Opening…

Part I

PAGE THE VALUE OF MATERIAL THINGS 1-169

DIVISION A--WANTS AND PRESENT GOODS

CHAPTER

1 THE NATURE AND PURPOSE OF POLITICAL ECONOMY: NAME AND DEFINITION; PLACE OF ECONOMICS AMONG THE SOCIAL SCIENCES; THE RELATION OF ECONOMICS TO PRACTICAL AFFAIRS 3

2 ECONOMIC MOTIVES: MATERIAL WANTS, THE PRIMARY ECONOMIC MOTIVES; DESIRES FOR NON-MATERIAL ENDS, AS SECONDARY ECONOMIC MOTIVES 9

3 WEALTH AND WELFARE: THE RELATION OF MEN AND MATERIAL THINGS TO ECONOMIC WELFARE; SOME IMPORTANT ECONOMIC CONCEPTS CONNECTED WITH WEALTH AND WELFARE 15

4 THE NATURE OF DEMAND: THE COMPARISON OF GOODS IN MAN'S THOUGHT; DEMAND FOR GOODS GROWS OUT OF SUBJECTIVE COMPARISONS 21

5 EXCHANGE IN A MARKET: EXCHANGE OF GOODS RESULTING FROM DEMAND; BARTER UNDER SIMPLE CONDITIONS; PRICE IN A MARKET 30

6 PSYCHIC INCOME: INCOME AS A FLOW OF GOODS; INCOME AS A SERIES OF GRATIFICATIONS 39

DIVISION B--WEALTH AND RENT

7 WEALTH AND ITS DIRECT USES: THE GRADES OF RELATION OF INDIRECT GOODS TO GRATIFICATION; CONDITIONS OF ECONOMIC WEALTH 46

8 THE RENTING CONTRACT: NATURE AND DEFINITION OF RENT; THE HISTORY OF CONTRACT RENT AND CHANGES IN IT 53

9 THE LAW OF DIMINISHING RETURNS: DEFINITION OF THE CONCEPT OF (ECONOMIC) DIMINISHING RETURNS; OTHER MEANINGS OF THE PHRASE "DIMINISHING RETURNS"; DEVELOPMENT OF THE CONCEPT OF DIMINISHING RETURNS 61

10 THE THEORY OF RENT: THE MARKET VALUE OF THE USUFRUCT: DIFFERENTIAL ADVANTAGES IN CONSUMPTION GOODS; DIFFERENTIAL ADVANTAGES IN INDIRECT GOODS 73

11 REPAIR, DEPRECIATION, AND DESTRUCTION OF WEALTH: RELATION TO ITS SALE AND RENT: REPAIR OF RENT-BEARING AGENTS; DEPRECIATION IN RENT-EARNING POWER OF AGENTS KEPT IN REPAIR; DESTRUCTION OF NATURAL STORES OF MATERIAL 81

12 INCREASE OF RENT-BEARERS AND OF RENTS: EFFORTS OF MEN TO INCREASE PRODUCTS AND RENT-BEARERS; EFFECTS OF SOCIAL CHANGES IN RAISING THE RENTS OF INDIRECT AGENTS 90

DIVISION C--CAPITALIZATION AND TIME-VALUE

13 MONEY AS A TOOL IN EXCHANGE: ORIGIN OF THE USE OF MONEY; NATURE OF THE USE OF MONEY; THE VALUE OF TYPICAL MONEY 98

14 THE MONEY ECONOMY AND THE CONCEPT OF CAPITAL: THE BARTER ECONOMY AND ITS DECLINE; THE CONCEPT OF CAPITAL IN MODERN BUSINESS 108

15 THE CAPITALIZATION OF ALL FORMS OF RENT: THE PURCHASE OF RENT-CHARGES AS AN EXAMPLE OF CAPITALIZATION; CAPITALIZATION INVOLVED IN THE EVALUATING OF INDIRECT AGENTS; THE INCREASING ROLE OF CAPITALIZATION IN MODERN INDUSTRY 118

16 INTEREST ON MONEY LOANS: VARIOUS FORMS OF CONTRACT INTEREST; THE MOTIVE FOR PAYING INTEREST 131

17 THE THEORY OF TIME-VALUE: DEFINITION AND SCOPE OF TIME-VALUE; THE ADJUSTMENT OF THE RATE OF TIME-DISCOUNT 141

18 RELATIVELY FIXED AND RELATIVELY INCREASABLE FORMS OF CAPITAL: HOW VARIOUS FORMS OF CAPITAL MAY BE INCREASED; SOCIAL SIGNIFICANCE OF THESE DIFFERENCES 152

19 SAVING AND PRODUCTION AS AFFECTED BY THE RATE OF INTEREST: SAVING AS AFFECTED BY THE INTEREST RATE; CONDITIONS FAVORABLE TO SAVING; INFLUENCE OF THE INTEREST RATE ON METHODS OF PRODUCTION 159

II. THE VALUE OF HUMAN SERVICES 171-355

DIVISION A--LABOR AND WAGES

20 LABOR AND CLASSES OF LABORERS: RELATION OF LABOR TO WEALTH; VARIETIES OF TALENTS AND OF ABILITIES IN MEN 173

21 THE SUPPLY OF LABOR: WHAT IS A DOCTRINE OF POPULATION? POPULATION IN HUMAN SOCIETY; CURRENT ASPECT OF THE POPULATION PROBLEM 184

22 CONDITIONS FOR EFFICIENT LABOR: OBJECTIVE PHYSICAL CONDITIONS; SOCIAL CONDITIONS FAVORING EFFICIENCY; DIVISION OF LABOR 195

23 THE LAW OF WAGES: NATURE OF WAGES AND THE WAGES PROBLEM; THE DIFFERENT MODES OF EARNING WAGES; WAGES AS EXEMPLIFYING THE GENERAL LAW OF VALUE 205

24 THE RELATION OF LABOR TO VALUE: RELATION OF RENT TO WAGES, RELATION OF TIME-VALUE TO WAGES; THE RELATION OF LABOR TO VALUE 215

25 THE WAGE SYSTEM AND ITS RESULTS: SYSTEMS OF LABOR; THE WAGE SYSTEM AS IT IS; PROGRESS OF THE MASSES UNDER THE WAGE SYSTEM 226

26 MACHINERY AND LABOR: EXTENT OF THE USE OF MACHINERY; EFFECT OF MACHINERY ON THE WELFARE AND WAGES OF THE MASSES 236

27 TRADE-UNIONS: THE OBJECTS OF TRADE-UNIONS; THE METHODS OF TRADE-UNIONS; COMBINATION AND WAGES 245

DIVISION B--ENTERPRISE AND PROFITS

28 PRODUCTION AND THE COMBINATION OF THE FACTORS: THE NATURE OF PRODUCTION; COMBINATION OF THE FACTORS 257

29 BUSINESS ORGANIZATION AND THE ENTERPRISER'S FUNCTION: THE DIRECTION OF INDUSTRY; QUALITIES OF A BUSINESS ORGANIZER; THE SELECTION OF ABILITY 265

30 COST OF PRODUCTION: COST OF PRODUCTION FROM THE ENTERPRISER'S POINT OF VIEW; COST OF PRODUCTION FROM THE ECONOMIST'S STANDPOINT 273

31 THE LAW OF PROFITS: MEANING OF TERMS; THE TYPICAL ENTERPRISER'S SERVICES REVIEWED; STATEMENT OF THE LAW OF PROFITS 282

32 PROFIT-SHARING, PRODUCERS' AND CONSUMERS' COÖPERATION: PROFIT-SHARING; PRODUCERS' COÖPERATION; CONSUMERS' COÖPERATION 292

33 MONOPOLY PROFITS: NATURE OF MONOPOLY; KINDS OF MONOPOLY; THE FIXING OF A MONOPOLY PRICE 302

34 GROWTH OF TRUSTS AND COMBINATIONS IN THE UNITED STATES: GROWTH OF LARGE INDUSTRY IN THE UNITED STATES; ADVANTAGES OF LARGE PRODUCTION; CAUSES OF INDUSTRIAL COMBINATIONS 312

35 EFFECT OF TRUSTS ON PRICES: HOW TRUSTS MIGHT AFFECT PRICES; HOW TRUSTS HAVE AFFECTED PRICES 323

36 GAMBLING, SPECULATION, AND PROMOTERS' PROFITS: GAMBLING VS. INSURANCE; THE SPECULATOR AS A RISK TAKER; PROMOTER'S AND TRUSTEE'S PROFITS 333

37 CRISES AND INDUSTRIAL DEPRESSIONS: DEFINITION AND DESCRIPTION OF CRISES; CRISES IN THE NINETEENTH CENTURY; VARIOUS EXPLANATIONS OF CRISES 345

III. THE SOCIAL ASPECTS OF VALUE 357-563

DIVISION A--RELATION OF PRIVATE INCOME TO SOCIAL WELFARE

38 PRIVATE PROPERTY AND INHERITANCE: IMPERSONAL AND PERSONAL SHARES OF INCOME; THE ORIGIN OF PRIVATE PROPERTY; LIMITATIONS OF THE RIGHT OF PRIVATE PROPERTY 359

39 INCOME AND SOCIAL SERVICE: INCOME FROM PROPERTY; INCOME FROM PERSONAL SERVICES 370

40 WASTE AND LUXURY: WASTE OF WEALTH; LUXURY 381

41 REACTION OF CONSUMPTION ON PRODUCTION: REACTION UPON MATERIAL PRODUCTIVE AGENTS; REACTION UPON THE EFFICIENCY OF THE WORKERS; EFFECTS ON THE ABIDING WELFARE OF THE CONSUMER 392

42 DISTRIBUTION OF THE SOCIAL INCOME: THE NATURE OF PERSONAL DISTRIBUTION; METHODS OF PERSONAL DISTRIBUTION 402

43 SURVEY OF THE THEORY OF VALUE: REVIEW OF THE PLAN FOLLOWED; RELATION OF VALUE THEORIES TO SOCIAL REFORMS; INTERRELATION OF ECONOMIC AGENTS 412

DIVISION B--RELATION OF THE STATE TO INDUSTRY

44 FREE COMPETITION AND STATE ACTION: COMPETITION AND CUSTOM; ECONOMIC HARMONY THROUGH COMPETITION; SOCIAL LIMITING OF COMPETITION 422

45 USE, COINAGE, AND VALUE OF MONEY: THE PRECIOUS METALS AS MONEY; THE QUANTITY THEORY OF MONEY 431

46 TOKEN COINAGE AND GOVERNMENT PAPER MONEY: LIGHT-WEIGHT COINS; PAPER MONEY EXPERIMENTS; THEORIES OF POLITICAL MONEY 443

47 THE STANDARD OF DEFERRED PAYMENTS: FUNCTION OF THE STANDARD; INTERNATIONAL BIMETALLISM; THE FREE-SILVER MOVEMENT IN AMERICA 453

48 BANKING AND CREDIT: FUNCTIONS OF A BANK; TYPICAL BANK MONEY; BANKS OF THE UNITED STATES TO-DAY 462

49 TAXATION IN ITS RELATION TO VALUE: PURPOSES OF TAXATION; FORMS OF TAXATION; PRINCIPLES AND PRACTICE 471

50 THE GENERAL THEORY OF INTERNATIONAL TRADE: INTERNATIONAL TRADE AS A CASE OF EXCHANGE; THEORY OF FOREIGN EXCHANGES OF MONEY; REAL BENEFITS OF FOREIGN TRADE 480

51 THE PROTECTIVE TARIFF: THE NATURE AND CLAIMS OF PROTECTION; THE REASONABLE MEASURE OF JUSTIFICATION OF PROTECTION; VALUES AS AFFECTED BY PROTECTION 491

52 OTHER PROTECTIVE SOCIAL AND LABOR LEGISLATION: SOCIAL LEGISLATION; LABOR LEGISLATION 504

53 PUBLIC OWNERSHIP OF INDUSTRY: EXAMPLES OF PUBLIC OWNERSHIP; ECONOMIC ASPECTS OF PUBLIC OWNERSHIP 514

54 RAILROADS AND INDUSTRY: TRANSPORTATION AS A FORM OF PRODUCTION; THE RAILROAD AS A CARRIER; DISCRIMINATION IN RATES ON RAILROADS 525

55 THE PUBLIC NATURE OF RAILROADS: PUBLIC PRIVILEGES OF RAILROAD CORPORATIONS; POLITICAL AND ECONOMIC POWER OF RAILROAD MANAGERS; COMMISSIONS TO CONTROL RAILROADS 534

56 PUBLIC POLICY AS TO CONTROL OF INDUSTRY: STATE REGULATION OF CORPORATE INDUSTRY; DIFFICULTIES OF PUBLIC CONTROL OF INDUSTRY; TREND OF POLICY AS TO PUBLIC INDUSTRIAL ACTIVITY 544

57 FUTURE TREND OF VALUES: PAST AND PRESENT OF ECONOMIC SOCIETY; THE ECONOMIC FUTURE OF SOCIETY 555

QUESTIONS AND CRITICAL NOTES 565

INDEX 595

Preface

This book had its beginning ten years ago in a series of brief discussions supplementing a text used in the class-room. Their purpose was to amend certain theoretical views even then generally questioned by economists, and to present most recent opinions on some other questions. These critical comments evolved into a course of lectures following an original outline, and were at length reduced to manuscript in the form of a stenographic report made from day to day in the class-room. The propositions printed in italics were dictated to the class, to give the key-note to the main divisions of the argument. Repeated revisions have shortened the text, cut out many digressions and illustrations, and remedied many of the faults both of thought and of expression; but no effort has been made to conceal or alter the original and essential character of the simple, informal, class-room talks by teacher to student. To this origin are traceable many conversational phrases and local illustrations, and the occasional use of the personal form of address.

The lectures, at the outset, sought to give merely a summary of widely accepted economic theory, not to offer any contribution to the subject. While they were in progress, however, special studies in the evolution of the economic concepts were pursued, and the manuscript of a book on that more special subject was carried well toward completion. That work, which it is hoped some time to complete, was, for several reasons, put aside while the present text was preparing for publication. The economic theories of the present transition period show many discordant elements, yet the author felt that his attempt to unify the statement of principles, in an elementary text explaining modern problems, and consistent in its various parts, helped to reveal to him both difficulties and possible solutions in the more special theoretical field. The unforeseen outcome of these varied studies is an elementary text embodying a new conception of the theory of distribution, an outline of which will be found in Chapter Forty-three. It is, in brief, a consistently subjective analysis of the relations of goods to wants, in place of the admixture of objective and subjective distinctions found in the traditional conceptions of rent, interest, and price.

The beginning of the systematic study of economics, like the first steps in a language, is difficult because of the entire strangeness of the thought, and it is not to be hoped that any pedagogic device can do away with the need of strenuous thinking by the student. The aim, however, in the development of this theory of distribution, has been to proceed by gradual steps, as in a series of geometrical propositions, from the simple and familiar acts and experiences of the individual's every-day life, through the more complex relations, to the most complex, practical, economic problems of the day. The hope has long been entertained by economists that a conception of the whole problem of value would be attained that would coördinate and unify the various "laws,"--those of rent, wages, interest, etc. This solution has here been sought by a development of recent theories, the unit of the complex problem of value being the simplest, immediate, temporary gratification.

Possibly some teachers will observe and regret the almost entire absence of critical discussions of controverted points in theory, which make up so large a part of some of the older texts. The more positive manner of presentation has been purposely adopted, and only such reference is made to conflicting views as is needed to guard the student against misunderstanding in his further reading. The author would not have it thought that he doubts the disciplinary value of economic theory or its scientific worth for more advanced students, for, on the contrary, he believes in it, perhaps to an extreme degree; but, for his own part, he has become convinced of the unwisdom of carrying on these subtle controversies in classes of beginners. The inherent difficulties of the subject are great enough, without the creation of new ones.

The fifty-seven chapters represent the work of the typical college course in elementary economics, allowing two chapters a week, and a third meeting weekly for review and for the discussion of questions, exercises, and reports. The subject is so large that the text is, in many places, hardly more than a suggestive outline. In class-room work it should be supplemented by other sources of information, such as personal observation by the students (many of the questions following the text serving to stimulate the attention); visits to local industries; interchange of opinions; examples given by the teacher; study and discussion, in the light of the principles stated in the text, of some such problems as are suggested in the appended list of questions; collateral reading; the preparation of exercises and the use of statistical material from the census, labor reports, etc.; history and description of industries; history of the growth of economic ideas. Suggestions, from teachers, of changes that will make the text more useful in their classes, will be thankfully received by the author.

Lack of space makes it impossible to mention by name the many sources to which the writer is indebted. Special acknowledgment, however, is gratefully made to C. H. Hull, of Cornell University; to E. W. Kemmerer, now of the Philippine Treasury Department, and to U. G. Weatherly, of Indiana University, who have read large portions of the manuscript, and have made many valuable suggestions; to W. M. Daniels, of Princeton University, who has read every page of the copy, and to whom are due the greatest obligations for his numerous and able criticisms both of the argument and of the expression; to R. C. Brooks, now of Swarthmore College, for a number of the questions in the appended list, and for helpful comments given while the course was developing; and to R. F. Hoxie and to A. C. Muhse, whose thoughtful reading of the proof has eliminated many errors. For the defects remaining, not these friendly critics, but the author alone, should be held accountable.

No book on economics can to-day satisfy everybody--"Or even anybody," adds a friend. But with this book may go the hope that what has been written with love of truth and of democracy may serve, in its small way, both to further sound economic reasoning and to extend among American citizens a better understanding of the economic problems set for this generation to solve.

FRANK A. FETTER.

Ithaca, N. Y., August, 1904.

THE PRINCIPLES OF ECONOMICS

I. THE NATURE AND PURPOSE OF POLITICAL ECONOMY

§ I. NAME AND DEFINITION

[Sidenote: Verbal definition of economics]

1. Economics, or political economy, may be defined, briefly, as the study of men earning a living; or, more fully, as the study of the material world and of the activities and mutual relations of men, so far as all these are the objective conditions to gratifying desires. To define, means to mark off the limits of a subject, to tell what questions are or are not included within it. The ideas of most persons on this subject are vague, yet it would be very desirable if the student could approach this study with an exact understanding of the nature of the questions with which it deals. Until a subject has been studied, however, a definition in mere words cannot greatly aid in marking it off clearly in our thought. The essential thing for the student is to see clearly the central purpose of the study, not to decide at once all of the puzzling cases.

[Sidenote: Natural sciences deal with material things]

2. A definition that suggests clear and familiar thoughts to the student seem at first much more difficult to get in any social science than in the natural sciences. These deal with concrete, material things which we are accustomed to see, handle, and measure. If a mere child is told that botany is a study in which he may learn about flowers, trees, and plants, the answer is fairly satisfying, for he at once thinks of many things of that kind. When, in like manner zoölogy is defined as the study of animals, or geology as the study of rocks and the earth, the words call up memories of many familiar objects. Even so difficult and foreign-looking a word as ichthyology seems to be made clear by the statement that it is the name of the study in which one learns about fish. It is true that there may be some misunderstanding as to the way in which these subjects are studied, for botany is not in the main to teach how to cultivate plants in the garden, nor ichthyology how to catch fish or to propagate them in a pond. But the main purpose of these studies is clear at the outset from these simple definitions. Indeed, as the study is pursued, and knowledge widens to take in the manifold and various forms of life, the boundaries of the special sciences become not more but less sharp and definite.

[Sidenote: Economics studies some social acts and relations]

Political economy, on the other hand, as one of the social sciences, which deal with men and their relations in society, seems to be a very much more complex thought to get hold of. We are tempted to say that it deals with less familiar things; but the truth may be, as a thoughtful friend suggests, that the simple social acts and relations are more familiar to our thought than are lions, palm-trees, or even horses. Every hour in the streets or stores, one may witness thousands of acts, such as bargains, labor, payments, that are the subject-matter of economic science. Their very familiarity may cause men to overlook their deeper meaning.

Many other definitions have been given of political economy. It has been called the science of wealth, or the science of exchanges. Evidently there are various ways in which wealth may be considered or exchanges made. The particular aspects that are dealt with in political economy will be made clear by considering two other questions, the place of economics among the social sciences and the relation of economics to practical affairs.

§ II. PLACE OF ECONOMICS AMONG THE SOCIAL SCIENCES

[Sidenote: Economics contrasted with the natural sciences]

1. Political economy, as one of the social sciences, may be contrasted with the natural sciences, which deal with material things and their mutual relations, while it deals with one aspect of men's life in society, namely, the earning of a living, or the use of wealth. It is true that political economy also has to do with plants and animals and the earth--in fact, with all of those things which are the subject-matter of the natural sciences; but it has to do with them only in so far as they are related to man's welfare and affect his estimate of the value of things; only in so far as they are related to the one central subject of economic interest, the earning of a living.

[Sidenote: Character of the social sciences]

2. The social sciences deal with men and their relations with each other. The word "social" comes from the Latin socius, meaning a fellow, comrade, companion, associate. As men living together have to do with each other in a great many different ways, and enter into a great many different relations, there arise a great many different social problems. Each of the social sciences attempts to study man in some one important aspect--that is, to view these relations from some one standpoint.

Man's acts, his life, and his motives are so complex that it is not surprising that there has been less definiteness in the thought of the social sciences, and that they have advanced less rapidly toward exactness in their conclusions, than have the natural sciences. This complexity also explains the discouragement of the beginner in the early lessons in this subject. Usually the greatest difficulties appear in the first few weeks of its study. The thought is more abstract than in natural science; it requires a different, I will not say higher, kind of ability than does mathematics. But little by little the strangeness of the language and ideas disappears; the bare definitions become clothed with the facts of observation and recalled experiences; and soon the "economic" acts and relations of men in society come to be as real and as interesting to the student as are the materials in the natural world about him--often, indeed, more interesting.

[Sidenote: Economics, politics, law, and ethics]

3. Political economy is related to all the other social sciences, it being the study of certain of men's relations, while politics, law, and ethics have to do with other relations or with relations under a different aspect. Politics treats of the form and working of government and is mainly concerned with the question of power or control of the individual's actions and liberty. Law treats of the precepts and regulations in accordance with which the actions of men are limited by the state, and the contracts into which they have seen fit to enter are interpreted. Ethics treats the question of right or wrong, studies the moral aspects of men's acts and relations. The attempt just made to distinguish between the fields occupied by the various social sciences betrays at once the fundamental unity existing among them. The acts of men are closely related in their lives, but they may be looked at from different sides. The central thought in economics is the business relation, the relation of men in exchanging their services or material wealth. In pursuing economic inquiries we come into contact with political, legal, and ethical considerations, all of which must be recognized before a final practical answer can be given to any question. Nevertheless the province of economics is limited. It is because of the feebleness of our mental power that we divide and subdivide these complex questions and try to answer certain parts before we seek to answer the whole. When we attempt this final and more difficult task, we should rise to the standpoint of the social philosopher.

§ III. THE RELATION OF ECONOMICS TO PRACTICAL AFFAIRS

[Sidenote: Economics is first a science]

1. The ideal of political economy here set forth is that it should be a science, a search for truth, a systematized body of knowledge, arriving at a statement of the laws to which economic actions conform. It is not the advocacy of any particular policy or idea, but if it arrives at any conclusions, any truths, these cannot fail to affect the practical action of men.

[Sidenote: But it touches many practical interests]

Political economy, because defined as the science of wealth, has been described by some as a gospel of Mammon. It is hardly necessary to refute such a misconception. Political economy is not the science of wealth-getting for the individual. Its study is not primarily for the selfish ends and interest of the individual. (Certainly some of its lessons may be of practical value to men in active business) for many economic "principles" are but the general statement of those ideas that have been approved by the experience of business men, of statesmen, and of the masses of men. Some of its lessons must have educational value in practical business, for political economy is not dreamed out by the closet philosopher, but more and more it is the attempt to describe the interests and the action of the practical world in which men must live. Many men are working together to develop its study--those who collect statistics and facts bearing on all kinds of practical affairs, and those who search through the records of the past for illustrations of experiments and experiences that may help us in our life to-day.

[Sidenote: Economic study needed in a democracy]

2. But, in the main, the study of political economy is a social study for social ends and not a selfish study for individual advantage. The name political economy was first suggested in France when the government was monarchical and despotic in the extreme. As domestic economy indicates a set of rules or principles to guide wisely the action of the housekeeper or the owner of an estate, so political economy was first thought of as a set of rules or principles to guide the king and his counselors in the control of the state. The term has continued to bear something of that suggestion in it, though of late the term "economics," as being broader and less likely to be confused with politics, has very generally come into use. But in the degree in which unlimited monarchy has given way to the rule of the people, the conception of political economy has been modified. In a democracy there is need for a general diffusion of knowledge. The power now rests not with the king and a few counselors, but in the last resort with the people, and therefore the people must be acquainted with the experience of the past, must have all possible systematic knowledge to enlighten public policy and to guide legislation.

[Sidenote: Is of growing interest and influence]

Moreover, with the growth of the modern state, with the interest increasing importance of business, and of industrial and commercial interests, as compared with changes of dynasty or the personal rivalries of rulers, economic questions have grown in relative importance. In our own country, particularly since the subjects of slavery and of States' rights ceased to absorb the attention of our people, economic questions have pushed rapidly into the foreground. Indeed, it has of late been more clearly seen that many of the older political questions, such as the American Revolution and slavery, formerly discussed almost entirely in their political and constitutional aspects, were at bottom questions of economic rivalry and of economic welfare. The remarkable increase in the attention given to this study in colleges and universities in the last twenty years is but the index of the greatly increased interest and attention felt in it by citizens generally.

To sum up, it may be said that in the study of political economy we are seeking the reason, connection, and relations in the great multitude of acts arising out of the dependence of desires on the world of things and men.

2. ECONOMIC MOTIVES

§ I. MATERIAL WANTS, THE PRIMARY ECONOMIC MOTIVES

[Sidenote: Feeling urges to economic actions]

1. A logical explanation of industry must begin with a discussion of the nature of wants, for the purpose of industry is to gratify wants. An economic want may be defined as a feeling of incompleteness, because of the lack of a part of the outer world or of some change in it. Often the question asked when one first sees a moving trolley car or automobile or bicycle is: What makes it go? The first question to ask in the part of the study of economic society here undertaken is: What is its motive force? Without an answer to that question one cannot hope to understand the ceaseless and varied activities of men occupied in the making of a living. The question merits long and careful study, but the general answer is so simple that it seems almost self-evident: The motive force in economics is found in the feelings of men. It is men's desire to make use of men and things about them which calls forth all the manifold phenomena studied in economics.

[Sidenote: Animal species shaped by their environment]

2. Wants among animals depend on the environment; that is to say, the utmost that creatures of a lower order than man can do is to take things as they find them. The imagination and intelligence of animals are not developed enough to lead them to desire much beyond that which is ordinarily to be obtained. And so the environment shapes and affects the animal. The fish is fitted to live in the water and thrives there, and we must believe, enjoys living there. The horse and the cow like best the food of the fields, and so each species of animal, in order to survive in the severe struggle for existence, has been forced to fit itself to the conditions in which it lives. After the animal has been thus fitted, its desire is for those things normally to be found in its surroundings. So different animals desire or want different things, but always it is the environment that determines the want, and not the want that determines the environment.

[Sidenote: Simple wants of primitive men]

3. In simpler human societies, wants are mostly confined to physical necessities; that is, in the earlier stages of society, man's wants are very much like those of the animals. Man bends his energies to securing the things necessary to survival. He feels the pangs of hunger and he strives to secure food. He feels the need of companionship, for it is only through association and mutual help that men, so weak as compared with many kinds of animals, are able to resist the enemies which beset them. He needs clothing to protect him against the harsher climates of the lands to which he moves. For the same purpose, to protect himself against the cold and rain, he needs a shelter, a cave, a wigwam, or a hut; for a house is but a larger dress.

[Sidenote: Manifold wants in civilized society]

4. In human society, wants develop and transform the world. In the rudest societies of which there is any record, savages are found with wants developed in a great number of directions beyond the wants of any animals. Man is not a passive victim of circumstances; his wants are not determined solely by his environment; his desires soar beyond the things about him. As men become more the masters of circumstances, their desires anticipate mere physical wants; they seek a more varied food of finer flavor and more delicately prepared. Dress is not limited by physical comfort, for one of the earliest of the esthetic wants to develop is the love of personal ornament. The rude hut or communal lodge to protect against rain and cold becomes a home. Out of the earlier rude companionship develop the noblest sentiments of friendship and family life. Seeking to gratify the senses and the love of action, men develop esthetic tastes, the love of the beautiful in sound, in form, in taste, in color, in motion. And finally, as the imagination and intellect develop, there grow up the various forms of intellectual pleasures--the love of reading, of study, of travel, and of thought.

The various wants of man are sometimes classified as necessities, comforts, and luxuries, but all economists take care to emphasize that these terms have only relative meanings which, in the rapidly changing conditions of modern life, are changing constantly. The comforts of one generation, or of one country, become the necessities in another; and luxuries becoming comforts, are looked upon finally as necessities. And as the desires grow, they more and more alter the world. Man has changed the face of the earth; he has affected its climate, its fertility, its beauty, because, either for better or for worse, his desires have impressed themselves upon the world about him.

[Sidenote: Wants must precede wealth]

5. In human society the growth of wants is necessary to progress. From the earliest times teachers of morals have argued for simplicity of life and against the development of refinements. We do not now raise the moral question, but there is no doubt that the economic effect of developing wants is in the main to impel to greater effort. They are the mainspring of economic progress. In recent discussion of the control of the tropics, the too great contentedness of tropical peoples has been brought out prominently. Some one has said that if a colony of New England school-teachers and Presbyterian deacons should settle in the tropics, their descendants would, in a single generation, be wearing breech-clouts and going to cock-fights on Sunday. Certain it is that the energy and ambition of the temperate zone are hard to maintain in warmer lands. The negro's content with hard conditions, so often counted as a virtue, is one of the difficulties in the way of solving the race problem in our South to-day. Booker T. Washington, and others who are laboring for the elevation of the American negroes, would try first to make them discontented with the one-room cabins, in which hundreds of thousands of families live. If only the desire for a two- or three-room cabin can be aroused, experience shows that family life and industrial qualities may be improved in many other ways.

[Sidenote: But impossible hopes lessen gratifications]

Not only in America, but in most civilized lands to-day, is seen a rapid growth of wants in the working-classes. The incomes and the standard of living have become increasing, but not so fast as have the desires of the working-classes. Regret has been expressed by some that the workers of Europe are becoming "declassed." Increasing wages, it is said, bring not welfare, but unhappiness, to the complaining masses. If discontent with one's lot goes beyond a moderate degree, if it is more than the desire to better one's lot by personal efforts, if it becomes an unhappy longing for the impossible, then indeed it may be a misfortune. But a moderate ambition to better one's condition is the "divine discontent" absolutely indispensable if energy and enterprise are to be called into being.

[Sidenote: Wants grow refined as wealth advances]

It is a suggestive fact that civilized man, equipped with all of the inventions and the advantages of science, spends more hours of effort in gaining a livelihood than does the savage with his almost unaided hands. Activity is dependent not on bare physical necessity, but on developed wants--in the economic sense of the term. Such social institutions as property and inheritance owe their origin and their justification to their average effect on the motives to activity. If society is to develop, if progress is to continue, human wants--not of the grosser sort, but ever more refined--must continue to emerge and urge men to action.

§ II. DESIRES FOR NON-MATERIAL ENDS, AS SECONDARY ECONOMIC MOTIVES

[Sidenote: The real man in economics]

1. The spiritual nature of man must not be ignored in economic reasoning. There has been much and just criticism of the earlier writers and of their conclusions because so little account was taken by them of any but the motive of self-interest in economic affairs. Generally it was assumed that men knew their own interest, and sought in a very unsympathetic way those things which would gratify their material wants. Thus man in economic reasoning was made an abstraction, differing from real men in his lack of manifold spiritual and social elements.

[Sidenote: Desires for the non-material may become economic motives]

2. The main classes of non-material wants that are secondarily economic are fear of temporal punishment; sentiments of moral and religious duty; pride, honor, and fear of disgrace; and pleasure in work for itself, for social approval, or for a social result. The first is best illustrated by slavery, where the slave is not impelled to seek wealth for his own welfare, but is driven by punishment to perform the task. The object is to create within the mind of the slave a motive that will take the place of the ordinary economic motive. The feeling of religious or moral duty leads men to act often in direct opposition to the usual economic motive. The taboo is faithfully observed by the members of a savage tribe who suffer as a result the severest hardships. A religious injunction prevents the use of food that would save from starvation. Pride, either of family or of calling; the soldier's honor leading him to sacrifice not only his future but his life; the love of social approval, holding men to the most disagreeable tasks--these illustrate how strongly social sentiments oppose the narrower motive of immediate self-interest as generally thought of. Pleasure in work for work's sake, and pride in the result, may act as motives quite as strong in some cases as desire for the product that can be used. And even where this does not change the kind of work done, it comes in to influence the interest and earnestness with which the work is performed.

[Sidenote: Economists must overlook no influence on value]

3. Whatever motive in man's complex nature makes him desire things more or less, becomes for the time, and in so far, an economic motive. These various social and spiritual motives sometimes work positively, in the direction of magnifying man's desire for things; sometimes negatively, to diminish it. If we are to understand economic action, we must take men as they are. A religious motive that leads men to refrain from the eating of meat or to eat fish in preference on certain days, is a fact which the economist has but to accept, for it is sure to affect the value of meat and fish at that place and time. Moral convictions, whatever be their origin, whether due to the teaching of parents, to unconscious influences, or to native temperament, may be quite as effective as the pangs of hunger in determining what men desire. Therefore, while these various motives are primarily social or moral or religious, they may be said to be secondarily economic motives, and they may become in certain cases the most important influences of which the economist must take account.

3. WEALTH AND WELFARE

§ I. THE RELATION OF MEN AND MATERIAL THINGS TO ECONOMIC WELFARE

[Sidenote: Man is the center of economic reasoning]

1. The gratifying of economic wants depends on things outside of the man who feels the wants. Man is to himself the center of the world. He groups things and estimates things with reference to their bearing on his desires, be these what are called selfish or unselfish. If we were discussing the economics of an inferior species of animals, things would be grouped in a very different way. But economics being the study of man's welfare, everything must be judged from his standpoint, and things are or are not of economic importance according as they have relation to his wants and satisfactions. Things needful for any of the lower animals are spoken of as "ministering to welfare" in the economic sense only in case these animals are useful to men. Examples are the mulberry-tree on which the silkworm feeds, the flower visited by the honey-bee. In the same view some men are seen to minister to the welfare of other men and therefore bear the same relation for the moment to the welfare of the others as do material things. In any case we study man's welfare as affected by the world which surrounds him.

[Sidenote: Physical nature is an unchangeable fact]

2. Material things and natural forces differ in kind and nature. This is an axiom which we must take as a basis for reasoning in economics. Things have certain physical qualities quite apart from any action or influence of man. They are operated on by mechanical laws; the force of gravitation causes them to fall at a certain rate under given conditions. They differ in specific gravity, reflect the rays of light, absorb or transmit heat. All these things are for man ultimate physical facts, but unless he knows these facts he cannot take full advantage of the favorable qualities of things or weigh properly their importance to his welfare. Things differ in a multitude of ways in their chemical qualities. Niter, charcoal, and saltpeter, combined in certain proportions, give certain reactions; different combinations give various results. Solids combine to form gases, and liquids unite to form solids, and these qualities and reactions of material things are for man ultimate truths of chemistry. Likewise many things have certain physiological effects. Sunshine acts on living bodies, whether plant, animal, or man, in certain ways. Some plants are nourishing to man, others are poisonous. If man were not on the earth, things would have the same physical and chemical qualities, mechanical laws would be the same as at present so far as we can conclude. Man cannot change the nature of things; but he can acquaint himself with that nature and then put the things into the relations where a given result will follow.

[Sidenote: But economics has to do with psychological effects]

3. As a result of these differences, things have different relations to wants. These various qualities, physical, chemical, physiological, are important in an economic sense only as they produce psychological effects, that is, as they affect the feelings and judgments of men. We come to some general thoughts which it will be well to define.

[Sidenote: Some definitions]

Gratification is the feeling that results when a want has been met. Feelings are hard to define in words; the best definition is found in the experience of each individual. We can only say, therefore, that gratification is the attainment of desire, the fulfilment of wants. The word that has usually been employed in this sense in economic discussion is "satisfaction"; but by its derivation and general usage satisfaction means "the complete or full gratification" of a desire, and this meaning is quite inconsistent with the thought in many connections in which the word is used. We shall therefore prefer here the word gratification, and its corresponding verb, gratify.

Wealth is the collective term for those things which are felt to be related to the gratification of wants. The word is applied in economic discussion to any part of those things, no matter how small. We shall have occasion later to define and discuss this term more fully.

Welfare, in an immediate or narrow sense, is the same as gratification of the moment; in a broader sense, it means the abiding condition of well-being. We have here a distinction very much like that often made between pleasure and happiness. If we think of only the present moment, welfare is the absence of pain, and the presence of the pleasureable feeling; but if we consider a longer period in a man's life or his entire lifetime, it is seen that many things that afford a momentary gratification do not minister to his ultimate, or abiding, welfare. Moralists and philosophers often have dwelt on this contrast. The difference is illustrated by the thoughtlessness and impulsiveness of a child or savage as contrasted with the more rational life of those with foresight and patience.

[Sidenote: Economics first studies wealth]

Wealth, in the general economic sense, is judged with reference to gratification rather than with reference to abiding welfare. It is the first duty of the economist not to preach what should be, but to understand things as they are. He must, in studying the problem of value, recognize any motive that leads men to attach importance to acts and things. He will therefore take account of abiding welfare and of immediate gratification to exactly the degree that men in general do, and the sad fact is that the present impulse rules a large part of the acts of men. Whether tobacco or alcohol or morphine minister to the abiding happiness of those who use them does not alter the immediate fact that here and now they are sought and an importance is attached to them because of their power to gratify an immediate desire.

[Sidenote: Then wealth and welfare]

5. In studying the question of social prosperity, however, we must rise to the standpoint of the social philosopher and consider the more abiding effects of wealth. Wants may be developed and made rational, and the permanent prosperity of a community depends upon this result. Any species of animal that continued regularly to enjoy that which weakens the health and strength would become extinct. Any society or individual that continues to derive gratification, to seek its pleasure, in ways that do not, on the average, minister to permanent welfare, sinks in the struggle of life and gives way to those men or nations that have a sounder and healthier adjustment of wants and welfare. We touch here, therefore, on the edge of the great problems of morals, and while we must recognize the contrast that often exists in the life of any particular man between his "pleasures" and his health and happiness, we see that there is a reason why, on the whole, and in the long run, these two cannot remain far apart. The old proverbs, "Be virtuous and you will be happy," "Honesty is the best policy," and "Virtue is its own reward," have a sound basis in the age-long experience of the world. Cynics or jesters may easily disprove these truths in a multitude of particular cases.

[Sidenote: Freemen are not economic wealth]

6. Wealth does not include such personal qualities as honesty, integrity, good health. Some economists speak of these as "internal goods," but it is far better not to speak of free men or of their qualities as wealth. Many difficulties arise from such a use of the term in practical discussion. One of the most important of all distinctions to maintain in economics is that between material things and men. Only in the case of human slavery may persons be counted as economic wealth. It is a different thing, however, to consider human services as wealth of an ephemeral kind at the moment they are rendered. We are, thus merely recognizing that men may bear at the given moment the same relation to our wants as do material things.

§ II. SOME IMPORTANT ECONOMIC CONCEPTS CONNECTED WITH WEALTH AND WELFARE

[Sidenote: Popular meaning of useful]

1. Utility, in its broadest usage, is the general capability that things have of ministering to human well being. The term is evidently one without any scientific precision. It expresses only a general or average impression that we have in reference to the relation of a class of goods to human wants. Every one would agree to the statement that "water is useful," thinking of the fact that it is indispensable to life and that it ministers to life in a multitude of ways. But what of water in one's cellar, water soaking one's clothes on a cold day, water breaking through the walls of a mountain reservoir and carrying death and destruction in its path? The poison that is doing what we at the moment desire, we call useful; that doing what we would prevent, we call harmful. Noxious weeds become "useful" by the discovery of some new process by which they can be worked into other forms, though they may still continue to be noxious in many a farmer's fields. The utility of anything, therefore, is seen to be of a relative and limited nature. The term "utility" in popular speech is very inexact. It can be employed in economic discussion only when carefully modified and defined.

[Sidenote: Kinds of goods]

2. Goods consist of all those things objective to the user which have a beneficial relation to human wants. They fall into several classes. We may first distinguish between free and economic goods. Free goods are things that exist in superfluity, that is, in quantities sufficient not only to gratify, but to satisfy all the wants that may depend on them. Economic goods are things so limited in quantity that all of the wants to which they could minister are not satisfied. The whole thought of economy begins with scarcity; indeed, even the conception of free goods is hardly possible until some limitation of wants is experienced. Practical economics is the study of the best way to employ things to secure the highest amount of gratification. The problem itself arises out of the fact that many things are used up before all wants dependent on them are completely satisfied.

A distinction is often made between consumption and production goods, or it may be better to say immediate and intermediate goods. Consumption goods are those things which are immediately at the point of gratifying man's desires. Production goods are those things which are not yet ready to gratify desires; some of them, being merely means of securing consumption goods, never will themselves immediately gratify desire.

[Sidenote: Value is utility given precision]

3. Value, in the narrow personal sense, may be defined as the importance attributed to a good by a man. The vagueness and inexactness of the word "utility," or the word "good," disappears when we reach the word "value." It is not a usual relation or a vague degree of benefit sometimes present and sometimes absent, but it refers to a particular thing, person, time, and condition. Value is in the closest relation with wants, and in this narrow sense depends on the individual's estimate. From the meeting and comparison of the estimates of individuals, arise market values or prices, which are the central object of study in economics.

4. THE NATURE OF DEMAND

§ I. THE COMPARISON OF GOODS IN MAN'S THOUGHT

[Sidenote: Wants and goods must be constantly adjusted]

1. As wants differ in kind and degree, so goods differ in their power to gratify wants. This general and simple statement unites the leading thoughts of the two chapters preceding. Confirmation of its truth may be found in observation and experience. The purpose of this chapter is to show how, starting from the general nature of wants and the nature of goods, we can arrive at an explanation of the exchange of goods. Recognizing the simple but fundamental fact stated at the opening of this paragraph, an exchange may be seen to be a rational and a logical result when men are living together in society.

[Sidenote: Ripe and unripe goods]

2. Immediately enjoyable goods are the first objective things whose value is to be explained. Goods come into relation with wants in a multitude of ways. Some things will not gratify a want until after the lapse of a long time, as ice cut in December and stored for summer use. Other things will never themselves directly gratify a want, but will be of help in getting things that do; such are the young fruit trees planted in the orchard, and the hammer that will be used to drive nails in a house that will shelter men. Still other things are gratifying wants at this moment, or are ready for use and will be used up in a very short time; examples of such are the food on the table and in the pantry, and the cigar in the pocket. All these things are called goods, because of their beneficial relation to man's desires, but the relation is very immediate in some cases, very remote in others. The value of all goods is to be explained, but the explanation will be more or less complex according to the directness or indirectness of their relation with wants. As it is the power of goods to gratify wants that alone causes value to be attributed to them, those goods which are ripest, which are ready to gratify wants, are nearest to the source of an explanation. The value of unripe enjoyments must be traced to some expected gratification as its cause or basis. In order to attack the difficulties one by one we will, therefore, in the following discussion, deal first with this class of ripe, consumable goods, as food, personal services, enjoyments of any sort that are immediately available. The explanation of these cases of value must precede that of cases in which the relation to wants is less obvious and direct.

[Sidenote: The law of diminishing utility]

3. As the amount of any good increases, after a certain point the gratification that the added portions afford decreases. This is called the law of the diminishing utility of goods or of the decreasing gratification afforded by goods. The reason for the truth of this proposition is found in the very nature of man and his nervous organization. Any stimulus to the nerves, however pleasant at first, becomes painful when long continued or increased unduly. The trumpet too distant at first for the ear to distinguish its notes, may swell to pleasing tones as it approaches, until at length its volume and its din may become absolutely painful. If we were to express the degree of gratification by a curve, we should see the curve rising gradually to a maximum, and then falling somewhat suddenly and becoming a negative quantity, when pain, not pleasure, resulted. The same change could be illustrated by any sensation or by any of men's activities.

The proposition must be understood as applying to the gratification resulting from each added portion of the sensation. There is a maximum point in the gratification afforded by any nerve-stimulus. A man coming in from the winter's storm and holding out his hands before the fire, feels an intense pleasure in the grateful warmth; a few moments later, the same heat becomes unpleasant. In winter we wish for a moderation of the temperature; on the sultry days of summer, we think of a cool breeze as the most to be desired of all things. Whether the temperature rises or falls, there is a point beyond which the change is no longer an addition to, but a subtraction from, pleasure. A man, however hungry at first, may be made miserable if forced to eat beyond his capacity. Each added portion of the good consumed contributes to the gratification up to a certain point. The sum of these pleasurable sensations may be called the total gratification, which finally reaches satisfaction or fullness. Then begins what may be called in algebraic phrase a "negative gratification" which, if it becomes large enough, will make the total gratification a negative quantity. Each added portion, dose or increment beyond a certain point reduces thus the welfare of the user. One may have too much of a good thing.

[Sidenote: The marginal utility]

4. Marginal utility is the gratification afforded by the added portion of the good. The marginal dose, increment, or portion is that which may be logically considered as coming last in the case of any good or group of goods divisible into small parts. In considering the strict theory of the case, in order to get at the principle involved, the doses may be spoken of as infinitesimally small. The marginal utility expresses the importance that men attach to one unit of this kind of goods under the particular circumstances at the moment existing, and not under certain conceivable conditions which do not in fact exist or need to be taken into account by the persons affected. The marginal unit of a homogeneous supply cannot be considered to have a greater utility than any other unit at the moment, and therefore the product of the marginal utility by the number of units, gives the total measure of importance of the supply then and there, and this is the value.

The value of goods, as has been indicated, is the measure of the dependence felt by men on a portion of the outer world, as the condition of gratifying their wants. From the very nature of wants, which reside in feelings, a dependence that is not felt, a relation between things and gratification that is not recognized, can have no influence on value. Now, it is at this margin of supply that dependence is felt. Men do not concern themselves about that which they have in superfluity--unless, indeed, the excess causes them some discomfort. It is well that they do not, for a wise direction of effort can only take place when men think mainly of their need of things that they want, and want most, and direct their efforts toward securing them.

[Sidenote: From marginal utility to value]

The diminishing utility of successive portions (doses or increments, as they are called) may be represented by a curve of utility.

The diagram is constructed on the hypothesis that a tenth unit of a certain good would have a utility expressed as 36; a fifteenth unit of 30, etc., and that the value of the whole supply is estimated according to these marginal units. Of course if the conditions were that "all or none" was to be taken, the result would be different.

Unit of Supply Marginal Utility Value of Whole Supply 10 36 360 15 30 450 20 25 500 30 19 570 40 15 600 50 10 500 60 5 300

This diagram is frequently used, and it is important to guard against some misunderstandings. The marginal unit of any given supply--for example, ten units--is not any particular unit, it is any one of the ten units. In the presence of nine units of the good the person or persons find all the various wants that are dependent on that good gratified to such a degree that the tenth unit has an importance expressed by 36. But as this last or marginal unit of supply may be used for any of the purposes, the importance of each and every unit likewise will be expressed by 36. Any one of the units, when once present is, in a logical sense, a marginal unit. When, however, it is a question of increasing the supply, some one unit may properly be looked upon as marginal. The dependence felt by men on the whole group is the product of the units by the marginal utility. As the number of units increases, the marginal utility decreases, until at length it may reach zero, and the total value would be nothing. A point of maximum value evidently will be found somewhere between the two extremes.

[Sidenote: Only one marginal utility at one moment]

Note carefully that on the one diagram are represented a large number of marginal utilities which never exist at one and the same moment. At any one moment there is a given number of units and there is but one marginal utility, and this is the same for each of the units. It is quite erroneous to say that when there are 30 units the utility of the tenth unit is 36; of the twentieth, 25; of the thirtieth, 19. It is equally incorrect to say that when there are 60 units the "total utility" is equal to the area between the right angle and the curve a-g, while the value is equal to the rectangle below and to the left of the point g. The curve from a-g but marks the height of marginal utilities that have no existence when the supply is 30. The "total utility," often spoken of in this connection, if it has any existence certainly cannot be calculated. The diagram must be understood as representing indicatively at any given moment but one marginal utility, the same for every unit of like goods. The other perpendicular lines are expressed in the conditional mood; they are what the marginal utility would be were the numbers of units different.

[Sidenote: Changing feelings changes utility]

5. Since goods possess utility only as they gratify wants, it follows that if wants change, the utility changes. Utility does not rest unchanging in the goods as something "intrinsic," but it depends on the relation of goods to men. This truth, unrecognized for many centuries, is now seen to be fundamental to the whole problem of value. The portions of a good added later do not appeal to the same man as the earlier portions. The man has been changed by what he has enjoyed. In changing his feelings, goods have also changed his wants. Hence, the added portions of the good are changed in respect to their utility or power to gratify a man's wants. Though physically and chemically, i.e., in every material way, they are exactly like the earlier portions, they cannot have the same want-gratifying power until he again changes, for they are not in the presence of the same feelings.

Wants are constantly shifting; different kinds of goods are compared in man's thought and arranged on a scale at every moment according to their felt utility. An increase in the amount of a good will drop the marginal utility of the added portions down the scale of usefulness for the next moment. When we rise in the morning, we want our breakfast; the breakfast eaten, another breakfast does not appeal to us. Our tasks done, we take a boat-ride or go golfing; then, appetite returning, we are tempted to our dinner. And thus from hour to hour wants are gratified, are altered and are shifted, until, wearied with the day's labor and pastimes, we go to rest. In a well-ordered life, in an advanced economic society, the means for gratifying our wants as they arise are provided in advance. The changing series of desires is met by a changing series of goods. Life has been defined as a constant adjustment of inner relations to outer conditions. Economic life is therefore like physical life, a constant adjustment; and this adjustment of goods but reflects the shifting and adjustment of feelings.

[Sidenote: Choice is constantly shifting]

6. The substitution of goods in men's thought is the shifting of the choice from a good that does not give the highest gratification economically possible at the time, to another good that does. The shifting that takes place on the scale of gratification makes it necessary for man to shift constantly his choice of goods. This again is the problem of "economy." Waste results when goods continue to be used to secure a lower degree of gratification, if they might be used to secure a higher. The change of choice may be because of a change in the man, or because of a change in the quality or the quantity of the goods; or because of a change in the ratio at which the goods can be secured.

§ II. DEMAND FOR GOODS GROWS OUT OF SUBJECTIVE COMPARISONS

[Sidenote: Desire may become demand]

1. Demand is desire for goods united with the power to give something in exchange. An example frequently given to show the difference between desire and demand is the hungry boy looking longingly at the sweetmeats in the confectioner's window. He represents desire, but not until the kind-hearted gentleman gives him a nickel does he represent effective demand. Desire, therefore, must be united with power to give something in exchange before it can be called demand. It must be for something that is attainable; yearning for something beyond reach, sighing for the moon, is desire that never can become effective demand.

[Sidenote: Demand the Social expression of shifting choice]

2. Demand is the social aspect of the individual man's comparison of utilities. It is the expression of the man's wish to substitute some of his goods for some one else's goods in order to get a higher satisfaction. This comparison is often made between two goods owned in different quantities. When men are constantly comparing things in their own possession, it is a short step to compare their goods with their neighbor's.

Demand for consumption goods is thus the manifestation of the man's desire to redistribute his enjoyments. In demand for goods men virtually say: "Part of what I have I am ready to give for part of what you have." The strength of their desire is expressed by the amount of their offer. When he makes this comparison and this offer, man enters into a social, economic relation with his fellows.

[Sidenote: The limit of the exchanger's demand]

3. The law of individual demand is: The trader will reduce his stock of a particular good to the point where its marginal utility equals that of the alternative goods. The greater the divergence in his estimates of the marginal utilities of two goods, the more ready is he to trade the lower utility for the higher one. Exchange is but the effort to adjust goods to wants in the best way. The less useful (marginally viewed) is traded for the more useful. The greater the difference, in the one trader's judgment, between the marginal utilities of the two goods, the greater is the maladjustment, and the greater, therefore, is the motive to seek readjustment by means of exchange. As the quantity of the good parted with declines, its marginal utility increases; and as more of the other good is acquired, its marginal utility declines. The marginal utility of the two exchangeable units must come to equilibrium in the individual's judgment. At this point demand ceases, not because an additional unit of the one good could afford no gratification, but because it would afford less gratification than the other good in which demand must be expressed to be effectual.

[Sidenote: The Demand curve]

4. Demand thus varies at different ratios of exchange between goods, and may be expressed graphically by a demand curve. This would show for any one man the decline of the marginal utility of each added portion of a good, and these individual demand curves may be united into a demand curve for a group of men. The demand curve expresses graphically what a man would be willing to pay at each particular stage in the increase of goods. We have here come to the very threshold of the subject of markets and exchange.

[Sidenote: Elasticity of demand]

5. Elasticity of demand, in the case of any good, expresses the degree in which a change in its ratio to other goods will increase the demand. Elasticity varies for different classes of men according to their wealth and to the cost of the goods. If strawberries are a dollar a box in the city market, a slight fall in the price, say to seventy-five cents, will increase the demand but slightly. But if the price is fifteen cents and falls to ten, the increase in the demand will be marked, for the number of consumers to whom a difference of five cents is important is then very great. The demand for the staples is comparatively inelastic. A certain amount of simple food is necessary to support life; an increase in its price will not quickly check the demand. On the other hand, if the price of staple foods falls, no very great increase will take place in the demand.

5. EXCHANGE IN A MARKET

§ I. EXCHANGE OF GOODS RESULTING FROM DEMAND

[Sidenote: Reciprocal demand becomes exchange]

1. Exchange in the usual economic sense is the transfer of two goods by two owners, each of whom deems the good taken more than a value-equivalent for the one given. The comparison of goods that has been discussed above is a kind of exchange. When a person chooses one thing rather than another, one form of gratification may be said to be mentally exchanged for another. This is exchange in that person's mind, or subjective exchange. But the word "exchange" as usually employed means an exchange of goods between persons. It is objective exchange, and when the word is used without modification, it is to be understood in the objective sense. In the last chapter were analyzed the motives of the individual man. Robinson Crusoe on his desert island would in very many ways be acted upon by the same motives in reference to economic goods that men are in society. Yet, it is exchange in society and the complicated problems arising from this transfer of goods from person to person that constitute nearly the whole of the subject-matter of political economy.

Exchange is seen to arise out of the differences in the situations of men with reference to goods. The different subjective valuations give rise to demand, and demand leads to exchange. In early societies differences in natural products were the most usual causes of exchange. Salt, though so essential to life, is found in few places. The metals early became indispensable for weapons of defense or for the chase, and were sought far and wide. Rare shells, feathers, jewels, and the precious metals appealed in early times to a universal desire for ornament. Products like these are the objects of a rude sort of exchange in the first simple efforts made to adjust possessions to wants. Within the tribe, differences in the skill and ability of men to produce arrow heads or weapons or ornaments, bring about the exchange of goods.

[Sidenote: Mutual advantage in exchange]

2. The advantage of exchange consists in the raising of the want-gratifying power of goods to both parties. It generally was assumed by medieval thinkers that if one party to an exchange gained, the other must lose. The mistaken idea prevailed that value is something fixed in the good, and unchangeable. Where the exchange is voluntary (and only that kind is here being considered), it is mutual advantages which make the exchange rational. Many false conclusions on practical questions still result from a failure to grasp this simple truth. It follows from this that the act of exchange is itself useful, for goods having a small importance to men are given a higher importance by being brought into better relations with wants. Merchants, peddlers, traders, and common carriers of all sorts, therefore, are adding to the utility of goods. This idea has been only slowly apprehended, but is now one of the least disputed propositions in economics.

[Sidenote: Demand is supply in another aspect]

3. Barter is the exchange of goods without the use of money. Either one of the goods traded in cases of barter may be considered as sold, and either one as bought, according as the matter is looked at from the standpoint of the one or the other party to the exchange. Demand, therefore, is supply, and supply is demand when the point of view is shifted from one party to another. The fisherman's demand for venison is expressed in terms of fish; the hunter's demand for fish is expressed in terms of venison. But to the fisherman the venison is the supply offered to him. The term "marginal utility" of a good, therefore, does not refer merely to the demand of the consumer; for it expresses by a single phrase the idea both of demand and of supply. The utility of the goods composing the supply is expressed in terms of the goods that represent demand and vice versa. The only way in which man can give definite, concrete, numerical expression to his desire for goods is to state it in terms of other goods. In expressing numerically, in terms of other objects, an estimate of the utility of an apple, a horse or a house, one inevitably gives expression to a ratio of exchange; demand for one good is the offer of another good.

§ II. BARTER UNDER SIMPLE CONDITIONS

[Sidenote: In isolated exchange the price is not economically fixed]

1. In isolated exchange, where only two traders engage in barter, their estimates give respectively the upper and the lower figures of the ratio at which the trade can take place. Let us recall the fact that a difference in the relative estimates that men place on goods is the first essential of exchange. Those estimates may be expressed in a ratio; we may say that A will give four apples for one orange, would be glad to give fewer, but will not give more; while B will give one orange for three apples, would be glad to get more apples, but will not take fewer. The outside limits of the ratio at which the exchange must take place will, therefore, be one orange for three or four apples.

A, seller of apples, offers 4 (or fewer) apples for 1 orange.

B, buyer of apples, demands 3 (or more) apples for 1 orange.

There is, in entirely isolated exchange, therefore, a lack of definiteness in the price, much depending on what Adam Smith called the "higgling of the market." In the old-time American horse trade much depended on "bluff"; in such cases it was as important to be able to judge character as to judge horses. A thorough analysis of the trade, however, would probably show that the bargain is concluded at a point which exactly balances the hopes of gain and fears of loss of one of the parties.

[Sidenote: Competitive bidding narrows the limits of price]

2. Where one-sided competition exists, the ratio of the exchange will be somewhere between the estimates of the two buyers most eager for the last portion offered. By competition is here meant the independent seeking of the same thing at one time by two or more persons. Where there is one market price paid by a number of buyers, it may be that no two of the subjective estimates are alike; the exchange value may differ from all of their estimates, and yet must correspond closely to two. Auction sales well illustrate the principle. If there is one ax to be sold and ten possible buyers for an ax, and there is no combination among them, the bidding will go on until the estimate of the buyer next to the most eager, has been reached. The most eager buyer can then secure the ax by bidding just a little above his next competitor. But if there are ten axes and ten buyers who know that there will be ten axes offered, the more eager buyers will refuse to bid much above the less eager ones. A shrewd auctioneer, therefore, often conceals the fact that there is more than one of an article, and having sold it off, brings out a second or a third one of the same kind, thus keeping the buyers in ignorance of the supply and getting somewhere near the estimate of the most eager buyer in each case. Advertisements of "a limited supply," "the last chance," "positively the last appearance," are meant to stimulate the demand of the patrons, and to lead them to buy at once. In general, therefore, where competition exists on one side, price is fixed with greater definiteness than in isolated exchange. Not so much depends on shrewd bargaining, on bluff, or on the stubbornness of an individual. Far more depends on forces outside the control of any one man. The bidders are impelled by self-interest to outbid their competitors, and thus the limits within which the market price must fall are narrowly fixed.

[Sidenote: Buyers fix price of perishable goods]

If things already brought to market must be sold at any price that can be secured, the buyers may be said to fix the price. This does not mean that they can buy it for any sum that they wish, but it means that when each one is trying to get it as cheap as possible, their bids finally determine how much it will sell for. In such cases, therefore, the competition is for the moment one-sided.

If a part of the supply can be withdrawn and kept without great loss, this will be done if the price is low. Strawberries, fish, and meat may be sold Saturday night at any price that will secure purchasers, but every thing that can be kept with little or no depreciation will be withheld from sale for a time. It may even be of advantage to the seller to destroy a part of the supply, when the increased price of the smaller amount will give a larger total.

[Sidenote: The margin of advantage and the marginal pair]

3. Where two-sided competition exists, the bidding goes on until a price is reached where the least eager seller and the least eager buyer have the narrowest possible motive to exchange. As the market ratio varies from those in the minds of the individuals when they come to the market, there is left a considerable margin to some and a very small one to others. This difference between the market value and the ratio of exchange at which any given individual would continue to exchange for the good may be called the margin of advantage. Moreover, the buyers will have a margin and the sellers a margin, and as that margin narrows there is less and less motive to continue the exchange until, finally, the margin disappearing, the buyer or seller, withdrawing from the market, ceases to be an exchanger, at least for that particular part of the goods.

The least eager buyer and the least eager seller may be called the marginal pair. They are the buyer and the seller respectively having the narrowest margin of advantage. Their outside estimates are nearest to the market ratio. If the market ratio shifts slightly in either direction, one of them will drop out of the exchange. It is evident that a buyer who is taking ten units may be on the margin with reference to the tenth unit, and yet may continue to be one of the most eager buyers to secure one unit. Thus, the marginal buyer is to be thought of as that person who, logically considered, is the least eager, or on the margin, with reference to a particular unit of supply, however eager he may be with reference to any other unit of supply. It would be well to recall here the discussion of the nature of wants and the variation in the intensity of demand.

[Sidenote: Market values built on individual estimates]

4. Market values are built up on subjective valuations. The idea of market values, therefore, is that of the want-gratifying power of goods as expressed in terms of other goods, where there are various buyers and sellers. They are not an average of the subjective valuations, nor are they made up of the extremes. They correspond closely with the subjective estimates of two of the exchangers. The other parties to the exchange are willing to accept the market ratio, for it offers them more inducements than it does to either one of the marginal pair.

§ III. PRICE IN A MARKET

[Sidenote: One price in a market]

1. A market is a body of buyers and sellers in such close business relations that the actual price conforms closely to the valuation of the marginal pair. The word "price" which we have used, may be defined as value expressed in terms of some commonly exchanged commodity. The term is used more broadly of anything given in exchange. The very terms of this definition imply that there can be but one price in a market. This is a somewhat abstract but a useful economic proposition. Very often within sound of each other's voices traders are paying different prices for a good. On the occasion of a break in the stock-market, excited traders within ten feet of each other make bids that differ by thousands of dollars. Retail and wholesale merchants may be purchasing goods in the same room at the same time at very different prices. But within a group of buyers and sellers where competition is approximately complete, price is fixed with some degree of exactness. The more nearly the actual conditions approach to the ideal of a market, the less are prices fixed by higgling, and the more impersonal they become, the buyers and sellers being compelled to adjust their bids to the needs of the market, and not being able to vary them greatly one way or the other.

[Sidenote: The earlier markets]

2. Markets are steadily widening through the improvement of means of communication and transportation. The earliest markets were established on the borders between tribes, villages or nations as a common ground where strangers met to trade. At such markets were brought together from sparsely settled districts a comparatively large number of merchants and customers. Buyers had the opportunity of wide selection both in kind and quality, and the sellers found a large body of customers gathered at one point. Throughout the Middle Ages purchases were made by the more prosperous husbandmen in great quantities once a year at the fairs or markets. As both the buyers and sellers came from widely separated places, there was, in most respects, no combination, and the conditions of a competitive market were present.

[Sidenote: The growth of markets]

The number of buyers and sellers that can constitute a single market is limited both directly and indirectly by the means of transportation. A dense population cannot usually be maintained without easy means of transportation to bring in a large supply of food, and to carry back manufactured goods great distances. The remarkable growth in the means of commerce since the application of steam to water traffic, and the invention of the railroad, have made it possible for goods to be gathered from most distant points. A market implies a common understanding among traders. Modern means of communication such as newspapers, post-offices, telegraph and cable, trade bulletins, commercial travelers, the consular service, and many forms of special agencies, are diffusing information widely. As a result of these changes, there has been a widening of the village-market to the markets of the province, of the nation, and finally of the world. While a part of every one's purchases continues to be made in the neighborhood, a greater and greater portion of the total business is done by traders who are widely separated and who are indeed members of the world market. Various articles produced in the same locality may seek different markets. The market for wheat may be in Liverpool, while that for fruit and eggs is in the village near the farm-house. If a given product of any community is sold in different markets, the net prices secured must be very nearly equal.

[Sidenote: The conceptions normal and market price]

3. Normal price is spoken of in contrast to market price when the actual market price results from exceptional circumstances and probably will not be maintained. The term "normal price," much used in economic discussion, is the price which, apart from exceptional conditions, is expected to prevail, and to which actual prices seem constantly striving to adjust themselves. As actual prices are nearly always either more or less than so-called normal price, and only momentarily ever correspond with it, the term "normal" would appear to be something of a misnomer. Moreover, as the circumstances of production change, this normal price itself is altered so that what is normal one day may be quite abnormal the next. The thought of "normal price" is an abstract one, but despite the inaptness of the word it is not without some practical validity. In determining whether he shall continue to produce certain goods, the business man is practically guided by his view of normal price. An example of departure from normal price as above defined, is found in the price of food when an expected ship has failed to arrive at a port with its cargo of grain. A scarcity amounting almost to famine might thus exist in a seaboard city, and the market price would rise; but as this would be due to an accident and would afford a larger gain than usual to those who happened to have a supply of grain, men would say that the market price was above the normal price. The arrival of the expected ship would cause the market price to return to the normal.

[Sidenote: Review of the argument]

In review, we see that the market value of goods grows out of the different personal estimates made by men. Market value itself being a complex and difficult problem, it can be mastered only by dividing it. First, therefore, must be studied the more general and obvious motives of men, the nature of wants and their effects on man's subjective estimates. The same simple motives that influence the subjective valuations made by individual men, may be traced to the conditions of the complicated market. It is their workings that are seen in the obscurest problems of market price.

6. PSYCHIC INCOME

§ I. INCOME AS A FLOW OF GOODS

[Sidenote: The recurrence of wants]

1. Satisfaction and gratification being only temporary conditions, economic wants appear in more or less regularly recurring series. Impressions are short lived, sensations are temporary, wants that have been satisfied recur. Wants recur for the same reason that they first arose. No impression on the nerves or on the senses is lasting. Man's senses were developed for the purpose of bringing him into relation with the outer world, of enabling him to survive in his struggle with the forces of nature. So, when a good has been enjoyed, the utility to that person of that thing or service for that particular moment, falls, it may be even to zero. To keep wants satisfied is impossible; we cannot do next year's reading or next week's eating now; we cannot live the life of to-morrow. The best results in reading or eating come from taking the right amount day by day. But it is a need in the life of men that wants should recur after a time, otherwise there would be no motive for action.

[Sidenote: Series of wants and series of goods]

2. The economic ideal is that this series of recurring wants should be met by a corresponding series of goods. It is evident that if a series or succession of goods varies, at different times, moments, and conditions, in its power to gratify wants, the closer the correspondence between the two series, that of wants and that of goods, the greater will be the total of gratification. We may liken man's life to a journey in which the supplies of food are gotten at the stations. If any one of these supplies fails, the traveler suffers the pangs of hunger, and if two or three supplies are at one point, they do not serve the needs of man so well as if distributed along the way. This constant inflow of goods is one of the fundamental needs of life. The savage dimly understands this need. Even the birds and the beasts adjust their lives to it either by travel or by toil. The spring and autumn migrations to new feeding grounds are the attempts of the bird to gratify this series of wants as they arise. The ant, the bee, and the squirrel anticipate, and work to fill their storehouses against the days of need.

[Sidenote: Social and private incomes]

3. Objective income consists of the additional sums of goods acquired by individuals or by society during the income period. The term national or social income may be contrasted with individual or private income in the objective sense. The nature of the acquisition of objective incomes may, in some cases, be different if viewed from the social and individual standpoints. Society, as a whole, may be said to acquire income only when goods are produced; individuals may acquire income by gift, bequest, theft, or other modes of transfer from other individuals. In many cases the two kinds of income, however, agree, the objective income of society being the algebraic sum of the goods acquired or parted with by all the individuals.

We should not understand that either social or private objective incomes include only material goods, for many utilities and labor services that never take on a material or money expression are included in either case. Indeed, we are close here to the conception of psychic income which is to be developed more fully.

[Sidenote: Money income]

Income of money is not often the same as income of things. Usually many of these subtler utilities are overlooked and omitted from the recognized money income. In this day the use of money is so common that we are sometimes led to ignore the value of things to which the money expression is not given. The money income is merely the money expression of the value of currently acquired goods, and it is the only medium through which such varied sources of gratification can be compared.

[Sidenote: Gross and net income]

4. Income in the logical sense must be a net addition, but the term gross income is not without popular and practical meaning. Gross income is sometimes spoken of in the sense of total receipts, as the total of goods secured; net income is the remainder after deducting expenditures and after replacing the goods employed to secure the income. In order to produce some goods technically, men make use of other goods. While they are storing up a supply of wood or coal it may be looked upon as the income, but they may burn it to help grow hothouse plants. While they gather flowers with one hand, they destroy fuel with the other. Only the net increase in value can be accounted income in the second period. The goods that come into a man's possession in any period are of many sorts: to get some he has destroyed many previously existing goods; while to get others he has not needed to use up the accumulations of the past or to mortgage the future. The one kind is gross, the other net income.

[Sidenote: Wealth and income]

5. An income of consumption goods is a part of wealth, but not the whole of it. The consumption goods, the "present goods" at the moment available, are the essential part of wealth for the moment's enjoyment. The only essential and immediate conditions of a series of gratifications is a regular series of consumption goods. But many things existing which could be used to secure a gratification are not in fact treated as consumption goods. A crop of corn is not all income. In a time of famine it could be used, but seed-corn was saved from last year, and some must be kept for next year. This is a part of wealth, but not of "present goods" as we understand the term.

[Sidenote: Some goods never can become enjoyable goods]

Further, in the economic world there is much wealth that never can gratify any want directly; many forms of wealth never can be consumption goods. It is true that everything called wealth is expected to contribute sooner or later in some way to the sum of gratifications. It is for that reason it is called wealth. It is, however, a mere figure of speech to say indirect want-gratifiers become want-gratifying goods. For example, the engine transporting a load of coal is indirectly gratifying wants; if it is transporting a train-load of passengers, the gratification is direct. A machine making cloth for next year is gratifying wants only in a metaphorical sense. A field used to produce food is not a direct want-gratifier until it is transformed into a residence site, a playground, or a tennis-court.

It is necessary therefore to recognize the distinction between present and future incomes. The value of the mass of wealth in possession and yielding income, rests in large part upon its power of contributing to income in some future period. Thus, any durable good may be looked upon as embodying a series of incomes ranging from present to future in varying degrees. This will be fully considered under the subject of capital.

[Sidenote: Income from wealth and from labor]

6. Incomes are called funded or unfunded according to the sources from which they are derived. Funded income arises from the possession of wealth or of claims on wealth, such as lands, railroad stocks, government bonds, etc. The income is "funded" because it corresponds to an abiding fund of wealth. The income arising from current labor is unfunded, because there is no permanent fund of accumulated wealth corresponding to it.

The idea of regularity connected with funded income is not essential to the idea of income in general, i.e., we cannot refuse to call a thing income because it occurs only this year. If it is part of the sum of goods that flows in, that is newly available for the man's use, it is income. But funded income is the more abiding, for income from wages stops when the man dies or fails to perform his work, while the income from wealth continues after he ceases to be active. Thus, families with equal incomes may differ greatly in wealth, the one depending entirely on salaries, the other on rents.

§ II. INCOME AS A SERIES OF GRATIFICATIONS

[Sidenote: Gratification the test of psychic income]

[Sidenote: All sources of income are productive]

1. The value of consumption goods is derived from the pleasurable psychic impressions which they aid to produce, and these psychic effects constitute the psychic income. The objective income is sometimes called the "real" income, but certainly it is not income in the most essential sense. Things outside of men cannot be feelings, they can only call out or occasion feeling, and it is the attainment of pleasurable conditions in mind or soul that is the aim of all economic activity. Material income and immaterial income are both related to and reducible to psychic income. Some portions at least of the objective incomes of goods are continually by use becoming subjective incomes of enjoyment. Men talk of material income as consisting of bushels of wheat, head of cattle, etc., and of immaterial income as the uses that durable goods yield directly or that men perform for each other, e.g., those of the singer, physician, teacher, judge--all services that do not take on material form. There was a long-standing dispute in economic literature regarding the difference between productive and unproductive labor. Productive labor was said to be that which embodied itself in abiding material form. The distinction led to some peculiar puzzles and paradoxes. The bartender mixing drinks, adds to the value of those ingredients; in a minute that value is dissipated. According to the distinction in question, he is a productive laborer because his services are embodied in material form, whereas the lecturer is regarded as an unproductive laborer because the results of his labor are not embodied in material form. But whether or not the service has for a moment embodied itself in material form is of no essential economic import. The presence of the waiter is as essential to the well-served dinner as are the polished silver and china, or as the well-cooked food. The distinction in question is not now made by economists, all labor that contributes to value being regarded as productive. But a similar distinction is inconsistently preserved by many writers in the case of material things. A building used as a factory is called productive, but used by the owner as a dwelling it is called unproductive because the service it renders does not appear in material form. But the use of the house, or that of land for a school ground or campus, secures a certain gratification, an immaterial good. Consistency requires that the services of men and the use of material things be judged by their psychic results, the question whether the service takes on a material or an immaterial form being disregarded.

[Sidenote: All wealth is logically related to psychic income]

2. Only those things and actions that are in some causal relation to gratifications can have value to man. This proposition of theory is demonstrated every hour in practical life. The business man always is trying to trace a causal relation between things that do not and cannot themselves directly satisfy wants, and things that do. The vineyard has no value to Tantalus, unable to reach its fruit. A captive, chained to a rock, attaches value only to the things within his reach. Men living in savagery and ignorance starve amid the possibilities of plenty. Chained by their ignorance and improvidence to a little spot of earth, they do not see clearly, either in time or space, the economic relations about them.

[Sidenote: Values of things distant in time]

3. Man's foresight and knowledge enable him to think of many periods at once, and thus his felt dependence on goods extends over a series of future productive agents. In order to simplify the problem, we have spoken of the economic man as living only in and for the moment. If he had no more knowledge, memory, or imagination than is necessary to compare goods here, only present goods could have value to him. Even the higher animals, and much more the savages, rise above that level of improvidence. With increased intelligence the economic life of man expands, and he attaches importance to things which at the present moment have not, and cannot have, the slightest influence on his immediate gratification. The extension of man's view works a momentous change in his economic estimates. Of the thousands of forms of matter in the world, only a comparatively few ever will make an immediate gratifying impression on man's senses. But many of them are so connected in his thought by chains of association with pleasures or uses, that almost instinctively and most intensely he attaches an importance to them. In most cases it would require close thought to see that the service attributed directly to them was but a reflection of that performed by some other good. Thus, more and more, the estimates placed by men on goods come to depend on knowledge and foresight, and not on immediate impressions and feelings.

[Sidenote: Goods related in varying degrees to psychic income]

4. Things are causally related in varying degrees to the psychic income, and have value only as their relation is known and felt. The explanation of value is not complete till value has been traced back to its source in gratification. Often the complex nature of the problem is ignored. If one discusses the trading of a bushel of grain, to be used by a hungry man for food, for a sheep to be kept for breeding, or for wool to be made into cloth next year, he may overlook the difference in the grade of wants compared. In this case, a gratification of the present moment is compared with a gratification of a very different kind at a future time. The problem involved is complex because of differences in time, in place, and in the nature of the want-gratifiers. The student should endeavor to reduce the problem of value to its simplest form by considering first the exchange, at the present moment, of immediately enjoyable goods. The logical starting-point in the theory of value is in those goods that are in closest touch with feeling, and on this basis may be built up an explanation of values in which reason and forethought have a greater part. Starting from the proposition that psychic income is the foundation of all values, we shall go on, however, to trace causes that give value to all the physical agents, and to the most indirect of want-gratifiers.

DIVISION B--WEALTH AND RENT

7. WEALTH AND ITS INDIRECT USES

§ I. THE GRADES OF RELATION OF INDIRECT GOODS TO GRATIFICATION

[Sidenote: Technical rank of agents]

1. Goods may be ranked according to their technical relation to wants. The technical rank of goods (sometimes spoken of as the degree of roundaboutness of the process) signifies the number of steps or processes that intervene between the agent used and the desired form. If one wishing the hickory-nut hanging above his head must first pick up a stick to throw at it, the nut is removed one step from desire. But even among savages the processes are much more complicated. The Indian with a crude knife fashions his bow and arrow, fastens the flint and cord which represent still other processes of industry, and shoots the bird which satisfies his hunger. In modern conditions the relations are vastly more complicated; only at the end of a long series do men arrive at the thing which gratifies their wants.

[Sidenote: Time relations of goods to wants]

2. Goods may be ranked by their relation to wants in time. The relation in respect to time is measured by the period that must elapse before the utility of an agent results in, is converted into, gratification. No agent or influence intervening, a thing may yet be removed a long way from gratification. A tree may not be fitted to bear fruit for ten years to come. Meantime, there are many other possible uses for the tree: it may be used for fuel, or to make a canoe with which to catch fish, or to follow some other indirect method of production. Evidently the technical and time relations of goods are very different. The number of steps has no necessary relation to the time. A number of technical steps may be taken in half an hour, or a process of a single technical step may last a year. In the mechanic arts the technical relations are of primary significance, but in economics the time relations are mainly to be considered.

3. Economic goods may be classified as immediately enjoyable goods and durable agents. Enjoyable goods are goods in a final form, producing gratification or just ready to give gratification the next moment, as the cool draft of air made by a fan on a hot day, the cup of coffee steaming on the table.

[Sidenote: Enjoyable goods and durable agents]

Many goods of just the same form as the foregoing may not be affording current gratification (except that afforded by thrift and forethought), but are kept because later they will gratify a more intense want or gratify a want better. Apples and potatoes are kept in a cellar so that their use is distributed throughout the winter; cider and wine are kept till they get a quality that appeals more to the palate. Coal, wood, and stocks of goods, are thus kept in the form of enjoyable goods, destined to be physically destroyed when at length they yield a gratification. Evidently they must be storing up meantime a certain additional utility, for otherwise there would be no reason why they should be kept for the future. Such goods as these are sometimes called unripened consumption goods, but until ripened they bear in part the character of durable agents.

Abiding sources of economic enjoyments are called durable agents. The inhabited house is a source of continued gratification in each moment's shelter it affords; but, further, it is the durable source of a series of future uses, as yet unripened. The hammer, the hoe, the tree, the field may all be considered as agents to secure consumption goods. Some of these are but one step removed from direct gratification, as the hoe helping the gardener to get food for his own use. Other agents are bound by many technical links to the ultimate gratification.

[Sidenote: Degrees of durableness]

4. This classification of goods is abstract, in that it is a classification, not of concrete goods, but of qualities shared in some degree by nearly all goods. Most goods unite in some degree both characters, but in varying measure. This is, therefore, a continuity classification, the varying classes of goods grading from those whose durableness is zero (just at the moment of consumption) to those most durable, which yield an endless series of uses or products. Yet the classification is practical, corresponding as it does with thoughts which men have in the use of goods. By repairs and other methods goods become, and are looked upon as, durable sources of a series of uses.

It is to be noted further that the enjoyable goods pass over into psychic income, that is, they are the stream of objective utilities that is each moment detaching itself as income from the great mass of wealth. The durable goods are those utilities which for the time remain, not yet ripened or ready to be converted into psychic income.

§ II. CONDITIONS OF ECONOMIC WEALTH

[Sidenote: Income as affected by climatic conditions]

1. The bounty and variety of the natural supply of indirect goods in the material world are the prime conditions of a bountiful income to society. The effect of climate on the supply of goods available for man is complex. Climate is itself a direct source of gratification. As temperature must be adjusted to man's need, climate satisfies wants directly. Health, energy, the beauty of noonday woods and of sunlit clouds are conditioned on the favor of nature. Climate affects, further, the supply of material economic goods. All the earlier civilizations arose in warmer countries. But, after man had gained a certain mastery over the obstacles of nature, he was able to soften the harsher features of climate, and with better shelter and clothing, with better stocks of winter food and fuel, the more favorable features of the temperate zone could be utilized. So civilization moved northward from Egypt and India to Greece and Rome, to northern Europe and America.

[Sidenote: By natural resources]

Soil conditions for vegetable life determine first the amount and kind of animal life. Animal life from one point of view is a parasite, living on the vegetable; it is only the vegetable that has power to assimilate most inorganic compounds. Water being a need of plant life, the amount of rainfall is one of the most important conditions of industry. Man, therefore, depends on the resources of the soil directly or indirectly; a fertile soil furnishes him either directly a supply of vegetable food, or indirectly a supply of animal food.

Natural supplies of metals, of coal, and of timber are important consumption goods, but they are also indirectly the condition for a vast variety of other goods. The industry that could exist without iron, copper, and coal would be of a very low grade.

[Sidenote: By flora and fauna]

The variety of flora and fauna, and their fitness for man's needs, largely condition the possible production. If, in the course of evolution, it had chanced that wheat and corn, the horse and the cow, had been crowded out in the struggle for existence, we should have had a very different civilization. The possibilities of civilization in Peru, and those of all the Indians on the American continent, were limited for lack of domestic animals. Animals that are fit for domestication are a necessary intermediate agent by aid of which man can appropriate and turn to his use the fertile qualities of the soil.

Not content with the material world about him, even when it is at its best, man alters it in many ways. He enriches the soil, improves the varieties of animals, he even in some slight degree affects the climate, and by the use of a multitude of artificial bits of matter called tools, works profound changes in the world in which he lives.

[Sidenote: By motion and energy]

2. A large part of the utility of goods is conditioned on motion and energy. It has been said that man's power in production is limited to moving things. The outer world is to man the sole source of motive forces. He can bring things together and they produce the result. Further, it may be said that nearly every kind of utility is conditioned on motion. It is man's aim to secure a constant inflow of goods. To secure this either he must move to get the goods, or he must cause goods to move toward him.

The law of "conservation of energy" helps to explain economic action; the supply of energy in the universe cannot be increased or diminished, but may take on new forms. So a limited supply in man's control may take on various forms and so have different effects on gratifications. One and the same source of energy may be converted into the different forms of heat, light, motion, electricity, etc. But there must be some source. Man's desire is directed to getting force at the right place and in the right degree. If light or heat is too intense, it causes pain; the glare of the sun blinds instead of giving keener vision. A moderate force applied to any of the senses gives the maximum clearness or pleasure. Man is constantly endeavoring to secure forces from the outer world and to adjust motion so that it will directly or indirectly best serve his purposes.

[Sidenote: By food, animals, and fuel]

3. Among the main sources of power used by men are food, domestic animals, and fuel. In eating food man stores up force in his own body. When he draws the bow he puts force into it to lie latent until liberated at the right moment. There must be a source of energy likewise that mental action may go on, and the power of sunbeams, stored for a time in food, is liberated in the processes of thought.

This first natural mode of liberating energy within their own bodies does not satisfy the growing needs and aims of men. Such a mode is "labor," which becomes at times painful and distasteful. In the earliest societies known, some sorts of domestic animals are found supplementing man's efforts and acting upon the material world to alter it for man. The dog joining in the chase guards his master's safety, and helps to bear his burdens. The draft-beast in the field turns the heavy soil, and aids in the final harvest. The trained elephant does the work of twenty men piling logs, loading ships, or carrying burdens.

Man further increases his control over the material world by making other men do his bidding. Domestic slavery, where wife or child serves the father of the family, or chattel slavery, where the vanquished toils for the victor, are all but universal in early communities. Such a method of increasing one's control over the forces of the world requires only superior strength, no special intelligence in mechanics, and is thus one of the first crude devices in a primitive civilization.

Fuel has been, up to the present time, perhaps the most important source of energy. Fire in the hands of savage man gave him dominion over the forests and over the metals. In this age of steam the liberation of the energy of the sun, stored up in coal in ages past, is still the indispensable condition of our developed industry.

[Sidenote: By the energy in wind and flowing water]

4. The greatest and most exhaustless reservoirs of power for man's use are in wind and water. While the supply of fuel is being used at a progressive rate and will soon approach exhaustion, there are elsewhere exhaustless stores of energy awaiting man's command. To make use of the wind for sailing a boat, only the simplest arrangements are needed; a windmill fixed at one place requires more ingenuity and machinery. The energy of the wind is derived from the sun and will last until the sun loses its heat. If some means can be found for equalizing the flow and for storing the power of the wind, it may yet become a great agency of industry. The force of falling water, long used in a petty way by the old water-mills, is just beginning to be employed on a large scale at such points as Niagara. Where fuel is high, as on the Pacific coast, wave motors have been successfully used in a small way, but wave motion is too irregular to serve well the needs for power. But the constant motion of the tides offers, at some favored points, a source of power that will remain as long as the earth revolves upon its axis.

[Sidenote: By the intelligent utilization of all these agencies]

5. Man studies and compares the durable goods that give him command over enjoyable goods, and attaches value to them. Thus energy is found dissipating itself throughout the world in ways useless to man, and in places where it cannot serve his purposes. As man grows in power of control over nature, he seeks to apply these forces in forms and at places he has selected. If he can arm himself with the energies of mine and torrent, he can react with giant strength on the material world. He ceases to accept passively its conditions, and to live on its grudging gifts; he becomes its fashioner, in a sense its creator. His intelligence and his wants are most important factors determining what the form of the physical world about him shall be.

But all the efforts of men in the most developed economy cannot make to disappear the differences in the quality of goods and agents. Desirable goods to consume are limited in quantity, and they vary in quality; hence they have value and some higher than others. Likewise, durable material agents and sources of power are limited in number and vary in convenience of location and efficiency. As men seek to gratify their desires, they attach importance to these agents of power. Each is valued for its service or its series of services. When anything is seen to contain a series of uses, it becomes a rent-bearer, and the economic problem of rent arises, one step more complex than the problem of valuing simple consumption goods.

8. THE RENTING CONTRACT

§ I. NATURE AND DEFINITION OF RENT

[Sidenote: Temporary use and permanent possession of agents]

1. The temporary use of materials and power and their sources is necessary to bring most enjoyable goods into being. Indirect goods have value solely because they help to get direct goods. The apple-tree is valued because it bears fruit, and the orchard because the trees give promise of yielding a succession of crops for years to come. There are thus two problems of value in connection with durable goods: that of the value of a temporary use for a brief period, as for a year; and that of the value of a thing itself, the use-bearer, for a long series of years or in perpetuity. To explain what fixes the value of the temporary use is the problem of rent; to explain what determines the value of long-continued use or of permanent control and ownership of a use-bearer is the problem of capitalization.

[Sidenote: Origin of the term rent]

2. The term rent is used in a number of senses, which must be carefully distinguished. The original meaning of rent was any regular income or revenue arising from wealth. The word comes from the low Latin renta from renda, in turn from redditus, that which is given, yielded or given back, or rendita, that which is given or returned. The French rendre (English render), to give or return that which belongs to one, is used very early. Chaucer used "rente" as an income. "Cattle had he enough and rente," cattle probably meaning property (chattels), and rente income. Rental is a collective term for a number of rents. The total yield of an estate was called its rental or rent-roll, and a list of the various sources of income, including all payments from tenants in money, produce or services, constituted its rental.

[Sidenote: Popular and special meaning of rent]

3. The popular meaning of rent is the amount paid for the use of material things which must be returned to the owners after the time of use agreed upon. We speak of the rent of a house, boat, etc., using the word as a synonym for hire. In the European languages the word is used more frequently in that sense. In the French la rente means the income from any kind of property; but corporate securities and national bonds came particularly to be called les rentes, because they are a form of investment yielding a permanent income. The one who has a perpetual income from bonds or rents is called a rentier. In German the term Rente is used more broadly than in English, as an income of any sort, Grundrente meaning the rent of land, and Capitalrente the income usually in England called interest.

A restricted meaning has long been applied by economists to the word: the income yielded by lands, etc. This was put in contrast with interest for money and capital, and with wages of labor. This meaning is now being abandoned by economic students.

A wider meaning recently given to the word by many economists turns on the supposed relation of some portions of price to cost of production. Thus, frequent use is made of the expressions: consumer's rent, producer's rent, buyer's rent, seller's rent, etc. In the well-founded opinion of some recent critics this usage rests on a mistaken reasoning. However, in the midst of this wide variety of usage the student must be forewarned and alert. Doubtless agreement will at length be arrived at. Meantime, no economist can dictate what meaning is to be attached to the term, but one may suggest the definition that seems to him most expedient. Throughout this work we shall endeavor to use the term rent uniformly and consistently as it is now to be defined.

[Sidenote: The essence of rent]

4. The essential thought in rent, as we shall use it, is that it is the value of the usufruct as distinguished from the value of the use-bearer or thing itself. The meaning of usufruct is the use of the fruits, or in legal phrase: "the right of using and enjoying the income of an estate or other thing belonging to another, without impairing the substance." The obvious fact is that fruits can be eaten without destroying the tree, the harvest gathered without destroying the field. By a metaphor the word in legal discussion is applied to the use of any product, and we shall employ it, as in common speech, in reference to one's own goods as well as to the goods of another.

[Sidenote: Rented agents are looked upon as durable]

The qualities whose use gives value are not usually indestructible, but they are treated as undestroyed. There is a famous phrase used by Ricardo, "rent is paid for the original and indestructible qualities of the soil." He said "indestructible," but the word is not apt. There are many qualities in the fertile field that must be destroyed when it is used. Every economist since Ricardo's time has recognized this, and many excuses for the inaccuracy have been given. After every harvest, the field is less serviceable than before, and if it is to be of the same grade of efficiency, the fertile elements must be restored. We cannot assert that Ricardo meant undestroyed, for he was not quite clear on the question. But it is evident that one can count as true income only that part of the value of product that remains after full repairs have been made. It is only by a fiction that most indirect agents can be regarded as indestructible. Things yielding rent are not indestructible, but generally they are preserved undestroyed.

[Sidenote: True rent a net income]

5. A distinction must be made between gross and net, or true and false rent. Before the usufruct is estimated, allowance must be made for repairs, depreciation, and for various expenses which absorb a good portion of the gross product. When this allowance has been made, the income may be considered as a net sum not due to the sale, or to the using up of any part of the thing rented. This is the essential thought in typical rent--that it is the value of the surplus, or net product, of an economic agent leaving the agent itself unimpaired in efficiency. The total product is sometimes called the "gross rent," but economic rent is "net rent." This thought is made clearer by the following discussion.

§ II. THE HISTORY OF CONTRACT RENT AND CHANGES IN IT

[Sidenote: Economic and contract rent distinguished]

1. Economic rent (likewise called natural, competitive, and sometimes rack rent) is to be distinguished from contract rent. Economic rent is the market value of the usufruct, and contract rent is the amount a man pays for the use of wealth by virtue of an existing agreement. The one is impersonal or economic; the other is personal or legal, being fixed by agreements between persons. The rents usually spoken of are contract rents.

The two diverge more or less. If the contract has been lately made the two will be nearly the same. Contracts of long standing often bind the tenant or borrower to pay either more or less than the present competitive price. If, after a time, the value of the use is greater than the contract rent, the tenant is fortunate in having his lease. But he is the loser if he is bound by lease or agreement to pay rent in a locality where land has become less valuable.

Economic and contract rent usually diverge also because of the agreement that the owner, or lender, keep up the repairs and pay the taxes. Here it is simply the difference between gross and net rent.

Custom may prevent the owner from charging all the usufruct of the agent is worth. If the contract rent is less than the economic rent, evidently the borrower enjoys a part of the usufruct, without charge, and to that degree is in the position of an owner. The usufruct in this case is divided between the two parties. Such instances were numerous in the Middle Ages in the renting of land, and still are found in many countries.

Contract rent is based on economic rent and tends to conform to it whenever there is competition. The existence of economic rent is the basis of the agreement to pay contract rent. Prospective hirers of agents forecast what the use will be worth to them and make their bids accordingly.

[Sidenote: The renting contract for the use of wealth]

2. The renting contract is the agreement of a borrower to pay for the use of a thing and, at the end of the time, to restore it in good condition or pay for its complete repair. In practical business it is necessary to have definite agreements to prevent disputes. Some provide that one party, some that the other party, shall keep up repairs. The form of the renting contract is observed by men in estimating the uses of their own wealth where no contract exists. If they count the gross product of an agent as rent, it is bad bookkeeping. In many cases it is necessary, therefore, to follow the form of the renting contract in order to determine the net yield of indirect goods.

[Sidenote: The renting contract in the middle Ages]

3. In early stages of industry the use of nearly all wealth is estimated under the renting contract. In the lower stages of culture, in hunting, fishing, or nomadic pastoral tribes, land is not recognized as wealth to be exchanged or owned. But at a later stage, as in the Middle Ages in Europe, land and the things pertaining to it, as ditches, houses, mills, cattle, stock, and the few simple implements, constituted the larger portion of the wealth. Land was granted to the tenant or serf in return for services. The contract was pretty strictly drawn and all items were specified. It was not hard to hold the tenant to his contract to keep the land in about the same condition. There was a certain rotation of crops; the tenant was obliged to keep his stock up to standard; and, moreover, he had a certain interest in the land because his contract rent (as explained above) was less than the economic rent. The landlord, therefore, could count pretty surely on the undiminished power of his land and stock from one year to another.

At that time, truck and barter were the common modes of exchange, and rents were paid in products and services, not in money. The fruits of the soil were consumed on the spot instead of being sold as now. Land was rarely, if ever, sold outright, so that there was no occasion to estimate its total selling value. It was thought of as a place on which to live and as a source of livelihood. Its yearly use was all that was subject to contract, sale, and exchange. Not the land itself but a rent charge on the land was sold, the term rent charge meaning an annual sum payable out of the yield of an estate. Many medieval estates were so tied up by legal conditions that they could not be sold outright; all that the owner could do was to sell or mortgage the annual rental. Thus, in the Middle Ages, it was all but universal to look upon most indirect agents as exchangeable only under the renting contract, as subject to renting but not to complete transfer and sale.

[Sidenote: The renting contract not convenient in commerce]

4. As industry developed, the renting contract remained almost wholly confined to cases of renting lands and houses. The materials and appliances needed for manufacture and commerce are so manifold and varying in quality that the rent-form of contract is very cumbersome and difficult for exchangers to enforce. If a merchant about to embark on a trading journey wished to rent a ship and a stock of goods, the renting contract became most difficult to interpret. He must agree to repay the loan in goods of the same kind and quality as those received, a contract most difficult to execute, and giving occasion to costly tests and countless disagreements. It was much easier for the merchant to get his loan under the interest contract, i.e., a money loan, with which to buy the goods. With the growth of industry and commerce, wealth increased in towns, taking many forms, as those of ships, wagons, tools, and stocks of goods, that could not conveniently be rented.

[Sidenote: The thought of it remains associated with a rural economy]

In England, the country which developed its industrial system earliest, the idea of rent, therefore, gradually became disassociated almost entirely from the use or hire of any wealth but land and real property. Because in the Middle Ages rent was associated almost entirely with natural resources, they being the only important forms of wealth which men rented from others, there was fostered the idea that the essential mark of rent is the connection with natural resources. It is a simple example of the association of ideas. In the transfer or loan of movable goods, the rent contract was quite overshadowed by the other form of contract, that of a money loan. According to this explanation the essential and primary difference between renting wealth and borrowing money at interest is not in the kind of wealth whose use is thus temporarily transferred, but in the nature of the contract. But as forms of wealth differ in their fitness for transfer under the two forms of contract, there goes on a competition between them, as a result of which each becomes associated with certain groups of goods. In the Middle Ages the renting contract was the dominant form, but it has been progressively displaced by loans in the money form, and its importance is still declining.

[Sidenote: Renting contracts most used with land]

5. The main forms of wealth whose usufruct is still sold under long renting contracts are land and its more durable improvements. In England farms are let under long leases, a very common form being the thirty-year lease. Under the old, almost fixed, conditions in agriculture such a lease was equitable, but when prices are rapidly changing and when new methods are being introduced, it gives rise to great hardships. About twenty-five years ago, the great fall in the price of agricultural products brought ruin to many of the tenant farmers. The land troubles in Ireland have been largely about tenants' improvements. When the lease expired, the landlord could appropriate all the improvements that the tenant had made. In America farms are let usually on shares, and from year to year, but the plan of a money rent is increasingly followed. The difficulty of getting an equitable arrangement between landlord and tenant is recognized by all. The landlord must make the proper repairs or see that they are made; he must specify in the contract whether the products can be taken away or are to be fed on the place so that the soil may not be impoverished, and he must provide for the purchase of other fertilizers. On the other hand, the tenant under the renting contract has little motive for improvement, and many occasions for discontent. So in America, far more than in the older countries, land changes hands by sale, the purchaser going into debt for it, giving his note and paying interest on the loan rather than rent for the farm.

[Sidenote: But many other goods are rented]

Many less durable goods are rented for brief periods. Carriages are rented for the day, bicycles by the week or month. Sewing-machines, boats, guns, tents, and even diamond engagement rings, yield their joys under the renting contract. People frequently hesitate between the renting and the purchase of a piano, and in some cases renting is the more convenient and desirable way of securing its use. The purchase of a dress-coat or of a masquerade-suit to be worn but once, involves for some an excessive and needless sacrifice. For a moderate sum its temporary use may be had, and it is then returned, little the worse for wear, to the accommodating clothier.

[Sidenote: Economic rent much wider than the renting contract]

A final word of caution may be given. Economic rent is not confined to the cases of contract rent. It exists in every case where a more or less durable agent yields a use that is scarce and desirable. The owner who uses a thing himself gets the advantage in the product as clearly as if he collected rent from a borrower. Houses lived in by the owners, house furnishings, clothing, books, all scarce and durable agents, are yielding rents in this logical sense. To the economist, therefore, the problem of economic rent, as one of the grand divisions of the problem of value, remains of undiminished importance, for in these unceasing streams of uses emanating from our environment, is found the basis for the value of all durable wealth.

9. THE LAW OF DIMINISHING RETURNS

§ I. DEFINITION OF THE CONCEPT OF (ECONOMIC) DIMINISHING RETURNS

[Sidenote: Economic agents contain uses to be obtained only with progressive difficulty]

1. The phrase "diminishing returns of industrial agents" is the expression of the fact that there is an elastic limit to the utility any indirect good can afford within a given time. Successive attempts to get additional services from a thing are usually in part successful, but each additional service is gained with more difficulty, or a smaller added service is gained for an equal expenditure of materials or effort. A book stands many hours untouched on the shelves of the library; but if, as often happens, two or more persons wish to use it at the same hour, time and energy are wasted. The book has a potential use during the twenty-four hours, but all this can be secured only at the cost of the greatest inconvenience. The greatest net uses, therefore, are seen to be to the first user and in the first hour, for these uses cost the least time and trouble. If the members of a family will take turns, one chair will serve for all of them; but if all are to be able to sit down together, a chair must be provided for each. Often it will happen that only one chair is in use, the other nine chairs being valued only for their potential uses. I knew two young men who owned a dress-coat in partnership, and as they had different evenings free from business all went well until both were invited to a reception which both were very eager to attend.

[Sidenote: This is true of all classes of agents]

Illustrations of this principle may be drawn from every class of durable goods. The example generally given is that of a field used for agriculture. It was long ago seen that a larger crop could usually be obtained on the same area, only with greater effort or expenditure; but this fact has been thought to be peculiar to the use of land. The examples given above have been purposely chosen from very different fields, to show that the truth is a general one: a good that affords a given service can be made to increase that service, ordinarily, only on condition that men put forth greater effort, or sacrifice more goods.

The decreased utility is most clearly seen in the diminished effect which other agents produce when used in connection with the thing. When several are trying to use the same book, and are wasting time trying to get it, we often say their study hours are less fruitful because of the poor library facilities. Again, we speak either of the diminished returns of the field, or of the labor applied to the field. Either the particular thing is said to show diminished returns or the other coöperating agents are said to show them.

[Sidenote: Decreasing technical effectiveness of material things]

2. As the agents used in connection with a fixed amount of any other agent (for mechanical, chemical, physiological, psychological, and other purposes) increase, their objective effectiveness after a given point decreases. Objective or technical effectiveness means effectiveness independent of the thought or estimate of men. It is not the effectiveness to produce a feeling in men, but to produce results on the material world. In a mechanism, if one part is increased without increasing the other parts, a point is reached where it does not add to the result. If in the building of a bridge the weight of the floor is increased beyond a certain point, the rest of the bridge being left unchanged, the bridge is weakened instead of strengthened. If the weight of the iron in the framework is increased beyond a certain point without strengthening the piers, the structure is weakened. If the pier is greatly enlarged, the bridge may not be weakened, but there is an utter waste of material and effort, and perhaps the main purpose of the bridge is defeated by the damming up of the stream. A bicycle frame, like a chain, is no stronger than its weakest part. If the strength of all parts of the wheel and frame is in equal proportion to the strain they must bear, added weight to any single part weakens the whole machine. The development of the modern type of bicycle, by many experiments, is a good example of the adjustment of materials according to the principle of technical efficiency.

A variation of the same principle is seen in chemical combinations. Exact proportions of materials must be used to get a certain result. Increase of one ingredient will not increase the desired product. Either the added part is rejected, does not enter at all into the compound, or it unites to form another and different product.

That the same principle holds good of the psychological effects of things, we have already fully recognized in discussing wants and marginal utility. A given amount of a good will affect the senses in a pleasurable way, but an increase in the amount will not cause a proportional addition to pleasure of sight, sound, or smell. On the contrary, such an increase may defeat the object entirely. Here we are at the threshold of the economic problem, for we have touched on "feeling."

[Sidenote: Economic diminishing returns relate to value]

3. The idea of economic diminishing returns arises when man recognizes these technical facts and their relation to gratification, in his use of a limited supply of indirect agents. All economy begins with scarcity. The varying effects produced by different agents therefore require to be studied or the sum or direct goods of enjoyment will not be as great as is possible. Waste will take place. A bridge will have its maximum use with a minimum outlay when the parts are in a certain proportion. Beyond that point, the increase of any part may add something to the usefulness of the bridge, but the agents must be taken from some other and greater use.

The thought of economic diminishing returns always has reference to value. If a particular kind and amount of a certain material is used in varying combinations with other agents, the value of the added product will not always be in the same proportion to the value of the added agent. The bridge-builder must consider not only what the added material will add to strength, but what it will cost, and whether the result will justify this expense. So the economic problem of diminishing returns is more complicated than the mechanical one, for it contains not only the technical but other factors.

[Sidenote: The marginal utility in goods]

If the value of the product increases less rapidly than the cost of the agents successively added to secure it, a point must at length be reached where the value of the added agents and of the additional product just balance; this is called the point of marginal utility.

If a certain value in labor, fertilizer, or material, be applied to an acre of land, it may be more than recovered in the value of the product. Further applications give a product increased not in equal proportion to the former yield, and so on till the value of the last-added agent just balances that of the added product. This is the best adjustment possible, and beyond this point there will be a deficit in value. Just where the equilibrium is found at any time is the margin of cultivation.

The term "cultivation" is taken from agriculture but must be understood in the broader sense of utilization, as the principle is not confined to the case of land or agriculture, but applies as well to the use of furniture, books, clothing, horses, or any other indirect agents.

[Sidenote: Meaning of intensive margin of utilization]

[Sidenote: The extensive margin of utilization]

4. There are two margins, the intensive and the extensive. The margin of utilization in the case of a single piece of wealth is called the intensive margin. Any form of indirect wealth, anything kept to use, may be considered as containing a series of uses. Using one thing more and more while uniting other things with it, is using it more intensively.

Getting more use out of the book by effort, out of the farm by applying more fertilizer, out of the house by putting more people into it, is intensive utilization. The earlier uses come easily, naturally; the later ones are gotten with increasing difficulty.

When a number of agents are of different qualities, the point between the one last used and the next unused is the extensive margin of utilization. The best agents that are available are naturally used first, but as they are more intensively used there is increasing inconvenience. Then recourse must be made to the inferior agents, whose first uses, however, are greater than the later, intensive uses, of the better grades. When the step is made to the use of agents that were before unused because inferior, it is extending the margin of utilization. The intensive margin of use is in the particular thing; the extensive margin of use lies outside of this.

The relation of the two margins may be shown in a simple diagram. Let the better grades of indirect agents be represented by longer rectangles, the upper parts of which represent the more accessible, more easily secured utilities. Each agent consists of many strata of uses. The best uses are grades a, b, and c, in M; but after M has been utilized intensively down to d, N will begin to be utilized at its highest point. When utilization goes down to f, O comes into use, and so on. Therefore it will be seen that until the intensive margin takes in d, M is on the extreme margin of utilization, and N is just outside it; when the intensive margin falls to g and h, P is inside the extensive margin, and Q is just outside.

[Sidenote: Equilibrium of the two margins]

The marginal utility or effectiveness of added agents tends to be equal on the intensive and the extensive margins. This is simply a case of the substitution of goods in the use of indirect agents. If the value of the added product in the use of a particular good decreases, a point finally is reached where it is better to transfer the outlay to another agent, to change from intensive to extensive utilization, to go over to the use of another field or of another machine not so good. The effectiveness of the labor or capital that men have to apply is being compared constantly in the two cases, and to the extent that this comparison is perfect the effectiveness of the agents tends to be equal on the margin in the two applications.

§ II. OTHER MEANINGS OF THE PHRASE "DIMINISHING RETURNS"

[Sidenote: Does not mean declining prosperity]

1. The phrase diminishing returns is sometimes taken as meaning merely a decrease in prosperity. Many ideas are connected with this phrase. It is not self-explanatory. It suggests various thoughts according to context and these have not failed to give rise to different uses. The student must be cautious if he is to think clearly about it. If population declines, or industry changes from one place to another, or from one kind of goods to another, it is sometimes said that returns are diminishing in the deserted district.

[Sidenote: Nor exhaustion of the soil]

2. A more common misuse of the term is to apply it to the exhaustion of the soil. If the soil of a district has been robbed of its fertile qualities and smaller crops are raised than was the case fifty years before, it is said to be a case of of the increased difficulty in the extraction of natural stores in mining. The veins near the surface being mined first, later the galleries must be cut deeper and greater expense incurred to get the stores. But the conditions here are very different from those we have considered under diminishing returns. Mines are used not under the renting contract, but under the royalty contract, which permits and contemplates a progressive using up of the limited stores of natural resources.

[Sidenote: Fallacious contract between manufacture and agriculture]

[Sidenote: All industries if limited as to one factor, as area, show diminishing returns]

3. Manufactures are often said to show increasing returns in contrast with agriculture as an industry of decreasing returns. There is here an inconsistent shifting of thought. Agriculture is thought of as limited to a certain area of ground, whereon evidently diminishing returns will take place. But the fixed limit of ground-space is not thought of in connection with manufactures. Taking the same view of manufactures, commerce, education, etc., that is, assuming each industry to be confined to limited area of ground, each is seen to be subject to diminishing returns. Some ground-space is one of the essentials to carry on any business. If the attempt is made to accumulate a large library in one small room, a point is reached where much energy is wasted in trying to find the books. In a university the psychical product, education, may be limited by the need of space. The school-room, laboratory, or college class-room could be used at midnight, it is true, but not conveniently; and as students increase, buildings must be added. The same is true of any industry. We cannot conveniently increase the business of a lumber-yard without a larger yard-space, or of a factory without a larger floor-space. But the added space may be gotten by spreading horizontally or piling up perpendicularly. A ten-story building on an acre lot represents ten acres of floor-space. Putting up higher buildings is an expansion in area by the more intensive utilization of the land. Devices like elevators, and more compact appliances, make possible an increasing business in manufacture, trade, or commerce upon the same area of land. All industries, if looked at consistently from this standpoint, are subject to the same condition, though it is true this will make itself felt in varying degrees in different lines of industry. In agriculture some similar devices are possible by the use of greenhouses, but it is true that in it, on account of the need of sun, light, and air, the limits of space are more quickly felt, and are less elastic than in most other industries. The difference, however, is one of degree, and not of kind. Higher factories, larger stores, enable manufacturers to adapt themselves to the law as applied to the surface of land, but not to escape its operations. Neither the law of gravitation nor the law of diminishing returns is violated or broken when materials are lifted to build the upper stories. Both "laws" are at work, even when the building is rising from the ground. Men are merely adapting their conduct to the conditions imposed by gravitation and diminishing returns.

[Sidenote: Confused with the question of large production]

Manufactures usually are thought of as enlarging by increase of the amount of capital employed, without limitation as to the area covered. But even here a limit is reached in the amount of capital that can be employed at any one location because of the difficulty of widening the market. The question, however, is one of the advantages of large production with large capital, not of the increasing use of a limited area of land. If manufactures and agriculture are to be compared with reference to their economic nature, it is essential to clear thinking that both be looked at with reference to the same conditions, and from the same point of view.

[Sidenote: Technical confused with historical diminishing returns]

4. Technical diminishing returns are often confused with historical diminishing returns. The principle of technical diminishing returns is that at any given moment the uses obtainable from any indirect agent cannot be indefinitely increased without increasing difficulty. Historical diminishing returns occur when, in fact, human effort is less bountifully rewarded in a later period than in an earlier one. If to-day a day's labor in agriculture produced less than fifty years ago, historical diminishing returns would have occurred. In fact, labor is more bountifully rewarded in agriculture than fifty years ago, yet it is true to-day that there are few fields or appliances which, if used more intensively with the prevailing prices of labor and material, would not show a diminishing return to the additional capital applied. Therefore, in the historical sense, increasing returns have prevailed, yet at every moment it has been necessary to apply resources under the guidance of the principle of diminishing returns.

§ III. DEVELOPMENT OF THE CONCEPT OF DIMINISHING RETURNS

[Sidenote: Recognition of diminishing returns to land]

1. The law of "diminishing returns" was first recognized and expressed with reference to the use of land in agriculture. There are several evident reasons why this occurred. It is obvious to every farmer and gardener that he cannot indefinitely increase his crop, that two men cannot always produce twice as much as one man, and that in general the product does not always vary in proportion to the labor and materials applied. Moreover, the food supply is a fundamental factor in industry and in the welfare of states. The limit to the supply of food on a given area, cultivated by a given method, early appeared and became a serious practical problem.

The circumstances in Europe in the eighteenth century drew attention to the subject. Population was increasing, and the pressure for food was strong. While all the forms of industry most common in cities were increasing, and the wealth of the cities was growing, poverty was increasing among the peasantry. Especially was this true in England during the Napoleonic wars, 1793-1815, owing to exceptional conditions. The food-supply from abroad was cut off, and when the English farmers, tempted by the high prices, took poorer land into cultivation, and sought to get larger crops from their older fields, a great object-lesson was presented on the principle of diminishing returns in agriculture.

[Sidenote: This confused with historical diminishing returns]

2. This truth of diminishing returns in agriculture was confused with the thought of historical diminishing returns. Circumstances of the time led to the belief that because of lack of food misery must continue among the masses of men. It was thought inevitable that the population would continue to increase and food become more scarce. The idea of diminishing returns became thus a prophecy of what would happen, a social philosophy, that affected the thought of men on every practical social question.

[Sidenote: The principle applies to land in all of its uses]

3. The application of the principle of diminishing returns was soon broadened to include land in other than agricultural uses. This was a natural and inevitable extension of the thought. It was evident that an unlimited use could not be made of a limited area of land, in any industry whatever. There is no explanation of rent of business sites, residences, lots, wharves, waterfalls, etc., unless account is taken of diminishing returns. If it were possible to do an unlimited amount of business upon a limited area of land, it would never get more scarce and could never rise in value. The idea of diminishing returns came properly, therefore, to be applied to land in all its uses. It is true, however, that the relatively large areas needed in agriculture make the phenomenon of diminishing returns much more striking in it than in most other industries.

[Sidenote: And to all indirect agents]

4. "Diminishing returns" should be broadly applied to all wealth having indirect uses. The argument for this view may take both a negative and a positive form. Why should we say that the principle applies to land and not to cases of other industrial agents? Why in the case of a waterfall and not in the case of the water-wheel? Why in the case of the field and not in the case of the trees in the field? Are they not all scarce and desirable goods yielding a limited supply of uses?

Positively it can be argued that the concept of diminishing returns is indispensable to a reasonable explanation of the value of any indirect agents. Anything that could afford an infinite series of uses at once would be an infinite supply. If an infinite number of uses could be gotten out of one hammer in all places at once, it would pound all the nails in the world. One wagon, one acre of land, one ax, one book of each kind, would serve for all men, and duplicates would be valueless. But in the case of every material thing there is a limit of convenient and economic use.

[Sidenote: Diminishing returns related to diminishing gratification]

5. Diminishing returns of indirect agents is a special case of the universal law of the diminishing utility of goods. Diminishing returns have to do with indirect goods, while diminishing gratification has to do with direct or consumption goods. They are two species or aspects of the same general principle. If the supply of certain indirect agents is increased, thereby increasing consumption goods, the utility of the indirect agents per unit diminishes. In such a case a diminishing return is the reflection, back to the indirect good, of the diminishing utility of the direct goods it helps to secure. Any indirect agent, added to a fixed amount of other agents with which it is technically used, is credited with a diminished utility, just as an additional supply of enjoyable goods, coming to meet a fixed demand, falls in value.

The concept of technical diminishing returns has reference to a limited period of time. Though a definite agent may have bound up in it a long series of uses, these cannot be secured at the moment. If a rent-bearer, such as a fruit-tree, were permanent, and men could wait through eternity for its yield, they would get an infinite yield of fruit. But in any finite period, there can be only a limited yield.

[Sidenote: The basal law of economics]

The concept of diminishing returns is one aspect of the great economic law of proportionality, that is, it is one expression of the fundamental, axiomatic truth, that there is a best or proper adjustment of means and ends. It is, therefore, the central and essential thought in political economy. On it depend all important conclusions with reference to the value of indirect goods. Out of it grow the important economic theories of rent and capitalization.

10. THE THEORY OF RENT: THE MARKET VALUE OF THE USUFRUCT

§ I. DIFFERENTIAL ADVANTAGES IN CONSUMPTION GOODS

[Sidenote: Connection between gratification, rents, and value of wealth]

1. Both rent and the value of durable wealth are based on the value of the fruits or products yielded by the wealth. Gratification, afforded directly or indirectly, is the basis of all values. The relation of most kinds of wealth to wants is indirect; but gratification thus afforded indirectly is none the less the basis on which the usufruct of wealth is estimated. Men find the logical or causal connection between direct goods, or final product, and indirect goods, or agents.

To explain the value of the durable wealth, or rent-bearer, a still farther step in thought must be taken. The value of the rent-bearer is based on the series of rents which it affords. To explain how these rents are added to give the value of the indirect agents is the task of a theory of capitalization. This being the relation, a change in the value of the product changes the rent, and this in turn changes the value of the rent-bearer. The theory of rent, therefore, has to begin with a review of the valuation of enjoyable goods.

[Sidenote: Effect of scarcity on utility of uniform goods]

2. In a group of consumption goods, all of the same quality, the marginal utility declines as the quantity increases. If the quantity of an article capable of ministering to man's wants is very limited, its value is high. If the supply of something of uniform quality, for which there is no substitute, is scanty, the value is estimated without reference to any other grade. If a fishing tribe caught very few fish, but these were all equally good, and if no other food were to be had, fish would have a high ratio of exchange with every other kind of goods.

If the quantity increases, the value of each unit of the whole supply falls, as the importance attributed to its parts declines. If an Indian hunting-party met with unusual success, the value of buffalo meat declined. If there is a remarkable potato crop, potatoes fall in value.

[Sidenote: Relation of different grades of consumption goods]

3. In a series of consumption goods of different qualities, the lower grades acquire value only as scarcity increases in the higher grades. If difference in quality between two grades of apples is marked and there is a superabundant supply of the best grade, no importance is attached to the poorer. But if the better grade becomes scarce, the appetite for the poorer grade increases, and finally it, too, will be consumed. In some years the small, knotty apples are allowed to rot on the ground; in other years they are gathered and are sold at good prices. But if there is an abrupt difference in quality, and hence in the marginal utility of the two grades, the value of the better goods may rise considerably before there is any recourse to the poorer. If the differences in quality are very slight, the presence of the lower grades has the effect of limiting the increase of value of the higher grades. Practically in almost all kinds of goods there are gradations in quality. Complete uniformity is of the rarest occurrence. When did one ever see a basket of peaches that were all of the same size, ripeness, color, flavor, and perfection? If the step from the higher to the lower grade is very slight, resort is immediately made to the next lower grade, some of which is substituted for the higher.

There is an independent reason for the value of each grade of goods; each grade would have value if there were none of the other, but they mutually affect each other's value when they exist, side by side, in the same market. The marginal utility of each is lessened by the presence of the other. And thus, two or ten grades constitute for many purposes a single supply as they shade into each other or are merged by substitution.

[Sidenote: Free goods are on the margin of utilization]

4. Goods of the lowest grades, having no marginal utility, are free goods. This is a simple truth, but it has important bearings. There may be said to be an "extensive margin of utilization" of many consumption goods. The poorer grades of apples, rotting on the ground, the multitudes of waste things not valued, are on the margin of utilization. When a lower grade is used, the margin is extended. The value of goods is measured upward from the margin of utilization, but this is simply to say that their value is measured from zero upward.

Likewise, there is an intensive marginal utility in consumption goods. As the better grade of apples becomes more scarce, they will be used more sparingly and kept to satisfy only the intenser wants. The superiority of some consumption goods, either in quantity or quality, often is exactly analogous to the "differential advantage" spoken of by economists in the case of productive agents. The differential advantage of the highest grade over the grade of free goods, whose value is zero, evidently is the whole value of the highest grade.

§ II. DIFFERENTIAL ADVANTAGES IN INDIRECT GOODS

[Sidenote: Differential advantage of agents in the quality of their products]

1. Rent varies with the quality of the products yielded by agents, other things being equal. Let us take first a simple case where the agent is the sole condition of the product. If there is but one tree bearing a certain luscious fruit, or but one spring yielding a mineral water, the rent of the tree or spring being equal to the value of the products must vary as the quality of the products varies. If two or more trees are standing side by side, they will be compared with regard to the difference in the quality of their fruits. If two fields differ in quality, greater importance will be attached to the field capable of producing the better grade or variety of fruit or product. A peculiar mineral quality in the soil may impart to wine a choice flavor that can at once be recognized by experts; while other fields, distant but a few rods, cannot by any effort be made to produce wine of the same rare quality. There is said to be a marked difference in the success of vineyards lying only a short distance apart on the shores of the larger lakes of New York. Nearness to the water moderates the temperature, often prevents frosts, and hence insures the ripening and quality of the fruit. In the Santa Clara valley, as in other parts of California, there is a frostless belt, sharply marked off from the lands where it is unsafe to attempt to cultivate the delicate orange-tree and other semi-tropical plants. In manifold ways differences in geological formation affect the use of land and the success of many industries. On one side of a little creek is limestone land, on the other shale, the limestone producing a crop larger and of better quality. When the peculiar nature of the one field is found to be the cause of the exceptional quality of its fruits, the difference in value is attributed to it.

[Sidenote: The lower grade limits the value of the higher grade]

If there is but one grade of agent, it is, of course, valued without reference to any lower grade. The effect of the presence of lower grades of agents is to lower the value of the higher, inasmuch as the lower grades are substituted for the higher. There may be at first enough of the higher grade of agents to produce all the fruit wanted of the better quality. If, then, there is an increasing demand, and the additional yield can be secured only with greater effort, the value of the product will rise. The presence of poorer grades, however, checks that rise, because use can be shifted to them. The value of grade one is not high because grades two, three, and four, which are worse than it, are available, but because they are not of better quality than they are. Poor as they are, their presence reduces somewhat the intensity of demand for the best grade. Indirect agents, therefore, are seen to be subject to just the same comparisons, substitutions, and estimates, when their value is considered, as are direct consumption goods.

[Sidenote: Differential advantage of agents in the amount of their products]

2. The rents of two agents differ as do the quantities of goods yielded by them, other things being equal. In the case just considered, the quantity remained the same while the quality differed; now is to be considered the case where the quantity differs while the quality remains the same. It is possible that one grade of agents is "poorer" because it produces less fruit, not fruit of poorer quality. Consider first the static problem. If both agents yield fruits exactly alike, the value of equal units at the same place and time must be equal, and the usufructs would vary in just proportion with the quantity of product. Now consider the dynamic problem. If the desire for that fruit increases, rent would grow as scarcity became more felt. The agents yielding, under the prevailing conditions, the largest product, would first be used; later, the poorer agents. The possibility of resorting to the poorer agents would keep the better from rising so high.

[Sidenote: Complementary agents unite to form a product]

3. When two agents are necessary to secure a product, the value attributed to each is influenced by competing uses. The thought of one agent independently producing a certain product is far too simple to correspond with reality. Two or more agents unite to produce a single product, and each agent at the same time can be used for acquiring other products. Complex as the problem appears, it is solved according to the principle of marginal utility at every moment in every market. The different uses, figuratively speaking, bid for an agent, and thus its marginal utility is determined just as is the price of a good by the bidding of buyers. Indeed, it is the bidding of buyers, indirectly. The more urgent the use, the higher the bid. The felt importance is reflected from the consumption goods that are sought, to the agent that will aid to get them. Two or more agents that are mutually needed for the acquiring of a product are complementary goods. A complementary agent may be either other material agents or labor.

[Sidenote: Complementary agents used intensively show diminishing returns]

When labor is applied to an agent, either to improve the Quality or to increase the quantity, it is subject to the law of diminishing returns. In the effort to increase the quantity of products, labor is applied first more intensively to the better agents. If it meets with resistance, if returns diminish, it is transferred to any of the poorer agents that have in them uses of as high grade as those still in the better agent. The superior effectiveness of the earlier over the later units of the added agent is called the "differential advantage" of the two fixed agents. The result of a day's labor applied to a field may be represented by 100, a second day's labor by 90 (it being only ninety per cent, as effectual), a third day's labor by 75; but it is more usual to say that the first field produces 10 more than the second and 25 more than the third, the second 15 more than the third. To the agent fixed in supply is attributed the difference in the effectiveness of the agent that is applied.

[Sidenote: The relentless extensive margin of agents]

4. The marginal uses of indirect goods are free uses. Here again is noted the close parallelism in the process of evaluating direct and indirect goods. There is an extensive margin in the use of an indirect agent, a point in the gradation from the better to the poorer agents where the materials and forces are left unused and have no value. Land beyond that point is free. Outworn goods in manifold forms, old pictures, old machines, having no longer charms even for a rummage sale, form a no-rent margin of wealth. On every hand a great multitude of things unused and worthless differ by only a shade from things that still are used and valued. Every rubbish-heap, rag-bag, junk-shop, and garret contains things once prized, now lingering on the margin of utilization.

There is also in agents an intensive margin, beyond which are certain unexploited uses in the things that we already have. This is a more subtle thought, but it has been already discussed in connection with diminishing returns. These potential uses in agents, uses which in the existing conditions lie outside the margin of utilization, of course have no value. We have noted that there is an equilibrium between these two margins. Rent is measured from a zero point of utility either in a good, or in other poorer grades of goods.

A corollary of this proposition is that there is a limit to the rental that anything can yield under any given condition. Below the present margin of utility of any goods there exist great quantities of free goods, unused goods, or unexploited uses. It is only uses above this margin that yield rent. Rent is the difference between the value of the better grades and the value of the free goods. It is therefore due to the limitation in the supply of indirect agents of the better quality, or to the scarcity of the more effective uses in those agents.

[Sidenote: Restatement of rent, economic and contract]

[Sidenote: Economic rent is primary]

5. Rent may be redefined as the value of the scarce uses of wealth within a given period. Rent is the felt importance of the usufructs of agents in securing gratification. It is measured by the marginal utility of any particular grade of agents in securing products. These definitions and the discussion throughout this chapter applies to economic rather than to contract rent. In fixing and agreeing on contract rent, men are seeking to estimate the importance of indirect goods, the importance that an agent will have in getting a product. They are bidding for the use of things, and what they bid is contract rent. Contract rent is based on the existence of economic rent. Economic rent does not depend on contract rent, but on the differences in the effectiveness of agents to secure a given product. If there were not differences in the product, and no limits to the supply of indirect agents, rent could not exist; it would be inconceivable. But these differences existing, economic rent inevitably arises, for men cannot keep from attaching value to the things that affect their desires. Contract rent in turn appears wherever the use of wealth becomes an object of exchange and agreement between men in a free society.

Chapter 11

REPAIR, DEPRECIATION, AND DESTRUCTION OF WEALTH: RELATION TO ITS SALE AND RENT

§ I. REPAIR OF RENT-BEARING AGENTS

[Sidenote: The necessity of repairing nearly all economic agents]

1. The continued rent of indirect agents is dependent on the continual repair of certain parts necessary for their efficiency. All earthly things wear out or decay. Whenever man's hand is withheld, nature takes possession of his work, regardless of his purposes. Dust gathers on unused clothes, and moths burrow in them. Shut up a house, and windows are shattered, roofs leak, and vermin swarm. To close a factory is to hasten the time when buildings and machinery will be piled upon the rubbish heap. The most magnificent and solid works of man have crumbled under the finger of time. The earth is strewn with ruins of gigantic engineering works, aqueducts, canals, temples, and monuments, whose restoration would be no less a task than was their first building. Everywhere vigilance and repairs are the conditions of continued uses of wealth. Some works of nature, such as waterfalls, may appear to have a continued use without repair, but they bear rent only when used with other things that must be constantly mended. A certain amount of labor on the banks of the mill-stream, and certain repairs on the dam, the water-wheel, and the gates are necessary. By a fiction in business contracts the waterfall may be dealt with apart from those conditions to its use, and may be rented, as a field is, with the agreement that the tenant keep up the repairs.

The efficiency of land as mere standing-room usually does not seem to be dependent on repairs. But here again the land yields rent in connection with other rent-bearing agents (such as houses and other agents above ground), which must be repaired. Standing-room on land is not a complete indirect agent; it is but one of the conditions for carrying on an industry, and even it often requires repairs to make it usable. Ranging from these extreme cases of stableness and durability, indirect agents vary to the extremes of fragility and ephemeralness.

[Sidenote: The fertile lands of large regions have lost their usefulness]

2. Most of the qualities that contribute to make land fertile in agriculture being destructible, the constant repair of tilled land is necessary to its continued fertility. If any things could be said to be indestructible, they would be some of the works of nature. In a sense, all matter is indestructible. Man cannot annihilate it, he can simply change its condition. But in economic discussion it is the value of things that is being considered, and from this point of view everything is in some degree destructible. The effects of bad husbandry are everywhere apparent, and in many regions fertile fields have been physically and economically destroyed. In Asia, lands that once supported millions, perhaps hundreds of millions, of population are now deserts. Egypt, for a time reduced to a semi-desert condition, has only in the past century been restored to a certain extent by the use of new methods and a return to the old ones. Many of the areas that were the granaries of Rome can now hardly support a sparse, half-starving population. The lands, or at any rate, the elements that gave them value, have been destroyed.

[Sidenote: Wearing out of some American lands]

Even in young America may be seen the effect of a failure to keep land in repair. As the new rich lands of the West were opened up, the old lands in the East were allowed to wear out, and many of them were abandoned. On the new lands in turn the same methods were followed, using up the first rich store of fertility with no attempt to keep up the quality of the soil. This may have been the best policy for the time; it would not have been economical to employ Old World methods of intensive husbandry when such rich extensive areas were being opened up. But the process was one destructive of natural resources. As settlement moved westward, great forests fell in ashes, and the soil was robbed of the fertile elements which it had taken centuries for nature to store up.

[Sidenote: Wearing out of the parts the railroad]

3. The machinery and appliances used in transportation and manufacturing are all perishable in varying degrees. Take as an example the great agency for transportation, the railway. The roadbed, which is but the natural soil excavated or filled to a better grade, is the most permanent part; yet every frost weakens, every rain undermines, a portion of it. Earthquake, landslide, and flood fill up the ditches, or tear down the embankments. Constant work is needed to keep it fit and safe for use. Above this is the track, slightly less permanent, more frequently changed. The ties rot, and even the rails of steel must be at times replaced. The rolling-stock is still less durable, and the different parts vary in length of life. It is said that the wheel-tires are renewed four times, the boiler three times, and the paint seven times, before a locomotive is entirely worn out. The oil used in the wheel, which is a necessary part of the running machine, has to be applied every day.

[Sidenote: Depreciation of manufacturing appliances]

There is a great difference in the length of life of manufacturing appliances. The building is fairly durable; yet an average depreciation-rate of one and one half per cent. a year must be allowed to offset a reduction in its value of over fifty per cent, in thirty years. Machinery differs greatly in durability; well-made, substantial machinery depreciates about five per cent. yearly. The engines and boilers depreciate more rapidly than the running gear; the loose tools have to be replaced every second to fourth year; while the materials consumed in the industry must be repaired and replaced at every repetition of the process of manufacture. If a factory is to be maintained in its efficiency in accordance with the terms of the renting contract, and is to continue its renting power, everything about it must be from time to time repaired and replaced.

[Sidenote: Neglect of repairs often has evil effects]

4. Neglect or postponement of repairs must cause a falling off of the rent-earning power. The neglect of repairs may have different results in the factory. The neglect of one kind simply reduces present rental while not preventing the future restoration of the plant to its full efficiency. If certain necessary tools wear out and are not replaced, the factory as a whole will be less efficient. Each part of the entire outfit being needed in due proportion, the loss in rental will correspond not merely to the lost efficiency of the missing tools, but to the crippled efficiency of the remaining appliances. Failure to apply seed to the land causes the land as a whole to be useless for that year's crop. In other cases, neglect of repairs increases the expenses of repairs and cuts off future rental. The adages, "A stitch in time saves nine," and "An ounce of prevention is worth a pound of cure," must be acted upon in every industry. The neglect to repair a roof causes damage to an amount many times the cost of a new roof. Failure to replace a bolt costing five cents may result in the rack and ruin of a machine worth many dollars. A handful of earth on a dike may save a whole country from destruction.

[Sidenote: But sometimes is economical]

Neglect of repairs may be economical, however, when outer conditions have first reduced the demand for the agent and consequently the rental. When the line of travel changes, it does not pay to keep an old hotel up to the same state of repair as when it had a great patronage. Old factories sometimes may better be allowed to depreciate while the price of repairs is invested in more prosperous industries. In a declining neighborhood the houses fall into decay, the owners seeing that "it would not pay" to keep them up.

§ II. DEPRECIATION IN RENT-EARNING POWER OF AGENTS KEPT IN REPAIR

[Sidenote: Repairs can not always prevent ultimate decay of agents]

1. Even where repairs are thoroughly kept up and present rent is undiminished, future rents may be decreasing because of natural decay. Changes go on in the substance of things which cannot be prevented by any attention to repairs. The wood in a framework will decay, the metals crystallize. There is also an unpreventable wear of parts that cannot be replaced without replacing the whole machine. It is the aim of the modern manufacturers to make machines like the wonderful one-horse shay, every part of equal durability. The development in America of the system of "interchangable parts" has greatly simplified and cheapened repairs, and has lengthened the working life of machines; nevertheless their lot is the scrap-heap at last. This general depreciation appears to be nearly avoided in large factories where there is serial replacement of the parts, but occasionally some invention or some improvement of process necessitates an almost completely new equipment. An old man once said to me: "I have lived in this house forty years: it was well built, has been repainted regularly, has never been allowed to leak a drop, and it is as good as it ever was. I see no reason why it could not be kept to eternity if always kept in repair." But the same could not be said of the house now. In general, there is finally a termination of the rent-earning power of wealth, and the whole has to be replaced.

[Sidenote: Technical changes destroy the uses of agents]

2. A change in inventions and processes may reduce the rent of agents, independently of their material condition. Rent is dependent on the indirect relation of things to wants; that relation may be changed if some other agent is found fitted to serve these wants more directly. Not only do the materials of houses change, but fashion and engineering skill change, making the old mansions cheerless and inconvenient, and affecting their rent-earning power. At every moment, in a progressive society, many rent-earning agents are being thrown out of use. The machinery in flour-mills has been almost completely changed, parts of it repeatedly, while the roller process has been substituted for the old millstones. Water-power, because of its uncertainty, has been replaced in many places by steam-power, and in many places steam-power in turn, has been rivaled by water-power since the improvements in the generation and transmission of electricity. A change in the process of making paper threw out of use much machinery that was only in part saved by its removal and adaptation to the making of coarser grades of paper. Many minor inventions in the iron industry, still more the invention of the Bessemer process, threw out of use great numbers of the old appliances.

[Sidenote: Industrial circumstances affect the uses of agents]

3. A change in the outer conditions that give occasion to the use of agents may cause depreciation. The exhaustion of materials on which machinery is employed may reduce its usefulness. A sawmill located in the midst of a forest has a high-earning power while the forest lasts, but when the forest is cut off the mill itself declines in value. Unless it can be removed to another forest and thus have its earning power renewed, it will have the value only of scrap-iron; it has become an indirect agent in the wrong place. Oil-boring machinery where a rich supply of oil is found has a high rental for a time, but when the oil-fields give out the machinery falls in value, being worth more or less than the cost of transporting it according as the next oil-field is near or far. Changes in fashions, calling for different kinds of products, cause a depreciation in the value of the old agents. Coarse salt, evaporated by the sun, was used by our fathers, but the finer product of the steam process is driving out the product of the old solar plants. As homespun went out of use, much machinery still in good physical condition was cast aside. Changes in transportation work revolutions in industrial methods. Many prosperous small forges on the country roads of Pennsylvania became valueless after the building of the railroads. New forges were built at favored points where materials and products could be shipped by rail.

[Sidenote: Various grades of efficiency in rent-bearers]

4. The agents employed in any industry range from the more efficient, high rent, down to the less efficient, low rent, grades in a more or less regular series. It follows that as these changes are going on, the place of agents on the scale of efficiency is constantly shifting. The various agents represent all grades of efficiency. One depreciates, possibly is restored later and takes a high place, and again depreciates until finally it is thrown out of use. One loom embodies the latest improvements and corresponds to the most fertile field; another can still be made to yield a little rent; the use of a third results in certain loss. A great mass of no-rent agents lie just below the margin of utilization in every industry. Some of these are permanently abandoned; some will be taken back into use when business conditions improve. When the iron industry is dull, many forges are out of blast; but when iron is again in demand, there is a gradual taking up of the abandoned forges, factories, and machines as they are brought within the margin of profitable utilization. Many agents not actually earning a rent, may become rent-earning through a change in business conditions.

§ III. DESTRUCTION OF NATURAL STORES OF MATERIALS

[Sidenote: Destruction of the American forests]

1. A large part of industry is now conducted without regard to the preservation of the source of income. A striking example of this is the use, or rather the destruction, of the American forests. In the last century the demand for lumber grew rapidly both on account of domestic needs and of the needs of the older countries. Great quantities of wood have been used and still greater quantities wasted, trees being girdled, the ground burned over, the timber destroyed in any way that would clear the soil--timber which to-day would be of far more value than is the cleared land on which it stood. Considering present needs and conditions, the labor seems to have been worse than wasted.

[Sidenote: Effects on value of timber]

The direct effect of this destruction of the supply has been the increase in the value of timber. To the settlers much of the timber was worse than useless; they paid and labored to get rid of it; now the supplies of lumber must be sought on the very margins of our territory: Florida, Maine, northern Michigan and Wisconsin, Washington, and Oregon. The supplies in Washington and Oregon are almost unavailable in the Eastern states on account of the cost of transportation. Professor Marsh, thirty years ago, strikingly characterized the policy that has been pursued: "We are breaking up the foundation timbers and the wainscoting of the house in which we live in order to boil our mess of pottage."

[Sidenote: Physical effects]

The indirect effects of these changes are fully as great as the direct ones. Forests greatly affect climate, temperature, and soil; they influence the humidity. They equalize the flow of streams, moderate floods, and by preventing the washing down of the rich soil, keep the mountain sides from becoming bare and sterile rocks. So, within the last two decades, the people in America have begun to think of forestry. Its purpose is to restore the forests to the condition of permanent rent-earners, to make the mountains yield not a temporary supply, but a perpetual crop of timber.

[Sidenote: Possible exhaustion of the coal-supply]

2. The extraction of coal and other mineral deposits reduces for future generations a supply already limited. The coal deposits in the earth have only recently been drawn upon. A small city like Ithaca probably uses to-day a greater quantity of coal than was used in all Europe two centuries ago. The large deposits of coal and their early development in England long gave a great advantage to English industry over that of other countries. In England, however, has first been felt the fear of the exhaustion of the coal-supply. Professor Jevons, in 1861, sounded the note of alarm; he prophesied that because the coal deposits of America were many times as great as those of England, industrial supremacy must inevitably pass to America. Already the supremacy in coal and iron production has passed to America, and that in textiles soon will come. In England the accessible supply of coal is limited, deeper shafts must be sunk, and the coal gotten with greater difficulty and at greater expense. Coal has risen in price in England within the last few years, and will continue to rise in the future. The coal deposits of America are thirty-seven times as great as those of England, but even these will soon be exhausted. And yet on the part of all except the coal trust, there appears in America a thoughtless disregard for the future. Supplies of copper, iron, and lead in favored positions are likewise limited, and are being rapidly centered in the hands of great companies. The increasing demand for these products insures a steadily rising income from their annual use. The value of the mines, being based on the series of incomes they will yield, may increase while their unused treasures dwindle in quantity.

[Sidenote: Many natural resources are being rapidly exhausted]

3. The exhaustion of natural stores of material is due to civilization, but it threatens to put an end to industrial progress. The savage does not go deep enough to use up permanently the world in which he lives. He uses the fruits that he finds, and those fruits are, almost without exception, renewed the next year. The only mines that were worked out in ancient times were gold and silver mines, while the mines of useful metals were touched but lightly. Within the last century the earth's crust has been exploited with startling rapidity. Scientific knowledge and mechanical improvement have combined to unlock the storehouses of the geologic ages. At the ever-increasing rate of their use, many important materials must be exhausted in the not far distant future. While it is probable that substitutes will be discovered for many of them, the outlook in some directions has little promise. To treat terminable incomes, exhaustible sources of supply, as permanent sources of income, leads alike to unsound theory and to reckless practice.

12. INCREASE OF RENT-BEARERS AND OF RENTS

§ I. EFFORTS OF MEN TO INCREASE PRODUCTS AND RENT-BEARERS

[Sidenote: Desire for better agents impels men to improvements]

1. While man destroys some agents of production he multiplies many others. We have noted many kinds of depreciation, destruction, and wearing out of wealth; but the normal thing in a healthy society is an increase, on the whole, of rent-bearers. The increase of rents is due to two causes: changes in the agents by which they become more efficient technically, or more numerous; and changes taking place outside of the agents, affecting the utility of the products. The first of these will be considered in this section.

The increase of the efficiency of agents is usually the aim of the individual producer, and thus is brought about an increase of the stock of wealth. In some cases, however, improvements such as the dredging of harbors or as the protecting of forests, are made by men collectively through the agency of governments. Somewhere, however, the desire for these changes must arise in the minds of individuals. Increase of most things involves "cost" or sacrifice, in the psychological sense; that is, man must strive, perhaps suffer, to get a certain result. This end, therefore, must be in itself desirable, and social organization must be such as to present a motive to the men to make the needed effort.

[Sidenote: Improvements by adaptation of natural resources]

2. Rent-bearers may be increased in quantity and improved in quality by the adaptation of natural resources to man's purposes. To get food, men use the tracts of land that under the conditions give the largest product. Other tracts less fertile, or for some reason less available, are ditched, tiled, and diked, and fertilizers are carried up steep hillsides to make a soil upon the very crags. In commerce and transportation, new ways are opened by canals, railroads, and tunnels. An isthmian canal will raise the efficiency of ships plying between New York and San Francisco, enabling them to carry a greater amount of freight within a year. The tolls will represent to the users an expenditure only partially offsetting the increased efficiency of the agents of transportation. By the building of wharves, the dredging of harbors, and by many other methods, indirect agents are constantly growing in number and efficiency.

[Sidenote: Machinery is an adaptation of natural resources]

3. Rent-bearers may be increased by inventions and improvements that make machines stronger, quicker, and better. This proposition is not logically different from the preceding. A machine is an arrangement of material things through which force may be indirectly applied to move matter. No fast line divides machinery as regards form, purpose, or cause of value, from the artificially improved natural agents that we have been discussing. Just as a field is drained, plowed, and cultivated to fit it better to yield a crop, so is the iron ore shaped into a form called a machine, better fitted to cut, carve, and weave as man wills. Machines are merely adaptations of natural resources.

[Sidenote: Bettering quality of agents]

Increase in machinery may be either in quality or quantity. The two causes have in most cases the same result. If the quality or efficiency of looms is doubled, it is as if their number had grown in like proportion. In its economic function the beast of burden may not illogically be classed with inanimate machines. The horses in America have been remarkably improved of recent years by the importation of thoroughbred stock from Europe. Ten or fifteen years ago the number of horses in the United States was found to have decreased, and there was much comment on this evidence of a declining industry. It was not at once recognized that there was embodied in horse-flesh more horse-power than ever before, as a single Norman horse has the strength of several Mexican mustangs. Numbers alone are not the measure of efficiency.

[Sidenote: Increasing number and better grouping of agents]

4. The increase of wealth and the betterment of environment go on as well through the increase in the number of appliances and through their improved arrangement, as through changes in their kind. A machine is an adjustment of various natural agents to each other so as to make a more efficient agent, and machines in turn may be adjusted as parts of a larger system of production. The ideal of the modern factory system is so to arrange the machinery that no bit of material will make an unnecessary motion. The log, once started through the mill, is carried automatically from one machine to another until it emerges as a roll of paper or as a box of tooth-picks, ready for use. In an American watch-factory one man tends twelve or fifteen automatic machines. A small brass rod is fed automatically to the machine; a piece is cut off, is picked up by a human-like metal hand; is put into a lathe, and shifted or held firmly while it goes through fifteen or twenty processes; and then is dropped into a box where it is ready for the "assembling" of the watch. As the machinery improves, factories making allied products are grouped to make a system still more efficient.

As the number of agents increases they are distributed so as to be where most useful to the owner. A man having two umbrellas keeps one at his office and the other at home; a student having two books of the same kind keeps one at his room and the other at the university; a farmer having two hoes keeps one at the barn and the other in a distant field, and by this distribution the agents are increased in efficiency.

[Sidenote: A larger and better environment]

The aim of a progressive society is to enlarge the environment, and constantly to adapt it better to the service of wants. This is done largely by mechanical agents, which capture the natural forces of the world, put them into the right place at the right time, and make them do the right thing, or which group and relate the materials of the world in the right ways. Some of the groupings in the chemical and physical world that do not fit man's purposes may be made to do so. The world in this way becomes more and more a great workshop, better and better adjusted to man's wants.

[Sidenote: Increasing some rent-bearers reduces the rents of others]

5. The betterment of the environment of society in some directions reduces the rent of other parts. The wish of the individual is to raise his own rent-bearers in efficiency, but in doing that he affects the agents owned and controlled by others. The ideal from a social standpoint is to increase not rent but the welfare of society, and this is not always the ideal of individuals seeking their own interest. However, as the efficiency of some agents rises, it becomes unnecessary and unprofitable to use the less fertile fields; they cease to be rent-bearers, and the rent of the richer fields falls under the influence of the new supply of products. Some inventions suddenly increase the efficiency of free goods to such a degree that the less efficient rented agents are thrown out of use, and the margin of utilization is moved to a higher plane than it was on before. Improved types of machinery more or less rapidly displace the older, less efficient types, which, therefore, more or less completely lose their rent-bearing power long before they are physically worn out. When improvements in agriculture that are applicable to a considerable area of land take place, and the product thus is increased and cheapened, the poorer land is abandoned. Inventions and improvements thus gradually becoming common property, increase the free goods and free uses not bearing rent and open to every one. One who improves the quality of a machine or the economy of a process may thus unintentionally injure some of the owners of low-rent agents, while unintentionally increasing the welfare of the mass of men for whom the margin of utilization is thus lifted.

§ II. EFFECTS OF SOCIAL CHANGES IN RAISING THE RENTS OF INDIRECT AGENTS

[Sidenote: Effect of decrease of the competing agents]

1. Changes in the number and kind of competing resources may raise the rents of particular agents. Rents may increase without increase in the quantity or number of a particular group of agents or without change in their technical efficiency. As changes in the conditions of society may reduce rents, so other changes may increase them. Agents of the same kind may diminish in number, either absolutely or relatively. If some of the competing machines are destroyed, the rents of the machines that remain rise, while if new supplies are found, either in nature or by improved industrial processes, the rents of the older agents fall.

[Sidenote: Effect of new uses for agents]

2. The discovery of new uses for agents or for their products raises their rents. Farm land of the poorest kind often is found to contain valuable mineral deposits. Such a lucky find has lifted the mortgage from a farm in eastern Pennsylvania, from which, in two or three years, has been taken feldspar exceeding in value the agricultural products of the same land in the last fifty years. The discovery of building stone, coal, natural gas, or oil land may make the annual rent (or royalty) of land tenfold its former total value. Fitness to produce nettles is not ordinarily a virtue in land, but the discovery that certain fields produce a superior quality of the nettle used for heckling cloth, causes them to take on a new value. A mineral spring, because of the supposed or proved healing properties of its waters, may be as good as a mine to the owner. Peculiar fitness for the cultivation of celery may convert marsh land into a substantial source of income.

Social changes are constantly causing agents to shift from lower to higher uses. As population grows and groups about new industries, farm land is used for residence lots, and in turn for business purposes. Rents therefore rise, and this rise is reflected in the higher selling value of the land. If a new demand arises for the product of any machine, its rent rises, although it may continue to turn out the same product as measured by number or quantity. For, if consumers increase, a given supply of agents becomes relatively smaller than before.

[Sidenote: Sudden variations in demand]

3. A rise in rents due to social changes may be relatively permanent or temporary. Business conditions sometimes change quickly. An urgent demand for special machinery raises quickly its rent and value. It is said that lace machinery is sometimes thrown out of use for several years, until a sudden renewal of the demand for lace causes the rental to equal, in two years, more than the original cost. At such times the value of factories increases greatly, but after a few years of prosperity business again collapses. Such prosperous periods are the opportunity of the business man and of the promoter to sell the factory at its highest price. Machinery adapted only for a special product will not sell as readily when less needed for its special use, as that which, like a turning-lathe, can be used for many purposes; but the more special the appliances needed for a certain product, the higher, more abnormal will be their temporary value when they are suddenly needed. Land near the site of an exposition takes on a very great value and again falls after the exposition is over. During the Boer War horses and mules rose in price in the United States on account of British purchases.

[Sidenote: Cause efforts to increase the supply of agents]

A rise in the value of any agent at once causes an attempt to duplicate it or to find a substitute for it; this attempt, if successful, puts a check or sets a limit to the rise. In this search for new devices the man who can see most quickly and clearly has a key to wealth. Some kinds of agents, as rare minerals or tools that can be produced only by highly skilled labor, cannot be increased rapidly in number and remain high in price for a long period; and favorably located building sites illustrate the same principle. In some cases, it is true, the demand may be due to some temporary cause, as in a period of unsound land speculation, but usually the growing value of location is due to a steady and abiding change in population or business.

[Sidenote: Franchises guard the growing rents from the influence of substitution]

4. Such public utilities as are guarded from competition by franchises, often rise in rental with increase in population. The leading classes of public utilities referred to are waterworks, gas-works, street-railways, ferries, and wharves. This evidently is only a special illustration of the principle just stated, where it is not easy to find a substitute for certain agents. Public franchises entitle the owners to special, sometimes exclusive, privileges, and protect them legally from competition. Not all franchises are valuable; many street-railways are unfortunate ventures, the earnings being insufficient to pay expenses, to say nothing of interest on the investment. But when they pay greatly, their high value is due to the impossibility of competition. The cars, mules, dynamos, steam-engines, and other agents combined to furnish transportation, have a special earning power because other similar agents are forbidden to be used in that market.

[Sidenote: Various kinds of "unearned increments"]

5. Industry abounds with cases of unearned increments of value due to accidental and social causes raising the rents of wealth. The term unearned increment may be defined as an increase in rents (or value) of agents, due to something other than the efforts or merits of the owner; in fact, it is that of which we have been speaking. In some cases powerful or wealthy men can bring about social changes in entirely legitimate ways. The owner of a large factory, moving it into the country, may buy up surrounding land and found a city, converting pasture lands and corn-fields into valuable building lots. Again, social changes are produced immorally, if not illegitimately, when wealthy men or influential politicians cause laws to be passed which inure to their advantage but which may ruin many other citizens.

[Sidenote: Also many chances of loss]

In most cases, however, social changes are impersonally caused. The individual owner who profits by them is powerless to affect the result. He can only adapt his conduct in some measure so as to reap an advantage. He can strive to increase the number and quality and to get control of such agents as he foresees will yield higher rents. In making such a forecast there is chance of loss as well as of gain. The term "unearned increment" has been frequently used in recent years. It is often assumed to be a peculiar thing, sharply in contrast to other changes in value. The foregoing hasty review may serve to suggest how manifold and complex are the instances of it, and what an important part it plays in modern industry.

DIVISION C--CAPITALIZATION AND TIME-VALUE

13. MONEY AS A TOOL IN EXCHANGE

§ I. ORIGIN OF THE USE OF MONEY

[Sidenote: The consideration of money can no longer be postponed]

1. The exchange of goods by barter is extremely difficult in most cases. Thus far we have not considered the subject of money and have so far as possible avoided even the use of the term. Value in economics does not depend on money, and is not necessarily connected with it. Things can be compared in their utility, their importance to our welfare can be estimated, without the use of money. Many problems of economics can be discussed pretty thoroughly and solved without the use of the word money or any term of similar meaning. But to-day it is impossible to go very far in the discussion of economic questions without using the concept of money, which is interwoven with every practical and theoretical problem in economics. We have delayed to the farthest limit the formal recognition of the subject; but we are now approaching the question of capital and interest, and it is no longer possible to avoid a preliminary consideration of the money concept.

[Sidenote: Exact measurement of utilities is not possible without some medium of exchange]

In considering the problem of exchange of consumption goods, we have assumed that it is possible to weigh small differences in the marginal utility of goods, and that such differences have influence on exchange. Now in exchange by barter such a small estimate is impossible. In barter things are exchanged directly for each other in kind. If the two things do not chance to coincide in value, the exchange cannot be completed. An equivalent must be found, or a multiple, if the marginal utility of two goods is to be equalized for either party by exchange. As in most cases this adjustment must be very incomplete, many exchanges that otherwise would be advantageous cannot take place. In the earlier stages of development, this careful estimate of value is not found. Children do not make it. The typical trade of the small boy is a "trade even"; Johnny exchanges his gingerbread for Jimmie's jack-knife. It marks an epoch in the industrial development of the boy when he begins to keep store with pins, and no longer trades candy for apples, but both for pins, which have become the medium of exchange in his boy world. He then can express values in much more exact terms. In our society most children begin early to grow familiar with this conception; but travelers find some savage tribes still in the earlier childish stage of development, unable to grasp the thought of a general medium of exchange. When, through lack of a medium of exchange, there is a failure to adjust utilities, there is a loss of the possible advantage in each defeated exchange. There is a further waste of time and of vain efforts to find something that will be accepted in exchange, and the loss offsets a large part of the gain even when the barter is effected.

[Sidenote: Money is found to serve as a general medium of exchange]

2. Some kind of enjoyable good in general use comes to be money, that is, to be accepted as a medium of exchange. The difficulties just mentioned are met by the use of a medium of exchange. A medium of exchange is simply one kind of wealth which is taken, not for itself, but to pass along, in the belief that it will enable the taker to gratify his wants and distribute his purchasing power in a more effective way. Money is an "invention" in that it is a means of exchange that came into use independently in a great number of communities. It is not an invention in the sense of a mechanical device suddenly hit upon, but rather in the sense of a social custom that grows as its convenience is tested by practice. Money is used, in some degree, everywhere except in the most primitive tribes. Historically viewed, the money first used in any community is seen in every case to be a commodity capable of giving immediate gratification, a direct good in immediate use. It then gradually comes to be used as money, which is an indirect agent. Still later, when the money habit is well established, a kind of material having no utility except as a medium of exchange may come to be used.

[Sidenote: Qualities of the primitive money]

3. Money in its origin is that good which best unites the qualities that make it easy to sell, to carry, to know, to keep, to divide, and unite. It is evident that if some one commodity is gradually to take on this use as a medium of exchange there will be a choice; some things will be better fitted than others. First, this thing must have the quality of salability, or marketability. In the channels of exchange it is taken not because it is wanted for itself, but because it will help to get something else that is wanted. To be sure of a ready sale in a primitive community it must, however, be something that is generally desired. Food and clothing, which supply the fundamental physical needs, are the most generally used and desired of all goods. But they do not have the second quality of a good money material, that of great value in small bulk, transportability. Food is bulky. The carrying of a venison or of a bag of wheat on one's back a short distance requires an effort as great as that for the procuring of the food. Furs, however, have this quality in a high measure, united with other qualities of money, as is shown by their general use in the exchanges of northern tribes. Thirdly, a thing must be recognizable; counterfeits must be easily avoided, and the quality must be easy to test: this is the quality of cognizability. The love of ornament is universal in human societies, and gives value to many materials combining in a high degree the qualities thus far named. Fourthly, the money material, when taken in exchange, must remain without loss of quality, perhaps for long periods, until it can be exchanged again. Food does not answer to this requirement, being organic and perishable. But some of the metals, having value in small bulk, salability, cognizability, and durability, step by step displaced other forms of money. Finally, money must be made of a material easy to divide and unite. It is a great convenience in small transactions to be able to represent a fractional value by a small coin. The money material thus, likewise, is easily shifted to and from its money use. It is a very poor money that has not this quality, yet a thing may serve for money in larger transactions without it. Cattle, slaves, and land have been thus used, although they answer in a very rough way these fundamental requirements of the money material.

[Sidenote: Industrial changes affect the convenience of certain money forms]

4. The changing material and industrial conditions of society change the kind of money that is used. The money use, as has just been shown, is a resultant of a number of different motives in men. Things that have the highest claim to fitness for money with a people at one stage of development would have a low claim at another. As each of these stages is passed, the thing used as money either increases or decreases in its fitness. The final choice depends on the resultant of all the advantages. The use of a material may become more general or less so. Shells used for ornament in poor communities cease to be so used in a higher state of advancement, and thus their salability ceases. Furs, used at some stage of development as money in all northern climes, cease to be generally marketable when the fur-bearing animals are nearly killed off and the fur trade declines. Tobacco was at one time in Virginia a great staple. Merchants were always ready to take it, and its market price was known by all; but as it ceased to be the almost exclusive product of the province, it lost the knowableness and marketability it had before. In agricultural and pastoral communities where every one had a share in the pasture, cattle were a fairly convenient form of money, but to-day would be a most inconvenient one; a city merchant exchanging goods for Poland China pigs and Texas steers would envy the proverbial owner of a white elephant.

[Sidenote: The proved fitness of gold and silver as money]

The value of the money material may fall so greatly as a result of greater production, as in the case of iron, tin, copper, that it becomes unsuitable. Again, as wealth grows, as exchanges increase, as the use of money develops, as commerce extends to more distant lands, the heavier, less precious metals fail to serve the money need, especially in the larger transactions. Thus, in a sense, different commodities compete, each trying to prove its fitness to be a medium of exchange; but only one, or two, or three at the most, can at one time hold such a place. Silver and gold, step by step, often making little progress in a century, have displaced other commodities, and are the staple and dominant forms of money in the world to-day. Every community has witnessed some stage of this evolution. Now nations are divided into two great groups, silver- and gold-using, in accordance with the metals they use as standards. The gold-using countries are the most advanced industrially, requiring the most valuable money metal. Many countries have passed in the last century from the silver to the gold standard, and in an intermediate period have tried to use both standards. The Asiatic and South American countries mainly use silver, while most of those in North America and Europe use gold.

While industrial changes thus affect the choice of money, in turn money reacts upon the other industrial conditions. If a new and more convenient material is found, or the value of the money metal changes to a degree that affects the generalness of its use, industry is greatly affected. The discovery of mines in America brought into Europe, in the sixteenth century, a great supply of the precious metals, and this change in the use of money reacted powerfully on industry. Money being itself one of the most important of the industrial conditions, is affected by and in turn affects all others.

§ II. NATURE OF THE USE OF MONEY

[Sidenote: Money is an indirect agent, a tool to effect exchanges]

1. Money in all its money uses is an indirect agent, to be judged just as other indirect agents are. The key to this section is the thought that the function of money is to serve as an indirect agent. Money is often, by a figure of speech, called a tool. Literally a tool is a bit of material which, taken in the hand, is used to apply force to other things, to shape them or move them. Figuratively, this is just what money does. A man takes it in his hand not to get enjoyment out of it, but to apply force, to move something, and that which he moves is the other commodity. Adam Smith aptly likened money to the road and wagons that transport goods, thus gratifying wants by putting things into a more convenient place. Money is only one of a multitude of forms of wealth. It is not even the most "valuable"; it has value just as other indirect agents have. The loss caused by taking away an indirect agent entirely is greater than the benefit usually attributed to it. Its utility in the extremest conditions is greater than its marginal utility under ordinary conditions. Food is not credited in the market with enormous value, but if starvation threatened, all else would be given for food. In a like manner, each individual values money according to the importance of the marginal service it renders, but the marginal service is far from measuring the loss that would be caused by the entire disuse of money. In a society without money, industrial processes would be very different, and exchange would be hampered in almost inconceivable ways. It is true, therefore, that money is an economic factor of high importance, but it is not so indispensable as many other factors to which far less value is attributed.

[Sidenote: Why a poor community lacks money]

A poor community has little money because it cannot afford more; it gets along with less money than is convenient just as it gets along with fewer indirect agents of every other kind than it could use. Pioneers in a poor community where the average wealth is low, cannot afford to keep a large number of wagons, plows, good roads, or school-houses. If the community were wealthy enough it would have more of these and of other things, and great as is the convenience of money, poorer communities have to do with little of it. It is, therefore, a confusion of cause and effect for poor communities to imagine that their poverty is due to lack of money.

[Sidenote: The use of money as a common denominator]

2. Out of its use as a medium of exchange comes the use of money as a common denominator of values. Money serves as a "common denominator," for, as all other things can be expressed in terms of money, through it the value of other things can be compared. The other things can be expressed in money because they are constantly exchanged for it. All things being compared with money, can in turn be compared with each other. Some consider this service as a common denominator to be the primary and most important function of money. Sometimes a money of account is found, which is not in use as a medium of exchange. Cattle and slaves have served as money of account while not used as a medium of exchange in larger transactions. Money of account is used, as the shilling in New York, which for a century has not been in use at all as a medium of exchange. It is, however, only apparently a denominator of value; the shilling represents five fourths of ten cents. The actual standard is the dollar; the shilling is only a habitual form of speech and is mentally reduced to terms of the money in use. A decimal system is a great convenience in the use of money as a common denominator, but not indispensable. It is a striking fact that England, until a few years ago the greatest industrial nation, still uses a money unit requiring cumbrous calculations.

[Sidenote: Money used as a storehouse for saving.]

3. Other uses of money are as a storehouse of saving and as a standard of deferred payments. These uses grow out of those before mentioned. The standard of deferred payments is the unit of value in which debts are agreed to be paid later. It is evidently most convenient, and therefore almost inevitable, that the common denominator in which all values are expressed from day to day should continue to be taken as the value unit when the completion of the exchange is delayed a day, a month, or a year. This will be more fully discussed at a later stage of our study.

The use of money as a storehouse of saving was more common formerly than it is now, when better ways than the hoarding of money are found for "laying up for a rainy day." In some measure, however, money is hourly serving this use, which is still an important one. Money kept to be used to-morrow or five years hence is a storehouse of value for twenty-four hours or for five years. In either case it is being kept to complete at a later time its use as a medium of exchange. A thing ceases to be money, logically viewed, the moment its owner keeps it without the purpose that it shall be spent ultimately. The typical miser is a man who has lost his reason as regards the money use. Money must be deemed, therefore, to perform the same essential service as a storehouse of saving that it does as a medium of exchange. In either case it is to be kept only to the moment when it will afford the maximum of pleasure.

§ III. THE VALUE OF TYPICAL MONEY

[Sidenote: The money use is added to other uses]

1. The money use, historically considered, is a new use added to a good, and increases the demand for that good. The history of any particular kind of money may be traced back to a point where it was not money, since which the money use has been added gradually to the other uses. The value of the material later to become money is determined, as is that of any good, according to its marginal utility in all possible applications. No new theory is required to explain the value of this same commodity as it gradually acquires the added use of a medium of exchange. The new use influences demand for the thing just as do the other uses. What is here said must be understood as applying to typical money, which is at the same time a commodity having other uses. Other things that are not typical money come later to be used as money, under legal regulations.

[Sidenote: The other uses continue, slightly modified by the money use]

2. A good that comes to be used as money continues to have a commodity use along with the money use. When a thing is wanted for some quality that gives immediate gratification to the user, the explanation of its value is simple. Ornaments, shells, feathers, food can be seen to have a direct want-gratifying power. The money use is one that works no physical or visible change in goods, and to many minds it appears so different from other utilities that it remains quite mysterious and incomprehensible. To persons accustomed to thinking on problems of value, this case appears to be no more difficult than that of anything else having two or more uses. Cows are used for milk, for meat, and as beasts of burden. Each of these uses is logically independent as a cause of value, yet all are mutually related, the values of cattle being determined by the consideration of all their uses united into one scale of diminishing utility.

[Sidenote: Money yields a series of rents which are the basis of its value]

3. The uses of money make it a rent-bearing form of wealth. The rent that money yields is in the form of convenience and economy. This is sometimes rendered directly as psychic income, as in enabling the traveler to buy his dinner, for the money thus yields gratification just as does the carriage in which he rides. One may go for a day to the seashore without a parasol and suffer from heat, or without money and suffer from hunger. In every case where money is retained for a time in possession, there is expected from it a usufruct as great as, or greater than, can be secured from anything else for which it can be exchanged. This usufruct is a net surplus, or income, yielded by a sum of money undiminished in amount up to the moment it is spent, but meantime increasing in the gratification it will help to secure. In many cases in practical business money yields gratification only indirectly, as the objective contract rent received as interest for borrowed money in business uses, or as economic rent when the use of money in business enables one to secure a larger income. Because money yields a rent men make the sacrifice involved in keeping a stock of it on hand. On this rent is based that part of the value of money that is derived from its money use. As the use of money as a standard of deferred payment, or basis of commercial obligations, does not require that it be owned by the parties writing the contract, this use of money is a free good, a sort of social by-product of the medium of exchange. When money is in use in a community, any person may draw up contracts in terms of money, borrowing and lending, buying and selling wealth, later to be repaid in other wealth or services expressed in the circulating medium.

[Sidenote: The general use of money is characteristic of this age]

4. Money may be defined as a generally accepted material means of payment and medium of exchange. This, its primary and essential function, may appear to be less important as new modes of balancing accounts of wealth are devised. But its functions as a common denominator of values and as a standard of deferred payment are increasingly important in an advancing society. It is this expression of the value of all other things in terms of money which may well be deemed the essential characteristic of the capitalistic age. In earlier periods wealth was thought of and expressed in concrete terms; now it is expressed in money. The general use of money affects men's ways of looking at wealth and speaking of it. Without appreciating the nature and function of money, it is impossible to grasp the significance of capital in modern industry, the consideration of which we are now to enter upon.