14. THE MONEY ECONOMY AND THE CONCEPT OF CAPITAL…

14. THE MONEY ECONOMY AND THE CONCEPT OF CAPITAL

§ I. THE BARTER ECONOMY AND ITS DECLINE

[Sidenote: Various points of view of the students regarding money]

1. The use of money prevails in very different degrees in various parts of the United States. The members of this class, representing nearly every state and territory in the Union, have lived amid very diverse industrial conditions. Some know best the country where conditions are similar to those of a hundred years ago; some, the villages where may be seen the handicrafts and the small general store. Others know better the cities with their varied industries; while doubtless still others, through family relations, know of the methods of great wholesale business, perhaps even of the larger commerce and foreign trade. Methods differ in the different lines of business, and according as a man is a farmer, a merchant, or a banker, he has different ideas as to the use of money and of the part it plays in modern industry. You come to this study with different experiences and preconceptions; as a result every statement produces a somewhat different impression on each of you. This is true in general of the statements made in political economy; but it is most strikingly true in the discussions of money. A city boy rarely sees a case of barter; whereas in many parts of the West and Southwest, and in the mountainous districts of the East, a large part of the business is carried on in this way. Town and city in New York state differ in this respect, but hardly more than do the rural districts of the different sections of our country. Banks are very numerous in the East, are few in the Northwest, and still fewer in the South. Men can understand each other better in a discussion if they are conscious of the fact that they do not instinctively take the same point of view.

[Sidenote: Countries differ in their use of money]

2. The extent to which, on an average, money is used in different countries of the world, differs widely. Statements in political economy must be guarded; few of them can be taken as universally true. As the different parts of one country may be contrasted, so may the different countries. The use of money in Siberia would be much less than that in Moscow and St. Petersburg, and again the average use in Western Russia is doubtless less than that in Austria. In Austria the money use is less developed than in Germany. While there is now little difference between Germany and France in this respect, France for a long time was the more developed industrially and made greater use of money.

There is greater use of money in the cities of the outlying countries than in the rural districts. In the cities of Mexico banks and credit agencies are employed as in the American cities. The rural districts are more backward and make far less use of money than is the case in the United States. The great ports of China are provided with all the facilities of modern banking. In the great cities of India one can get a bank draft that will be paid in any part of the world. But go a very little way out of the cities of China and India, and conditions greatly change; money is far less used and principally as a storehouse of saving.

[Sidenote: Slight use of money in the Middle Ages]

3. In a historical view the European nations are seen to begin with a barter economy and to pass through great changes as regards the use of money. Here the view shifts from a comparison of different nations at the same moment to a comparison of the same nation through a period of centuries. To understand, even in a measure, what is about them men must know out of what it grows. In the early Middle Ages money was used chiefly in cities, and there only to a limited extent. Almost universally a "barter economy" prevailed, or, as it has been called, a "natural economy," a term taken from the German "Naturalien," which means natural products, enjoyable things, as opposed to money. Natural economy, therefore, means that condition of society in which things are exchanged in kind. In the Middle Ages land was the great and dominant form of wealth. The prince himself was dependent on land for his income. The conquering chief or invader took possession of the land and parceled it out to his followers, and they in turn to their vassals. The income of the rulers was in the form of "Naturalien" (wheat, chickens, eggs), the kind and amount of which was fixed by contract or by immemorial usage. The landlord had land as his wealth and income-getter; the tenant received the use of the land in payment for his labor.

[Sidenote: Land, the main form of wealth, was rented without the use of money]

The condition of the serf appears to have been, under these circumstances, inevitably connected with the "barter economy" as applied to the renting of land. A farm cannot be moved, and in medieval conditions its products mainly had to be used on the spot. If the serf was to use and enjoy the land, he had to stay upon it. Having no money he had to pay in labor or in products, for its usufruct. In those times the powerful man, politically, was also a wealthy man whose wealth consisted of landed estates. Between the landlord and the serf existed a lasting relation, inherited rather than voluntary, but similar in its conditions to the renting contract. The villein had the use of the stock, pastures, fields, woodlands, provided he kept them undiminished and undestroyed to transmit to his children. Under such conditions there was great fixity of economic relations. While in some respects this was a happy condition, it had its disadvantages. The renting contract, in connection with a fixed rotation of crops and some communal modes of cultivation, hindered improvements. The more intelligent cultivator could not change his methods for the better. It may be seen not only that the use of money on a medieval manor was slight, but that the conditions for the growth of the money habit were most unfavorable. The terms of agricultural contracts, the modes of speech, the habits and thought of the mass of the people, were therefore determined by the conditions of the barter economy. A change in these respects was slowly worked by forces originating outside, in a very different industrial environment.

[Sidenote: Contrast between city wealth and feudal estates in the Middle Ages]

4. With the growth of cities developed a new class of wealthy men and a new view of wealth. The student of history knows of the conflict that grew up during the Middle Ages between the cities and the landed aristocracy. It found its cause in economic conditions. There were obvious differences between the wealth of the feudal landlords, and the wealth that grew up in cities. One must be used mostly on the spot, the other can be moved. The fruits of one are perishable for the most part; the fruits of the other can be kept for a longer period. The methods of agriculture are exceptionally stable; production by handicraftsmen is dependent on the peculiar skill of the workman, giving greater room for invention and a premium on skill. The one industry may be carried on by servile labor; the other can be efficiently followed only by free workers having the ambition to excel.

[Sidenote: Money thus more used in city trade]

The use of money grew up in the city. The density of population made it easy, the growth of wealth made it possible, and the nature of the exchanges made it necessary. Whereas the relation of landlord and serf under the renting contract continues from year to year, the relation of the buyer and seller of shoes, hats, etc., in the city, is temporary, these things forming only a part of man's economic needs. Barter with a particular individual is much more inconvenient if exchange is only occasional than where the contract is a continuing one, and there is an annual balancing and settlement of accounts. So, as city industry and commerce grew the use of money increased, both in small neighborhood trade and in the larger transactions with distant countries; and thus the business methods of the cities grew into sharper contrast with those of the rural districts.

[Sidenote: Money loaned and borrowed in cities]

5. The loan and hire of wealth in medieval cities came to be expressed as a money loan. The loan of money and of other wealth expressed in terms of money, began in the cities. The use of money and the expression of the value of things in terms of money was common there throughout the Middle Ages. Moreover, as the movable forms of wealth multiplied, the agreement to return borrowed wealth in kind became impossible in cities; the loan in terms of money became the only practicable thing. A merchant embarking on a trading expedition must have such a number and variety of goods, that he finds it both very difficult to rent them and wasteful in time to enumerate them and return them in like kind. It therefore became usual to make a loan either of the things expressed in terms of money, or of money with which to buy the things, thereby reducing to a single, simple, easily interpreted contract, the indebtedness which the borrowing of a thousand different things occasioned.

[Sidenote: The medieval opposition to loans at interest]

Such a contract differed not in economic purpose, but only in form and terms of obligation, from the renting of wealth. The church writers, however, got much confused in regard to the nature of money loans. They did not see that it was things which the merchant wished to borrow. They did not see that the money loan was simply a more convenient mode of transferring the use of wealth from one person to another. The moralists and lawmakers of that day said: Money is unfruitful, therefore taking interest for it is robbery. We cannot follow here the controversy as to the justice of interest on money which involved other ideas than those mentioned, but even to the present time traces of the old fallacy may be seen more or less plainly in the economic theory as well of conservative writers as of the socialistic opponents of interest. The principal sum expressed in the loan contract was called the capital sum, from caput, head, and the amount paid for its use was first called usury, money for the use. How the word interest came to take its place, and the word usury came to mean excessive interest is one of the most interesting chapters in economic history. The term capital then came to be connected with city wealth, with movable forms of wealth, with things supposed to be peculiarly "the product of labor"; and interest was assumed to be connected only with this capital. The term rent on the other hand was connected especially with the use of land. The connection was a historical accident, but it has had an important influence on economic theory.

[Sidenote: Rivalry of the commercial and landholding classes in Europe]

6. The owners of city wealth and of country landed estates often were opposed as well in social and political as in economic affairs. The practical economic questions of the Middle Ages and the practical political questions largely turned on these two groups of interests. The men of wealth in the cities, the merchants and manufacturers, often were found opposed to the landed aristocracy. This social division between the commercial and agricultural classes doubtless helped to strengthen the prejudgment as to the nature of the two kinds of wealth. Indeed, in view of the situation, it may have been in a measure justifiable and expedient to contrast the thought of city wealth, which has come to be called capital, with that of landed wealth. But even if it were, it is now misleading and erroneous to continue the use of such concepts in a new country and in our modern conditions.

[Sidenote: Land continues to be rented while city wealth is borrowed in money form]

Indeed, for centuries the sharper features of the contrast have been steadily softened. The money economy of the city gradually spread to the rural districts, but never entirely displaced barter, which lingers everywhere. Important steps toward a money economy were the commuting of forced or customary labor of the serfs into a money payment to the lord, and at the same time the substitution of money payments for payments in kind (use of lands, specified goods, etc.) to the peasants. Thus arose a free peasant class receiving wages. But land continued to be rented and landed estates to be hereditary throughout Europe. As they did not pass from hand to hand as a commercial or marketable form of wealth, their value was rarely, if ever, expressed in terms of money and as a ratio to the rent they bore. The result was the fixing of the erroneous idea that agricultural wealth is essentially different in the character of its service and yield from wealth used in manufactures. One phase of the error was the idea held by the physiocratic writers and by Adam Smith that in agriculture "nature labors along with man," while in manufacture "nature does nothing, man does all." This view was corrected by later critics (Buchanan, Ricardo, and others), but the main portion of the fallacy persisted in the supposed contrast between the characters of the services performed by natural resources and by artificially produced wealth.

§ II. THE CONCEPT OF CAPITAL IN MODERN BUSINESS

[Sidenote: Extension of the use of the money loan and of the capital concept]

1. The development of the use of money and credit has led to the expression of the value of all indirect agents, without distinction, in terms of money. This is a capitalistic age. The development of a class of money-lenders has led to a transfer of all sorts of wealth from owners to users by means of money. As in medieval Europe city wealth was bought and sold, and measured and expressed, so in twentieth century America are the farm, the waterfall, and the mine. Every purchase with money owned or borrowed is to-day called an investment of capital. To invest means to clothe, and an investment of capital is clothing money in any kind of wealth, whether it be a ship, a factory, or a farm.

Interest on money is the contractual form in which more and more the use of wealth is paid for. The borrower does not ask the wealthy man to buy for him a factory and to rent it to him. It is not impossible for the transaction to take that form; but in practice it is inconvenient. The capital concept, the expression of wealth in the form of money, spreads over almost the whole face of the economic world. In promissory notes, mortgages, capital stock, bonds, and many other forms, are expressed the obligations of borrowers bound to pay regularly a sum called interest for the use of the multifarious wealth they have chosen to employ.

[Sidenote: Definition of capital]

2. Capital to-day may be defined as economic wealth expressed in terms of the general unit of value. In economic discussion new conditions must be recognized and an attempt made to adapt definitions to the language and needs of practical life. By this definition, capital, at any given moment of time, includes all economic goods in existence, when they are thought of in terms of their value. But things have different durations, some are parts of the capital of the world only for an instant, others for a week, a month, or years. Most capital is composed of things durable in a large degree.

It has been seen above that there is no reason for keeping things unless they will increase in value, that is, unless a rental is logically attributable to them. Everything kept for a day, a month, a year, is kept because thus it will continually give off uses or by accumulating them it will become more useful. Hence, when interest is defined as the payment for the use of capital, it is connected with all wealth that is expressed in the capital form. In practical business and in theoretical discussion this is the idea of capital that alone can be consistently followed. Capital is the value equivalent of a sum of money "invested," "clothed" in forms of wealth purchased and exchanged. Wealth has become fluid in modern times; it was crystallized in medieval times. Under the new conditions, wealth, expressed in the mobile form of capital, flows into the most distant corners of the industrial world.

[Sidenote: Distinction between money and capital]

3. Capital must not be identified with money although it is expressed in terms of money. While money and capital are not identical, neither are they opposite or mutually contradictory. Money is but one species of the genus capital. It is a particularly durable form when industry as a whole is considered, a particularly fleeting form in the individual's possession, and a particularly important, though not necessarily the most important, form in its social significance. The things composing capital are concrete things, scarce forms of wealth, some of which are yielding gratification at the present moment, or are destined to do so at some future moment; others of which are not themselves giving direct gratification, but are indirect agents for the gratifying of wants. To this latter group belongs money.

The caution contained in this proposition may appear to some to be superfluous, but it is most needed. The mind is so prone to identify things that are expressed currently by the same words. The ease with which money and capital are thus confused has led to various popular fallacies on practical economic questions.

[Sidenote: Contractual interest and rent involve a difference of business procedure]

4. Renting wealth and borrowing capital have the same economic purpose, but the capital contract presents certain peculiar features. In the interest contract for the loan of capital the interest always is and must be expressed in money; the capital sum must be expressed as value; and the interest rate expresses the relation between these two values. In each of these features the interest contract is in contrast with the renting contract. While the rent itself may or may not be expressed in terms of money, the value of the rented wealth is not so expressed, and there is no rent-rate expressing the relation between the two values.

[Sidenote: The wealth concept and the capital concept contrasted]

As here presented, the essence of the capital concept is in the mode or form of expression of wealth, not in the physical nature, the origin of its value, or any peculiarity in the kind of wealth; the content of the concept is limited only by man's thought of wealth, every good becoming capital when it is capitalized, that is, when the totality of its uses is expressed as a present sum of values. The difference between the wealth concept and the capital concept is therefore subjective, not objective; it is a difference in the mode of man's thought regarding wealth. The rent contract and the interest contract are modes of borrowing and lending which reflect this difference of conception. In their effort to express more exactly to themselves and to others the relative felt importance of their environment, men take in turn different points of view, and use different modes of expression. The most developed and exact of these devices for the social expression of valuations, which became possible only with a money economy and widened markets, is the capital concept, whose nature has been analyzed here.

[Sidenote: The capital concept now prevalent]

Summarizing the thought of this chapter, it may be said that the capital concept has gradually developed with industry, and is now the most widely prevailing mode of expressing the quantity of wealth. It is used in the discussion of all the most important problems of modern industry. The questions of income from wealth, of trusts and corporations, nearly all that is most notable in the development of modern industry, require the use of the capital concept. Yet (returning to the thought with which this chapter started) in many of the outlying districts other modes of looking upon wealth are employed. References to modern industry must be understood usually as applying to the most developed capitalistic conditions.

15. THE CAPITALIZATION OF ALL FORMS OF RENT

§ I. THE PURCHASE OF RENT-CHARGES AS AN EXAMPLE OF CAPITALIZATION

[Sidenote: The nature and sale of rent-charges]

1. From the twelfth to the sixteenth centuries the sale and purchase of rent-charges was the most general form of borrowing and lending wealth. A rent-charge in the Middle Ages was a definite income that was to be paid out of the rents of an estate, business house, manor, etc. The property was said to be "charged" with the payment of that income, and some estates were passed on for generations from father to son charged with a certain rent. It was thus possible for the owner of money to buy a rent-charge, either one that had been created a generation before, or a new one created by some landowner for the especial purpose of borrowing money to go on a crusade or of improving his estate or of investing in other business. The transaction took this form: the purchaser of the rent-charge paid a sum of money, called the capital sum, and obtained in return a rent-paper entitling him to receive permanently a given income. The house or land was security for the debt. The seller gave up the right to the rent as it came in year by year, and received in return a capital sum in hand. Generally he had the right to repay the sum whenever he wished and thus extinguish the rent-charge. Logically viewed, the purchaser bought an equitable part of the income, therefore an equitable part of that rent-bearing wealth. In effect it was just like a loan except that the purchaser of the rent-charge could not demand the repayment of his money. He could, however, sell the rent-charge when he wished to get his capital out. Gradually it became usual to sell and transfer rent-papers just as is done to-day with mortgages and bonds. Rent-papers thus came in the fifteenth century to be negotiable paper in somewhat general use. There was a rise and fall of the value of the rent-paper with changes in the demand for investment in rent-charges or with changes in the security.

[Sidenote: Rent-charges were a convenient investment in medieval cities]

2. The sale of rent-charges grew out of an industrial need of the exchange of safe permanent incomes for larger sums of wealth. The custom of the purchase of rent-charges grew up in the cities. The increasing wealth of cities, the growth of commerce and enterprise, caused rent-charges to be sold by the owners of houses and real estate in the cities, and the custom spread to the country. It is an instance of the way income became more fluid in the cities during the Middle Ages. This kind of loan contrasted strikingly in the Middle Ages with those loans made commonly by reckless kings, prodigal nobles, and distressed peasants to secure consumption goods. Merchants needed large amounts of wealth for their growing enterprises, and they felt that if they could get a capital sum down they could make it earn more than the rent-charge. A perpetual income of one hundred units was therefore exchanged for a sum at the moment of twenty or twenty-five times that amount. As the wealth of the cities increased, there were some men who wished to retire from active business, and there were widows and children with property which they could not manage directly. Such persons either could not afford to take the risks of active business, or could not judge of them, and they formed a class of lenders or investors seeking some safe income. Between the two classes of active merchants and capitalist lenders, each of whom saw his own advantage and followed it, the practice of buying and selling rent-charges thus grew up.

[Sidenote: Rent-charges were not forbidden by the church]

The practice was allowed by the church, though interest and the lending of money were forbidden. The loan was substantially a loan of capital and the rent-charge was substantially interest, but in the eyes of the church moralists there was a marked difference, in that the obligation to the purchaser of the rent-charge was secured by a permanent and substantial form of wealth, and the contract usually was favorable to the borrowers. In its origin the practice was not merely an evasion of the law against usury, but a convenient form of contract. It doubtless came, however, to be used as a means of evading the law of the church against usury, and thus became an entering wedge for the general use of money loans.

[Sidenote: The market value of rent-charges reflects the exchange ratio between present and future money incomes]

3. Rent-charges had a market-value, varying with time and place, and expressed as a number of years' purchase of the rent-charge. The sellers of rent-charges were influenced by many motives: a lord wished to build a castle, or go on a crusade; a farmer wished to improve his estate; a merchant wished to embark on larger ventures. Opportunities thus opened in the cities for men of wealth to get a fixed income for a payment of ready money. In the cities, the buyers seeking a fixed income would bid down, or bid up, the value of the rent-charges, which thus came to have a quotable market value. In time, greater and greater amounts were paid by the investors in return for the guarantee of a given income. In rural districts the value of the charges was low, that is, the capital sum was but ten or twelve times the value of the annual rent-charge; while in the cities it rose to twenty and even twenty-five times the annual rent-charge.

A memento of this practice, probably, is the manner in which the price paid for land is spoken of still in England and the continental countries in a phrase quite unfamiliar to American ears, as a certain number of "years' purchase." If an estate is sold for twenty times the annual net rental it is said to be sold at twenty "years' purchase." This does not mean that the rental for twenty years only is sold, but that the rental in perpetuity is sold for twenty times the annual rent; that is, the land is sold outright for twenty years' rent paid at once. The estate is looked upon primarily as yielding a fixed income; the value of the permanent possession of the estate is thought of as a certain number of times the value of the income secured. "Years' purchase" means, therefore, the length of time required for the income to amount to the purchasing price.

This attains the thought of the present value of the estate, or capital sum in it, though the capital sum is thought of as a multiple of the income, instead of the income being calculated as a percentage of the capital value. Now at the rate of "ten years' purchase" an investment of money in land affords an annual interest of ten per cent., as each year the rental is one tenth of the original investment; twelve years' purchase yields eight and one third per cent., twenty years' purchase, five per cent., and twenty-five years' purchase, four per cent. Increase in the number of years' purchase corresponds to a decrease in the rate of interest which the original investment of money, the capital sum, is expected to yield. This is equally true whether the investment be in the legal form of a purchase of the fee-simple of land, or in that of the purchase of a rent-charge. We are brought to this conclusion: that the present value of the rents in perpetuity, of any given wealth, is the capital value of the wealth; and that the reciprocal of the number of years' purchase is the rate of interest that an investment is expected to yield.

[Sidenote: Purchase and sale of rent-charges gives way to more modern contracts]

4. The sale of rent-charges has gradually given place to the modern form of money loan. The conditions of the contract in the sale of rent-charges were gradually changed for greater convenience. When the purchaser (the lender) was given the right to require repayment of the capital sum at the end of a specified time, the transaction was brought still closer to an ordinary loan. In this form, the sale of rent-charges is still found in southern Germany, but the greater simplicity of the money loan, and of the sale outright, has led to the almost total disuse of the older form of transaction.

The purchase of rent-charges was long looked upon as a very different thing from the loan of money, but to modern eyes it is not, and the old distinctions between the moralities of the two kinds of income appear now mainly quibbles, justified in a slight degree by certain social facts of the time. The rise of industry led to different ideas on the lending of money; the prejudice against it weakened in large classes of the population, especially in Protestant countries, and its use rapidly spread. Not until 1830 did a decision of Rome remove all disapproval on the part of the church. Rent-charges are instructive now as showing the mode in which rents began to be capitalized in earlier centuries.

§ II. CAPITALIZATION INVOLVED IN THE EVALUATING OF INDIRECT AGENTS

[Sidenote: The capital value of durable wealth is the sum of its expected rents]

1. The buying of any indirect agent is practically the purchasing of a "rent-charge." To account rationally for the market value of anything, its importance must be traced back to "gratification." We have examined and accepted the proposition that if a good is not affording enjoyment at the present moment it is kept because it will yield a rent until it is used. If it is never to afford direct enjoyment, if it is never to mature physically into the class of enjoyable goods, the explanation for its value must be found in the fact that it is capable of yielding a series of rents of enjoyable goods. In the last analysis the value of anything must be found in its power of affording psychic income, a series of psychic rents. Now when such a durable income is bought outright, what is the basis on which its value is estimated? What other than the rents it will afford? Exactly as did the purchasers of a medieval rent-charge, the buyer of the durable wealth pays a definite sum in return for the right to enjoy a series of future rents. As was the case with rent-charges, however, the amount paid will be less than the full matured value of the rents. A long series, even a perpetual series, may be exchanged for no more than ten, twenty, or twenty-five annual rents. While therefore the selling value of the good is the sum of the values of the rents, it evidently is that sum discounted. Immediately, when we have reached this point in the reasoning, our proposition must suggest itself as self-evidently true in this form: the value of any good is the sum of the entire series of rents it contains, discounted, at some rate, to their present worth. What determines the rate of discount is a question that will call later for a fuller explanation.

[Sidenote: Capital value is not primary]

2. There are two modes of approach to the problem of interest: one from the side of income (rents); the other, from the side of the bearer (capital). The rate of interest expresses a relation between two values, the value of the income and the value of the sum loaned, whether it consists of money or of other wealth expressed in terms of money; But which of these values is primary in a study of the causes of value? Which is the base from which the other is derived by multiplying at the rate expressing their ratio? The answer to this question cannot be a matter of indifference to the economic theorist. Universally heretofore the study of interest has been approached from the side of capital. A capital sum was said to be invested and to earn a certain interest, that is, per cent., of that sum. The usage of speaking of the investment of capital as a sum given, and of "interest on capital" predisposes the mind to this view.

[Sidenote: Expected rents are primary, and capital value is the "years' purchase"]

But the approach from the side of income has been shown to be in some important cases the historical origin of the rate of interest, and we need but reconsider reasoning that has gone before to see that this is the logical order in all cases. Rent, or income, is a link in the chain of value, connecting gratification or psychic income, consumption goods, rent or usufruct value, and finally capital value. To one keeping in mind the logical cause of value, it becomes inconceivable that capital value could precede income, a view possible only when a fragment of the problem is seen. This being true, the mere mention of a capital sum implies the interest problem, and assumes the interest rate. The capital is of that amount because the anticipated incomes, discounted at some rate, equal that sum. The capital sum is a certain number of years' purchase of the series of rents which can be secured by the use of wealth in various industries. The owner of a number of dollars (or of an amount of other wealth expressed in dollars) has open to him various investments. The value of any wealth is due to the possibility of deriving incomes from it. If, however, the expected income fails to be realized, the capital loses its value, or it is revalued on the basis of the new rents. The investment is then said to be a losing one. Thus, at each stage in the valuation of capital, before it is invested and at every moment thereafter when the valuation is readjusted to the rents realized or expected, rents are logically primary, the source from which the capital sum is derived.

[Sidenote: The rate of capitalization of rents is not fixed merely in commerce]

3. The capitalization of comparatively safe permanent incomes from real estate contains within itself all the factors for the independent determination of the interest rate, and is not to be explained merely by reference to "the prevailing rate of interest" in other investments. The value of land usually is explained simply as the capitalizing of its rents at "the prevailing rate of interest." The rate is assumed to be fixed by conditions in manufacturing and commerce, and if five per cent, can be gotten there the capitalist would never buy land unless investment in it were made equally attractive. The cause of the rate thus is supposed to rest outside the transaction itself, the exchange of land for other capital seeking investment. The economic student is safe in assuming always that explanations of this sort are fallacious. The cause of value in any one exchange or any one industry is not thus to be juggled and shifted into another industry. It is true that the values of goods are so wonderfully interrelated by substitution that as the price of fresh beef will affect that of salt mackerel, so the capitalization rate of machinery affects that of land; but the influence is not from one side only, it is mutual. When anything has value, it must have in itself an independent cause of value.

[Sidenote: The exchange of any present and future rents results in a rate of time discount]

It can not be otherwise in the particular problem of value called capitalization. The first task of scientific study is to state clearly the nature of the problem. In this case it is seen to be the exchange of a present sum of wealth for a series of future rents. Whenever there are income-bearers and buyers and sellers of them, there are the conditions required for the determination of the market rate at which those future incomes shall be discounted. Manufactures and commerce have no peculiar relation to this process. By a flight of scientific imagination we might assume that the stock of indirect agents in the world consisted only of natural food producers, and that this stock and its yield were absolutely unchangeable by man's will or efforts. Each man in such case would have to stand with hands tied, and take the fruits as they matured. Even in such a case there would be capitalization and a rate of discount on future rents. The fruit-tree (that is, the whole future series of fruits) would bear a certain relation to one year's yield; the field would bear a certain relation to its crop. Wherever there are buyers and sellers of more or less durable agents of it matters not what kind or origin, there are present the elements and causes for the fixing of a rate of time discount.

[Sidenote: Capitalization of a perpetual uniform series of rents;]

4. In practical business may be seen innumerable instances of the capitalization of both permanent and limited series of incomes. The simplest case is the capitalization of an unvarying and supposedly perpetual series of rents. Whatever the rate of time discount prevailing, rents infinitely distant become infinitesimally small when discount is compounded. The present rent is worth most, next year's less, and so on in a decreasing series.

[Sidenote: Of a probably increasing series of rents;]

But social changes alter rental values, and so far as these changes are foreseen, these anticipated or expected rents are made the basis for present capitalization. Investors and owners alike may foresee that a piece of land used only for agriculture will, within a few years, be taken up for city lots, or will be needed for a factory or as the site of a railroad station. The capitalized value would not in this case be based upon a series of uniform rents each of the amount yielded annually now, but on the progressive series expected. In some cases the physical output of an agent may decline while the price of the product increases. Modern foresters foresee that the selling price of the timber will be greater twenty-five years from now than it is to-day, and they therefore estimate the rental value of the forest on the basis of the future price, thus justifying expenditure that would be unwise if present prices were to continue.

[Sidenote: And of a declining or fluctuating series of rents]

Again the expected series of incomes may be declining, as the royalties (not typical rents) secured from mines. If the income is expected steadily to fall, and to disappear at the end of the twenty-fifth year, the value of the mine would be the capitalized sum of a limited and degressive series of incomes.

[Sidenote: Mode of fixing the rate of time discount in practical business]

Every exchange of a durable agent involves an estimate, rough and imperfect it may be, of that agent's future. The practical men, however, who are thus fixing the "capital value" of goods, are usually only dimly conscious of the logical nature of the process. In fact the process goes on in a way much less analytical and conscious, much more empirical, than this analysis would indicate. Most men simply buy as cheap as they can the agents which at the price they believe will add most to their income. The future changes are only roughly, not accurately estimated. The shrewd bargainer is the one who foresees more clearly than his fellows the complex changes to come. Other men blindly follow. The ability and the inability to foresee such changes make men rich and poor. In all this bidding for capital the logical basis of the value is the series of rents. When the agent is bought outright, the very concluding of the bargain fixes a relation between the expected value of the income and the value of the capital invested. In other words, the exchange of durable agents virtually wraps up in them a net income, which it is expected will unfold year by year when rents mature and are secured. At the moment of the investment, the expected rents are expressed as a percentage of the capital sum.

§ III. THE INCREASING ROLE OF CAPITALIZATION IN MODERN INDUSTRY

[Sidenote: As exchange increases capitalization of goods becomes more usual]

1. Where a system of exchange is highly developed, things are looked upon as capital yielding an objective income rather than as wealth yielding immediate means of enjoyment. In the old organization of industry most men got most of their living from the things they raised or made. At the present time goods are gotten in the most indirect ways; men seek wealth because it will yield them an objective or money income, knowing that if they can get the income, they can get other things by exchange. In business to-day, wherever there is a rental, it is capitalized, has a market value, is bought and sold. Men compete in the purchase of income-yielding agents. There is a continual contest in judgment among investors to secure the largest rent for the smallest outlay. On the other hand, the owners of any rental strive to secure the largest capitalization for it that they can. In this market for capital it is money rents that are exchanged as an indirect means of arriving at gratifications.

[Sidenote: Various kinds of corporation securities put expected incomes in salable form]

2. The issue of capital stock is the putting of the incomes of wealth into marketable form. Stock companies, or corporations, are business enterprises which issue stock, or certificates of a share in their wealth and income. Doubtless the convenience of the sale and transfer of invested capital by the use of stock, has been one of several reasons for the large increase of this form of organization during the past century. Originally the stock of a company taken collectively represented all the capital invested, and each share entitled the owner to a given portion of the total income earned. The shares were issued in regular denominations in terms of money, and this amount expressed on the face of the stock remained fixed. But as a business proves more or less profitable, the value of a share of its income rises and falls regardless of the original amount of stock issued. At once there is a divergence between the nominal or face value and the market value of the stock. The nominal value is relatively permanent, the same year after year; it may increase by further issues, but rarely is it decreased. But when stock is the only form of claim on the earnings that is issued, the fluctuations of the market value of the stock record the real value of the business, that is, the capital value of the rents it is expected to yield. But in present practice there are several forms (of which stock is but one) in which an investor may buy a share in the earnings of a business. Bonds usually do not give their owner a vote in the management or make him in the technical legal sense a part owner in the business. Bonds representing money loaned to a company, and entitling their holder to regular interest payments, are nearest in form to the medieval rent-charge. Next stands preferred stock, which entitles the owners to share first in the dividends, if there are any; and finally the common stock, which gets a share only when the other claims are satisfied. By the multiplication and further variation of these readily salable claims on industrial incomes, the needs and desires of investors are met more fully and with greater precision.

[Sidenote: Any continuing income can be capitalized]

3. Men seek to convert into marketable capital any increase of income in their wealth or business. A man who invests a given capital sum in machines, buildings, and materials buys them, as others do, at prices that represent their usual, or market, earning power. If he succeeds exceptionally in his business, he makes the capital earn more than the rents on which it was capitalized. The same material wealth becomes worth more because of the reputation of his products, and therefore the trade-mark and good-will of the business can be capitalized. In this sense a good name can be sold, and is at least as much to be desired, even in a mercenary age, as great riches. Likewise, social changes, new needs, the growth of population, increase the net income of wealth, or the rents of a business. The basis of capital value is income, and whatever be its cause, political or economic, material income can and will be capitalized and added to the market value of the privilege, wealth, or industry on which the income is conditioned.

[Sidenote: The capitalizing of franchises for public-service corporations]

Notable cases of this sort arise in connection with public franchises. If a street-railway or a gas-company is given the exclusive right to operate in a given locality, any income above average interest on the investment is capitalized either in the higher price of the stock or in additional stock issued without the addition of any material to the plant. If the franchise is unlimited, the income may be capitalized as practically perpetual; if the franchise is limited, and is to expire in thirty or forty years, only the limited series of privileged incomes can ordinarily be capitalized. When, however, the managers are able to exert influence enough to have the franchise extended, and the investors believe in the skill of the managers and perhaps in their power to bribe the legislators, the value of the stock continues higher than it could usually be under a limited franchise. Such circumstances becloud the question whether the exceptional income arising under the franchise should go to the public or to the company. Granted, however, that the company is entitled to the income, the burden of proof is on those who object to the capitalizing of the income as is done in every other business.

[Sidenote: Some difficulties in the capitalization of corporate incomes]

4. The manipulation of dividends and the resulting changes in capitalization open up great opportunities for the dishonest increase of private fortunes. A great change in the market value of stock is made by a comparatively small change in the income it regularly affords, for if the prevailing rate of interest on money loans is five per cent., each dollar of dividends is capitalized at $20. It might seem that the dividend would be declared if earned, otherwise not. The matter is not so simple and impersonal, however. The control of corporations is vested in the hands of a small group of directors who have both the opportunity and the temptation to withhold dividends when they are earned, to pay them with borrowed money if unearned, and in either case to keep the stockholders and the public in ignorance of the real condition and earning power of the business. The stocks can, by this manipulation of dividends, be made a lottery for the legitimate investor, a trap for the unwary, and a source of unrighteous gain by men recreant to their trusts.

In this way it may be seen that an earning power not known to bidders in the market does not enter into capitalization; a fictitious earning power, however, is capitalized so long as the investors continue to be deceived. Instances of this kind present problems not only of private morality, but of the preservation of free industrial institutions. The solution of these problems would perhaps be hastened if the a economic nature of capitalization were more clearly understood. Capital value in modern industry is everywhere the expression of the serial rents of wealth, discounted at a prevailing rate of time discount.

16. INTEREST ON MONEY LOANS

§ I. VARIOUS FORMS OF CONTRACT INTEREST

[Sidenote: Distinction between contract interest and time-value]

1. Interest, the amount paid according to contract by one person to another for credit given in terms of money, is but one expression of a larger problem, that of the difference in present worth of goods at two periods of time. This larger problem appears under several forms: first, as a difference in value, due to time, where there is no money expression (to be considered in the following chapter); second, in discount on a money loan for a short, definite time; third, in a long-time money loan at a fixed rate of interest; fourth, in a credit loan--that is, the sale of the thing on credit in terms of money.

The last three cases involve interest more or less clearly. Time-discount, as will be more fully explained, is the basis of interest. The interest may be greater or less than the time-discount in the goods, owing to miscalculation on the part of the borrower or to an unforeseen change in the conditions. Men bid for the use of wealth with the intention of repaying it at some future time, and the interest they agree to pay is based on their estimate of the discount of future rents, which they think is involved in the present valuations of the goods. Time-discount is involved in goods, however, in numberless cases where there is no contract interest. Even a Robinson Crusoe must recognize in his consumption goods and in his various indirect agents differences in value at different periods of time, of which he must take account.

[Sidenote: Risk and expenses to the money-lender]

2. Gross interest must be distinguished from net interest. The forms of wealth yielding incomes are so mutable, and are used under such complicated conditions, that both in theoretical discussion and in practice much care is needed to distinguish between the yield attributable to the income-bearer, and that attributable to other wealth or services used in connection with it. That the sum paid as interest on a loan contains other elements is recognized constantly in practice. As in the case of contract-rent allowance must be made for repairs and depreciation, so in the case of contract-interest allowance must be made for risk, or the average loss occurring in the industry. Money loaned in hazardous ventures must yield a higher rate of interest. Likewise capital used by the owner in a hazardous venture must frequently earn very high returns (not all logically interest) to offset the losses that are likely to occur.

The lender must also, in estimating net interest, count the cost of placing, supervising, and collecting the loan. A pawnbroker lends only small sums and spends much time and effort to keep at interest a moderate capital. Five thousand dollars loaned in sums averaging ten dollars represents five hundred transactions, and yet if placed at five per cent, it yields but two hundred and fifty dollars a year. While, therefore, the borrower of a small sum estimates the economic interest (or anticipated gain in income) even higher than the oppressively high contract-interest he may be forced to pay, the lender must credit a large part of the gross interest to the labor he expends in carrying on the business.

[Sidenote: Short-time loans by discounting of commercial paper]

3. The most usual form of short-time loan is that made by a bank or broker to business men on security of commercial paper. By commercial paper is meant promissory notes given by customers of the merchants, bills of lading for goods that have been shipped to their customers, and various other evidences of indebtedness that may be offered the banks for discount. When goods have been sold on time (as thirty, sixty, or ninety days) the seller has the choice between letting the time expire and collecting the bills direct from the customers, and discounting the bills for ready money at the bank. According to the conditions and needs of the particular business, either method may be chosen. In most industries there is need for larger capital at the seasons when the product is put upon the market. The merchant or manufacturer plans his business in the expectation of an average rate of discount at such times, and if it chances that the discount rates are abnormally high, he has no choice but to go on borrowing and paying the high interest out of the expected profits of his business. This risk of a change in the interest rate is one of many chances he has to run.

[Sidenote: Long-time loans by purchase of mortgages, bonds, and stocks]

4. Most debts in modern times are outstanding for a term of years and represent the lender's purchase of a claim on the earnings of some productive enterprise. The simplest forms of long-time loans are those made on the security of real estate, which is mortgaged to the lender for the term of the debt. Usually the debtor is obliged to pay the interest either annually or semi-annually, and often, but not always, is permitted to reduce the principal by partial payments. These real-estate mortgages rest on the security of the particular mortgaged wealth, and, unlike most short-time loans in bank, are not personal obligations resting on the general credit of the borrower. Most other long-time debts share this character of being non-personal; if payment is defaulted, only the particular wealth can be sold for payment, not the general wealth of the borrower. Corporation bonds, issued by railroads and other large stock companies, have increased greatly in number in recent years. They yield an income fixed in advance, and are secured usually by mortgage on the entire property of the corporation issuing them. The income of some special kinds of "preferred stocks" is so guaranteed as to make them for investors substantially the same as bonds. Another large class of long-time loans are those made by national, state, and local governments. Tens of billions of dollars of public debts are now outstanding, held by private investors in every walk of life.

The contract in the case of each kind of these loans provides for a fixed term after which the borrower must repay or renew, and for a fixed rate on the nominal or par value of the loan. Nearly all the securities (bonds, certificates, evidences of indebtedness) are salable at a market rate. It is therefore the income that is fixed, the selling price (or capital value) fluctuating above or below the nominal sum except just at the moment when it is payable. The long-time loan thus is very similar in its economic character to the old-time rent-charge.

[Sidenote: The cost of credit to the improvident buyer]

5. The sale of goods on credit is a mode of lending and involves interest in a disguised form. In some cases merchants will not sell cheaper for cash than for credit, for fear of offending their main body of credit customers; but this is exceptional, as there are good reasons why such a difference should be made. The credit sale usually involves interest, and often at a very high rate. In many stores there are two appreciably different prices, one for "slow pay," the other for "spot cash." If a bill paid at the end of the month is five per cent. more than the cash price, the difference is equal to sixty per cent. per annum for the privilege of postponing payment. Such a rate of interest is paid only by the improvident, but that is a large class ranging from factory workers to college students. The cash discounts allowed by merchants clearly express the time difference. On fifty to one hundred dollars of outstanding bills, many perfectly honest persons are paying interest at the rate of seventy-five per cent. per annum. The merchant is forced to make this difference because he must seek not only to earn interest on the capital thus invested, but to recover the costs of bookkeeping and collections, and the risk and loss of unpaid bills. The discounts allowed by manufacturers and wholesale houses measure in the same way the difference between cash and credit sales. Not unusual is a discount of "six per cent, in ten days, five per cent, in thirty, or sixty net." The buyer allowing his bills to run for two months (six per cent, for sixty days) pays thirty-six per cent, per annum for the use of that money. The difference is so great that it is impossible to carry on in this way a large business against strong competition. Such purchases on credit frequently are made, however, by dealers in small towns.

[Sidenote: Evasion of legal rate of interest]

6. Interest is often concealed under other forms which increase the apparent rate. This fact is well shown in the ways by which usury laws fixing the legal rate of interest are evaded. A simple method is for the lender to charge a commission for making the loan, or, if it is a bank, to charge for a pretended cost of exchange to bring the money from some other city. Sometimes the borrower is required to keep larger deposits with the bank than he voluntarily would. Needing $5000, he is compelled to borrow $10,000 and to pay interest on twice as much as he is permitted to use. Again the borrower, in periods of unusual demand for money, is forced to make a long loan instead of a short one. When a one month's loan at ten per cent, would meet his need, he is forced to borrow for twelve months at six per cent., during ten months of which time four or five per cent, is the prevailing rate. In these and other ways the real rate, or burden of the loan, is made different from that which is expressed.

§ II. THE MOTIVE FOR PAYING INTEREST

[Sidenote: Money borrowed to buy consumption goods]

1. Interest for loans to obtain consumption goods is paid because they are felt to have greater importance at the moment than an equal amount (either of goods or of money) will have in the future. A sudden stress of misfortune may impart to a thing at the moment far more than its usual value. One standing face to face with starvation cannot be worse off a year hence; often there is good ground to hope that if the present misfortune can be relieved, the future better fortune will make it possible to repay a loan with interest. In other cases, the object of a loan of consumption goods is to increase the future earning-power of the borrower. When the student borrows money that represents to him food, clothing, text-books, tuition, and other expenses incidental to a course in college, the expenditure is intended to increase the effectiveness of the worker. When he borrows he has little earning-power, but with that faith in himself which makes the young American so interesting, he pictures himself four years later, sheepskin in hand, drawing a munificent salary with which he can easily satisfy the most exacting Shylock. Such an expenditure is sometimes called "an investment of capital," but it should be called a consumption loan--nevertheless in many cases a loan wisely made. To call this an investment of capital is to confuse man, the end of production, with material means.

Sometimes this higher estimate of the present good is unwise, viewed in the light of wider experience. Goods that meet momentary desire make an exaggerated appeal to untrained minds. The child, the spendthrift, the savage, cannot properly estimate the relative values of present and future. The improvident sometimes lightly agree to pay an exorbitant interest for an immediate consumption loan, making a ruinous difference between present and future gratifications.

[Sidenote: Money borrowed to buy indirect agents]

2. Interest on indirect agents is paid as a more or less indirect means of securing gratification. This can be clearly seen when durable agents are hired that produce gratification directly. A carriage bought with borrowed capital and used for the pleasure of the borrower is expected to afford a utility greater than that to be gotten by the amount of the interest in any other way. A spade bought with borrowed capital and used to cultivate the owner's garden is expected to add products of greater value than the interest.

But how is it in case the agent is used to gratify persons other than the owner? The music-teacher who buys a piano on credit expects to increase his earnings by a sum greater than the interest he has to pay. If the addition to his earnings exceeds the interest charge, it is because he has found a use for the borrowed capital greater than that on the basis of which it was capitalized in the market. The amount of the interest is secured through the pleasures and services the piano affords to the patrons of the teacher. In the most complex cases of the borrowing and use of indirect agents, there is ultimately this same basis for the interest: enjoyment afforded by the use of capital in the particular period. To the borrower, what the capital makes possible is an addition to his income as great as, or greater than, the prevailing interest. Most loans in our society are now of this sort. Money is borrowed to invest in business, to get better machinery or a larger stock; with this capital is secured a better or larger product, and the product finally being sold at a profit, the business man is at a point where he can satisfy his wants without encroaching on his capital. Logically, therefore, the consumer of the product pays the interest in the price, and the final consumer's enjoyment must be deemed the logical source of the money interest. The borrower's motive for paying interest on these indirect goods evidently is his hope of profit through realizing a greater money rent than he has contracted to pay for their use.

[Sidenote: The special case of money borrowed to pay debts]

3. The money market in which short-time loans are made is peculiar in that the money frequently is borrowed to pay debts, not for investment. In beginning the discussion of interest, it always is remarked that it is not money, but capital, that is borrowed and loaned. This caution against the superficial errors that so easily beset the popular discussion of interest is much needed, but it is well to note a peculiar case which is apparently in contradiction to this statement. The usual method by which money is loaned in the great industrial centers is called discount, which is the exchange of a certain sum of money for a note or other credit paper of a larger amount, the interest thus being taken out in advance. Much borrowing in the form of discount is for the same purpose as other borrowing--to acquire control of more productive agents, to embark on new enterprises. The peculiarity of the discount money-market is that an unusual number of loans are made to meet contracts that have already been made. There is always a great mass of outstanding obligations, and merchants are compelled to renew these loans on penalty of bankruptcy. This market for short-time loans is not connected closely with the general market for loanable capital. When the need is for ready money, other concrete capital cannot flow in to meet it. This special money demand, therefore, in time of greater or less stress, may fluctuate rapidly, and the interest rate be temporarily higher or lower than the rate on long-time loans. This case is similar to that where two markets, as a retail and a wholesale one, exist side by side, but slowly exerting a mutual influence.

[Sidenote: Productive borrowers seek a profit on their investments]

4. In the long-time money loan the money generally is borrowed first merely as a medium of exchange to get control of indirect agents. The borrower of a long-time money loan for productive purposes is always seeking to gain by investing the money in wealth that will yield an income larger than the interest he must pay. The borrower, therefore, invests in view of the rate of interest, of the market price of the goods in which he plans to invest, and of the probable chances for earning profits in the business. This case, where certain goods whose price is known are approximately selected before the money is borrowed for investment, is the type of loan to be kept most usually in mind in economic discussion.

Evidently the price of these goods, to control which is the real object of the loan, is merely the sum of the expected rents they will yield, capitalized at the prevailing rate of time-discount. The borrower expects either to make these particular goods earn rents larger than those on the basis of which they have been capitalized, or to transfer them to an economy where goods are capitalized at a higher rate than he is paying. The income yielded by these goods, if the borrower's expectation is fulfilled, is but the difference between present and future rents that has been wrapped up in their capitalization. As time elapses and the rents emerge in wisely chosen investments, the borrower has a surplus large enough to pay the contract interest. It appears, therefore, that the motive of the borrower is to get control of future rents at prices that already involve, in their capitalization, a rate of discount somewhat greater than the interest he contracts to pay.

[Sidenote: The developed market for money loans]

5. The rate of contract interest on money loans is adjusted at each moment in the money market by the bidding for money loans. This is a true statement only if it is understood in a somewhat superficial sense. No error connected with interest is, however, more crude than the view that the interest rate is in any broad sense due to the quantity of money. Some loans are made apart from the general market, by private agreement between borrower and lender; but in nearly every such case the rate agreed upon is seen to be closely related to that of the general market to which either borrower or lender can resort if he wishes. The greater number of borrowers and lenders of money have a range of choice in their bargaining. The interest rate in modern developed money markets is that rate which brings to equilibrium the demand for money loans and the money capital available within the period. If the ready, loanable money in private hands, in banks, in insurance-company reserves, &c., increases, a lower rate must be offered to borrowers; if the supply decreases, a higher rate will be quoted. In the one case, more men borrow; in the other, fewer borrow and more seek to lend. Thus a rate results, but a rate that is closely connected with larger set of facts--those, indeed, which determine in the long run the rate of capitalization in the community.

[Sidenote: Every person is a buyer or a seller of present goods]

6. The individual must adjust his business dealings to the market rate of interest. The market rate is fixed by the bidding of individuals, and every one has something to do with fixing it. In a multitude of minutely small ways, as present and future goods are compared by men, the rate of interest is affected positively or negatively. But for practical purposes the individual, counting for little in the midst of millions, must look upon the interest rate as beyond his influence. Therefore, while the rate is determined by each to some degree, all that any one does is to buy or sell present goods, borrow or lend capital, use up or save wealth, according as his own estimate of time-value is less or more than the market rate. In fact, the estimates of individuals diverge constantly from the market rate, but are brought into harmony by their actions with reference both to money loans and to the use and valuation of the various forms of wealth. A Robinson Crusoe working on his island and valuing future goods relatively to present goods higher than before, consumes less; or, valuing them lower, consumes more. The business man who values indirect agents above the market rate borrows, and if he miscalculates and fails to make them earn the expected rent, he loses. In this experimental way many other acts are influenced by the prevailing interest rate and in turn affect it, thus aiding to formulate society's estimate of the value of present as compared with future rents.

17. THE THEORY OF TIME-VALUE

§ I. DEFINITION AND SCOPE OF TIME-VALUE

[Sidenote: The simplest cases of time-value]

1. Time-value is the difference between the values of things at different times. Things differ in value according to form, place, quality of goods, and according to the feelings of men, and--not least important factor--according to time. The simplest and clearest case of time-value is the difference noticeable in the same thing at different moments. Is this good worth more now or next week? Shall this apple be eaten now or next winter? These questions can be answered only after comparing the marginal utilities which differ according to the varying conditions of the two periods.

All the other cases of time-value can, by the practical device of substituting other goods of equivalent value, be reduced to the typical case of comparison of the same thing at different times. The comparison may be between very similar things, the one consumed being replaced by a duplicate. An apple borrowed now may be returned next year in the form of one of the same size and quality. The essential thing in this comparison is not physical identity, but equivalence in size, sort, and quality at the two periods. This is borrowing under the renting contract.

[Sidenote: Time-value in the case of different kinds of gratifications]

But two or more quite different things may be expressed in terms of another thing and so be made comparable. Money becomes the value-unit through which different things may be reduced to the same terms for comparison. With this mode of expressing the value-equivalence of various goods, the interest contract first becomes possible, money (the standard of deferred payments) being the thing exchanged (possibly only in name) at two periods of time. What is really compared are various gratifications which may be produced by very different material things or services. In its last analysis comparison of values at different periods of time must be a comparison of psychic incomes, of two sums of gratification. The comparison of the value of a bushel of apples with that of a barrel of potatoes or a suit of clothes at the same moment appears simple enough. When all are expressed in terms of money, the comparison of each with its value-equivalent at a later date becomes easy. The simplicity and obviousness of time-value in the case of money loans at interest led men at first to recognize that phase of the problem exclusively, and later the term "interest," not without much confusion of thought, was given a wider significance. Let us now see how large a part of the whole problem of time-value is outside of the money loan.

[Sidenote: Time-value is involved in capitalization of land]

2. The problem of time-value is quite separable from the concepts of money and capital, though usually connected with them in practice and theory. It is true that the problem of time-value was first clearly recognized in connection with money and a formally expressed capital sum. Misled by this fact, and taking a very narrow view, writers seventy-five years ago recognized but dimly the problem of time-value in connection with the valuation of the incomes derived from land. It is true, as has been shown above, that the mere putting of an estimate on a durable good such as land involves the process of capitalization, which in turn implies a comparison of the values of the rents expected at different periods. Diminishing returns in the use of agents involves a loss of time to secure the usufructs emerging. The relation of these facts was not clearly seen until of late.

The phenomenon of time-value as above defined may be seen to be broader even than that of capitalization. The difference in the value of the successive rents of wealth must have been recognized and in some degree measured before there was any conscious calculation of capital value. Differences in value due to time are everywhere. The problem of time-value often is present where money is not even spoken of or thought of. Money no more causes this time-difference in value than balances cause weight.

[Sidenote: Time-value is taken account of in the keeping up of repairs]

3. The problem of time-value is involved in repairs and depreciation, and in the use of consumption goods. It is possible, as we have seen, to increase the sum available for present needs, and to encroach upon the future by postponing repairs on intermediate goods. The balancing of the cost of repairs against the future income is a never-ending task in practical business. One making repairs must purchase the needed materials and labor at a capitalization determined by their expected earning-power in other industries. If the repairs in question will not ensure an annual saving as great as this expected rent, they will not be made. When an industry is declining, it may, for the sake of putting the capital into a better business, be good policy to let the machinery fall into bad repair. The problem of time-value is involved in the application of one's energy to repairing one's own possessions. It is a thought of wide bearings that numberless minor decisions in every petty business involve, if they are correctly made, a measuring of the rate of capitalization.

[Sidenote: And in the choice of enjoyments]

As will be more fully shown in discussing the relation of the prevailing rate of interest to saving, the recognition of time-value is implied in the use men make of consumption goods, in their postponement of enjoyment, in their storing of goods for future use. The varying gratifications yielded by consumption goods, and their values in different conditions cannot be explained without taking account of differences in time. Wherever there can be a choice in the time at which, and consequently in the conditions under which, a thing can be used, there is a choice presented between the different values. Time-value is present even in a period during which no goods continue to exist, as when a good is consumed at a moment of greater need, to be replaced at a time when less valuable. If an apple is borrowed on the promise to return an apple and a peach at the end of a year, the peach represents the time-difference in value but in the meantime there has been no apple in existence. It is only in a figurative sense that it may be said that interest is paid on that "capital." Interest is paid because of a difference in want-gratifying power, but during the interval there is no material capital.

[Sidenote: Prodigality and vice involve a high discount of future happiness]

4. The problem of time-value is involved in much foolish pleasure, in prodigality, and in vice. Economics touches frequently on the borders of ethics. If there were to be formulated an economics of personal conduct, it surely would give a large place to the comparison between present and future pleasures. Forethought, or prudence, is the virtue of recognizing not only future dangers to be avoided, but the greater future joys to be gained in exchange for present pleasures. The reckless and the prodigal underestimate the future and barter all to gratify the moment's impulse. The drinker exchanges the hopes of worthy life for the exhilaration of the spree. Indulgence in social pleasures, if secured at the price of lost sleep, weakened health, and debauched character, are loans from the future made by youthful prodigals at usurious interest. If no one ever paid more than a moderate rate of interest for the gratification of his present whims and impulses, most hospitals, drug-stores, and medical colleges would close, and half, if not all, the prisons would be empty.

Indeed, time difference in value is a universal phenomenon of life and conduct. Contract interest is but one phenomenal form of time-value, and this in turn is but one phase of value. This section may serve to suggest how much more varied and pervasive the fact of time-value is than has usually been recognized in popular or economic discussion of the subject of interest.

§ II. THE ADJUSTMENT OF THE RATE OF TIME-DISCOUNT

[Sidenote: The exchange value of present and future goods]

1. The fixing of the discount on future goods is, in its essentials, like the fixing of the market price of consumption goods. This problem appears to be one of the most difficult in economic theory; but reduced to its simplest terms, it is an aspect of exchange value, and its ultimate explanation must be found in a comparison of psychic incomes. There must be noted the conditions of demand and supply, the interplay and final equilibrium of the two forces. The declining and marginal utility to the two parties to exchange must be carefully analyzed. One who can do these things is prepared to find the answer to the problem of time-value. Whenever a group of buyers and sellers meet, a ratio of exchange commonly will be arrived at. The ratio of exchange between buyers and sellers of present and future rents likewise is fixed at the estimates of a "marginal pair," at which point the amount offered and taken comes to equilibrium, for at that point no motive exists for any one to change sides.

[Sidenote: The peculiar nature of the exchange in the case of time-value]

[Sidenote: Several reasons why this is not easily recognized]

2. Time-value as the premium rate on present goods is unlike the ordinary market price, of goods only in the special nature of the utilities exchanged. The one peculiar need in the theory of this subject is a clear understanding on this point. The goods exchanged, or compared, are direct and indirect goods, or present and future goods, or, more generally speaking, two goods or groups of goods unequally distant in time from present enjoyment. What are sold in a case such as capitalization, involving an estimate of time-value, are present goods or gratifications; what are bought are future gratifications, or indirect agents which stand for, typify, or make possible, future gratifications. Practically every man in a market acts on the knowledge of what the exchange of direct and indirect goods means; yet abstractly stated, the thought seems at first difficult. In valuing any durable good, the theory of time-value is implied. Every time a machine, a house, a book, a field, is bought, the distinction between direct and indirect goods is acted upon, for a choice has been made between present enjoyment and future provision. Anything that endures is an indirect good and implies in its valuation a premium rate on present goods.

The real nature of the exchange in time-valuation is made unclear by the uncertainty of life, leading men to work on to provide against possibility of mishaps; for the most part the world's treasures never afford to their temporary owners the gratification that they typify, or could give. The nature of this exchange is made unclear also by habit, under the influence of which the exchange in so many cases is not carefully thought out, is not the result of a close comparison of the utilities of goods in present and future moments. The real nature of this exchange is made unclear by the indirect, or induced, gratification derived from wealth. Wealth gives to its owner power, prestige, the esteem of his fellows, and pride in evidences of success and growing prosperity. Its very possession creates a new need and imparts to it another utility, that of insuring against the misery of a declining fortune one who has enjoyed wealth and power. Men make the greatest efforts up to the last moment of life to retain wealth that they will enjoy only in this subtle and indirect way. Thus every motive that leads men to postpone present enjoyment makes them bidders for indirect agents and for future goods, and helps to determine the market rate of premium on the present, and of discount on the future.

[Sidenote: The scarcity of present gratifications]

3. There being a limited number of indirect agents, their limited powers in a given period limit the supply of present goods. The principle is familiar that value is always connected with relative scarcity. Now the desire for the present goods is indefinitely large. If the right kind and quality could be had at will, an enormously greater amount of present goods would be used. But the present goods are dependent on indirect agents. The psychic income of a civilized community is dependent on a favorable and extremely refined environment: houses, libraries, theaters, the agencies of travel, as well as the sources supplying the more material needs. These indirect agents, even in the richest community, are limited in variety, in quality, and in number.

[Sidenote: The total of future uses in vastly greater]

But if indirect agents could produce an indefinitely large product at any given moment, the supply of present goods could be indefinitely increased. The supply of utilities, therefore, is limited by "diminishing returns" in the use of agents, making their maximum yield depend upon the lapse of time. The uses any given material can yield in a limited period have an absolute limit: an acre of land with the most perfect cultivation cannot feed the world; but remove the limit of time, wait an eternity, and the acre would yield an infinite crop. The economic return of a given agent in a given period is reached much sooner than the technical return. If agents are forced to yield more bountifully, it is at the sacrifice of utilities in other agents, and a point of maximum net yield is found in any given period. Here also the lapse of time is the condition of the increase of the net utilities derivable from limited agents.

[Sidenote: The choice open to the investor of money]

4. The rate of capitalization of income and the rate of contract interest on money capital tend to unite into a single market rate. A person wishing to exchange present goods or income for future goods may buy an income-bearer at its capitalized value, or he may create a new rent-bearer. Having saved a sum of money, either he may purchase a factory known to be profitable; or he may hire the services of men and unite them with materials and machinery to create a new industry or a new form of income-bearer; or he may loan his money to others to make either kind of purchase. In any one of the three cases it is evident that capitalization (that is, the discounting of future rents in goods) is the primary and important fact making possible the emergence of a surplus, or net yield, over and above the value of the capital. The expected uses contained not only in whole industrial establishments, but in the particular materials and agents united to form new agents, are purchased at their capitalized value; that is, the future uses have been discounted and have entered into the price of the goods as less than they will be when realized as actual rents. This is the crucial point in the theory either of contract interest or of time value; for to explain the rate of interest as due to the process of "producing" capital agents out of other materials, is to beg the question involved. The surplus yielded by capital above its cost is but the realization of a net income made possible by the discounting of future rents.

[Sidenote: The choice open to the borrower of wealth]

A person wishing to make an exchange of the opposite kind to that described may sell his wealth for money; he may exchange for present enjoyable goods his income at its capitalized value; or he may use up what he has, let it depreciate, fail to make repairs, convert it to various consumption purposes, and thus invade his earning power. When the interest rate is five per cent., the sacrifice of any unit of regular income permits the spending of twenty times that amount for present enjoyment. The advantages of these various methods tend to equilibrium. If the owners of developed productive agents hold them at too high a capitalized value, investors will apply their efforts and savings to duplicating these forms of wealth. If, in turn, any of the minor factors, as materials or uses of goods, are overvalued (overcapitalized) it will appear ultimately in a check in the demand for them at these prices, and in a reduction in the demand for money loans. As it is possible for any investor and for any borrower to choose among these investments and loans, there is practically but one rate, the rate which expresses the general ratio of exchange between present and future income. Owners and investors take the line of least resistance, get the most they can for their money, and choose whatever form is most advantageous. The interrelations between the various interest rates are therefore close and constant. The market rate of interest thus extends over all forms of wealth and pervades every phase of business. The value of every durable agent is fixed with reference to a prevailing interest rate, through the discounting to their present worth of all the incomes it is believed to contain.

[Sidenote: A sacrifice sale involves a high rate of interest]

5. Where goods are sold at forced sale or sacrifice, it is equivalent to a contract loan at a high rate of interest. Market values being dependent upon market conditions, the offer of goods at a given moment may not find the usual or normal number of buyers or the usual demand. Just such conditions are most likely to exist at the times when business men feel an unusual need of money. Two courses are open to them in this emergency, either to borrow the money at a very high rate of interest, holding the goods for better prices, or to sell the goods under the unfavorable conditions. The end of both courses is the same--to get ready money; and the methods are not essentially unlike--the exchange of greater future values for present values. The sacrifice sale thus reveals the merchant's high estimate of the interest rate. The purchaser of some kinds of property in times of depression is securing them at a lower capitalization than they will later have. The rise in value may be foreseen as well by seller as by buyer, but the low capitalization reflects the high interest rate temporarily obtaining. A. T. Stewart is said to have laid the foundation of his fortune when, being out of debt himself, he bought up the bankrupt stocks of his competitors in a great financial panic. The high contract interest at such times is but the reflection of the high premium on present purchasing power. Here then is another mode in which the prevailing rate of interest on money loans is kept in close harmony with the rate of time valuation.

[Sidenote: Interrelations of the money interest rate and of time-discount]

6. The rate of contract interest on safe long-time loans registers pretty nearly the prevailing rate of time-discount in the community. There are of course different capital markets, and the estimates put upon next year's income as compared with this year's is very different in Montana, New York, and London. Because of the friction in the transfer of investments from one locality to another, these differences may persist indefinitely; but within each capital market the interest on any particular loan must, for reasons readily seen, tend to conform pretty closely to the prevailing rate. Various groups of men living in the same community have, however, varying estimates of time-value. The increase of safe long-time bonds issued by strong corporations and by wealthy nations as, for example, the New York Central Railroad, and the government of Great Britain, gives a large number of choice investments where the element of risk is almost entirely absent. Various agencies have developed for making the loans, that is, for bringing the borrower and lender together with the minimum of trouble and expense. Other efficient, but somewhat more costly, agencies for bringing together the owners of loanable capital and men wishing to use capital are savings-banks, building and loan associations, insurance companies issuing endowment policies, and mortgage-investment companies of many kinds. While on the one side of the bidding are thousands of lenders offering to exchange ready money for assured incomes, on the other are thousand of borrowers offering to exchange the promise of assured incomes for ready money. If either of these classes got far out of touch with the prevailing rate of capitalization, to which all the valuations are adjusted, that class would lose greatly.

[Sidenote: Relations between the concepts of rent, interest, and time-value]

7. All the net usufructs actually yielded by wealth are rents; economic time-discount is never a realized income; it is merely a calculation form, or anticipation of the difference between present and future gratifications. There has been much discussion as to what should be the relations in thought between rent and interest. Space permits here only an indication of the view on this question involved in the foregoing treatment. Rent, as the term is here applied, includes all the net productivity attributable to the ownership and use of capital, whether the yield be in economic form (in an increment of value) or in contractual form. Even contract money-interest must be looked upon as a species of the genus contract rent, the peculiarity in the money loan being merely that the thing which it is agreed to return is a certain number of units of the standard money.

The term "interest," first applied in the Middle Ages to a payment for the use of a money loan, came to be used more broadly by the earlier economists as the income attributable to those goods which generally were bought and sold in terms of money. In other words, interest was supposed (though erroneously) to be uniquely connected with the particular production instruments to which the term capital was narrowly and mistakenly confined. Still more to add to the confusion, the term interest was about this same time identified with the broad problem of time-value. The terminology has remained ever since in this stage of arrested development. Our suggestion is to retain the word interest in its original meaning, still almost universal in business circles, of a contractual payment on money loans, applying the term time-value (for lack of a better word) to the subtler economic problem.

[Sidenote: Rent and time-value are essentially different phrases of the value problem]

Time-value is here understood to be that all-pervading difference in the values of uses and gratifications of wealth at different points of time. A comparison of the value of momently appearing uses of wealth is the rent problem. Here are, therefore, very different aspects of the value problem. The rent conception is earlier grasped by men, is nearer in point of logic; the concept of time-value has only recently been clearly recognized. If men lived only in the moment, they would be concerned only with rent; living in the future also, they are constantly regulating their acts with reference to time-value.

18. RELATIVELY FIXED AND RELATIVELY INCREASABLE FORMS OF CAPITAL

§ I. HOW VARIOUS FORMS OF CAPITAL MAY BE INCREASED

[Sidenote: The older and the modern way of viewing wealth]

1. Men seek to increase income by increasing capital. Men may strive to increase their rents without expressing the rent-bearer in terms of capital. Peasant owners and small proprietors, toiling fondly on their little estates, seeking steadily a larger crop, a larger income, accomplish wonders in bringing waste land to a high state of cultivation. Working on the soil that is at once their livelihood and their home, they do not consciously reckon the value of the labor they are putting upon it. No money can buy that which to them is beyond price. But, in our money economy, efforts are largely directed toward the increase of the capital sum. Investment takes the form of putting in a sum of money in the hope of getting an income bearing a certain relation to it. The first thought is of the value of the wealth invested, which has been carefully measured and expressed in dollars and cents. Wealth looked at in the older way was valued for what it did immediately for its owner, for its concrete fruits; looked at in the modern way, it is valued as a marketable income-bearer readily convertible into a multitude of other forms. Thus investments come to be thought of in terms of general purchasing power, from which it is expected to realize an income of a given percentage.

[Sidenote: Free goods of unlimited supply]

[Sidenote: Beginning of scarcity of common materials]

2. There are some classes of goods that can be increased without any noticeable increase in difficulty. The extremest examples are undiminished goods such as air, sea-water, the water of large rivers. These are free goods because, however much is used, the supply is immediately renewed. But they are undiminished only in a relative sense and in reference to present need. The water in the Western rivers long flowed on, undiminished by the uses made of it. But progressing civilization required more water for cities, for mining, and for irrigation, and now states and corporations are going to law over these formerly undiminished free goods. Some kinds of goods are produced from such very common materials that it might seem possible, by the substitution of agents, to produce an unlimited supply. How can bricks be limited in number, being made as they are from one of the commonest materials on the earth's surface? But the largest clay banks are limited in size; a large proportion of the places where bricks are needed are not near a supply of clay of good quality; and after a brick-yard has been used for a time there is increasing difficulty in getting out the material. While, therefore, bricks are scarce and hard to get from the outset in some places, the scarcity grows more marked in many places at first well supplied. If materials are scarce in any degree, their continued use for one purpose increases their scarcity in all other uses. Economic goods are goods having value; value implies scarcity, and an increasing demand means inevitably a higher value at some point. This is true of clay, stone, water, and the commonest kinds of labor.

[Sidenote: No scarce goods can be indefinitely increased]

It has long been customary for economists to talk of economic goods that could be increased indefinitely (meaning infinitely or, in any event, without any limit ever appreciable to man) without any increase in the cost or scarcity. This class of goods was considered to be very large. There is no such class of economic goods; it is evidently impossible that there should be. If they are already "scarce," increasing demand must make them scarcer. There are, however, some goods that practically can be increased with so little difficulty that their limitation is not of great social importance. Progress, population, prosperity, are not primarily conditioned on their amount; limitation will be felt far earlier elsewhere. They are at one end of the scale; they are the relatively increasable goods.

[Sidenote: The products of land are increased at a given time and place at increasing cost]

3. There is a large class of goods whose increase is seen to be gained with increasing difficulty. This is seen most clearly in the diminishing returns from land. In the attempt to get some food-products in greater quantity from a given area at a given time, increasing difficulty is met with at once. This attempt continued for a series of years results in historical diminishing returns, as was strikingly illustrated in English experience during the Napoleonic wars, when wheat rose in value because of the greater difficulty of producing the larger supply needed. Some replenishing agents will restore themselves if given time; the forest will grow up if left untouched by man; the field will recover its fertile quality if allowed to lie fallow. But this self-replenishing of agents is a slow process, and time is costly. Man therefore tries in other ways to force more uses out of goods, until checked by the increasing difficulty. The goods subject to "the law of increasing cost," as it was called formerly, were considered to be a peculiar class comprising only a small portion of wealth. But it can now be seen that the law may apply ultimately, though in differing degrees, to every kind of economic goods. Indeed, the principle just discussed is no more than one phase of the law of economic diminishing returns, which has a universal application to the realm of values.

[Sidenote: Agents most nearly fixed in amount are somewhat increasable]

4. There is a class of goods, natural agents and stores of materials which appears to be relatively fixed in quantity or which is increasable only with much difficulty. The first part of this proposition expresses mildly the thought that long obtained among economists: it was said that the supply of certain things was absolutely fixed, the chief of these being land used for agriculture. The idea as held by Malthus and Ricardo was modified by John Stuart Mill in somewhat inconsistent ways. Land, it was said, is a thing which "man cannot make," therefore its supply is fixed. The second part of the opening proposition expresses the view here held: the supply of no important class of goods is absolutely fixed, in any reasonable sense. Most, if not all, belong to the class that is increasable, although it may be with much difficulty. Even when the exact thing cannot be duplicated, as a bust by an ancient sculptor or an autograph of a dead author, many substitutes serving the same or closely related wants, affect and limit the demand, and thus increase the supply. Men cannot, it is true, increase the stores of copper in the earth, but they devise new processes to extract it from ores before worthless, and invent methods of procuring aluminium, which yields some of the same utilities as copper. Even the supply of land, as is shown elsewhere, is constantly changing. Thus all kinds of wealth can be increased in some degree; many kinds in the course of time are very greatly increased with little or no direct effort, but the supply of all alike can be secured in larger amount at any given moment only at the cost of increasing difficulty.

§ II. SOCIAL SIGNIFICANCE OF THESE DIFFERENCES

[Sidenote: Physical amount vs. economic supply]

1. Not the fixity of the physical amount of agents, but the economic supply is significant. There is danger of confusion between these two ideas. The statement that "land" cannot be created and that therefore "the supply is fixed" involves a fallacy. The word supply means the amount that is available at the moment or during the period spoken of. The land in Greenland is not, and probably never can be, a part of the supply of land in England. The land in America for centuries was not, but now has become, for some purposes, a part of the supply in the same market as the land of England. The question of importance in economic discussion is not whether the physical material can be brought into existence, but whether the economic "supply" can be increased. The existence of coal-mines in Venus or Mars is of no economic importance to us, but coal-mines on the earth, yet undiscovered, present a potential supply that at any moment may be realized.

[Sidenote: Discovery enlarges the supply of natural resources]

2. Discovery of new lands and of new natural deposits continually enlarges the economic supply of the agents most nearly fixed in physical amount. This proposition states a historical fact. Any explanation of the economic occurrences of the last five centuries or of the immediate future, that ignores this fact of the increasing supply of many kinds of land and natural resources in the markets of the civilized world, must lead to false conclusions. The rate of this movement has been more rapid in the past century than theretofore, and perhaps more rapid than it will be henceforward; but that this development will continue in large measure and for a long period, is not open to question. Undeveloped areas will be opened to the world, and new geologic realms will be explored. Yet the notion criticized above is found in all the older text-books. The idea arose in England in the first quarter of the nineteenth century when land and food were rapidly rising in price, and it has vitiated a large part of both the economic theory and the practical conclusions on this subject.

[Sidenote: The effective supply grows by invention]

3. Invention, including new modes of transportation and new processes, increases the economic supply of most scarce goods and provides substitutes for the others. Some inventions increase economic supply by making available the uses in goods that were before unavailable. Subsoil ploughing annexes to agricultural land new layers of soil that are just as important as new acres added to the surface. If land could be used three times as deep, it would be as good for many purposes as if it were of three times the extent. New trade routes and new means of transportation add to the supplies available in the older countries as effectively as if their areas were increased. The building of railroads in western America had an effect on English rents identical in nature with that which would have been produced had an equal area of somewhat less fertile land touching England, risen out of the ocean. Every country in Europe has repeatedly felt the shock of these great economic changes which have compelled the recapitalization on a lower plane, of nearly all kinds of their landed wealth. Where the same agents have not been multiplied, substitutes have been found that are just as effective in meeting the economic need. It is the result, the gratification, that man seeks: any particular good is but the means to an end.

[Sidenote: Production of land by physical change]

4. Increasing wealth and new labor make possible the increase of the agents that appear most nearly fixed in supply. When the need arises men turn to new enterprises. The reclaiming of land in Holland is a striking but far from isolated example. Among the larger undertakings of this kind are the draining of the Haarlem Lake in 1840-58, by which 40,000 acres of rich land were made available, and the draining of the Zuyder Zee, which is adding 1,300,000 acres. Though there have been many minor undertakings of the kind, the area reclaimed is relatively small compared with the whole area of the land in the world used for agricultural purposes. There are still great areas of fens, swamps, and marshlands, such as those on the Jersey coast in this country, which with moderate effort could be reclaimed. While the possibility must be recognized, the increase of the area of available agricultural land by means of such physical changes is relatively small.

[Sidenote: And by the work of pioneers]

The work of the pioneer, as a producer of a supply of land, is, however, of the greatest importance. The pioneer annexes new areas to the economic world and to the market in which he has lived. This is recognized of late by writers that perhaps do not fully mark its significance to economic theory. The work of the explorer and prospector is that of a producer of mineral resources, and daily market quotations reflect the changes in "the supply" of these natural stores.

[Sidenote: Successive utilization of various grades of agents]

5. Limitation of the supply appears first in the better qualities, and efforts to increase wealth are then directed to making available the poorer grades. Great quantities of the poorer grades of wealth, even of those things that are relatively fixed in supply, lie unused. Great areas on the edge of civilization still await the pioneer, the prospector, and the miner. Here is a source of wealth and a field for enterprise. The growth of society may cause some of the poorer agents in time to become the best. When men crossed the ocean to settle on Manhattan Island, it was a wilderness; but the growth of commerce has caused the land in New York city to become more valuable than that in London. Changes are still in progress, for of late the smaller ports to the south have increased their trade at a more rapid pace than New York has.

[Sidenote: Goods ranged on a scale of increasableness]

The difference in increasableness of the various forms of wealth is of importance in considering various social questions such as the effects of an increase of population, and the kinds of taxation most equitable and most favorable to the progress of society. Account must be taken of the fact that the number of bricks can be increased more easily than the amount of land; but there must not be overlooked the possibility of increase in any of these forms of wealth, nor the limits to the increase of any one of them. When one wishes to save or increase wealth, he turns to these great unappropriated fields, unused things or things imperfectly used, and tries to convert them into effective agents. The different forms of wealth may be ranged on a scale according to the ease with which they can be increased by effort. They may therefore be classed as relatively fixed and relatively increasable. Some natural resources belong at one end, and some at the other end of this scale. No hard and fast line divides the different kinds of goods, but the difference in degree of increasableness is a fact of great social importance, affecting the direction in which industry can and must progress.

19. SAVING AND PRODUCTION AS AFFECTED BY THE RATE OF INTEREST

§ I. SAVING AS AFFECTED BY THE INTEREST RATE

[Sidenote: The interest rate traces the division between present and future gratifications]

1. In the case of consumption goods, present marginal uses are often less than future uses as judged at the present. The proposition that future goods sometimes have a greater instead of a less value than present goods may at first seem to deny the general fact of economic interest, which is a premium on present over future goods. The contradiction is only apparent, however, and the proposition is merely a proper interpretation of the theory of interest. The assertion that present goods have greater value than future goods, as we have accepted it, requires two explanations. First, it means that this difference exists when the two are judged and compared at the present moment. The future use when it matures may be much greater than the present use; indeed, the very existence of interest depends upon this surplus of value arising by the lapse of time in the future use. Secondly, the proposition does not mean that every concrete good, or every use of the goods, is worth more in the present than in the future; it means merely that the demand for present goods preponderates so that a market rate in favor of present possession prevails. In a great many cases a particular good may have a greater value to be kept for the future than to be used at present, in which case it is kept, or it is exchanged for something else having a higher value in the present. But this preference of the future over the present cannot pass a moderate limit without condemning the person to present misery, and at length to death. On the other hand the excessive preference of present over future would lead to the using up and wearing out of wealth, to the present enjoyment of every possible resource, on the penalty of future misery. Evidently somewhere between these two extremes there must be, in each economy, a ratio of exchange between present and future, which in fact is the interest rate. This rate applied to utilities traces through each good a line analagous to the isothermal line on the map, marking off a zone of utilities for the present and other zones for each period of the future. There is thus a close relation between saving and the rate of time-discount.

[Sidenote: The less necessary goods are the ones saved]

Let us illustrate by the case of fruit stored in the cellar for future use. In the fall after the appetite for apples has been gratified up to a certain point, there still remains a large stock which affords less gratification if consumed at once than if kept for a time. Thus wood, food, and clothing are stored in the summer for the winter's need. Even the animals act on this principle. Squirrels, bees, and ants store up in the season of superfluity for the season of scarcity. The animals recognize with their feeble intelligence or by instinct, that a time will come when these consumption goods will represent greater importance to their welfare than they do at the moment. It results from the nature of wants and the principle of diminishing utility that in many cases some portion of a large supply of present goods must be worth less now than at a future time. This part, the marginal, less necessary part, will be left for a future time, and it is to this part that our opening proposition refers. This is roughly illustrated by the diagram.

Things that cannot be kept, perishable goods, do not permit of this comparison. But if goods that can be kept continue to be used after utility has fallen down the scale, their high value for the future is cast away. Man lives not alone in the present but, in a far greater measure than do any animals, he lives in the future also. His economic life and his economic judgment comprehend a great number of periods at once. With the aid of memory and imagination he forecasts the future, and compares it with the present. The diminishing utility of goods, therefore, is modified by this fact that a thing has want-gratifying power at different periods. Before man uses goods for an inferior purpose he will ask whether, if they are kept for the future, they will not gratify a greater want.

[Sidenote: The less valuable rise in value with the lapse of time]

2. The gradual rise of a consumption good with the lapse of time from the lower to the higher degree of gratification is the rent it yields. The difference in value of present and future rents is expressed by the discount of the future use when it is capitalized at any earlier moment, and emerges in the rise in value as the thing approaches to the time when it can render the later use. Next year the unit whose use is deferred will afford as much gratification as the earlier units do now, and more than if used at the present moment. The importance of any present utility is compared with its importance a year later, plus interest at a rate which expresses the limit to which future uses are discounted. Anything that makes men feel more the importance of future uses causes them to value those uses more. But the pressure of present want is such that a present use of a lower order competes with a future use of a higher order. Only goods of a lower order, nearer the margin, are reserved for the future. But just as the possibility of using a thing for several different purposes at present causes it to be valued more highly than if it had but one use, so the possibility of reserving to the future a portion of a stock imparts to every unit a higher marginal utility.

[Sidenote: Interest is the equalizer of time values]

3. The saving of present goods for future use is encouraged by the motive of gaining the interest. Many consumption goods grow into higher uses in the hands of the owner, whether he uses them for himself or not. Ice may be stored in midwinter when it is all but a free good and a little labor serves to fill the ice-house. Kept until the summer months, the ice rises in value as the desire for it grows. Likewise the higher price secured by the owner of a thing kept for sale to others, reflects the change in utility, and affords practically a rent which is the motive for investing capital in that business. Any saver or abstainer puts aside present wants only when the future good, with the addition of time-value or of money interest, appears as large as the present good. Interest is therefore the equalizer of the value of things in different periods. Put into the scale of judgment when present and future are compared, it helps to balance the disparity in the gratifications given by economic goods in different periods of time.

[Sidenote: Saving increases and improves economic agents]

4. The postponement of present wants results in bettering the economic environment for the future. Economic environment means simply the economic conditions in which men live, the stock of wealth, the supply of useful things with which they are surrounded. This betterment may be only temporary, only for the immediate future. Like the busy bee or the prudent ant, one may in summer store the cellar with consumption goods to be consumed the following winter. But often there is a more lasting way of improving the economic environment by converting savings into durable indirect agents. The accumulation of wealth that will yield its fruits only after years of growth is the record, so to speak, of the successful competition of forethought with present desires. It means that the two periods have presented their respective claims and that men have decided in favor of the future. Saving thus lifts society from poverty to wealth by the progressive enlargement of the sources of future utilities.

[Sidenote: The kinds of abstinence]

5. Abstinence is the faculty of mind that enables present wants to be subordinated to future wants. Abstinence may be considered as a quality, or faculty, of the mind, or as an act resulting from that quality. There is little danger of confusion in this usage, but it is well to note the distinction and the fact that the former is the primary meaning. Abstinence expresses an act of the will, a choice made by man. It is the guardian of the future, so to speak, against the greediness of the present. For convenience we may speak of conservative abstinence as that which keeps men from using up or invading their present stock of resources, and of cumulative abstinence as that which impels them to add to that stock. There is no sharp dividing line, no abrupt break, between these two, yet on the whole they differ. There is a quality of mind very like the inertia or momentum of physical matter. The inertia of mind makes men resist stubbornly the reduction of wealth and of inherited social position; but it requires a more positive quality of mind to add to wealth at the cost of present sacrifice. Abstinence is embodied in individuals, never elsewhere, and is found in most varying degrees of strength. Upon it depends the growth and betterment of man's environment.

§ II. CONDITIONS FAVORABLE TO SAVING

[Sidenote: Political insecurity discourages saving]

1. Political security and domestic order are essential to the development of saving. As saving results from a comparison of the future with the present, any lack of certainty regarding the future decreases the appeal it makes. Men employ roughly the theory of probabilities in this matter, and count a utility only half as much when there is but one chance in two of enjoying it. In countries where there are constant revolutions and border wars, as in Africa and South America, and in lands where brigandage is common, as in Italy, Macedonia, and Bulgaria, the motive for saving is cut in two. Oppressive and irregular taxation kills the motives of providence, and decreases the appeal made by the future. While the miserable subjects of the state live from hand to mouth, the very sources of the public revenue disappear. Improvidence grows upon such a people into a prevailing national custom; ambition is wanting; industry is the sport of chance; economic order and economic prosperity are impossible.

[Sidenote: Influence of private property on saving]

2. Social institutions that give a motive to the individual are essential to saving. Among these institutions the most important are the family and, closely connected with it, the institution of private property which, in its ideal manifestation, places the responsibility for economic welfare on the individual or the family. Through it the state says to men: "Save if you will; the wealth and its fruits shall be yours. But if you spend and consume all you can, you alone will suffer the consequences." It is true that the institution of private property never is found in an ideal form. Dishonest public officials weaken and defeat its benefits. Every propertyless family marks a failure in its purpose. Private property is a favorite object of attack by social reformers, but it never can be safely abolished in a civilized state until some other incentive is provided, equally effective to make men subordinate present desires to future welfare. Unless the mass of men can be greatly changed, property creates the only motive that can induce saving regularly and on a large scale. It diffuses responsibility for present consumption. It multiplies the motives for abstinence and thus increases the welfare of all economic society.

[Sidenote: Safe and paying investments encourage saving]

3. Opportunity for the investment of small savings favors a spirit of abstinence. The institution of small property, peasant proprietorship, worked powerfully in this direction in many parts of Europe, and the same effects have resulted in America from the wide diffusion of property in land. If the decline in the number of small independent farmers has somewhat weakened this influence in America, in other ways other agencies are effectively performing the same functions. Savings-banks, penny banks, building and loan associations, penny-provident funds, and other convenient means of investing small sums, encourage men to reduce their tobacco bills, their candy bills, their saloon bills, and to lay aside for the winter's coal, for the children's education, for houses, for business investments, or for old age. Probably no one thing has given a greater stimulus to saving than has the development of insurance and the endowment policies in connection with it. While the great modern corporations have destroyed many of the small business enterprises into which so much of the saving of the past was put, at the same time the increase of negotiable paper, of loans, and of stock in joint-stock companies, has opened up other large fields for investors.

[Sidenote: Changing interest rate in relation to saving]

4. Variations in the rate of discount of the future react upon the spirit of saving in various ways. This very general proposition requires more detailed discussion. In general, a high rate of interest gives a large motive to save, for as the discount on the future is large, so is the reward for waiting. But this favoring motive may be offset by other unfavorable conditions, and is, in fact, wherever the high rate continues. In countries backward economically, where war, brigandage, and political oppression prevail, the rate of interest is frequently ten and twelve per cent. on the best secured loans. A high interest rate does not of itself insure a high degree of cumulative abstinence; it is only one of several factors. But in a new and favored country like America, a high rate of interest is a strong stimulus to saving. Again, interest may fall while saving continues at the same or a greater pace. Ordinarily a fall from six per cent. to five, giving men a smaller motive for abstinence, would be expected to cause less saving, yet this is not always the case. Custom and example help to fix a habit of saving in individuals and cause them to continue saving at a lower rate of interest. With the growth of wealth, the prevailing ideas as to the amount needed for a competence change, impelling to greater saving. The tendency, however, of a fall in the rate of interest is to weaken, and that of a rise of the rate, other things being equal, is to strengthen the motive to save. But the influence of the interest rate on saving is relative to the character of men.

§ III. INFLUENCE OF THE INTEREST RATE ON METHODS OF PRODUCTION

[Sidenote: Saving permits improvement of agents]

1. The individual saver is enabled to improve the agents that he uses. The simplest case is presented when means of enjoyment are improved and made more durable. If Crusoe on his island spends less time and fewer resources on gratifying his immediate wants, he may improve the quality of his clothing and the convenience of his house and furniture. By thus putting his consumption goods into durable instead of temporary forms, he will increase eventually the sum of utilities enjoyed. Again, abstinence permits the tools of the laborer to be made more convenient. If the farmer spends less time in the garden and he and his family live on plainer food, while he makes a plow, mends a rake, and builds a shed, he will be enabled thereafter to gather a greater crop with less effort.

[Sidenote: Saving of consumption goods for exchange]

2. Consumption goods, when saved, may be exchanged for services, and these may be used to create durable agents. Various ways are open to one wishing to increase his stock of durable agents. He may forego seeking immediate enjoyments while he makes durable agents himself. Or he may make and save a stock of consumption goods, a surplus supply for the future, and exchange it for durable agents. Finally, one who has accumulated consumption goods can always exchange them for the services of those seeking subsistence and enjoyment; and thus in control of a labor force, he can direct it toward the production of new forms of productive agents.

[Sidenote: Money savings are converted into other wealth]

3. In modern industry, saving frequently takes the form of money, which is then loaned to productive borrowers. This is the typical form of saving in modern industry. As it is more and more the case that income takes first the form of money, saving most conveniently takes the money form. The clerk on a salary of $60 a month spends $50 and saves $10 which he lends to a neighbor or deposits in a savings-bank. The borrower is thus empowered to increase his stock of productive agents in the measure that the lender has limited his consumption. The complexity of the process by which money saving becomes embodied through a money loan in new productive agents should not blind to its real nature. The money is saved as a means to the exchange of present goods for future income. Money even in our day is occasionally stored away for future use under hearthstones or in old stockings and hollow trees, but this is a primitive and wasteful method, involving the loss of all the additional rents that its exchange and investment would yield.

If the money saved by the thrifty saver is loaned to a thriftless borrower, wealth is not increased, but merely changes hands. The prodigal mortgaging his wealth, spending the money, and living beyond his income, absorbs the savings of the other. One saves and adds to wealth, the other consumes it. There is no net increase of goods, but two individuals have shifted positions; each has gotten his reward of growing affluence or penury.

The "normal" end, however, of savings and loans is productive. The borrower, in getting control of purchasing power, aims to put a new machine where it will be useful, to remove obstacles, and to make economic agents more effective. Along the border-land of industry the active and alert borrower seeks out opportunities to make new agents earn a rental, and having found the opening, turns to the money market for the means to profit by it.

[Sidenote: Lower interest means higher capitalization]

4. A fall in the rate of interest normally accompanies an increase in the mass, efficiency, and valuation of durable economic agents. A lower rate of interest means a higher capitalization of all incomes. It is not that either can be called the cause of the other; rather both are aspects of the same thing, the interest rate merely registering the change in capitalization. If the rate of interest has been five per cent., an income of $100 has been capitalized at $2000. When the rate falls to four per cent. the income is recapitalized at $2500. All along the line of investment there is an increase in the value of the durable economic agents.

[Sidenote: And more complex industrial processes]

[Sidenote: It encourages the increase of fixed charges to reduce cost of operation]

Another phase of the change is the greater complexity of the processes of industry. Production becomes technically more complex when interest falls. Rental, product, and present goods, bear a smaller ratio to the value of capital, and therefore it becomes advantageous to apply newly formed capital to uses which before did not justify the investment. Where formerly the utility of a second tool did not justify its making, now it can be made to earn the smaller rental needed to balance its capital value. One form, therefore, which the change takes, is a multiplication of the tools already used. Things are placed wherever most convenient. Another form this change takes is the putting of new links into the chain of technical production. Cost of operation constantly is compared with fixed charges, the interest with the capital investment. Expensive improvements on railroads, the straightening of curves, the tunneling of mountains, the reducing of grades, the replacement of lighter by heavier rails, have been made possible by a fall in the rate of interest. A fall in the rate of interest disturbs the equilibrium that has been arrived at, between the cost of operation, the amount paid for wages, coal, etc., and the income on permanent investment. If the rate of interest has been five per cent. and falls to four per cent. many permanent improvements before unwise become economical. One thousand dollars paid annually in wages then balanced an interest charge on a capital investment of $20,000; now it balances the interest charge on $25,000. It becomes a paying thing for the railroad to abandon or throw aside an enormous capital represented by the old, less perfect roadbed, and build a new one alongside of it. The changes of this kind one sees in traveling on the great and progressive railroads, reflect in part the growth of traffic, but in part also a change of the interest rate, making it a net saving to increase the capital investment in order to reduce the cost of operation per unit of traffic.

[Sidenote: Diffused benefits of saving]

The benefits of saving viewed broadly are not confined to the owner of the wealth saved, but are diffused throughout society, in the degree that they increase and improve the industrial environment, and thus raise the efficiency of production. Such a change works the same results as would a magical increase in the fertility of the soil, an improvement in the richness and accessibility of natural mineral stores, or in the quantity and quality of artificial appliances.

II. THE VALUE OF HUMAN SERVICES

DIVISION A--LABOR AND WAGES

20. LABOR AND CLASSES OF LABORERS

§ I. RELATION OF LABOR TO WEALTH

[Sidenote: Work and play defined and distinguished]

1. Labor is any human effort having an aim or purpose outside of itself. It is difficult to define satisfactorily the term labor. No definition will quite mark off all the cases. The efforts put forth by men may be classified according as they are pleasant in themselves, and according as they have separable useful results. These two factors combine to form four groups of actions.

Effort Objective result sought Name of action

1. Pleasurable Not useful Play 2. Pleasurable Useful Labor 3. Painful Useful Labor 4. Painful Not useful No special name

The fourth combination is not found in rational life, for no motive exists to do a painful act for a useless result. Let us consider the other three.

[Sidenote: Play]

The first group comprises most of the sports, games, and pastimes found in every land and time. In the mere putting forth of the powers of mind and muscle there is a joy felt by children and men of all races, and this is heightened by companionship, emulation, and even by a spice of danger. Play is not dependent on a useful objective result later to be enjoyed, but, like beauty, is its own excuse for being. The tired student goes out-of-doors to bat the tennis-ball, making no change in the material world, except to wear out his shoes and to lose the ball, but finding that hour rich in the joy of life. If properly chosen, play strengthens and vivifies both soul and body, leaving an afterglow of health and happiness. The choice of sports and temperance in their pursuit are among the surest tests of wisdom in men and in societies. A love of vigorous play no less than the power of sustained work, marks the dominant and progressive peoples of the earth.

[Sidenote: Labor as pleasure]

Acts in the second group give pleasure and at the same time leave an objective result. The hunter gets more pleasure if he returns with well-filled bags of game, but the distinction between the sportsman and the "pot-hunter" is not hard to find. The one has his joy in the sport, the other in the material results of the sport. This kind of action presents some puzzling cases, but in general must be classed as labor, since labor is to be judged by the objective economic results rather than by the pleasure of the act itself.

[Sidenote: Labor as sacrifice]

In a third class are the acts that are painful in themselves, that are done unwillingly, but that leave a pleasurable result. Unfortunately a large part of the actions of men are of this class, which to most minds is the typical labor.

[Sidenote: Joy in work is the ideal]

There is thus labor that is pleasurable in itself and labor that is painful though it leads to a desirable result. The social ideal clearly is that all human labor should be made pleasurable. Social dreamers love to picture a day when all shall find for effort a full reward in the mere doing,--the reward of the artist, of the scholar, of the saint, in addition to the objective result in economic wealth. Probably we are slowly nearing this ideal. Not only in the professions and in the esthetic arts, but in commerce, in mechanics, and in the humblest walks of life are found men free from envy, rejoicing in their daily tasks. Such is the normal feeling of the healthy optimist. And yet in every serious occupation there are numberless moments and occasions when the spirit flags and only hard necessity holds men to their tasks. The dilettante does not go far or long or steadily; the real tasks of the world are done by men that labor, now with joy, now wearily.

[Sidenote: The distinction between men and things]

2. The agents of production compose two great species, material goods and human services. Our discussion of consumption goods, rent, and interest has been an analysis of the nature and uses of material goods. We now come to the other great species, human services, which comprise those acts of men (one's own or other's) that minister to the gratification of wants. There are also misdirected efforts, and evil deeds which are "disutilities" to all but the doer.

The distinction between men and things is fundamental in modern economic discussion where each man is looked upon as free. It is not so clear where slavery exists and the master looks in the same way upon the services of his cattle, of his chattel slaves, and of his land. Even in the freest society, man's services are compared purely as to their utility, with the uses of other parts of the material world. It is said that the price of mules at the Pennsylvania mines has been affected by immigration, because a man and a mule sometimes represent interchangeable services. But in the study of political economy the distinction between men and other material things must never be lost sight of; they are the two fundamental classes of economic agents, the one being solely a means to an end, the other being an end in itself.

[Sidenote: Rent and wages mutually affect each other]

3. Labor and material wealth are complementary and indispensable to each other in most of their uses. The discussion of material wealth and its value apart from the subject of labor, of the problem of rent and interest apart from that of wages, does not imply that this material wealth would have the same value in real life if labor were absent. As one field affects the value of another field, and one good, by substitution, the value of another good, so does labor affect material wealth. Some material wealth can be used apart from labor, but most of it must be used in combination with some labor. Rent, therefore, is not determined in concrete cases apart from men and their services. It is allowable, however, in abstract analysis, to simplify the question by leaving out a difficult complication, and thus to set forth more clearly the logical bearing and effect of a certain factor.

[Sidenote: Certain shares of the product are logically attributed to each]

Each of two kinds of agents used together affects the utility of the other, and the value of the product. If neither can be credited with the whole value, how is any distribution to be made between them? It is not possible to measure their technical services in the product, but it usually is possible to gage their marginal utility under particular conditions. Flour, water, and labor are needed to make biscuits; but water being a free agent, does not enter into the combination with any marginal utility. A match also is almost indispensable to start the fire (and who has not seen the time when he would give far more for a match than for a bucket of coal), but as things usually are, the match is credited with a value of a very small fraction of a cent. Again, how is to be measured the economic service of the tree and of the labor needed for gathering its fruits? There is here suggested the superficial aspect of what is known as the problem of complementary values. Where two or more things are indispensable to a product, how much shall be credited to each?

[Sidenote: Labor gratifies directly and indirectly]

4. Human service has the same general relation to wants that material goods have, affording gratification either directly or indirectly. It is axiomatic that to be "economic goods" human efforts like material goods must afford utilities whose importance is felt. Many services give pleasure directly and are immediately consumed. A tropical potentate has an attendant to fan him, and another to carry an umbrella; a humble citizen is shaved, doctored, sung to, and played for. The gratification in such cases is directly produced in personal comfort, in the consciousness of heightened beauty, in the feeling of self-esteem. Value is thus created and consumed immediately, taking no material form apart from the consumer.

[Sidenote: Labor embodied for a time in material form]

But the results of most human services may be seen to rest, at least temporarily, in some material form. Effort is put upon a material thing to be used later. The work of the waiter in spreading and arranging the table is not an immediate service, for it is embodied in material form an hour or two before the meal. The service of cook no less than that of gardener and butcher, is put into material form before it comes to the consumer. The woodman fells, cuts up and splits a tree, and piles it at the door, putting his labor into a utility to be consumed months afterward. The old economists used to class labor as productive and unproductive according as it was or was not embodied in material form. The classing of the services of cook, waiter, valet, etc., as unproductive seems, even from the old point of view, to have been inconsistent, and the attempt to distinguish services by any such test is now wholly given up. Whether the service rests in material form for a week, a month, a year, or as often happens, for a much longer period, is not essential. The test of the productiveness of services is not their embodiment in material form, but their appearance as psychic income, their ministry to wants. The most varied kinds of human activity may be unified by this thought in the concept of economic labor.

§ II. VARIETIES OF TALENTS AND OF ABILITIES IN MEN

[Sidenote: Grades of labor are analogous to grades of wealth]

1. As material things differ in their fitness to gratify wants, so do men differ in their powers of labor. The fields, hammers, plows, tools, and machinery of different kinds and qualities have been seen to grade off from the best to the poorest. The poorest, discarded or just about to be discarded, are no-rent agents. The utility felt and recognized in the better qualities is expressed in the rents they yield. Recognizing the variety and inequality of human talent, some economists of late speak of the "rent" of ability, meaning that, like land rent, the greater utility (and corresponding reward) of some labor as compared with others, reflects the difference in the quality of agents. But this expression, though often met in contemporary economic writings, is one to be avoided because it tends to blur the essential distinction between human and other agents. Pursuing the same analogy some economists have talked of capitalizing the worker,--expressing in a lump sum the value of the man as the present worth of the series of incomes which he may be expected to earn in his working life. This, also, is to be avoided, for while possibly it is suggestive in studying some problems, it is on the whole a misleading analogy, dimming the distinction between free-workers and owned and exchangeable wealth.

[Sidenote: Physical differences among men]

2. The physical strength of workers differs according to age, individual, race, and sex. Differences due to age are the most obvious. The child, at first weak, grows toward his maximum of physical strength, which he attains before his fullest intellectual capacity. The period of maximum physical working power lasts fifteen to twenty-five years according to the individual, and then gradually declines as the old worker approaches again the inefficiency of the child. Mental efficiency develops more slowly and longer, the highest qualities of judgment and wisdom being the fruits only of a life rich in experiences. Families and strains of stock differ notably in physical and mental powers; one excels in stature, another in development of muscle. The differences within families are inexplicable, sometimes one brother excelling in one thing, the other in another. The physically perfect man is a rare product. Among three thousand students are but two score endowed with the remarkable combination of lungs, heart, muscle, nerve, and character, that makes possible the finest athletes. The national and racial differences in working power, even in the simplest tasks, are marked but difficult to explain, as so many influences of customs, habits of life, and varieties of diet modify the result. We cannot tell how much of the Englishman's great superiority over the East Indiaman is due to individual, native differences of mind and body, how much to the social environment in which they have lived. Certainly, though, the difference is not mainly one in size; in the Chinese War the little brown men of Japan outmarched all the others. Certainly fiber counts for more than bulk, and character for more than muscle.

[Sidenote: Comparative strength of men and women]

A difference in the physical strength of the sexes is found in some degree throughout the world, but it would appear to be far more marked in civilized than in savage communities. Compare the records at the Vassar field-games with that of the men in any leading college: in the hundred-yard dash, fifteen seconds as against ten and a fraction; in the high jump, forty-eight inches as against six feet and over. The muscular force of American college women as tested in the Yale and the Oberlin gymnasiums is but one third that of men, that is, taking all the students, the weaklings and the little men along with the athletes, and the women large and small. As to strength of back the average for men is 154 kilograms, for women 54 kilograms; legs, average for men 186, average for women 76.5; right forearm, average for men 56, average for women 21.4. This is an abnormal difference. The natural and possible strength is more nearly attained by men than by women under our social conditions. Women escape the physical toil which strengthens, but not the mental strain which kills. Men carry more of the wood, but the women not less of the worries. A fairer test is applied among peasants in field-work in France and Germany, where the strength of women is found to be about two thirds that of men. American women should do and will do more to attain their natural strength when we attain sounder ideas of education and saner modes of living.

[Sidenote: Talent and training as factors of efficiency]

3. Differences in intelligence are a resultant of native talent and acquired ability. It is difficult to distinguish these two factors sharply. Two men sitting side by side in an examination, get the same grade; one of them has had excellent preparation from childhood, and all the opportunities that money, travel, and cultured associates can give; the other, under great difficulties, has prepared in a country district school with a little coaching now and then, and struggling against great odds, has at last entered college. The same grade does not mean that their natural ability or even their efficiency in this particular class, is equal. Yet the grade is the best expression to be had of their efficiency in the particular work. Native intelligence shortens the time needed for preparation in any calling; hastens new methods; decreases the cost of supervision; saves materials, tools, and time; diminishes loss from breakage; makes possible the use of finer machinery and better appliances, and imparts those subtler qualities that distinguish the best from the mediocre products. Education and native talent are in a degree interchangeable; one supplements the other. Education increases adaptability; the trained mind will outstrip the untrained mind of greater power. It makes direction easier, fits for higher tasks, and decreases the difficulty of coöperation. Any ability may be helped by education in the broad and true sense, though a fool cannot be made wise by training, and though many a potential genius doubtless has been dwarfed in dusty school-rooms by stupid teachers.

[Sidenote: The moral qualities required in industry]

4. The moral qualities of the worker are increasingly important as society grows more complex. The need of a particular moral quality is relative to the special task in hand. Honesty is needed in the bank teller, but he need not spoil a good story. The champion broncho-buster of Arizona is not a Sunday-school superintendent. So, discipline, obedience, self-control, regularity, and punctuality are needed, for more and more in these days business is run by the watch; confidence, patience, good temper, in fact all the virtues in the calendar are necessary at some time and place, and most of them are needed all the time in business. Places may be found in our developed society for those who are deficient in these qualities (it is fortunate that it is so), but these are the poorer places. Many men fail to examine the qualities necessary for success, and do not understand the causes of their own failure. Blind to their own faults, they are dropped down one notch after another in the scale of industry, and, equally blind to the virtues of their successful rivals, they rail against the unjust fates.

[Sidenote: The union of many qualities needed]

5. Skill and capacity in industrial tasks is a resultant of many qualities. The simplest task calls for a combination of force and judgment,--even the digging of a ditch, the raising of a window, or the fitting of a stovepipe. For most industrial tasks rarer combinations of qualities are required. The retail clerk must be neat, punctual, polite, and long suffering. A confidential clerk must have discretion, judgment, and other moral qualities in an unusual combination. The substitution of qualities is possible within limits; a rare quality may make amends for the lack of a commoner one, and a man may, because of peculiar fitness in some regards, continue to hold a position for which in other ways he is little fitted. The rarest and most valued worker is one uniting many good qualities and fitted to deal with emergencies. The economic efficiency of the worker often is no stronger than its weakest link. A strong motive for training is offered by the fact that supplying some one lacking quality may raise the total efficiency in a remarkable degree.

[Sidenote: Inequality of talents shown by biologic studies]

6. Biologic studies have of late made clearer the existence and continuation of the inequality of talents. The political philosophy of the eighteenth century was based on the idea of natural rights and natural equality. Adam Smith, accepting the prevailing view, discussed wages on the assumption that all men had equal natural ability. It is still a favorite assumption of radical social reformers that the natural ability of all men is equal, and that all the differences in success result from political injustice. The study of biology of late has made patent the unending differences that prevail throughout the animate world. No two members of the same family or species are just alike; no two pigeons have wings of just the same length. Nature by numberless devices is experimenting constantly with variations on either side of the established mean. The accepted fact of biologic evolution rests on the foundation of inequality in structure and powers, making possible selection and adaptation. Men in all their qualities of mind and body display this kaleidescopic variety. In all life there is inequality, and the whole drama of human history as well as that of biologic evolution must be meaningless or illusory to the man who does not see this truth. Accustomed now to this point of view, we as inevitably think of the natural inequalities in men as did Adam Smith of their equality.

This fact does not force to the conclusion that industrial inequality as it exists to-day, the great disparity of incomes, correctly or justly reflects the degree of difference in men's qualities, either native or acquired. It does not follow that a thousand-dollar income represents ten times the ability of a hundred dollar one--far from it. But to those who ignore the inequality of men, the whole problem of industrial remuneration must remain a mystery. A crude socialism is possible only to those who are blind to the enormous differences in human capacity.

[Sidenote: Scarcity of labor is essential to wages]

[Sidenote: Unlimited demand for labor]

7. The scarcity of human services, relative to wants, is the fundamental fact in the problem of wages. It is clearly seen that some qualities of service are scarce. Most women will confess that they cannot warble as Patti could, most men will admit that they have not the mercantile ability of John Wanamaker. The man of mediocre capacity recognizes even through the fog of his self-esteem that there is a reason for the high value of certain rare services. But it must also be recognized that the commonest services have value only because they are scarce. There are many things to be done if there were labor enough to do them. There is no need to "make work," in the popular sense; it is here, but labor is lacking to do it. It is true there may be a temporary superfluity of human labor at a time of an industrial crisis. There is at all times a superfluity of "useless" human agents whose qualities are such that they have no net utility. The ignorant, insane, feeble-minded, vicious, drunken, and debauched, can give to the world only negative utilities. But services that are in any degree useful are nearly always in demand, and the higher services are so rare that they are in great demand. The proverb, "There's always room at the top," is seen to be true when conditions are thus analyzed. There is a large, though limited, supply of the commoner kinds of services at the bottom of the scale, but in every branch of human effort there is a never-ending lack of that higher qualification and training required for the best results.

21. THE SUPPLY OF LABOR

§ I. WHAT IS A DOCTRINE OF POPULATION?

[Sidenote: The employer's and the social view of supply of labor]

1. The supply of labor means here not the number of workers available in any one industry, but the number available in the whole field of industry. The individual employer thinks of the supply of labor as consisting of the men seeking employment in his special industry. In this view it is the demand by the employers that apportions the workers among the various occupations. The social view of the supply of labor, however, looks at the whole field. The demand for labor is then seen to be represented not by human employers, but by resources and agents presenting opportunities and demanding labor to employ them. The rich acre, the tool, the machine, all material wealth needing the human touch to give it a higher utility, represent a demand for labor in this broad sense. The thought of a supply of labor is therefore relative to that of the demand embodied in resources. A million men are a great or a small supply of labor according as they occupy a little island or a large continent, according as they are equipped with a small or a large supply of agents.

[Sidenote: Population in relation to resources]

2. "Supply of labor," as an economic problem, presents a large and complex case of diminishing returns. The population of different countries and of different sections of a country is seen to bear a general relation to their resources. An unintelligent race with little wealth and poor machinery is doomed to remain few in numbers. Mountains, districts poorly watered, the frozen regions of the North, are sparsely populated because natural resources are lacking. If food production alone is thought of there are apparent exceptions to this statement, but there are no absolute contradictions of it. A favored harbor may make possible a flourishing commerce on a rocky coast; an unfertile soil may support a large population when great deposits of coal or iron insure by exchange great food-supplies. Productivity must be measured under modern conditions by the purchasing power that is possible in the environment. The connection of wealth and resources with the extent of the population is in itself a recognition of diminishing returns, of an objective limit to the number of men that can occupy a certain area and employ a given stock of agents.

[Sidenote: Equilibrium between numbers of animals of different species]

3. Each species of the lower animals is seen to have a relatively fixed habitat limited by its food-supply and by its enemies. The rocks tell a story of a slow and steady change that has gone on in the earth and in the species of animals that inhabit it. History records some rapid changes due to convulsions of nature or to interference by man with the natural conditions. But the usual condition is an equilibrium of numbers, long maintained, though each species appears to have in itself a capacity for unlimited increase. Why this contradiction? The limit set by the food-supply is seen in a simple case when herbivorous animals are placed on an island from which they cannot escape, and where there are no dogs, wolves, weasels, or foxes. Substantially this experiment was unintentionally tried on an enormous scale with the rabbit in Australia. This peculiar and long-isolated continent contained none of the rabbit's ancient enemies. The rabbits became a pest, devastated great areas, were hunted, trapped, poisoned, and great numbers of them died of starvation outside the fences erected to stop their advance. In the imaginary island they would increase up to the point where starvation would bring about an equilibrium between the number of animals and the food supply. The destruction of one kind of animal by another limits numbers in another way. The number of lions is limited by the number of their prey in the region where they roam. The number of deer, therefore, is limited in two ways, by the amount of their food and by the number of lions which catch the deer. The more numerous the lions, the fewer the deer; the fewer the deer, the greater the supply of vegetable food; as the pressure increases on one side, it decreases on the other, until an equilibrium is reached.

[Sidenote: The surplus of life germs]

Throughout nature each species of animal keeps its customary place, changing little despite its efforts to increase and to crowd into the habitat of other species. Even the slow-breeding elephant, with a period of gestation of three years, and producing one calf at a birth, would cover the entire earth and leave no standing-room in a few centuries if every calf born could live to full age. The myriads of frogs born every spring, the swarms of insects, the countless plants, are struggling to find a foothold on the crowded earth. Of the vastly greater number of seeds and embryos, only one in a multitude ever comes or could come to maturity. Here are the undisputed facts on which rests a biologic "doctrine of population," so to speak, for the vegetable and lower animal world. Because of the limited powers of the soil, no form of life, animal or vegetable, can continue to increase even for a single generation, without meeting enormous forces of opposition, which destroy great numbers and set a limit to the increase of the species.

[Sidenote: These facts related to the doctrine of population]

4. A doctrine of human population is a reasoned explanation of the causes determining the number of people in the world. Man in his economic life is constantly struggling with the problem of the scarcity of goods. If in any given environment men continue long to increase, they must, like the lower animals, meet limits in the capacities of the resources they use. The supply of labor force which is thus brought to be combined with the material agents must meet with diminishing returns unless these agents also continue to increase at a like rate. The relation of population to resources thus presents probably the most fundamental problem in the realm of economics. It is a problem of great complexity, bristling with difficulties, and incapable of exact mathematical treatment; but it is capable of rational study. There is a great difference between a purely fatalistic view of this question and the view that is to be reached by a consideration of the motives, causes, and physical influences at work; It is possible to find some principles in the chaos of prejudices and contradictions that the subject presents. The fruit of a century of discussion of the economic, social, and biologic factors involved, is a rational, if not a final, doctrine of population.

§ II. POPULATION IN HUMAN SOCIETY

[Sidenote: The biologic stage of human population]

1. In the earlier stages of human history, population is limited mainly by biologic factors. The biologic stage continues so long as there are no artificial restraints put on the birth-rate, and no deliberate destruction of offspring for the purposes of limiting the size of the family. There the limits are all objective; they are found in scantiness of the food-supply, or in destruction by enemies, animal or human. Each species has an average or normal birth-rate, great or small. Just why this varies, why the rabbit produces a score of young in a year, and the elephant but one in three years, is a question capable of a rational answer, but it is one for the natural scientist rather than for the economist. Each species is impelled by instinct to realize this birth-rate, to bring into existence as many young as possible.

No human society known to us is so primitive that it has not passed this stage, but many societies have risen but little above it. In most savage tribes, where starvation, disease, and war are constantly at work, the difficult task is to maintain the population. Few of those born arrive at maturity. The custom of the adoption of captives from hostile tribes is widespread, because the efficiency and even the survival of the tribe depends upon keeping up its number of warriors.

[Sidenote: War among primitive societies]

2. War for the possession of limited resources is the first rude social remedy for an excess of population. War is the normal condition of most primitive tribes. Its cause usually appears to be standing feuds and ancient enmities, but the deeper and abiding cause is the struggle for hunting-grounds, for pasturage, for natural resources. The rude industry and economy of hunting, fishing, or pastoral peoples, or of those in the earlier stages of agriculture, requires a large area for a small population. Distant excursions and frequent forays, when food fails, develop rival claims to favored districts, and war is the only settlement. Fighting under these conditions is an activity of such economic importance that much of the energy of the tribe must be strenuously given to it. The ceaseless loss of life in savage wars is almost incredible to modern minds. The invasion of the Roman Empire by the Teutonic tribes, the later successive inundations of medieval Europe by the fierce pastoral tribes from central Asia, are more recent and familiar examples of the economic and political effects of the increase of population and of the outgrowing of resources by barbarian peoples. When the custom arises of capturing enemies and reducing them to slavery instead of killing them, forces are set into operation to reorganize society and to create new checks on the growth of population.

[Sidenote: Crude beginnings of volitional control]

3. Volitional control of population begins by the destruction of offspring before or after birth. The population problem ceases to be simply biologic, and takes on its sociological aspect, when the awakening intelligence of man first grasps the mystery of birth, and when the first attempts are made in any way to regulate family relations or to interfere with the growth of numbers. The student of primitive peoples finds in the methods applied to prevent the birth of children an almost inconceivable brutality. The same methods to a large degree persist in savage communities to-day. Infanticide was generally practiced in ancient times among peoples of advanced civilization, as, for example, in Sparta and Rome, where not only deformed and weak children, but unwelcome ones, commonly were destroyed. The practice, if not legalized, is at least permitted even to-day by public opinion in great portions of India, China, and other densely populated districts of the world. It is one of the dark spots on our own civilization.

[Sidenote: Private property limits population]

[Sidenote: The problem a psychic one]

4. The pressure of increase of numbers on resources is confined by individual industry and by private property to special portions of the population. A condition of communism, where all the members of the tribe or family share equally, means that all enjoy together when food and wealth are abundant, and all starve together when it becomes scarce. Along with a fierce enmity for other tribes, is found in many early societies a close approximation to tribal communism. Private property alters the nature of the struggle for subsistence and of the motives for limiting population. Society divides into a number of partially independent classes or family groups, each holding its share of wealth apart, not in common with the tribe. A society with private property is like a ship divided into a number of water-tight compartments. In communistic conditions if population increases, all sink together into want. The self-interest of those having private property keeps them from dividing their property, and starvation is confined to the propertyless members. This acts in two ways: it increases the motive for the production of wealth; it gives a motive for the limitation of the consumers of the wealth. A smaller family with larger resources means a wider margin between numbers and misery. This converts the problem of population from a material one of a balance of food and physical needs, to a psychic one of a balance of motives in the minds of men. When this stage is reached, the extreme objective limit of the birth-rate or of increase of population is no longer attained in the well-to-do classes, although it may still continue to be in the less provident.

[Sidenote: Social classes differ in volitional control]

5. Volitional control is effective in very different degrees in different families and industrial classes. The possession of property is both a sign of forethought and an incentive to it. Concern for the welfare of children is one of the most powerful motives, especially after social distinctions become marked. It may become abnormally strong, leading parents to sacrifice their own welfare or their own lives foolishly for their children, as is done often in the accumulation of property. Among the classes with property the provision for the children depends not only upon the amount of wealth, but upon the number among whom it is to be divided. It is simple division: wealth the dividend, number of children the divisor.

Among the poorer classes very different motives operate. After the first few years the parents' income is increased by the earnings of the children, both on the farm and in the factory districts if the laws do not prohibit child labor. Moreover, when the children are grown, their wages will depend on the general labor market, not upon the number of their brothers and sisters. So, according as the family income is from rents or from wages, the motives of the parents differ.

[Sidenote: Motives in volitional control]

Postponement of marriage must be classed as a mode of volitional control of population. The average age of marriage, both of men and women, is higher in the classes of greater wealth and ambition than in the poorer classes. The contrast in this regard between civilized and savage peoples is likewise noteworthy. The failure to marry, from whatever cause, is, in the social view of the question, volitional control. It is rare that the motive is directly and immediately the wish to avoid parenthood; now it is religious zeal, again it is disappointed sentiment; here it is conflicting duty, and there it is the individual selfish wish to retain an undivided income for one's own enjoyment. By countless strands of motive in the form of sentiments, social institutions, and interests, the primitive impulses of humanity are firmly bound; and in varying degrees, in different classes, the enormous possibilities of reproduction are controlled by human volition.

§ III. CURRENT ASPECT OF THE POPULATION PROBLEM

[Sidenote: The many motives controlling population]

1. Changes in population are resultants of many forces: those favoring a high birth-rate and low death-rate, and those limiting births or survival. Whether the population on the whole shall grow, stand still, or diminish, depends upon the relative strength of contending forces making for life or death. But this control may lose its cruder aspect and may be waged in the realm of motive. More and more it is volition that controls in human society the growth of population; less and less it is the objective limit of the food-supply. Dire need resulting in ill-health and even in starvation, is still acting in some portions of society, but less to-day than ever before. The growth of population in this stage is not "fatalistic," as there is no inevitable tendency to increase or to decrease. It depends on the interaction of a number of forces, clearly distinguishable, by which population actually is kept far within the limits of food resources. Volitional control is not by a central and unified despotism determining human action, but it is by motives of the most complex sort, diffused throughout society and acting upon every member of it.

[Sidenote: The standard of life in Asiatic countries]

2. The desire to maintain and raise the standard of life is the most effective motive limiting population in our society. The phrase "standard of life" expresses the complex thought of that measure of necessities, comforts, and luxuries considered by any individual to be indispensable for himself and his children; that measure which he will make great sacrifices to secure. This standard differs from land to land, and from time to time. In the Asiatic countries it is so low that it touches in large classes the minimum of subsistence. Despite adverse influences and the uninterrupted series of famines, the population of India in the last century under English rule increased from two hundred millions to three hundred millions. Such a population "lets out all the slack" of income, and never takes up any. The great public works of irrigation, forestry, and transportation, and the development of industry under English rule, gave an opportunity for a higher standard of living; but it was used instead to permit the existence of a greater number of men in the same old misery. These facts have a bearing upon the question of Oriental immigration to America. The emigration of millions of Chinese from their native land would leave no void in their numbers. Peopling their own land constantly down to their own standard of living, they have the power, if they are tempted hither in great numbers, to people this continent also to the same density.

[Sidenote: The American standard]

The American standard of living, while it differs in different classes, is on the whole the highest found anywhere in the world. The increasing appeal to individual selfishness in the last twenty-five years, the greater ease of travel and taste for it, the multiplied and costly pleasures and pastimes, make children a greater and greater burden. The abnormal conditions of city life increase the sacrifice required to support children, and take away a large part of the value of their services in the home. In the greater cities are whole areas larger than the city of Ithaca where children are not admitted to the apartment houses, where no one who has a child can rent rooms. Despite the increasing incomes of the masses of the population, the number of childless homes is increasing, and while the standard of comfort grows, the size of the average family dwindles.

[Sidenote: The decreasing death-rate]

3. Great improvements in medical and in sanitary science are decreasing the death-rate and thus partly neutralizing the effects of a lower birth-rate. The death-rate in a community is a fairly good index of its general welfare. The death of a large proportion of the children before they arrive at maturity indicates poverty or ignorance. The death-rate in the Middle Ages, especially in cities, was tremendously high, but during the last hundred years has steadily decreased. The race of man which, ever since the beginnings of volitional control, probably has had a smaller death-rate relative to the total number of individuals coming into existence than has any other species of living creatures, has to-day a far lower rate than ever before. Even in the most miserable industrial population where one half the children die before they are five years old, the death-rate is much less than among the young of the lion or the eagle.

[Sidenote: The quality of population counts]

4. Volitional control is acting with the greatest force in the more capable classes and thus threatens to reduce the quality of the population. The quality of population is of more import than its quantity, alike in its economic, its social, and its ethical results. The productive force of a population is not measured merely by numbers. "Who" make up the population at any moment is no more a matter of indifference than "how many." One new-born child represents a negative addition to society, unintelligent, incapable, foredoomed to become a burden; another, with energy, thrift, inventive genius, comes to enrich and uplift his fellow-men. Quality counts for much.

[Sidenote: Change in the American birth-rate]

The average number of children reaching maturity in the families of the American colonists was six; the average number to-day in families of American descent is about two. Since many of these do not live to maturity, and of those who do survive many do not marry, the stock does not maintain itself in numbers. Much larger families are found among the poor whites of the mountains, the foreign population, the rate negroes, and, in general, in the lower ranks of labor. Forces are at work to sterilize or reduce in number the more intelligent elements of the population. The "new woman" movement, tempting into "careers," takes away from family life many of the women most worthy to become the mothers of succeeding generations, Self-interest is at war with the social interest. The individual asks, "Am I bound to sacrifice my comfort and happiness to the general good?" If this continues, the result must be a steady decline in the proportion of the population born of the successful strains of stock, and a steady increase of the descendants of the mediocre and duller-witted elements.

[Sidenote: Rate of increase in the nineteenth century]

5. Population increased at an unprecedented rate throughout Christendom in the nineteenth century, but the pace is now slackening. The nineteenth century saw a great increase in the food-supplies available for Europe. The resources of the American continent were hardly touched until the great Western movement of population began and new agencies of transportation brought American fields thousands of miles nearer to European markets. The improvement of machinery and of other economic equipment in Europe likewise aided to increase production rapidly. Population followed, though not with equal step. Europe had a population of 200,000,000 in 1800, nearly 400,000,000 in 1900. The increase in England was from 12 to 18 per cent, each decade; it had 8,000,000 in 1800 and 30,000,000 in 1900. The United States had 5,000,000 at the beginning of the century and 75,000,000 at the close, an increase of over 30 per cent, each decade. Recently there has been a notable decline in the rate of increase in all the countries of Europe. France is already at the stationary stage, and England probably will have reached it by the middle of the century. The rate of increase by decades has fallen in America from thirty-three to twenty-four since the Civil War. Though the movement of the population is still upward, large classes are stationary or declining in numbers.

[Sidenote: Conclusion]

Population should increase more slowly than wealth and resources if progress is to go on. It has done so in the past century, and there is no probability of a too rapid increase in Christendom in the near future. A stationary or declining population, while not desirable, is not an impossibility. But this does not destroy the significance of the fact that there is inherent in humanity a great potential power of increase, the realization of which would be disastrous, the control of which is an important and ever-present condition of the social welfare.

22. CONDITIONS FOR EFFICIENT LABOR

§ I. OBJECTIVE PHYSICAL CONDITIONS

[Sidenote: Subjective and objective factors of efficiency]

1. The efficiency of labor, in its broadest sense, is its ability to render services or produce things that minister to welfare. The efficiency of labor is a resultant of many influences. In part it depends on the physical and mental powers of men; in part on things outside of the worker that either stimulate and strengthen him, or give him more favorable conditions in which to work. These are respectively the subjective and the objective factors of efficiency. In its broader sense, therefore, the phrase "efficiency of labor" implies any and every influence that makes for a larger and better supply of goods.

[Sidenote: Bounty and goodness of productive agents affect the output of labor]

2. The efficiency of labor is limited objectively by the abundance and quality of material resources. Material resources include both those called natural (as the field and its fertile qualities), and those called artificial (as improvements and machinery). According as these resources are more or less developed, as labor is employed in a fertile or a barren field, with a sharp tool or a dull one, with a highly developed machine or a poor one, the product is more or less. If resources were much more abundant than at present, many goods now scarce would become almost, or quite, free. In the last chapter it was shown that an increase of the labor in a limited area or with a limited supply of indirect agents results in a decline in the relative bounty of the environment. A certain part of the result is thought of as due to material agents, a certain part to labor. "Efficiency of labor" is thought of in the narrower sense as the part of the product that is logically attributable to labor,--the laborer's contribution to the value of the product,--as apart from rent, the part attributable to material resources.

[Sidenote: Causal relation of wages and efficiency; food]

3. The laborer's efficiency is greatly affected by the quality of his food, clothing, and shelter. Usually workmen that are getting good wages enjoy abundant food and creature comforts; poorly paid workers go scantily fed. The question arises: which is cause, which effect? Some maintain that all that is needed to make workmen more efficient is to feed them well. In some cases this is probably true. The Porto Ricans enlisted in the American regular army are reported to have increased at once in strength, weight, and vigor; the Filipino recruits, thanks to the American army rations, soon outgrew their uniforms. Some employers in Europe pay their workmen an extra sum on condition that it is spent for meat. But if wages increase, it is by no means certain that more or better food will be bought or if it is that the workmen's powers will be increased. There is a limit to the benefits of increasing food. There is some reason to believe that in America great numbers of our people, perhaps even many manual laborers, would be better off if they bought simpler and less costly food. The maximum of health and vigor may be attained with moderate outlay, and beyond that point richer food doubtless does more harm than good. Poor judgment in the selection of food is shown in many workers' families, and there is no appreciation of its influence on health.

[Sidenote: An experiment in feeding]

A few years ago an experiment in the feeding of pigs was tried on the Cornell farm. Four groups of six pigs each were put in four different pens and fed four different rations. Though alike in breed and age; the groups began at once to differ in character. One group squealed more; another scratched more; another waxed fat faster. Every week they were weighed, and finally were butchered, hung up, and photographed. At that same time, at the Elmira Reformatory Mr. Brockway was experimenting on some criminals of the lower class. They were given daily baths, special physical exercises, and were fed on a specially bountiful diet. Scientific philanthropy stopped there, but photographs "before and after," reproduced in the printed reports, show the great physical improvement that resulted, and a marked change occurred likewise in disposition and intelligence. Many laboratory experiments have been made of late to test the chemical nature and the physiological effects of foods. It is becoming more fully recognized that the quality and quantity of food, and the cooking of it, have a great influence on the economic quality of the worker.

[Sidenote: Clothing]

The effect of the quality and amount of clothing, while of course varying with the climate, is in general of less practical importance. Loss of heat and energy, dulling the powers, stiffening the muscles, causing illness with many trains of evils, make ill-clad workmen inefficient. The cost of clothing enough for comfort is, however, comparatively small, the amount spent for ornament is comparatively high. Even more important in its effects on efficiency is housing. The conditions in the factory and in the home make for health or for disease.

[Sidenote: Physical conditions surrounding labor grow worse or better]

4. The growth of society is, for the average man, making some of the conditions of efficiency more difficult, others more easy, to secure. In agricultural and sparse populations fresh air, sunshine, good water, and unbounded natural playgrounds for children, where they can grow into strong and efficient manhood, are free goods. As population grows more dense, these things become more difficult to secure; men are brought into unnatural conditions, the evils of slum and factory life develop, and the housing problem appears.

The character of the housing and working places could well be left to individuals in early times. If the individual chose to live and work in unsuitable places and under unsanitary conditions, it was usually his own fault and he bore the consequences. When the unsanitary conditions about each family are visited upon its neighbors, society must deal with them. Engineering, sanitary science, and medicine must be directed against the evils; factory and tenement-house legislation must seek to make possible a decent life in the cities, the factories, and the homes. Indeed, in many places the development in these and other directions has enabled the mass of the workers to enjoy blessings impossible to the most favored in the past.

§ II. SOCIAL CONDITIONS FAVORING EFFICIENCY

[Sidenote: Government to insure the reward to labor]

1. The first social condition for the workers' efficiency is political security. For the same reason that this condition is favorable to the growth of capital, it is essential if men are to labor in the present and for the future. As the framers of the Constitution expressed it, the function of government is to insure domestic tranquillity, provide for the common defense, and insure the blessings of liberty to the citizen. Directness and certainty of reward are more essential than mere size of reward in insuring action and effort. There must be a close relation between work and the fruits of work. Political insecurity weakens this relation and makes the reward dependent on chance.

[Sidenote: Common honesty as a condition to efficient labor]

2. The prevalence of standards of honesty in private and public business is a condition to high efficiency. Corruption in government has the same effect as political insecurity; in fact, it is but another form of it. We are accustomed to the thought that in an Asiatic despotism a worker beginning a task is uncertain whether he will reap the reward, as public officials may at any moment seize upon the fruits of his labor. But in our own country similar evils are not entirely lacking. Assessments often are unfair, and justice sometimes is bought. Men in high executive positions are able to make or mar the fortunes of their followers. Sometimes a legislator from a country town goes to the state capital poor and returns rich. Such things becoming generally known tend to break down the motives to industry. They breed the notion that wealth is more dependent on chance or jobbery than on efficient service. Dishonesty in private business means the use of energy not to produce wealth, not to add to the sum for all to enjoy, but to get it from some one else. Public corruption and commercial dishonesty alike entail on the industrious not only the immediate loss, but the far greater cost of weakened character, relaxed energy, and decreased efficiency of labor.

[Sidenote: Effect of caste on efficiency of lower and upper classes]

3. Custom and social ideals that raise or depress hope and ambition, affect efficiency. The institution called caste, which fixes the place of the worker and makes it impossible to rise out of the social position in which he is born, and disgraceful to do any work reserved to other castes, is deadening to energy. It exists in some form throughout the world, and where it is not called by that name, the same caste spirit is at work. The European peasants in the Middle Ages lived under the shadow of it. Where slavery exists the master class at times feels its hardships. "It is not so hard to live," says the hungry Creole daughter in "The Grandissimes," "but it is hard to be ladies.... We are compelled not to make a living. Look at me: I can cook, but I must not cook; I am skilful with the needle, but I must not take in sewing; I could keep accounts; I could nurse the sick; but I must not." Nowhere in the world is there less caste than in America, but it is here. The negro's low measure of industrial virtues is partly the cause of the prejudice against him, but in turn doubtless inherited class feeling is in some measure the cause of his inefficiency. To close to a worker all but the menial occupations is to take from him the most powerful motives for effort. The thought is paralyzing. The race problem in America is in part one of caste sentiment, whatever can or cannot be done about it.

[Sidenote: American democracy and the efficiency of labor]

Democracy makes for the efficiency of American industry not less than do the great natural resources. If America is to surpass the world in all the great industrial lines, it will be largely because of her ideas and institutions. They lead to greater energy and to a faster working pace in all grades of labor than is found anywhere else in the world. There is danger that as the West is closed to settlement something of the spirit of enterprise will be lost. To Western eyes already the young men in the older East seem to be trammeled by social conventions. In an older community there is less of hopeful ambition; one's position depends more on what his fathers achieved; in the new community, more on what he does himself. If it is true, as wise students declare, that the frontier has been the nursery of our democratic ideas, we may well ask what effect the closing of the frontier will have on our national sentiment and on our material prosperity.

[Sidenote: The balance of advantage between work and leisure]

4. Custom and national temperament affect the efficiency of labor by determining the normal period of labor time. After the bare necessities of life are provided for, the worker has a wide or narrow margin of productive energy to use as he pleases. If four hours' work a day would enable him to live, will he work longer or will he stop? The answer is determined by the balance of utility and disutility. Will additional hours of labor yield more gratification than idleness yields? Does the pain of toil repel more than its fruits attract? The use made of spare time differs according to climate, race, and temperament. In the tropics the margin is converted usually into loafing, in the temperate zones largely into objective forms of enjoyment. Individual differences are plainly seen when each man labors on his own field. The prudent man, in the old maxims, makes hay while the sun shines and ploughs deep while sluggards sleep. In the modern larger organization of industry, working hours are much the same for all workers in the establishment. Individual preferences are still expressed, however, in irregularity of employment. In the South some manufacturers have found that on an average the negroes will work in a factory not more than five or six hours a day, working ten hours for four days and lying off two days a week. Such a standard of working hours is the mark of the primitive stage of wants and industrial qualities, although a shortening of the hours of manual labor, as incomes increase above bare subsistence, is in accord with a rational valuation of leisure. A moderate change in that direction cannot but increase rather than diminish the efficiency of labor.

§ III. DIVISION OF LABOR

[Sidenote: Division and exchange of labor]

1. Division of labor is a term expressing that complex arrangement of industrial society whereby individual workers are enabled to apply themselves to the production of certain kinds of goods, securing others by exchange. The term "division of labor" is simple, but the thought is a complex one. Its full discussion would cover the whole field of political economy, but only its most essential aspects can here be touched upon. Division of labor and exchange are counterparts and mutually determine each other. Division of labor depends on the extent of the market, and in turn widens its limits. The number of articles that any one would care to produce at one time and place depends upon the opportunity to exchange them. These two aspects of industry thus are inseparable in thought and practice. The worker finds division of labor existing as a social institution and, according as he adapts himself to it wisely or foolishly, it increases more or less his efficiency.

[Sidenote: Division of labor between trades and territories]

2. Division of labor is primarily between individuals, but appears between trades, territories, and nations. In division of labor between trades, each worker applies himself to the production of some product or group of products and secures other goods by exchange. A special form of this is territorial division of labor, arising out of differences in soil, climate, and natural products, when each community develops in a high degree some one class of products to exchange in distant or foreign trade. Division of labor beginning because of such natural differences, becomes fixed by habit and training, by the advantage of a larger and regular labor supply, by the economy of nearness to related and tributary industries, and by the use of waste products where industry is conducted on a large scaled. The natural advantages in another district must be large to enable it to start successfully against these acquired economies, and territorial division of labor thus tends to continue for long periods when once established.

[Sidenote: Advantages of division of labor]

3. Division of labor increases efficiency by: (a) increasing skill; (b) saving time; (c) saving tools and materials; (d) improving quality; (e) increasing knowledge; (f) stimulating invention; (g) encouraging enterprise; (h) economizing talent. There is a tradition that an ingenious lecturer in one of our universities was accustomed to give to his class eighty reasons why division of labor was of advantage. It is none too many, as every reason for the modern, as contrasted with the primitive, organization of industry should be included. The phrase division of labor is but a synonym for specialization, a word that expresses all that is most characteristic of our complex industrial society. The headings just given may serve, however, to suggest the leading phases of the subject. Repetition of the same task trains the muscles, forms a mental habit, and gives the swiftness and deftness of touch called skill. Specialization saves time by making unnecessary the physical change of place for the worker, the frequent shifting of tools, and the mental readjustment required for the undertaking of a new task. Specialization saves tools for, either each kind of work must be most ineffectively done, or there must be provided for each worker a complete set of tools which thus will be used rarely and will rust out rather than wear out. If a few tools are thoroughly used, they yield a larger income on the investment, and require less care and repairs in proportion to their uses. In fact this fuller economic use of machinery and plant where a large product is turned out at one place, is a prime factor in the advantages of large production, a subject to be treated elsewhere much more fully than is here possible. By specialization is made possible a quality of goods never to be secured by the less skilled efforts of the Jack-of-all trades. The specialist steadily grows in knowledge of his materials and of the best processes, and he gains a power of delicate observation and facility in meeting new difficulties that are impossible when attention is divided among a number of tasks. By dividing and simplifying processes, specialization stimulates invention. The most complex machines have been developed gradually by combinations and adaptations of simple tools, and the more a process is subdivided, the greater is the chance of hitting upon a device to repeat mechanically the few simple movements. Division of labor increases the motives of emulation and enterprise, by making possible the more exact comparison of results. It economizes talent by giving to each the highest task of which he is capable, while fitting the less efficient workers into the minor places made possible by subdivision. In an American wagon-factory, a one-armed man operating a machine is turning out as large a product and earning as high wages as any other employee. The same advantages of specialization are found with modifying conditions in educational and professional lines. The marvelous progress of science in recent years has been made possible by each worker's doing a few things and doing them well.

[Sidenote: Best adjustment of talent and occupation]

[Sidenote: Choice of a life career]

4. The individual worker, to attain his highest economic efficiency, must select from the occupations made possible by division of labor the one for which his talents are best fitted. It seems unnecessary to state this almost axiomatic truth, yet the slight reflection given to the choice of an occupation by most young people gives to this statement a very practical bearing. The world is filled with industrial misfits, "round men in square holes," good carpenters spoiled to make poor doctors. It so often happens that the natural aptitude of the youth is the thing last or, in any event, least considered. Unreasoning imitation, family traditions, parental wishes, class pride, social prejudice, childish whim, are often decisive of the life career. Happily in some cases, before too late, the man "finds himself," but too often the poverty of the family and the obstacles to education preclude the exercise of intelligent choice. It is of importance to society as well as to the individual that talent should be discovered in time, that tasks should be fitted to aptitudes, that each member of society should attain to his highest efficiency. The approach to this ideal, made possible by popular education, the decline of caste, the spread of genuine democracy, the progress of social justice, will increase not only the workers' efficiency, but society's abiding welfare.

23. THE LAW OF WAGES

§ I. NATURE OF WAGES AND THE WAGES PROBLEM

[Sidenote: Wages and rent compared and contrasted]

1. Wage in the broad sense is the income due to labor, in distinction from that due to the control of material agents. The uses of material agents, studied under the subject of rent, are sometimes called "material services." The adjective refers to the source or bearer of the use, and does not imply that the service is to be thought of as a material thing. In its last analysis a service is never a material thing, but a psychic effect on men and their wants. Material services and human services are merely specific kinds of the genus services (or utilities), and it would doubtless be a better usage to speak of labor's services and wealth's uses. Wages bear the same relation to man's services that rent does to the material uses of wealth. Wages are more like rent than like interest in that neither wages nor rent are expressed as a percentage. While rent is the value of the uses of things, wages is the value of the services of men. In discussing interest, wealth is capitalized; but, in discussing wages, men are thought of as affording utilities for a time, as is wealth under the renting contract. The resemblance thus is very close between rent and wages, but not so close between wages and interest.

Despite this interesting analogy, it is not well to speak, as some do, of "the rent of labor"--as well might one speak of the wages of wealth. Such a usage only beclouds the distinction between two concepts, suggesting identity where there are important differences. The aim of scientific classification is missed when contrasts are thus concealed under a single term.

[Sidenote: Nature of the law of wages]

2. A law of wages is a statement of the relation of the general causes of value to the value of human services. In real life no one agent is valued independently of other goods. The felt importance of a good depends on the degree to which other wants are gratified. If men are starving, they attach less importance to ornaments; if cold, more importance to clothing and fuel, being willing to part even with some needed food to secure them. That is, man's desire for each thing is affected by his general condition and by the existence of other goods and wants. A similar relation exists between the values of indirect agents, and must exist between wages and rent.

We are to discuss the law of wages. An economic law does not state a command; it is not a political law; it states merely an observed relation. Things do not need to happen actually according to any law of wages that can be formulated, but they will happen in the measure that the assumed conditions exist. The law states a tendency of wages, just as the law of gravitation states a tendency and does not predict positively whether a given object will fall at a given moment. The "law of wages," therefore, is to be understood as a hypothetical statement of the value that will be attributed to labor under a given set of conditions.

[Sidenote: Economic wages and contract wages]

3. Economic wages are the value of human services in the broad sense; contract wages are the goods paid by one wages man to another according to an agreement. In discussing rent and interest, we have become familiar with this important distinction between economic and contract values. Economic wages are fundamental, the primary subject of theoretical study. Contract wages are the wages paid by one man to another in accordance with an agreement, and may not at this moment coincide with economic wages. When the contract was made, one party may have been ignorant or helpless, and have failed to get all he now could; or meantime the conditions may have changed. But contract wages are based on economic wages and tend to conform to them. If one person performs services for another without expecting to receive economic goods or services in return, it is a gift, not wages. A workman can get as contract wages the amount of his economic wage if free competition exists and he acts intelligently. Of course, these are important conditions.

Real and nominal wages must be distinguished: real wages are the reward of labor as measured in goods and enjoyments; nominal wages are the reward expressed in terms of money, whose purchasing power varies from time to time and from place to place.

[Sidenote: Scarce services gratify wants]

4. Human services, being one of the conditions of psychic income, bear the same relation to wants that material goods bear. As the material agents that are fitted to gratify wants are scarce, labor is applied to the outer world to change and adapt it, thus making it answer desire better. Labor, thus, in many of its applications merely supplements the bounty of nature. Men have a use to and for each other; they have a relation to other men's welfare similar to that borne by material things. The different human actions have all grades of relation to gratification, from harmful to helpful, just as things have. According to their relation to this scale services therefore become ranked either high or low in the estimation of men. Some acts are negative services, to use the term service in a paradoxical sense; they are things to be avoided and escaped. Value then is attributed to the services of men according to their rank in this scale, just as it is to the uses of agents in the case of rent.

Scarcity is the condition of value in labor, as it is of value in any good; but scarcity is a relative term. The commonest kinds of labor would not ordinarily be called scarce, but compared with their possible desirable uses, they are scarce, and this fact is the key to a large part of the wage problem. The question is: how and in what degree does this scarcity cause value to attach to labor?

§ II. THE DIFFERENT MODES OF EARNING WAGES

[Sidenote: The simplest case of economic wages]

1. The self-employed laborer earns wages in the broad economic sense. In this sense the isolated workman, Robinson Crusoe on his island, earns wages, but these wages could not be measured at all exactly. They are a part of an indivisible income, and there is no way to determine how much should be attributed to the uses of the wealth employed and how much to the labor. The independent farmer, producing on his own farm nearly everything he consumes, may be said to earn wages in the broad sense. These can, moreover, be estimated, because they can be compared with what he could get by working for some one else. The farmer, therefore, attributes a certain part of his income to the farm as rent and a certain part to his own labor as wages.

[Sidenote: Wages of the self-employed exchanging worker]

2. The wages of self-employed labor are often simply the value of the material product it secures by exchange. Labor has value indirectly because embodied in products. The worker value of these products is reflected to the labor which secures them. The wages of the fisherman day by day, as he follows his vocation, are simply the market value of the fish he catches day by day. The gold-miner, working with simple tools in the days of placer-mining, earned wages exactly expressed by the gold he washed out.

The independent worker with few tools does not think of attributing any considerable part of his income to his tools. The umbrella-mender's "kit" is so small that his true wage is little less than his total receipts. The tinker, the shoemaker, and the tailor, who went from house to house in the old days, thought only in the vaguest way of marking off from their incomes a part to be counted as the rent of their little outfit of tools. Until very recent times the capital invested in tools commonly was small, and usually was owned by the handworker who thus received an undivided income, of which wages were by far the larger part. It was inevitable, therefore, that labor alone should have been thought of as the cause of the value of goods produced by the artisans in the towns and cities. This error, small at first, was magnified as the capital investment of modern industry grew, and it persists in many fallacious notions that still taint modern economic theory.

[Sidenote: Both impersonal and personal causes of contract wages]

3. Contract wages, paid by an employer, rest on the same cause of value, the direct or indirect effect of labor in the gratifying of wants. When contract wages come to be spoken of, the personal element of bargaining between man and man comes in to obscure somewhat the impersonal causes that are operating. If the fisher and the miner bring their products to the general markets, the impersonal part of the problem is uppermost and the wages are recognized to be the market value of the material products. But if an employer hires a number of workmen, and the labor of each becomes merged and lost to view in a complex product, the uncritical mind stops, loses all hold on a guiding principle of value, and sees only the superficial fact of a personal bargain between employer and workman. Such a view overlooks the logical cause of value, and the network of impersonal forces which enwraps and binds the personal acts.

[Sidenote: A single direct personal service]

To begin with the simplest case: workers often are temporarily employed to produce for others means of gratification at once consumed. The barber shaves his patron, the ferryman takes the traveler across the river, the boy carries a message, the surgeon sets a broken bone. Each performs a useful service, but produces no long-abiding material result outside of the beneficiary, and no separable, salable material good. When each is paid according to the value of the gratification afforded, the first step is taken toward the regular contract-wage relation between man and man.

[Sidenote: The continued wage contract for personal services]

In ordinary domestic service the only condition not present in the cases just given is the more abiding character of the contract relation. The employer does not hire a coachman each time he wishes to take a ride, but having summed up the advantages of a coachman's services, he buys them by the month or the year. The price is determined in the market for coachmen of the needed ability, qualities ranging from stupid to bright, from weak to strong, and from drunk to sober. Instead of buying flowers from day to day, a wealthy man hires a gardener to cultivate them in a conservatory. The average market price of flowers influences the wages paid to the gardener, his wages being but the sum of the values (or of his contribution to the values) of flowers, well-kept lawn, and garden products. According to the conditions of each household and of the general market, the one or the other mode of buying these utilities is the more advantageous.

[Sidenote: Labor employed on products exchanged]

4. The payment of the laborer to produce goods for exchange is the most common modern case of wages. The relation of wages to the value of the product is in this case more complex, for the employer is directing the labor to gratifying the wants of others, not his own wants. It is the desire of prospective customers for the product, and the chance of exchanging it, that will eventually enable the employer to recover the amounts paid to laborers. Labor is only one of the elements entering into the product. Within limits it may be substituted for the other elements, fewer machines being used and more laborers, or vice versa. No more will be given for any labor than it is expected to add to the value of the product. As employers test by experience the contribution of the marginal labor to the value of the product, labor is constantly compared with the value of other things.

When industry becomes complex, the connection between the wages and the value ultimately realized in the product may be broken for a time, but rarely for a very long time. Because of miscalculations, labor is employed on things that prove to be quite valueless, and on other things that have a much greater value than was expected. When months or years intervene before the value of the labor is realized in the sale of the product, the employer must forecast the outcome as best he can, and employ labor only when the wages promise to be recovered. These are complicating facts, but in any logical view they do not falsify the principle that wages are determined by their prospective contribution to the utility of goods.

[Sidenote: Various methods of remuneration, but one general rule]

5. The wages paid by the various methods of remuneration--as, by time, by the piece, by premium for output--all conform in a general way to the economic value of the service. Many methods are employed to measure the services of wage workers. If time is used, a general or average output is assumed, and the workman must come up to that standard if he is to hold his place. If payment is by the piece, the price per piece must be enough to make possible the prevailing time-wage to workers of that grade if the supply is to be maintained in that industry. The convenience of the different methods of payment varies from industry to industry, and even from task to task within the same factory, so that now one, now another method is followed. In any case, however, the aim is to find some convenient measurement of the rate of labor, and of its contribution to the value of the product.

§ III. WAGES AS EXEMPLIFYING THE GENERAL LAW OF VALUE

[Sidenote: Ratio of exchange of services adjusted to their marginal utility]

1. Each grade of labor is a potential supply of desirable things and its wage is determined in essentially the same way as if it were an actual supply. If all the various psychic goods that labor produces were spread out before men in visible form, some would be in great demand, some would exchange in a very unfavorable ratio with others. The exchange would come to equilibrium at a point where each buyer had adjusted his supply of enjoyments in the most favorable way, had so distributed his purchasing power as to get those kinds and amounts of services which afford him the highest possible sum of enjoyment.

[Sidenote: Differences in wages persist]

In this situation the real wages of some being so much more than those of others, the low-paid workers will have a motive to change their occupations. But the various laborers have limited abilities and cannot change at will and, despite the unfavorable ratio, they may be compelled to continue at the same work. Just as apples cannot become peaches or sheep become horses when there is a change in their price, so the unskilled workman cannot become skilled quickly, if he ever can, and the possibility of changing occupations within any reasonable period is very small indeed. Labor is constantly trying to adjust itself, to get into the better-paid industries. It moves, it emigrates, it seeks training and education. Especially the workers between the ages of fifteen and twenty-five choose the callings that promise the highest reward. Within limits an adjustment is possible, but these limits are not wide and not quickly shifted, and the wages of labor continue diverse in different occupations for an indefinite time.

[Sidenote: Various grades of labor and rates of wages]

2. The term general rate of wages can be used only of a certain grade of labor and of the rate for the average worker. Every grade and kind of ability has its rate of wages. To be sure, it is sometimes convenient to speak in a broad but inexact way of "a general rate of wages," when comparing different countries and periods. When it is said that the rate of wages is higher in America than in England, in England than in France, in France than in India, the comparison is between men of the same occupation in the different countries; e.g., the unskilled laborer or the mechanic gets more here than the same grade of laborer gets in England. There is no such thing as a general rate of wages extending throughout all industries.

The different grades of ability differ more markedly in wages than do industries compared as wholes. In the manufacture of cloth all grades of ability are required, from the highly paid artist and engineer, down to the roustabout in the yard. The industries of manufacturing, commerce, and education alike require the coöperation of bookkeepers, janitors, carpenters, and superintendents. It is easy in most cases to pass from any grade of occupation in one industry to a corresponding grade in another industry; but it is difficult to pass from a lower grade to a higher grade in the same or another industry.

[Sidenote: Equilibrium of services and wages]

Abstractly considered, that is, wherever free competition exists, there is a constant tendency toward a state of equilibrium; each workman is moving into the industry where he earns the highest possible amount, and where he receives just what his fellow-men estimate his importance to be, judged by the service he performs. Each man's place is determined by his specific gravity, just as the place of liquids poured into a glass is determined by their density. There is much reason to believe that this condition is approached actually in a far greater degree than is thought by those who come to the question with preconceived notions of what ought to be, or of what they would like to see. This principle of the economic wage does not preclude the questioning of the justice of existing institutions, but it is a guide in the discussion of all practical problems of wages.

[Sidenote: Wages follow the law of marginal valuation]

3. The law of wages may be stated thus: in any state of the labor market the wages of any labor or class of labor is equal to its marginal contribution--that is, to the value of its products. Each agent in industry, whether it be a plough, a horse, or a man, is valued in connection with other agents, never apart or isolated. It is not the total service any one of them performs that can be got at; all that can be got at is the utility attributed to the last unit of supply. Their marginal contribution determines their importance. Each agent is considered in combination with other things at a given moment under existing conditions of supply.

[Sidenote: Wages exemplify the general law of value]

This statement of the law of wages is broad, and appears to be modified in many ways in practice: by changes in industry, by ignorance on the part of the worker, by unequal skill in bargaining; but the law of wages just stated allows for these modifications, and is a guide amid the complexity of facts, for it gives a place to the influence of trade unions, caste, and everything else that affects the labor-supply. The law of wages is but the general law of value, working itself out amid the special conditions accompanying the gratification of wants by human effort.