of business

WHAT MAKES A NATION PROSPEROUS ii

from the home has given rise to a division of the field of private economics into two distinct parts, one of which is known as business economics, the other as home economics. That these two parts, which the Greeks regarded as the same subject, are now so widely separated shows that we have gone a long way from the primitive condition in which business and home life were united, and are approaching, if we have not already arrived, at a condition in which they are completely divorced. Whether this is, on the whole, a good tendency or only partly good and partly bad, is a very interesting and difficult problem. 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, which 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 obliged 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," wrote also 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 income the people over whom the king ruled must be made prosperous ;

WHAT MAKES A NATION PROSPEROUS 13

that is, the social income also must 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 the 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 have 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 also could 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 importance 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.