Elementary principles of economics

Front matter

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Preface To The First Edition Vu

period of the formal study of the book, but may also encourage and direct the student in the after days of his professional or business or political life.

RICHARD T. ELY, GEORGE RAY WICKER.

Hanovbk, N. H., 1904.

Preface To The Second Edition

The reception accorded this book in the thirteen years since its first publication, a reception which has gratified even more than it has surprised the authors, perhaps justifies a word of appreciative acknowledgment to the thousands of teachers who have contributed to its success. They may share the authors' gratification in knowing that a Japanese translation has found wide acceptance in the schools of Nippon ; that the regular edition has been used in England, Canada, Australasia, and other English-speaking lands ; and that more recently Mr. L. L. Price, the distinguished English economist, has revised the book, and, by utilizing more fully the national experience of the United Kingdom and employing English monetary terms and illustrations, has adapted it better to the schools of our British cousins. The authors in this revision have availed themselves in various places of improvements in style and substance made by Mr. Price, and gladly acknowledge their appreciation and their indebtedness to him.

So wide an acceptance has proved to the authors at once a challenge and a menace : a challenge to their best efforts in making the book better ; a menace in the fear lest in some subtle way their best efforts at improvement might go astray. Bold caution seems to be the injunction laid upon them by the measure of their earlier success.

X PREFACE TO THE SECOND EDITION

All descriptive and illustrative material has been very carefully recast, except in the few cases where it was evident that the older illustration was to be preferred. The theoretical treatment has been as carefully reconsidered. Wherever a simpler, clearer, better statement could be devised, the old has given place to the new. Wherever changes of theory have won their way into general acceptance within the last decade, there has been no hesitation or reluctance in adopting the change. Truth may be eternal, as Lowell wrote : —

" but her effluence, With endless change, is fitted to the hour."

One limitation, seriously felt by the authors, they have not been able to break down or evade. Several lesser topics, vital, timely, and often closely related to the economics of our country, — such as immigration, the conservation of natural resources, and the economic position of women, — could find admission only by an impracticable enlargement of the book or by displacing other material which seemed to have at least equal claim to inclusion. Selection was demanded. Here critic and author should alike be bound.

The kind criticism of a host of students, teachers, and friends, and the particular, searching, and good-natured criticism of some thousands of the junior author's own students in Dartmouth College, the corpus vile sed dilecturn of his experiments in teaching during sixteen college generations, should show its influence in this revision ; we hope and confidently believe that such an influence will be traced. More particular acknowledgment is due to Professors F. H. Dixon and C. A. Phillips, and Mr. J. M. Shortliffe, of Dartmouth College,

Preface To The Second Edition XI

who have brought their own experience in using the earlier text as their contribution to the common purpose of shaping a book that may best fit the needs of American students in school and college.

RICHARD T. ELY, GEORGE RAY WICKER.

PREFATORY NOTE BY THE SENIOR AUTHOR

While Professor Wicker and I have both worked hard

and long on this book, going over it together word by

word, discussing it at length point by point, I deem it

only fair to say that the major portion of the toil has

been his, that to him belongs the final literary form of

nearly the whole work, and that to him is due chiefly the

credit for whatever improvements in style and theory this

edition shows over the first.

RICHARD T. ELY.

Madison, Wisconsin,

Part I Consumption

Introductory: Utilities and Goods The Law of Diminishing Utility

XIV CONTENTS

CHAPTER PAGE

III. Demand . 104

IV. The Economy op Spending and Saving . . . 116

PAET II

PRODUCTION

I. Introductory 126

III. The Organization of Production . . . . 155

PAET III

TRANSFER OF GOODS (Exchange)

I. Introductory 178

II. Value 183

III. Monopolies and Monopoly Value .... 204

IV. Money 225

V. Credit and Banking ..*.... 244

VI. International Trade 262

PART IV

DISTRIBUTION

I. Introductory » » . 291

III. Wages and the Labor Problem 312

IV. Interest 339

V. Profits 358

VI. Socialism , , . .868

CONTENTS XV

Book IV Public Finance Chapter Page

I. Expenditure and Revenue 384

XL Revenues in the United States 399

APPENDIX I Subjects for Essays, Discussions, and Debates . . 419

Courses of Reading 426

Index 439

Chapter I Preliminary Remarks On The Nature Of Economics

Although the whole book which follows is but an expanded definition of economics, the student who is about to enter upon a study of the subject may well wish to have explained to liim in advance, at least in rough outlines, what is the field into which he is about to enter. At the outset, therefore, let us attempt to frame some idea of the nature of the science and of the group of sciences with which it is most closely connected.

The Place of Economics among the Social Sciences. — First of all, economics is a social science. That is, it deals with man in his relation to society. But there are other social sciences besides that which we are about to study; among them history, political science, and sociology. ^

The question therefore naturally arises, How is our science distinguished from the others ? To answer this question, we must consider more closely the different aspects under which society may be viewed. From the first, men in society have been busy in various lines of effort, which for convenience we may group as follows : language, art, education, religion,

B 1 family life, social life, — in the narrow sense of that term, — • political life, and economic life. It is with the last of these eight spheres of human activity that our science has to deal. By the term " economic life " is meant, roughly speaking, that part of human activity which is devoted to getting a living.

A peculiar feature of these activities is that they are ail collective; that is, they are activities which one man cannot well carry on alone. In the case of family and political life and some of the others this is at once obvious. Careful examination shows it to be true of them all. It is for this reason that the sciences which deal with them are called social sciences.

Preliminary Definition of Economics. — Economics, then, is the science which treats of those social phenomena that are due to the wealth-getting and wealth-using activities of man. It deals with all those facts about society that result from man's effort to get a living. The wealth-getting activity itself we call economic activity. The economic life, or the relations to which the economic activity gives rise, we may call by the simple word " economy." With this understanding, we may say that economics is the social science that deals with the economic life, or the economy, of man.

The Economic Unit. — If we keep in mind this meaning of the term "economy," we shall see that there are economies of various sorts. Thus, the economy of the ancient Greek household, with its slaves and dependents, is different from that of the medieval city or of the modern nation. In this book we study the economy of the world or the nation as a unit, with individual, household, city, and state as subordinate economies.

The eight different human activities which have been enumerated cannot be entirely separated in thought any

REMARKS ON THE NATURE OF ECONOMICS 3

more than they are actually separate in real life. Thus legislation, though it belongs primarily to the province of political science, has an intimate bearing on economic life. Again, industry in Russia is seriously hampered by the frequent recurrence of saints' days, which have therefore great economic importance ; and even in Bavaria within a few years the number of saints' days was lessened by action of the state with the approval of the church ; but saints' days have primarily to do with religion, not with economics. In the same way, economic life is dependent upon all the other groups of human activity.

Final Definition of Economics. — It is evident, then, that a complete definition of economics must be made broad enough to take note of this fact. We may sum up all these considerations in a final definition, as follows : Economics is the science

(1) which treats of those social phenomena that are due to the wealth-getting and wealth-itsing activities of man; and which

(2) deals with all other phases of his life in so far as they affect his social activity in this respect.

1. Economies is a social science.

2. Each great department of social life has its appropriate science.

3. Economies is the branch of social science that deals with the

phenomena to which the wealth-getting and wealth-using activities of men give rise.

4. Economies deals also with all the other social phenomena in so

far as they affect economic activity.

1. Into what different groups may man's social activities be divided ?

2. With which group does economics primarily deal? What con-

cern has it Avith the others?

3. What have the different groups in common?

4. What is economics?

Name five of the most important public questions of to-day.

What ones are primarily economic? Trace indirect economic

relations of the others.

How large a part of our lives is concerned with matters that are

essentially and directly economic?

The teacher may find it advisable to supplement the text of this chapter with a discussion of the meaning of science and other broad and fundamental concepts. As a basis for such discussion, Karl Pearson's Grammar of Science is unexcelled.

Chapter II The Principal Divisions Of Economics

Economics is a science which covers so wide a field that it has been found desirable to divide it into parts, each of which is often treated by writers in separate works or in separate volumes of the same work. It may help the student to have outlined for him, in advance, the divisions as they will be presented in this work.

First of all, it has been thought best to present to the student in the opening chapter an idea of what the science is, and to show him, as is being done in the present chapter, what are the main topics with which the science is concerned. In another introductory chapter there is presented a discussion of some of the fundamental institutions in our social order.

In the second place, it is thought advisable to give in a few chapters a skeleton outline of the economic history of mankind, with more particular attention to those late developments in English and American economic history that have given rise to existing economic conditions. This part of the subject is often omitted from elementary textbooks, and therefore a word of explanation is here in place.

Few students undertake the systematic study of economics without having pursued courses in history ; but the histories usually studied in schools are devoted in great part to other than economic considerations, and are written from another point of view than that which should be ours in our present study. It is of the utmost importance that the student sliould approach the study of present economic conditions imbued with the historical spirit. As the chapters on economic history will show, social and economic institutions are not permanent, but constantly changing ; and to understand aright what is, we must know whence it has developed, and, so far as we can, whither it is tending. Moreover, the study of economic history should show the student, as perhaps nothing else can, that great changes in the economic condition of a nation or a class do not come about in a moment at the command of an individual or of a great number of men organized in a state, though the will and the action of individual and state are powerful forces.

The way will thus be made clearer for that which is more commonly presented in textbooks under the name of economics or political economy. An analysis of economic phenomena at any time shows that these may be divided for purposes of clearer study into four main parts: first, those connected with man's consumption of goods, or, in other words, with the satisfaction of his wants; second, those connected with the production of goods ; third, those connected with the exchange or transfer of goods among men ; and fourth, those connected with the distribution of the income of society among the individuals, classes, and factors of production which cooperate to create that income. By dividing thus the general subject of economic theory, we are enabled to look at man's economic life from four points of view. The four divisions which we have indicated are usually treated under the following headings : consumption,' production, transfers or exchange, and distribution, and we shall discuss them in that order.

Certain socio-economic problems of great present interest will, on account of their special importance, be treated at considerable length in those divisions of the general subject

THE PRINCIPAL DIVISIONS OF ECONOMICS 7

to which they have a logical relation. Thus, under the head of transfers or exchange, we shall discuss the subjects of monopolies, bimetallism, and protective tariffs, and under the head of distribution, many of the practical problems concerning labor and wages.

Finally, the financial relations and operations of government, national, state, and local, are of a nature so important to the welfare of the citizen, and in some respects so peculiar, that it is thought well to treat them separately in chapters devoted to the subject of public finance.

1. For convenience of treatment, economics is usually divided into

several different fields of study.

2. The present book begins with an introduction explaining the

nature and scope of the science.

3. A sketch of economic history is given to prepare the student

for a better understanding of present conditions and problems.

4. Economic theory is presented under the four general headings :

consumption, production, transfers (or exchange), and distribution.

5. A short presentation of the subject of public finance is added

to give the student a more complete idea of the nature of economics.

1. What subjects are discussed in the introductory chapters of

this book?

2. Why is it thought wise to include economic history ?

3. What are the usual main divisions of economic theory? In

what order are they given in this book?

4. What is the meaning of distribution as a division of economics?

5. Of what does public finance treat?

1. What are the relations of consumption and production?

2. In what sense is exchange a part of production? In what

sense is distribution a part of exchange?

3. Name some of the chapter topics in this book which you think

might properly have been placed in other connections.

Chapter III Fundamental Institutions In The Existing Socio-economic Order

In every civilized state to-day there are certain conditions under which men carry on their economic activities, so fundamental in their nature that we do not often stop to consider them. So deep-lying are they and so long established that we easily fall into the error of thinking of them as necessary to the very existence of society under all conceivable circumstances. Yet careful consideration will convince the student that this is far from the case. Let us, then, consider in detail some of the more important of these fundamental institutions in the existing order of economic society,

I. Property

By property we mean an exclusive right to control an economic good. '

By private property we mean the exclusive right of a private person to control an economic good.

By public property we mean the exclusive right of a political unit (city, state, nation, etc.) to control an economic good.

A. Private Property

The right of private property is so fundamental in our modern civilization that we hardly think of it as resting on the will or consent of society, maintained only by constant

, vigilance on the part of society, and subject even now to slow and gradual modification. Still less, perhaps, has it ever appeared to most of us as a right that is open to question. The reason for this attitude of mind is that people are ruled in great measure by custom rather than by the light of history and of reason. When any customary right has spread very widely and become deeply rooted in society, men fall into the error of calling it a " natural right." There is, to be sure, a sense in which the property right maybe called natural, namely, that the right has been rather the result of a natural evolution than of any conscious convention. But, as usually employed, the term natural right implies that the right is " established by nature " and hence is not to be called in question. In reality there are no such rights. A man in isolation could obviously have no " rights " whatever. The word rights necessarily implies society, and points to the origin of rights not in any abstract nature, but in the grouping of men. All true rights are or should be rational — rights which can show good reason for their claims, and can justify their existence on the ground that they promote human welfare.

Yet it must be noted that the very fact of the long-continued existence of any social institution furnishes strong presumptive evidence that the institution has ministered to social welfare. Therefore, those who appeal to the law or to public opinion to overthrow or to abate the force of the institution have to bear the burden either of showing that social conditions have so changed as to destroy the beneficent operation of the institution, or of offering very strong evidence that some other institution would better subserve the end.

Beginning of the Right of Private Property. — On looking into the history of private property, we find in the first place that, as a clear and distinct concept, it has not always existed among men. It is probable that the sense even of tribal ownership or property was a slowly developed product of civilization. The idea of private property was of still slower and later growth. The savage at first owned nothing. Doubtless, even in very early times, when the primitive man had caught or killed an animal, he considered it more or less his, though even in such cases it was the common property of his family or tribe rather than the exclusive property of the individual. From insignificant beginnings, especially from the possession of personal articles of clothing and adornment, the right or feeling of ownership has grown, including more and more things and dividing the ownership more and more, until at last nearly everything is owned and nearly everyone owns something. Not until a rather advanced stage of civilization had been reached did land become property, and even to-day the last forms of tribal ownership of land have not everywhere, even among civilized peoples, given place completely to individual property.

Strengthening of the Right. — In the second place, it is only in comparatively recent times that private ownership has been either so exclusive or so extensive as it is at present. It is not many centuries since a Scottish clan held the right to the territory it occupied so absolutely that no chieftain, however powerful, could abridge the right. To-day, there are tracts of country in Scotland almost stripped of their agricultural population, with game rather than men finding a living on these estates. Slowly, however, a reaction has set in, and most nations are now beginning to enforce and extend their public claims and are developing the social side of private property.

Limitations to the Right. — In the third place, we find that even to-day private property has certain sharp limitations which indicate whence it springs and from what source it draws its being. Society, through the state, even now says to the individual citizen, " Thus far shalt thou go, and no farther," By its action it shows that it is the grantor of private rights, and that it may withdraw them whenever such a course will be to its advantage. Let us consider some of these limitations.

1. Limitations to Private Property imposed by Society in its Own Behalf. — 1. Taxation. — The first of these limitations exists in the taxation of private property, which from one point of view may be regarded as simply the taking by organized society for its own uses of a part of the value of what it has left to the private ownership of its citizens. Taxation, as understood to-day, is a comparatively recent activity of the state. During the Middle Ages the right of the state to take private property for its support was stoutly opposed, and there was a strong tendency to regard all taxation as extortion. To-day the right of taxation is almost universally conceded. Taxation is perhaps the most extreme limitation imposed upon the right of private property by society in its own behalf.

2. Eminent Domain and Requisition. — A second limitation exists in the right of organized society to appropriate to itself specific pieces of property with direct compensation to the private owner. This right is exercised especially in time of war, as when the nation for its military needs takes cattle for the subsistence of its troops or wagons for their transportation. Such an assumption of proprietorship is known as requisition. But in times of peace the government often takes for its own purposes, with due compensation, land or other property, under the exercise of what is known as the right of eminent domain, — words which in more common language simply mean ultimate ownership.

3. Fines, Forfeits, and Escheats. — Fines, imposed and collected by government, form a third clear limitation upon the absoluteness of private property. A fine is a money ■payment exacted hy the state as a penalty for some offense against the law. When, instead of money, other property of the offender is taken, the name forfeit is used. Escheat is the name applied to property which reverts to the state through the death of the former owner without a will and without heirs. The word is also used to name the form of reversion in such cases.

II. Limitations directly in Behalf of Individuals. — The three limitations just described are such as society sets up directly in its own behalf. But there are still others, enforced by society not directly for itself but for individual citizens. (1) The first is the exercise of the right of eminent domain in behalf of individuals or corporations. If a regularly chartered railway company is unable to make terms directly with the owner of land over which it proposes to lay its tracks, it can secure possession by appealing to the government, which compels transfer of the property for compensation. It should be noticed, however, that in ail such cases it is presumed that a superior public purpose is to be served by the company.

Moreover, there is a vast system of limitations upon the use, or rather the abuse, of private property, which are designed to prevent the individual from injuring himself or others. We need not enter into an extended description of these limitations. Generally speaking, (2) no man may use private property to maintain a public nuisance. As the Latin law phrase has it : Sic utere tuo ut alienum non laedas; i.e. So use your property as not to injure another's. Nothing is more fallacious than the idea that the right of ownership allows a person to do as he pleases with his property. It is true that rights of private property have sometimes been so defined as to permit many abuses to go unpunished, but it has been the tendency of society so to limit the rights as to exclude abuses. Whenever any given right has proved generally unfavorable to the welfare of society, society has modified or abolished that right, or, failing to do so, has endangered its own stability. However, we must frankly recognize that, as law operates in accordance with general principles, many abuses exist that cannot be remedied by law. The problem is to prevent wrong use without impeding right and desirable use. If the student thinks seriously about this, he will discover many cases of a wrong use of property which at the same time cannot be corrected by any general rule. For if the attempt is made to form a general rule to prevent the particular abuses, it will be seen that the same rule would in many cases prevent a right use. It is within the spirit of the law to go as far as possible by general rule ; as time goes on we learn how to prevent an increasing number of wrong uses of property. But after we have done our utmost, there will still remain a large field of wrong uses which can be corrected only by individual action or by associated efforts of a private sort.

B. Public Property

Public property, as defined above, refers to an exclusive control of some political authority and is a very different thing from free goods, because the laws of property, as for instance those regarding theft, apply quite as stringently to public as to private property, 'sometimes even more so. The sharpness of the law of public property in the post office is well known.

It is one of the defects of current discussions of property that the concept of public property has been treated inadequately by economists and publicists generally, with the result that false and one-sided conclusions have been drawn. Distribution depends on public as well as on private property, and the interrelations of these two are vital in any given distribution of wealth.

But it must be borne in mind that, strictly speaking, property refers to rights only. Property is an exclusive right. Speaking accurately, then, property is not a thing, but the rights which extend over a thing. A less strict use of the word property makes property include the things over which the right extends. We say of a farm, "This is my property," meaning the land and improvements on it and not merely the rights in them. But, strictly speaking, property is the right, and not the object over which the right extends.

II. Guaranteed Privileges

Closely connected with the general subject of property is the legal arrangement whereby exclusive privileges are awarded in return for services to society. Such privileges really become a special form of private property. Their particular importance is in determining the distribution of wealth, but they are not without importance also in the production of wealth, on account of the stimulus which the hope of such privileges may give to invention and improvement.

Chief among guaranteed privileges are patents and copyrights. Society, in all modern nations, grants patents to inventors of mechanical devices and copyrights to authors of literary or other artistic productions. Copyright is extended not dnly to books, pamphlets, and the like, but also to marks or names designed to distinguish certain products in the market. Such copyrighted trademarks have been of great economic importance in recent years.

Most modern states proceed on the assumption that the public interest will be furthered by granting these exclusive privileges, and it is generally agreed that the policy has been justified by its results. Yet experience has shown that neither patents nor copyrights should be given without limitations. Patents should not be given on light and trivial grounds, nor for unlimited or overlong periods. Moreover, owners of patents should be made by law either to use them or to allow them to lapse, and to grant to others the right to use them on payment of a reasonable royalty. Similarly, copyrights are carefully guarded in the interests of the public. The law in a general way aims to give the reward of services to the author, and avoids allowing a reward for services which others have performed.

III. Contracts

Another fundamental institution in our present industrial society is contract. Contract, while logically a separate right from that of property, naturally flows from it, and is usually regarded as in reality an incident of property or one of the bundle of rights of which property in general consists. Thus property, in the absence of limitation, is assumed to include the right to contract for the use or sale of the thing owned. Some sort of contract lies at the basis of all associated action. That this condition of associated activity should be maintained by the state can hardly be doubted, yet even the right to contract has its limitations resting upon human well-being. To-day legislation provides (1)

who may and who may not contract, (2) for what purposes valid contracts may be made, and (3) under what forms and conditions they must be made to be vaUd. Experience justifies this regulation. Children, for example, cannot as a rule make contracts that will bind themselves, because they are not presumed by the law to have the requisite knowledge and judgment. Again, agreements which are clearly opposed to public policy, such as an agreement entered into for the commission of a crime, are invalid and would not be enforced by the courts.

IV. The Right to Establish Private Enterprises

The right to establish private enterprises is another fundamental one which is nevertheless changing and changeable. It is only within the last century that the right has come to have its present wide scope, especially in the case of corporations. Many restrictions indeed exist, as in the case of the liquor traiSBc ; while in the field of the so-called public utilities, — railways, lighting works, etc., — restrictions have so increased recently that it is generally necessary to secure special authorization to establish a new enterprise. It is still open to serious question, however, whether society has not gone too far in our own country in the direction of granting freedom to establish private business.